What does 2010 have in store for your finances?

Published on Saturday 26 December 2009 13:50

After one of the most difficult years for personal finance in living memory, Scotland on Sunday's panel of Money Help Desk experts reveal their predictions for the coming 12 months, and show how you can best prepare for the next stage of the economic rollercoaster

PENSIONS

TOM McPHAIL

Head of pensions research at Hargreaves Lansdown

2009 was the year of the demise of final salary pensions. In the end I lost count of the number of announcements of scheme closures, to new and to existing members. By contrast, 2010 is about the future.

Guaranteed pensions are a thing of the past. Employers will be willing to make a contribution to employees' pensions but what they will not be willing to do is to take on the open-ended liability that goes with a final salary scheme. Unfortunately the legacy of under-funded promises is still with us.

This means that we will probably see one or two high profile scheme collapses. There are a number of major UK employers which are struggling to make a profit and which have very substantial pension scheme deficits, so don't be surprised to see some bad news on this front.

The inevitable election will be followed by the inevitable appointment of a new pensions minister, followed by the inevitable new agenda for pension reform.

Meanwhile, the development of Personal Accounts (to be given a new name in January) will continue, hopefully moving towards a launch in 2012.

In the meantime, we may see the early announcement of auto-enrolment into company pension schemes for those employers running company pensions already. This will probably be followed by an unseemly scramble by employers to cut their pension scheme contribution rates in response to the sudden increase in membership numbers.

There are also grounds for optimism. I think we will see the continued growth of the Sipp market, as more and more investors take control of their retirement savings and take an active interest in their investment choices.

Similarly, I am hopeful that we will see a significant increase in the number of pension investors who shop around at retirement, making active efforts to select the best possible retirement income arrangement for their needs.

On the investment front, it is hard to believe that we won't see further volatility in asset valuations. The end of Quantitative Easing will be a moment for collective breath holding, as we wait to see whether the recent surge in prices was indeed a Bank of England sponsored asset bubble.

I don't think annuity rates will rebound significantly from their present low, indeed they could yet go lower, though given the current uncertainty out there I wouldn't be greatly surprised if I turn out to be wrong on this last point.

SAVINGS

MICHELLE SLADE

From Moneyfacts

THIS has undoubtedly been one of the most difficult years ever experienced by savers, with the only light in the gloom being the increased demand for savers' cash, thanks to the credit crunch.

New rules requiring banks to build up their reserves of money, combined with a drying up of money markets meant that institutions battled to outdo each other to offer top rates. Without this demand, savers would have likely experienced even lower rates than those currently on offer.

Unfortunately for savers, as the year draws to a close the demand for their money appears to have eased as providers return to more traditional ways of raising funding, as confidence gradually returned to the money markets and in-house investment arms. With bank base rate predicted to stay on hold for most if not all of 2010, there is not likely to be much change for savers in the rates on offer now, compared with those they are likely to see next year.

The best rates on offer will continue to be on fixed rate accounts, including bonds and ISAs, but reduced competition to attract savers' money may see rates fall slightly as they have been doing since the end of November.

Deals requiring savers to lock away money for five years will continue to offer the highest rates, but these will likely become increasingly unpopular with savers as the likelihood of a base rate rise increases.

The popularity of easy access accounts amongst savers will mean they will continue to be attractive to both savers and providers alike, but the trend of offering larger bonus and restrictions, such as limits on the number of withdrawals permitted, is likely to continue during the next year.

The biggest boost for savers in 2010 is likely to be at the start of the new tax year when all savers and not just the over 50s can benefit from the increased cash ISA allowance of 5,100. As with previous years the ISA season will inevitably bring a range of competitive deals both before and after the increased allowance comes into effect as banks and building societies look to attract savers' tax free allowance.

However, savers' greatest friend next year may well be inflation, which in recent months has been rising steadily. If this continues, it could be that the Bank of England takes the decision to increase bank base rate sooner rather than later, which will bring much needed cheer from savers.

DEBT

YVONNE MacDERMID

chief executive of Money Advice Scotland

For some people this coming year will be one of worry, especially if they have arrears on their mortgage or cannot pay their rent. For homeowners, the new Home Owners and Debtor Protection Bill currently making its way through parliament to the second stage has to be welcomed. It puts the consumer at the heart of the issues they will face when in debt, and/or are having problems with their mortgage.

It offers enhanced consumer protection which has to be welcomed. It provides new routes to sequestration (bankruptcy) for those who perhaps can't access it now.

Debt can and does cause mental health problems, and we are striving hard to work with the industry to raise the awareness of the decision makers and collectors alike, about the problems of debt and how important it is to work together. We are also working closely with the mental health charities and the mental health professionals. By having a rounded approach we hope that more people will understand the problems, and that we can achieve solutions.

The new measures contained in the bill should help tackle some of the problems for everyone, but underlying this, is the need to seek advice quickly, and from reliable sources.

Think carefully about how much you want to pay (if at all) for advice, which can be obtained free from reliable sources such as CAB, local authority money advice centres and law centres among others. You can identify an adviser in your area on www.money advicescotland.org.uk.

PROPERTY AND HOME LOANS

JOHN POSTLETHWAITE

A financial adviser and mortgage broker at Punter Southall

House prices have shown some recovery in the last months of 2009, largely because of a shortage of property.

This shortage of available homes for sale can be attributed to many home owners putting a priority on consolidating their financial positions at a time of a lack of confidence in the market because of the economic conditions. Coupled with low interest rates and the stamp duty holiday for properties costing under 175,000, these factors have combined to trigger a small recovery in house prices.

I do not see these conditions remaining for long into 2010 and believe that property prices will remain fairly static throughout the year. Stamp duty will be re introduced on 1st January for homes over 125,000, and more property will become available on the market. If interest rates were to rise this could even lead to a short term dip. However, I anticipate rates will be fairly static in the early part of 2010.

That said, the main threat to interest rates is inflation. We have already seen some indications that inflation is set to rise, with the increase in oil prices and VAT rising back to 17.5 per cent.

I do not see spending in the High Street increasing until the middle part of the year, but when it does it could stifle any recovery in the housing market.

Lack of available mortgages has plagued 2009 as lenders have been reluctant to lend. We have started to see some competition returning in the closing months of the year. Many lenders have been reducing their interest rates and making some of their better deals available to borrowers with smaller deposits. However, gross lending will be approximately 140 billion in 2009 down from 360bn in 2007. I think there will be a modest increase in lending in 2010 given the pledge by government backed lenders such as Northern Rock to increase lending by 5bn.

Last year I urged people to stay on a variable rate or a tracker to take advantage of the low interest rates. Now it may be the time to start looking at fixed rates again to guard against the predicted rise in rates in 2010.

As the average Bank of England base rate is about 5 per cent rather than the 0.5 per cent we have experienced since March 2009, if we do start to come out of the recession and rates rise, I would start to look at long-term fixed rate of 4 to 5 years.

Over the long term if you can fix for less than the long-term average base rate of 5 per cent I think you will be doing well. You can currently obtain a four- year fixed rate from the Abbey at 4.89 per cent and with increased competition I am sure we start to see other lenders starting to compete for this business.

STOCK MARKETS

JUSTIN URQUHART STEWART

A director of Seven Investment Management

The good news is that the world economy is no longer in recession even if the UK has been somewhat of a laggard. The question now is how sustainable is this recovery and what impact will that have on our investments? For me, though, there is one key issue that will affect the entire globe – what happens when the governments around the world take away the steroids?

The enthusiastic recovery in share markets around the world has been very encouraging considering our position this time last year. However most would admit that such strength has been down to the huge international stimulus packages that have been injected.

The problem is that if you pull back the stimulus too soon then your economy could tip down again; however if you leave the stimulus too long you run the risk of a nasty bout of inflation (mind you certain finance ministers secretly wouldn't mind a bit of inflation to help devalue their debt!).

So what next? Certainly the East has continued to see some enthusiastic growth and although there may well be bubbles developing, longer-term demand prospects seem more encouraging in that part of the world. However, closer to home, economies might well become more subdued and especially in the UK where domestic demand is likely to be rather muted, not only because of personal borrowing, higher taxes and lower spending, but also government expenditure cuts beginning to bite, especially after the election.

The UK economy is in a difficult place, and is further hindered by a dysfunctional banking system. This can only hamper recovery when smaller, and especially export focused, businesses will be needing further cash-flow support which is so vital as they move from recession to a somewhat anaemic recovery.

Investors should look therefore for returns beyond these shores which will at least benefit from a weaker sterling. Areas that might well appeal will be some of those rather dull infrastructure companies that have been somewhat ignored in the equity recovery. Such companies as ABB and Siemens in the Euro zone may well provide greater security as the second half of the year starts to reveal a lack of vigour in the recovery and especially in the UK.

So we must prepare for austerity – but good housekeeping now could lay the ground for a firmer economic position at the end of the decade.

INSURANCE

IAN CROWDER

From AA Insurance Services

The past 12 months weren't great for drivers struggling to cope with the recession. Car fuel prices have risen over the year; the number of people being caught by speed cameras has been rising, parking attendants seem to be ever more vigilant. And the average cost of car insurance has risen at a faster rate than at any time over the past 15 years. In fact, it rose by 14 per cent, according to the AA's latest benchmark British Insurance Premium Index.

Home insurance, on the other hand, has seen the cost of contents insurance remain relatively static although buildings cover has risen by about 10 per cent.

Will these trends continue into 2010? Are the days of cheap insurance over?

Car and home insurance are both very competitive – it seems that every other daytime TV advert and direct mail shot is from an insurer claiming they offer cheaper rates than anyone else. The comparison websites have also grown fast. Yet, despite this, premiums have continued to go up.

Because of the recession, motor insurers have seen investment returns falling and have been digging into ever-diminishing reserves to meet claims. At the same time the cost of claims has been rising – at one stage the industry was on average, paying out 110p in claims for every 100p taken in premiums – a situation that is clearly unsustainable.

Inroads into this deficit are being made through a combination of improving efficiency and premium increases. While I expect to see premiums continuing to rise during 2010, they should start to level off.

Also, 2010 should see two new pieces legislation that will help to contain costs. Firstly, in April, the government expects to put into effect legislation to allow electronic delivery of insurance certificates, something the industry has been lobbying for and which came to a head during the postal dispute in the autumn of 2009.

Today the certificate is little more than confirmation that the information it carries is on the national Motor Insurance Database, from which the police draw data for their automatic number plate recognition equipment which is very successful in helping to identify uninsured and untaxed vehicles. It is also used when you apply for your tax disc online.

Secondly, a new offence of "keeping a motor vehicle without insurance" will help stem the tide of uninsured drivers. It removes the excuse that a car kept on a drive is uninsured because it isn't used on the public highway. Either a car must be insured, or be subject to a SORN (Statutory Off-Road Notification) to the DVLA and if neither are in place, the owner will suffer a fixed penalty and the risk of having the car confiscated.

Claims following accidents with uninsured drivers add around 30 for every car insurance policy bought by honest motorists so this must be welcome news. However, the greatest contributors to increasing premiums are fraud and personal injury claims and these will, present the greatest upward pressure on premiums during the coming year. While the industry is doing much to control fraud, people are increasingly likely to put in claims for even relatively minor injuries. A planned review during 2010 of how personal injury claims are handled to simplify cumbersome and costly legal processes in otherwise straightforward claims is to be welcomed.

On the home insurance front, many people are expecting premiums to continue to rise following the headline-hitting floods in Cumbria last year. But while this event on its own will have relatively little impact, it does underline the concern that insurers have about climate change and the effects that this will have on property claims.

We are seeing more severe weather events. Flash floods in places with no history of flooding; mini-tornadoes; extreme hail storms all contribute to the battering that our homes seem to be suffering, quite apart from increasing potential for more frequent major floods in known risk areas, including the threat from rising sea levels.

The industry and its reinsurers are constantly monitoring the effect of severe weather on property and the likelihood and frequency of future claims. Much of their effort is spent looking well into the future but some of the problems are manifesting themselves now. This will see continuing rises in premiums as the industry will need to build reserves to cope with future major events.

TAX

VALERIE SMART

Tax Director, PricewaterhouseCoopers Edinburgh

The question for 2010 is not if we will see tax increases but when they will come into operation and who they will hit.

Benjamin Franklin wrote "In this world nothing can be said to be certain, except death and taxes". For 2010 a further certainty will be the announcement of higher taxes in the second half of the year with a wide impact across all of society.

The direct taxes, which are compulsory and raise the most money, are income tax, national insurance and corporation tax. The most effective indirect taxes, with an arguable element of consumer control are VAT and fuel duties.

It seems likely that we will see a budget within two months of an election so summer seems the likeliest time for changes to be announced. It is a big jump from the 20 per cent tax band to the 40 per cent tax band for higher rate taxpayers, so a real possibility would be to see more income tax bands introduced – perhaps a 30 per cent and 35 per cent band.

This could be combined with an increase in the upper threshold for national insurance although given the unpopularity of the recent changes – denounced as a tax on jobs – this may be an increase too far in the current climate. An increase in the rate of VAT also seems a real possibility.

A radical move for an election year would be to abolish inheritance tax replacing it with capital gains tax on death which would simplify the tax system and reduce costs of collection. Changing capital gains tax relief on the disposal of private homes to a rollover relief instead of a full exemption would also remove some anomalies from the system without hitting the property sector.

Dividends from shares are paid out of profits which have already suffered corporation tax, so only higher rate taxpayers pay income tax on them and even then at lower rates than on other forms of income. Removing the differential income tax rates charged on dividends would encourage companies to retain and reinvest profits rather than pay them out to shareholders and would prevent small businessmen saving tax by extracting profits as dividends rather than earnings but would hit the income of pensioners.

Corporation tax rates are unlikely to see large increases as Britain needs to stay competitive internationally but a possibility would be taking away inflation allowances on corporate capital gains bringing companies into line with individuals.