The coming year looks set to be challenging for our personal finances. What is going to happen to the mortgage market? How can we sort out our debts? Will our savings become worthless as interest rates fall? But in all times and seasons there are winners as well as losers.
Scotland on Sunday's Money Help Desk panel of experts predict what they expect to see over the coming 12 months, and how you can best navigate the twists and turns of the next stage of the economic cycle
White-knuckle ride for shares will continue but look for green shoots of recovery
JUSTIN URQUHART STEWART
Director Seven Investment Management
The year 2008 was a tough one, and we expect 2009 to be equally hard, although we hope that the equity markets will stabilise and rally a little by the year end, supported by the Government's spending plans, lower interest rates, lower fuel prices and the weaker pound.
At Seven Investment Management, we believe that the UK household has borrowed far too much cheap money in the form of mortgages on homes, car loans, credit cards and other forms of credit. With the banks in trouble, and now much more circumspect about who they lend to, the real cost of borrowed money will increase, despite the Government's best efforts to induce them to lend.
Basic economics suggests that when the real cost of a product goes up, in this case credit, demand will fall. The high real cost of borrowing, and widespread and increasing unemployment, will lead the UK consumer to batten down the hatches, cut back and gradually reduce their debt to more manageable levels.
This will suck money out of the high street and add to the slowdown already under way. It is, frankly, a very unpleasant downward spiral we are caught in.
The impact on the markets will be twofold. Firstly, corporate earnings could fall as consumers spend less, both at home and in our overseas markets, further putting pressure on the stock market.
In addition, the cost of credit will lead many firms to issue new shares to replace existing debt arrangements, reducing the already weak buying power of the stock market.
However, it is possible that towards the end of next year we may start to see a rally in the equity markets as Government spending packages, lower interest rates, lower oil prices and weaker sterling start to foster the first green shoots of the recovery.
The second impact of the UK consumer battening down the hatches is that inflation could fall, which could be very positive for gilts and other bonds, such as high-grade corporate bonds, which have been very badly beaten up this year.
Investors may want to seriously consider holding a portion of their investment overseas, as we expect sterling to continue to be weak, particularly against the euro. For this reason, we like high-grade government and corporate bonds issued in euros, as well as our own domestic sterling variety.
FAMILY & PROPERTY
Children and adults need greater security
Director Sheehan Kelsey Oswald
IT MAY be a vain hope, but I am looking to 2009 for some improvements in the housing market.
Twelve months ago couples separating were able to get on with their lives much more easily – the difficult thing often was agreeing if the house was to be sold. People are now having to live under the same roof for much longer, or trying to run two households when they simply can't afford to.
Too many of us have become used to relying on biennial remortgages to free up cash to pay off debt accumulated as a result of living beyond our means, and as mortgages have become more scarce and house values have fallen the difficulties are now really beginning to bite.
Scottish consumers also now face additional uncertainty, expense and delay resulting from Home Reports, which became mandatory from December 1. Anyone selling now must obtain a Home Report before marketing the house. Indications are that the costs will range from 450 for a property valued up to 100,000 to 1,400 for properties valued at 800,000 – all before VAT and estate agency and conveyancing fees.
I am also looking forward to the recommendations of the Gill review on the provision of civil justice. There have been indications that the recommendations will be brave and far-reaching.
As a family lawyer, I hope that the policy group will grasp this opportunity to radically change the way divorce actions, in particular, proceed through court. We need a mechanism to ensure that parties make early disclosure of their financial position, judges and sheriffs who are experienced and interested in family cases, and we need to make the process of divorce and separation quicker, less stressful and less expensive.
But top of my wish list is the successful implementation of the Adoption and Children (Scotland) Act 2007 – finally.
For three years Scottish children have been denied the opportunities of their counterparts south of the border and it looks hopeful that that situation will end in 2009.
Scottish children deserve the security that this act will bring and I hope that the difficult work that needs to be done to get the act into force will finally come to fruition early in 2009.
Flexibility key for home loans
Mortgage adviser Punter Southall, Edinburgh
IF YOU are coming to the end of your mortgage deal, it may pay you to stay on the standard variable rate for a while. It will cost you nothing and give you the flexibility in the future to either repay capital or to transfer on to a new rate in the future should you wish to, with either your existing lender or a new one.
When lenders start to compete again for your business, I predict the fixed rate market is where they may do it. The differentials on tracker mortgages at the moment are very high.
Millions of customers who were lucky enough to have fixed the margin above base rates on their tracker mortgages in 2007 and early 2008 are paying between 0.1% and 0.25% above the Bank of England rate (that is a total rate of 2.1% to 2.25% and could soon be even lower). Currently, you are doing well if you can obtain a differential of below 2.25%, meaning a pay rate of 4.25%, not including the fee you would have to pay for it. I believe that, to a certain extent, the current differentials are so high to help fund the loans they were "giving away" last year.
Fixed rates are slightly different. Based on swap rates (ie the rate money markets charge to swap fixed and variable money) the banks and building societies have a known cost for the term of the fixed rate. They can build in their mark-up and fee and then have a known profit for a number of years. When rebuilding their balance sheets, this will be very important to them, as it allows them to massage their profits. Currently, swap rates are below 4% over two, three and five years, so lenders do have some room for movement.
If you are moving and there are no attractive fixed rates available, I would go for as short a term tracker as possible. Most new loans are tying you in with a lender, and, as I have said, most new rates are above the lender's standard, so by taking a short-term tracker for two years you are only committed to the higher differential for this period, after which you will revert to the lender's standard variable rate, which at the moment will be cheaper than the initial rate you have been charged.
If we have started to emerge from this economic crisis by then, you will be free to leave the lender and seek a cheaper alternative elsewhere whether this be fixed or tracker. But if we haven't, you may see a reduction in your payments anyway. Better still if you go with Nationwide, C&G (LTSB) or the Woolwich, some of their loans will even let you switch to a fixed rate within the tracker term and they will waive any early redemption charge. However, you may still need to pay a new reservation fee. Be sure to check the terms and conditions before signing.
Savers will have to look harder for best rates as cuts continue
Savings expert Moneyfacts
FOR most of 2008, savers were seeing some of the best rates ever offered, with rates much higher than we would normally expect at that level of base rate. However, as the year draws to a close, many will feel they are getting a raw deal as rates continue to be cut in line with the Bank of England base rate.
Although rates will inevitably fall at the beginning of 2009, as the latest 1% cut filters through, savers should be heartened by the fact that, following the last reduction, many providers opted to reduce some of their more competitive deals by less than the full 1.5% cut.
Institutions do not want to deter their savings customers as they are a vital part of their business. As a result, they are all looking to maintain competitive deals in a difficult market.
If you don't need access to your money for a period of between three months and five years then you could opt for a fixed rate investment. Rates of 5% can still be found on fixed rate bonds, or 4.5% on fixed rate Isas, which also benefit from having tax-free status. As banks and building societies have a guarantee that they can have your money for the agreed term, rates are usually higher than on variable rate savings accounts, and if the base rate continues to fall, you will be quids-in.
As we enter 2009 and the end of the tax year, rates should start to increase on Isas as the fight to claim the money of those who have yet to put away this year's allowance begins. Isa rates can seem low compared with other variable accounts, but when you include the tax boost, Isas become more favourable.
2009 is unlikely to have a repeat of the boom in rates we saw in 2008, but savers will still be able to find competitive deals. To make the most of their money, savers need to do their homework and shop around. You can't assume that your existing savings organisation will always offer the best deal, as in most cases they won't.
Many savers have also learnt a harsh lesson in 2008: that the banks are not infallible. Even some of the best known banks got into trouble. As we never know what is round the corner, by making sure you have no more than 50,000 with any one deposit-taking institution, you can ensure your money is 100% safe in 2009.
Remember it is good to talk when the problems mount
Head Money Advice Scotland
IF YOU are suffering and hung over with debt problems after Christmas, there is help at hand for you. The key thing is don't panic.
Looking forward into next year, there will be some real casualties which a plaster won't fix. We know already that many people are affected by credit card debt and other debts, so here is some advice.
The key thing is to keep in touch with your creditors and let them know that you are having difficulties. It is likely that if you can't manage to pay your credit cards, other debts are affected as well. If you seek advice from a money adviser they will be able to assist you with writing to your creditors, and will work out an income and expenditure statement.
We all know that sometimes we get caught up in the rush for presents and food, and can neglect the priorities such as council tax. If you fall behind, it is important that you contact the local authority and try to set up an arrangement with them which also takes into account payments for other debts. Many local authorities have in-house money advisers who will be able to help set up a repayment programme and write to your other creditors. As council tax is an ongoing liability, it is important that you make an arrangement to pay arrears, as there will be future payments required.
For many homeowners the current situation may worry them, especially if they have a fixed rate mortgage which is coming to an end, and may possibly have arrears and be worried about getting another mortgage. Try not to worry too much, as a money adviser can usually help. Your lender may also agree to payment holidays, so it is important you let them know about your situation.
If you are working and can afford to pay creditors on a regular basis, and if they agree, then you could enter into a Debt Arrangement Scheme. This is a Government-backed scheme, which has no fee to enter the scheme. You do, however, need to access an approved money adviser who will act on your behalf and negotiate with the creditors.
It goes without saying that borrowing more to get out of debt is only adding to the amount you owe and all the problems that go with it.
So for some readers the warning bells are ringing, and like Father Christmas it is time to tighten the belt!
If you need more help, visit www.moneyadvicescotland.org.uk for details of money advisers in your area.
You will find two wheels are better than four as car premiums carry on rising
Insurance expert The AA
IT'S a brave person who will predict with any measure of certainty what's going to happen during 2009, especially given the state of the economy and how much less our pound will buy.
But insurance remains a must. This year will, I think I can say with reasonable certainty, be a year when car insurance premiums will continue to rise – perhaps by more than 10% (they rose by 8% last year). That's because personal injury claims and the cost of accident damage repairs are rapidly escalating. But dismiss any thoughts about driving without cover, as technology used by the police is becoming increasingly successful at identifying those without it.
One way to economise might be to go with two wheels rather than four. A scooter is cheap motoring with amazing fuel economy, and cheaper tax and insurance: to say nothing of beating the traffic jams. So buoyant bike sales can be expected, especially when the warmer weather comes.
On the home front, premiums will remain great value for money. But one little-publicised fact is that the Government agreement which ensures people in homes prone to flooding can still obtain cover won't apply to properties built from January 1, 2009. Check before you buy, otherwise you might find it difficult to insure your new home if the area has a history of flooding.
Many readers will be thinking about getting fit after the Christmas excess. Remarkably, about 20% of Britons are worried about the weight of their pets too, according to a survey we conducted.
Like humans, fat cats and dogs suffer health problems, so make sure their insurance is up to date. And given that a pet can be an enormous comfort in times of trouble, many people will be thinking about the patter of tiny paws, so pet insurance premiums could well become more competitive.
With the pound reaching parity with the euro and little sign of improvement, holidaying in the UK will enjoy a boom. Britons will become a 'stay at home' nation and will consider caravanning – so there could well be great caravan insurance options out there too. And given that people are keeping their cars for longer, there are likely to be more breakdowns. So don't forget your breakdown insurance.
Sadly, insurance claims for burglary go up during downturns. But by taking care of your property, whether it's your car, home or caravan, you can reduce the risk of being a target for thieves. And by making sure you are properly insured you are at least protected if the worst does happen.
Old age provision will feel pain of cuts in contributions and scaled-back schemes
Head of pensions research Hargreaves Lansdown
AT THE risk of over-simplifying, if 2007 was the year the credit markets hit the buffers, then 2008 was the turn of the equity markets and 2009 is going to be the year when the real economy finally realises it has run off the edge of the cliff and starts falling. It probably isn't going to be very pretty.
The three sectors that have driven the UK economy forward in the past few years – financial services, construction and retail – have all suffered sharp reversals. This means the economy is going to contract and jobs will be lost. We have to go through the slow process of de-leveraging, of paying off debts and of adjusting to the new reality. Actually it is the old reality; we all just got a bit carried away.
This in turn is going to have a knock-on effect on pension provision. I expect to see more surveys showing declining pension contributions; employers announcing scheme restructuring to reduce costs; more people having to put off retirement or to retire on a lower income than they had been planning for.
The Pension Protection Fund is going to have a busy year. Hopefully this won't involve a major scheme failure, because the fund doesn't have a substantial reserve of assets; in fact it too is presently in deficit. In addition, from January 2009, the rate of increase applied to deferred final salary benefits will reduce from 5% to 2.5%.
For those investors who are able to take a long view – pensions benefit from being able to plan over decades – there will be some investment bargains to be had in 2009. The most popular sectors for positive returns appear to be investment-grade corporate bonds, high-yield UK equities and North America.
Annuity rates are likely to keep heading down throughout 2009.
Also, early in 2009, we should hear some news on Equitable Life from the Government, once it has worked out how it is going to justify ignoring the Parliamentary Ombudsman's recommendation for compensation.
From April 2009, the cost of buying back added state pension years will increase significantly. The end of the tax year is also the deadline for registering large pension funds for protection from the Lifetime Allowance.
Up for reform should be the cost of public sector pension provision; also the restrictions on how pension benefits are paid out from age 75. Both these issues are long overdue for Government attention and are the subject of popular campaigns for reform.
The typical tenure of a pensions minister is nine months. So there is a fair chance that either Rosie Winterton or James Purnell, or conceivably both, will no longer be focusing on the nation's retirement provision by the end of 2009.
Why we need Darling to wield his axe on bill payments now more than ever
Tax director PricewaterhouseCoopers
A GREAT deal has been said about whether cuts to VAT will stimulate the economy, when tax rises will be required in future. At the present time cash flow is king for both individuals and small businesses. It would be a welcome measure if the Chancellor recognised this by axing the requirement for payments on account of tax bills, which bases tax bills on the previous year's earnings.
Early payment of tax makes sense when incomes and profits are rising but is a crippling burden when they are falling. Accurate prediction of income is more difficult than usual in the current environment, so estimating the tax bill in order to reduce payments on account is a difficult process.
It would be far better if the Chancellor extended the tax payment dates, boosting every taxpayer's cash flow. This could be extended to individuals paying tax under PAYE by not attempting to collect tax on investment income through the tax code.
Similarly, there has been a lot of complaint about banks not passing on interest cuts to mortgage holders. However, the Bank of England rate is not necessarily the rate at which banks borrow money which they in turn lend, and, of course, the other side of the coin is the impact on the income of savers. If the Chancellor was to reintroduce mortgage interest relief for a limited period of, say, five years, there would be an immediate boost to mortgage payers' cash flow, no impact on the income of savers and a boost to the housing market.
Joining up the tax system more would be very welcome. The UK system is disjointed and confusing to many. Consider three examples. Companies take inflation into account when their capital gains are taxed, but individuals cannot. If it is not justifiable to tax inflationary gains of companies, why should it be so for individuals?
The second example considers the status of marriage in the tax system. Transfers between spouses normally don't incur inheritance tax, and this applies until the couple divorce. By contrast, the exemption for capital gains on transfers between spouses only applies until they separate. Is it logical to distinguish in this way? And why should HM Revenue & Customs charge interest on tax paid late at a higher rate than they pay on overpaid tax refunded? They are not a profit making body.
Making tax changes transparent when they are announced is something taxpayers would welcome. Stealth taxes, particularly those imposed by fiscal drag when allowances and exemptions aren't updated, are a particular issue. With Xboxes about 200 and bicycles often more than 250 there are enough concerns about the cost of Christmas without worrying about whether there might be an inheritance tax cost as well if the 250 small gift exemption, set years ago, is exceeded. Inflation-linking all exemptions would deal with this.