Jeff Salway: Savers forced to become borrowers

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CHRISTMAS can’t come quickly enough for payday lenders, preparing to cash in as yet more people turn to short-term borrowing.

For many households, Christmas is as much about debt and financial stress as it is about mince pies and bad knitwear. Some five million people will use short-term credit including payday loans to help fund their festive season, according to insolvency body R3.

It has also published new research showing that Scots are more likely than people elsewhere in the UK to get deeper into financial difficulties as a result of a payday loan.

And it’s not just vulnerable and low-income households that have been sucked in by the payday loan machine. The sheer numbers tell you that.

More middle-income Scots are turning to payday loans to get through the month or clear unexpected costs. The reasons are myriad: from unemployment and wage stagnation to higher living costs and the squeeze on affordable credit.

But there’s another factor that’s rarely mentioned: the attack on savers. Millions of people rely on the interest from their cash savings to supplement their incomes, and the combination of inflation and low interest rates has had a brutal impact.

Now savers are losing out as a result of the Funding for Lending Scheme, launched in August to give lenders access to cheaper borrowing. It’s been hailed as a success, with 30 lenders taking advantage of it to indulge in a mortgage rate war (albeit one that isn’t reaching first-time buyers).

But cheap borrowing means lenders don’t need to attract savings deposits with which to fund mortgages. And guess what? Those banks and building societies are withdrawing their best deals again, just as inflation heads back up.

The interest from the average best-buy easy access account has plunged from 3.25 per cent to less than 2.5 per cent in just four months. The average Isa rate is falling too, with just one account left paying 3 per cent.

It’s likely to get worse too. Most cuts have applied to new offers, but we can expect banks and building societies to target existing deals over the coming weeks.

Savers have been dubbed the forgotten victims of the financial crisis, with good reason. Now payday lenders are among those cashing in at their expense.

Drawdown rule change needed

THE nature of financial services means the most technical and seemingly trivial changes can have a profound impact on people. One example is the Treasury’s 2011 decision to reduce the level of income that can be taken in pension drawdown from 120 to 100 per cent of the GAD rate.

This is the rate set by the Government Actuary’s Department and is based on gilt yields. But with gilt yields (and therefore annuity rates) plunging to record lows, the income that drawdown investors can take has also fallen.

Some who entered drawdown in 2007 when gilt yields were at their peak have this year, on their five-year review, suffered a 55 per cent cut in the maximum income they can take from their pension.

Now, following political and industry pressure, there’s talk that the Treasury is reviewing the rules on income drawdown limits.

It all sounds very dry and it’ll never make headlines, but thousands of pension investors will breathe a massive sigh of relief if the Treasury does ease the restrictions.

Twitter: @vaughansalway