How to limit damage from spending cuts

MANY families will face a declining income in the years ahead, following last week's announcement of a package of austerity measures designed to "restore sanity" to the public finances.

In January, prices in the shops will jump when VAT climbs from 17.5 per cent to 20 per cent, at a time when many staff are facing pay freezes. In April a hike in National Insurance to 12 per cent will lop another 1 per cent off pay packets.

Families have been hard hit. From January 2013, child benefit will stop for higher earners, and students can expect to pay more towards their education. Rail fares will increase by 3 per cent on top of inflation from 2012. On the jobs front, 500,000 public sector posts will disappear. The pension expectations of those in work have taken a hammering, with the state pension age rising to 66 by 2018. Women's pension age, which was already increasing from 60 to 65, will now rocket much faster as a result.

Public sector staff will be asked to pay 3 per cent more into their pensions from 2012, and have been put on notice that their final salary arrangements are over. Elsewhere, quasi-compulsory pension contributions are to be introduced in two years for private sector employees not already saving into a pension.

Pensioners have not escaped entirely. From next year, the pensions of state workers and some in private company schemes will climb more slowly, as annual increases are dictated by the lower consumer prices measure of inflation.

But many pensioner benefits, such as the winter fuel allowance and free bus passes, have been preserved.

The markets responded well to the Chancellor's package, leading to lower interest rates. This not only gives security to the UK's 11 million mortgage borrowers that their monthly bills will not rise sharply soon, but it has also allowed some lenders to slash rates, particularly on five-year fixed deals. Furthermore, falling interest rates make it cheaper for the government to borrow as well, allowing the deficit to fall faster, and hasten the light at the end of the tunnel.

Elsewhere, mortgage support for those made redundant has been extended for a further two years.

From April, the personal tax allowance will rise by 1,000 to 7,475, and the threshold for National Insurance also climbs, helping to shield the lower paid from the 1 per cent hike.

The Isa allowance will lift by 500 to 10,669, boosting the tax haven. And from April the state pension will rise faster in future, thanks to a new link with earnings. Finally, the austerity measures will be phased in over years. This will allow businesses and households to plan their finances to protect them from the storm.

AWD Chase de Vere's Patrick Connolly said: "Households need to look carefully at money coming in, and money going out. Unfortunately, there is not a lot you can do about money coming in. But most households can cut their spending. Check you are not paying over the odds for insurance or utilities. Identify areas of waste which could be cut back, and release money to cushion you for the future."

Scotland on Sunday suggests ten ways to beat the cuts.

1 Shop now to beat VAT

If you have any large purchases in mind, such as new carpets, kitchens or a car, buy now, as you will pay more when VAT rises to 20 per cent in January

2 Avoid National Insurance hike

Talk to your employer, to see if he will pay more into your pension, as a way of mitigating higher NI bills. This will not be a good idea if you are in a final-salary pension scheme, or likely to receive any other salary-linked benefits, as your salary may be lower as a result.

3 Hang on to child benefit

If you are approaching the higher rate tax threshold, you may want to pay more into your pension, or swap a pay rise for other work-related benefits to avoid losing the child benefit. Extra time off might be tempting with a family.

4 Prepare for pension age rise

If you do not think you will be able to work until 66, fill the state pension gap yourself. By 2018, the basic pension will be around 6,300. This can be plugged by saving roughly 60 monthly into a pension.

Women face a more uphill task, with those in their mid-50s, who once expected to retire at 60, suffering a six-year wait for a state pension. However, most will receive a better state pension in their own right, as they only now need 30 years' contributions for a maximum payout.

5 Coping with redundancy

If you fear your job may be at risk, talk to your employer about alternatives, such as a non-paid sabbatical, shorter hours, a job share or a pay cut. It may pay you to stay in work until the economy recovers, when better options will be available.

6 Get compensation

If made redundant you are entitled to compensation, provided have worked for two years. The minimum you get is statutory redundancy. The under 22s are entitled to half a week's pay for each year in the job. Between 22 and 40, you get a full week for each year, and above that you get a week- and-a-half, up to 20 years and 380 weekly. Companies may offer staff more than the minimum.

7 Shelter lump sums

The first 30,000 of a redundancy payout is taxfree, but after that it is taxed. Those in line for big compensation, will soon find themselves in the 50 per cent tax bracket. In the current tax year, it will still be possible to pay 100 per cent of your earnings for this year into a pension, provided you earn less than 130,000. Next year maximum annual pension contributions are restricted to 50,000, but you can carry forward unused allowances from the previous three years. In theory, then, you might be advised, where possible, to delay redundancy until after April, where you could potentially shelter significantly more of your lump sum from tax.

8 Cut mortgage bills

Mortgage companies have begun to lower interest rates, following last week's fall in five-year swap rates to 1.99 per cent and two year rates to 1.2 per cent.

It is possible to fix a mortgage for five years from below 3 per cent with Ing Direct, if you have 40 per cent equity and can pay a big deposit. Five-year deals below 4 per cent are also available from NatWest, Yorkshire Building Society and First Direct. Look at the best buy tables and consider whether switching to a cheaper deal could save you money.

9 Save save save

If you face losing child benefit from 2013, try to put part of the benefit you receive until then into a savings account to soften the loss. The increased Isa limit should also be exploited to shelter your income from tax.

10 Claim all your benefits

Citizens Advice Groups and various charities can offer support and advice.

'We have to tighten our belts but we have jobs'

DISTRICT nurse Evelyn Ryan is resigned to paying higher contributions into her pension, and is just thankful to have a job and a pension to look forward to.

Evelyn, a nurse for 36 years, said: "It's not an ideal situation. But I think we have got to be realistic given the state the economy is in."

Chancellor George Osborne announced that increases to the amount public sector staff pay into their pensions will be phased in, and targeted at the better paid.

However, by 2014/15, the government hopes to raise an extra 1.8 billion through contributions, which averages out at 3 per cent per employee.

Evelyn, from Glasgow, said: "We are all going to have to tighten our belts. No-one wants to pay more into their pensions, because we will be left with less at the end of the month. But at least we will still have a job."

Evelyn, who is a team leader at Coatbridge Health Centre, could yet be hit by restructuring at NHS Lanarkshire. The authority has reorganised top management but is now working its way down the ranks. Some team leaders may be made redundant, and Evelyn faces having to re-apply for her own job.

She said: "I don't think we are going to lose many, and hope those we may do can be found among staff approaching retirement. On that basis, it shouldn't be too bad. But it has implications for us all.

"For me, it's being in a job that matters, and in the NHS we still feel relatively safe. If you've got a job and a pension, then it's reasonable to be asked to make a fair contribution."