THE current year will be viewed as one in which we became aware that we had deluded ourselves into thinking we could always borrow our way out of trouble and house prices would rise forever more.
By contrast, 2008 will be the year in which reality sets in. Some may face hardship, and as house prices and the economy slow there will be casualties. But it is by no means all bad news.
Scotland on Sunday asked members of its consumer panel, which helps readers week in, week out, with their financial problems, to share their hopes, fears and hot tips for what to expect and how to survive the coming 12 months.
We thank them for their thoughts, not least because you won't find better advice anywhere.
Fortune favours those brave enough to look at currency, property and FTSE 250 companies
JUSTIN URQUHART STEWART
Director, Seven Investment Management
ALONG with the doom and gloom of endless commentators and the reverberating sounds of creaking property values, many investors have felt the fear of falling investment values.
Yes, of course we have serious issues to address such as a weakening global economy, certain inflationary pressures and a credit squeeze: but I am not going to write today on this as so much has already been written. Better that I should search for some possibly more positive areas.
Such periods of investment volatility as we are currently seeing create interesting opportunities. The first to come to mind is currency. The investment herd has agreed the US dollar must keep falling for the time being, but I would suggest that when market sentiment is so wholly facing one way, this is a perfect signal to glance in the opposite direction.
The dollar, especially from the position of a stronger sterling, may well be looking more attractive. In fact the strength of our pound can provide us with an opportunity to buy overseas assets at a lower cost than previously seen for some time.
A second area which, for reasons of other difficulties, could provide some interesting opportunities is buy-to-let. This area has mushroomed over the past decade and often attracted those seeking an apparently easy method of making money at low risk. After all, "property doesn't really go down in value"; or so I have been told so often over the past two years.
Property is of course an excellent asset class, but only at the right price, and the pain of certain property falls over the next few months will provide some excellent opportunities for the brave to buy flats and houses at fairer values.
Thirdly, don't write off the private equity market. The credit crunch may have evaporated much of the liquidity, but some of the more dramatic falls, certainly among some of the FTSE 250 companies, have thrown up some interesting opportunities.
As values have fallen, the potential for management buy-outs and buy-ins has become greater. Both Clinton Cards and Marchpole have been mentioned, along with Carpetright, as all being potential candidates.
In the unloved retail sector there are definitely those who can see value, as illustrated by the Icelandic retail raider Baugur with rumours of it further increasing its holdings in the UK sector.
One final area is the wave of reinvestment that we are seeing flow back from those exporting nations flush with excess foreign currency reserves. Primarily we think of China, but to that we can add Singapore, Abu Dhabi and Dubai, as well as Russia and India.
This wave of investment is primarily via the increasingly familiar Sovereign Wealth Funds of some of these nations.
Some seem to be fearful of foreigners buying up our assets, but I would call it free flow of capital in a free trade environment – a core part of capitalism. We in the UK have always been familiar and open to investors – after all that is what we have been doing to others since Sir Walter Raleigh went off potato hunting. However, maybe our ardour for free trade may have limits when, for example, Gazprom might launch a bid for BG Group (British Gas)?
Yet the flow of these funds is an encouraging sign of confidence in both the investment structure and corporate valuations. The current level of investment we believe stands at some $55bn, which although large should be put into perspective against the current estimation of China's reserves of $1.46 trillion.
None the less, these investments have the effect of providing at least some form of comfort for investors knowing that there are a number of potential buyers lurking in the shadows.
House price slowdown is a signal to start saving
Chief economist, Halifax Bank of Scotland
A HEALTHY rebalancing of the economy is set to begin as consumer spending and house price growth slow and personal savings increase. Householders' finances will be much more focused on savings, with less emphasis on housing wealth.
We expect a slowdown to begin in the Scottish housing market next year, with inflation falling to 4%.
But house prices in Scotland are still forecast to be stronger than elsewhere in the UK for the fifth consecutive year. We look for UK house prices to be flat in 2008.
While 2008 is expected to record the smallest rise in Scottish house prices in eight years, the slowdown must be viewed in context. We estimate that 2007 was the sixth consecutive year of double-digit inflation in Scotland. Values here have risen by 138% over the past 10 years from an average price of 59,000 in late 1997 to 141,000 today.
Property transactions levels, rather than prices, are likely to bear the brunt of the slowdown. We forecast a 5% fall from an estimated 150,000 transactions in 2007 to 140,000 in 2008.
2008 will be a year when home buyers search for value. Lochgelly, Paisley and Greenock are forecast to record the strongest price rises next year. These are towns with a combination of lower than average house prices and good transport links into Glasgow or Edinburgh.
Aberdeenshire is likely to see continued property price growth, given the strength of the local economy and energy prices. House price performance in the city has tended to closely follow the crude oil price over the past 20 years.
Sound economic fundamentals will support house prices in 2008. The economy is in good health; employment levels are high. Scottish economic growth is likely to remain close to its long-term average pace in 2008. Employment, a key driver of housing demand, is expected to rise to new record highs. Scotland's relatively good housing affordability – the house price to earnings ratio in Scotland is the lowest of any part of the UK – is also a positive factor for the property outlook.
We expect the Bank of England to cut rates at least twice next year to insulate the economy from anything more than a gradual economic slowdown. But further reductions are more than possible and could occur rapidly. Lower rates will help to support consumer confidence, improve housing affordability and limit the slowdown in the Scottish housing market.
Many mortgage borrowers due to come off fixed rate loans during 2008 will look to take advantage of the potential for rate cuts by shifting into variable rate mortgages. In the first nine months of 2007, 75% of borrowers took out a fixed rate mortgage, one of the highest rates on record. In October 2007 this had fallen to 68%. More falls in fixed-rate borrowing seem likely next year.
UK deposit-based savings surpassed 1 trillion during 2007, increasing by an estimated 75bn (or 8%) during the year. Holdings of deposit-based savings accounts are likely to be boosted by the recent volatility in share prices as investors seek less risky investment options. We predict that savings deposits will increase by 80bn, the biggest ever annual rise in monetary terms, to 1.1 trillion in 2008.
We forecast that total savings, which include the amount invested in equities and pensions schemes as well as deposit based savings, will increase by 10% (400bn) to 4.6 trillion in 2008. Total savings will therefore be more than three times the forecast outstanding level of household debt.
2008 will mark the beginning of a period of adjustment for both the UK and Scottish economies. Over time, the emphasis will move from consumer spending and house price growth to a more savings led economy. This will take time, but it can only be for the long-term good of the nation.
Hunt down a tracker but don't get trapped
Mortgage and financial adviser, Punter Southall
MY BIGGEST wish for 2008 is that lenders become more transparent and provide consumers with the total cost of a loan over a given period so they can more easily compare deals.
In many cases it is too easy to focus on the headline-catching rock-bottom rates without considering the other costs such as the arrangement fee. For smaller loans, it is often more cost-effective to have a slightly higher rate but lower costs and fees.
My hot tip for borrowers next year is to opt above all for flexibility, as we could be facing uncertain times. Consider a tracker with no early redemption charges if you are taking out a new loan or remortgaging.
The Bank of England dropped interest rates by 0.25% in December, but most indicators point to further cuts to come. The housing market is slowing in Scotland. Across the UK, the Nationwide Building Society and Halifax indicate that house prices in the UK dropped by between 0.8% and 1.1% in November. Most experts expect UK interest rates to slide a further 0.25% in the first quarter of 2008.
This would mirror what has happened in the US, where interest rates have been reduced to combat the effects of their credit crunch.
But this doesn't mean we will be out of the woods. Borrowing costs are likely to remain significant for many, and credit will be harder to come by for some.
Although falling rates appear to be good news for families and first-time buyers, they are only half the story. The credit crunch is forcing banks to pay more for the funds they raise to lend to us for mortgages, so they are increasing their margins to cover these costs.
This has primarily manifested itself in two ways: the first being higher application fees, and the second higher differentials on interest rates. Three months ago you could obtain a tracker rate with no early redemption fees at 0.1% over base rate. Today, the same product is 0.36% above.
So as banks get squeezed, the ultimate cost will be borne by the consumer, and there is no sign of this easing.
Fixed rates are starting to soften a little, but I tend to view this as an indication that they have further to fall. At present they do not look good value.
To give an example, Nationwide's cheapest two-year fixed rate with no application fees is 6.49%. But you can obtain a lifetime tracker from C&G at 0.36% above Bank of England base rate, giving a current interest rate of 5.86%, which also has no application fee.
Therefore a tracker rate which is transparent and will fall along with future rate cuts throughout 2008 looks a good option.
However, I would be wary of trackers that tie you in. Although initially they look attractive, as they are cheaper than the flexible ones, if rates go up rather than down as everyone expects, you will be stuck with rising monthly bills until your tracker period expires.
A flexible loan with no early redemption charges looks better value, not least because you will not be penalised for switching to another product and can take advantage of a fixed rate later if needed or if they start to look more attractive.
Furthermore, there are a number of tracker schemes which like C&G do not have an end date, so you are not forced to review your mortgage every couple of years if the scheme still suits you and your circumstances.
Changes to bankruptcy law may ease the misery of debt
Chief executive, Money Advice Scotland
A GUID New Year tae yin an aw! We will all soon start wishing each other a good New Year, and it is a lovely concept, but for people enduring debt problems it will be very much business as usual.
So, looking into my crystal ball, what do I see for 2008?
Next year will see a raft of sweeping changes taking place in the field of credit and debt legislation. We fully expect to see radical adjustments to our bankruptcy laws in April which will bring us into line with England and Wales.
Subject to meeting certain criteria, debtors will be able to petition (apply for) their own bankruptcy and could effectively be discharged from their debts within one year.
Whether that is a good or bad thing remains to be seen. However, all is not as it may seem. For those debtors who are thinking about loading up great debts and then going bankrupt in April, think again. This may cost you dearly. Although you could become a discharged bankrupt faster, you may still have to make payments towards debt for quite some time to come.
This new legislation is aimed at giving debtors a fresh start, particularly small businesses. In my view that is a good thing. My concern is that we may see more reckless borrowing, an increase in interest rates and then the domino effect emerges…
Besides changes in bankruptcy law, there will be new assistance for debtors who face council tax debts. Unlike unsecured consumer debts such as credit cards and personal loans, council tax debtors can't ask the court to give them more time to pay their debts.
However, the new legislation will enable debtors to ask the court for extra time to pay, and if granted it will also allow them to have any arrestment stopped on their salaries; so there is a better degree of consumer protection available under the new rules.
The full impact of the Consumer Credit Act, which came into force last April, will in my view begin to be felt.
As part of the reforms, the Financial Ombudsman Service (FOS) now provides a free dispute resolution scheme. This will make it easier for us as consumers to exercise our rights. If we don't succeed in resolving a dispute with the creditor, then the FOS is there to adjudicate.
Other initiatives which I think will have an influence come from the Money Advice Liaison Group, which has produced guidelines for collection of debts when dealing with clients with mental health problems.
This advice includes making sure they are treated sympathetically, that credit organisations have properly trained staff and that they refer the customer on to other agencies if they believe they require specialist help.
This is sterling work, and it is my fervent hope that all sectors of the financial industry will implement them, and not just pay lip service to them.
Mental health problems , while aired more in the public arena now than in the past, are still in some ways a silent issue. But experiencing mental ill health coupled with debt problems can be very traumatic.
Debt and problem credit are not simply a matter for individuals but for society as a whole to confront. So if I could ask the Fairy Godmother for one wish next year it would be for the wider public to better understand the difficulties many may face in the coming 12 months.
I would also appeal to consumers to be more active and exercise their rights. Finally, I would like to see better evidence of the credit and related industries treating their customers fairly – after all, it is only what they deserve.
Savings manager, AWD Chase de Vere
I'M NOT alone in expecting the Bank of England base rate fall in 2008 and while this isn't great news for savers, under normal circumstances it would at least be good news for borrowers.
However, due to the credit crunch this isn't the case. Borrowing remains expensive and many people won't have as much to put aside in a savings account for 2008. Which in turn forces many down the credit route and so becomes a vicious circle.
Saving is not a luxury but can be essential. For annual spending such as birthdays and Christmas it be can be the lifeline between enjoying life and starting the year with a credit hangover.
For any taxpayer looking to start saving, a tax-free cash mini Isa is a great place to begin. Every UK resident over 16 has an allowance of 3,000 per tax year they can invest, increasing to 3,600 from April.
There are also some great regular savings vehicles. Britannia Building Society offers 7.50% gross fixed for one year for up to 250 per month, or Abbey is offering 7.25% gross fixed for one year, again for up to 250 per month.
We've also seen some fantastic fixed-rate bonds come to the market in recent months.
For a competitive one-year fixed rate, London Scottish Bank is offering 6.85% on a minimum of 2,000, currently 1.35% over the current base rate. Even some of the variable-rate accounts have had a surprise increase, such as Heritable Bank's easy access, which pays 6.46%, up from 6.26%.
Added to that we've had some competitive product launches, such as Bradford & Bingley's My Time Postal, easy access account, paying 6.45%. These rates have yet to feel the effects of the recent base rate cut, however, so will no doubt come down in the coming weeks.
Action needed to save homes and the lives of young drivers
Manager, AA Insurance
IF WE learned anything last year, it should be to always expect the unexpected. Vast amounts of rain brought widespread flooding not just in flood-prone areas but also in places where there was no record of flooding at all. While Scotland escaped relatively unscathed this time, it was a salutary reminder of the vulnerability of many homes.
Home insurance premiums started to rise, reflecting the vast cost of meeting claims, and I think that will continue at least during the first part of 2008. My hope is that there is serious Government investment in flood defences and that the Climate Change Bill provides provisions to ensure new buildings are more flood and storm resilient. Similarly, local authorities should think through where housing is built. It will help no one if families start to find their homes are uninsurable because of where they are located.
What about car insurance? Top of the 2008 agenda must be young drivers. Those aged 21 and under are 10 times more likely to suffer a serious accident than drivers aged 35. This is a worsening trend against an overall UK improvement in road safety. There are proposals for a one-year learning period which would mean 18 is the earliest a driver can hold a full driving licence. In addition, I wouldn't be surprised to see firm proposals to restrict the number of passengers young drivers can carry. That's because a young driver (particularly male) with a car load of mates is much more likely to end his journey in tragedy than if he is driving on his own or with one passenger.
I'm heartened by the latest report that for the first time, the number of claims for accidents involving uninsured drivers is falling. The police now have the power to use automatic number plate recognition technology to stop vehicles that might be uninsured. Around one in 20 drivers in Scotland has no car insurance, and it costs honest drivers around 30 per policy to fund the cost of injury claims as a result of accidents involving uninsured drivers.
Finally, the busiest day for AA patrols will be Thursday, January 3 – when most people return to work in Scotland. If you haven't used your car much over the holiday, check it over, and take it out for half an hour to boost the battery.
Get back to basics in uncertain times
Head of pensions research, Hargreaves Lansdown
THE fallout of the global liquidity crunch, excessive exuberance in racking up credit card debts, an overdue readjustment in the housing market and the introduction of Property Information Packs could make 2008 a challenging year for some households.
The message here is back to basics; make sure interest is paid on time; overpay debt reduction if you can; act conservatively and don't assume that the value of your house will always rise; also invest for the long term unless you know what you are doing.
The stock market volatility experienced in the latter part of 2007 looks likely to persist through the early part of 2008. There is still uncertainty about where the banking sector is headed. There may well be more bad news to come; equally, as a sector, it is possible that there are some bargains to be had now (though on balance, probably not Northern Rock).
China has produced some astonishing returns over the past year, but again, there is much uncertainty. Our investment team tips Russia as a market with good potential.
All this volatility can be offset, to some degree, by the strategy of saving money regularly (ie every month) into a long-term savings plan such as an Isa or a pension. This smoothes out the fluctuations in the market over time, and is a good discipline. Make sure you use your tax-free allowances.
On the pensions front we will see more details on the evolution of Personal Accounts, due to be introduced in 2012. One of the key concerns among pensions professionals and politicians, is that the Government is still failing to take account of the issue of means-testing and the fact that for some people, saving in a pension doesn't make sense because they will be replacing welfare that they would have received anyway.
Another worry that the Government seems intent on ignoring until after it is too late is the fear that the introduction of Personal Accounts may cause existing pension scheme contribution rates to fall. Hopefully we will see some signs of recognition of these two concerns in the coming year.
Later in 2008, we will hopefully see the removal of the restriction that currently prevents investors from putting their Protected Rights savings into their Sipp.
I anticipate more development through 2008 in the at-retirement market. Over the next few years we are going to see millions of people reaching retirement; 800,000 in 2012 alone, and this is causing a lot of interest in the pensions industry.
So too is the fact that everyone's life expectancy just keeps on improving. This is causing real challenges – and opportunities – for pension schemes and annuity companies. We will see more product development for this end of the pensions market, and perhaps too we will see one or two more 'disaster' headlines from pension schemes who have miscalculated their mortality assumptions.
I also think we will see more consolidation among financial institutions, including mergers and restructuring.
If you make one New Year's resolution, make sure it is that you know what is happening to your money.
Taxing 12 months for advisers and clients
Head of private clients, PricewaterhouseCoopers
MY PREDICTION for 2008 is taxpayers and tax advisers are in for a busy year. Here are 10 things to think about:
• If you like to write out a paper tax return you must file it by October 31, otherwise you will have to file electronically. Register early.
• The Chancellor said in October that the inheritance tax nil rate band could be transferred from husband to wife. For many this change will enable the value of the family home to be protected from inheritance tax when the parents die without elaborate arrangements in place.
• The annual allowance for pension contributions goes up to 235,000 on April 6, 2008 and the standard lifetime allowance goes up to 1,650,000. Most of us could make pension provision more tax efficiently. Review your pension savings.
• Use your Isa exemption early in the tax year rather than just before the end to get the benefit of the tax-free income and gains for longer.
• From April 6, an 18% flat rate of capital gains tax replaces the rate linked to income. For many, high-income yielding investments will be less attractive than investments with high capital growth. Change investment criteria if appropriate.
• Anyone with a family business should consider how the profits are shared to minimise tax efficiently. New proposals on income shifting are likely to adversely affect arrangements which reduce the family tax bill.
• April 5 is the last day for changing accumulation and maintenance trusts to avoid future inheritance tax charges. It is also the last day for taking advantage of transferring interests in life rent trusts to others under the pre 2006 regime.
• The Chancellor is expected to abolish taper relief on April 6, as well as removing relief for inflationary gains. Potential losers, who should review their options, include employees or directors who own shares in their company if it is a listed plc, shareholders and owners of family businesses, members of partnerships, some AIM investors, owners of furnished holiday lets and many commercially let properties.
If you are an investor in quoted stockmarket shares, an owner of buy-to-let or other rented residential property, a seller of antiques or paintings or a beneficiary of an offshore trust you may be a winner if you delay realising gains until after April 6.
• If you are a non-resident taxpayer who relies on staying out of the UK for more than an average of 91 days per year bear in mind that after April 6 the way you calculate the days of presence in the UK will change. Instead of ignoring days when you leave the UK by midnight, any day in which you are present in the UK will count as a day of presence. If you are a regular commuter from Europe or elsewhere you may find this reduces the amount of trips you can make to the UK without affecting your tax position.
• If you are not domiciled in the UK but work or live here, proposed tax changes may make it cheaper to opt to be taxed on your worldwide income rather than just the income and gains you remit to the UK. Otherwise once you have been tax resident for seven out of the last 10 years you are expected to have to pay an extra 30,000 on top of your tax on remittances with the possibility that this may go up to 50,000 if you are resident for 10 out of the last 12 years. If you opt for remittance basis you will lose your personal allowance and annual capital gains tax allowance.
Clearer advice today for a brighter tomorrowCOMPANY PENSIONS
Head of pensions consulting, Mercer
MANY workers have built up benefits in a company-sponsored defined benefit (DB) or final salary pension scheme. Often referred to as the "Rolls-Royce of pensions", such an arrangement provides a pension of a known percentage of salary, providing an invaluable element of certainty in retirement provision.
Of course, not all DB schemes have proven such happy places. Over recent years there have been many devastating stories of long-serving scheme members left with virtually nothing after the insolvency of their employer.
However, there is no doubt that such DB schemes are now far more secure than a few years ago. The Pensions Protection Fund (PPF) will pick up most of the pieces should the sponsoring employer go into liquidation. But hard-pressed employers are having to pay ever increasing levies to fund the PPF.
It's not just the PPF that is allowing members to sleep easier in their beds. Trustees are increasingly switching the plan assets from high returning but volatile equities to more secure, but lower yielding, investments such as government-backed gilts and fixed interest bonds issued by large corporations.
If all of the above additional cost was not enough, ever increasing life expectancy has been the last straw for many employers. While this is great news for mankind, for sponsors of DB pension schemes the reality is not quite so good.
Recent legislative changes have motivated enthusiastic trustees to apply ground-breaking good governance principles to the management of their DB schemes. Members have never been so well looked after, but all this governance does not come cheaply.
The recurring theme is clear. The "Rolls-Royce of pensions" is going ever upmarket and at a significant price. Increasingly private sector employers are unwilling to pay that price and are changing their pensions.
Many employers now offer defined contributions (DC) pensions to new employees. Under such an arrangement, members accumulate their own and their employer's contributions in a "pot" over their working lifetime and will generally purchase an annuity at retirement. There are two key points to note. First, the final annuity amount (ie your pension) will depend on the level of contributions you and your employer have put in. Second, the risk transfers to the member in the sense that the retirement annuity will depend on investment returns during the working lifetime and on annuity rates when the annuity is purchased.
In a nutshell, there are problems associated with each of the main types of pensions provision in the UK, so my wish list for 2008 would include the following:
• DB schemes could be better designed to share the risks and cost between the employer and members. There are examples of DB schemes where pensions are calculated using a defined formula but are subject to reduction if life expectancy rises.
• Recognising that DC provision is increasing, more work needs to be done to ensure that members receive better information about the range of pensions they may receive, plus the chances of actually receiving particular amounts.