Money news, advice and predictions for savers and spenders. This week: how to survive the banking crash.
By Jeremy Gates
When the bills came in for the mess created by overpaid bankers in 'The Age of Irresponsibility', there was never likely to be a rush of people stepping forward to pick up the tab.
But it doesn't take much imagination to hear the groans and guffaws in golf clubs across Britain as older people with time on their hands - and savings, hopefully somewhere safe - digested the implications of the Government's £500 billion bailout package to prop up the ailing banking system.
Premium Bonds, where it has been devilishly hard to be a winner for many months, will get even meaner in prizes after National Savings and Investments (NS&I) confirmed a second set of rate cuts within 18 days.
Although the two £1 million jackpot prizes each month are preserved, the prize fund rate fell from 3.40% to 3.20% from October 7.
For good measure, NS&I slashed its Direct ISA to 4.80% after the cut in Bank base rate. That could leave it more than a percentage point below Cash ISAs with some building societies.
Those in deeper shock may be shareholders in Lloyds TSB, many of whom held the stocks in recent years to subsidise their pensions.
Lloyds TSB has not dared to tinker with the payout for some years, or even to admit it could be cut, fearing investors would march out en masse if it did.
Barely a fortnight ago, these shareholders could congratulate themselves on their generosity as they accepted a dent in that magnificent dividend as the cost of their 'ultra-conservative' bank rescuing a stricken HBOS.
After worldwide stock market mayhem, Lloyds TSB's famous dividend could vanish completely for some time as the Government demands a decent return on its new preference shares ahead of ordinary shareholders.
We won't know for sure until Lloyds TSB announces full-year results in February.
Of course, the interests of Lloyds TSB's army of small shareholders - more than 636,000 of a total 813,000 hold fewer than 1,000 shares - who have had a good run for their money, can hardly be equated with the overriding importance of saving our banking system.
But serious savers, which tends these days to mean 50-plus folk who enjoy glancing through cruise brochures, face a downhill ride from here of Cresta Run proportions.
Leading mortgage brokers, such as Ray Boulger at Charcol, think the Bank of England base rate will hit 3.5% by mid-2009, and others in the financial world believe rates will go even lower to kickstart genuine economic revival.
Frank Cochran, of Wolverhampton-based financial advisors FSC Investment Services, says: "The Government should really cut rates by 2% now to increase liquidity.
"The threat of inflation that poses is the least of our worries when the alternative is massive deflation and a huge loss of jobs."
However, the real victims of this week's earthquake are those saving for a pension, in particular the 5.3 million members of defined contribution (DC) pensions held mainly in managed funds massacred in the tempests convulsing the markets.
Fund manager Fidelity calls them "the forgotten millions" of the credit crunch - and it isn't difficult to see why.
Traditionally, pension funds always relied heavily on the big banks to deliver both the capital growth and dividend income which underpin healthy long-term returns.
This crisis could have a devastating impact on the pension 'pots' of millions of workers.
"Many personal pension funds will have been eroded by up to 30-40% over the past 12 months," says Geoff Tresman, chairman of financial advisors Punter Southall.
"The severity of the impact may depend on how near savers are to retirement date, and how aggressive they have been in investment planning.
"Most people will have invested in managed funds of equities, gilts, properties and cash. The severity of this crash may easily have wiped 30% off their fund values, and those in a more aggressive stance may have lost up to 40%."
Julian Webb, executive director of DC business at fund managers Fidelity International, says: "We have received a larger than usual number of calls from DC members this week, asking where their money is invested.
"This is a very encouraging sign, but I do worry the vast majority may not be taking such an interest."
Perhaps millions simply don't want to know the truth of what has happened to their savings.
A new survey from the National Association of Pensions Funds (NAPF) predicts a further wave of closures of defined benefit (DB) pensions linked to final salary by private employers.
In many cases, employees currently enjoying DB pensions will be swept into inferior DC schemes because their pension fund trustees fear that companies simply won't have the cash to guarantee a final salary pension.
The NAPF says that even before this crisis, one in five employers still offering DB pensions had plans to 'level down' pension provisions by 2012.
The huge hit to personal pension fund values might explain, says financial advisor Hargreaves Lansdown, why more than one million people stopped paying into private pensions this year. This trend could intensify when others see how their pension pot has fared.
But the real fall-guys of the present situation are pensioners who have to buy an annuity in the present circumstances - either because retirement is imminent and they need money to survive, or because they are reaching their 75th birthday, when the law insists a pension pot is used to buy an annuity.
With a shrunken lump sum and interest rates set to fall, this is not the best of times for many savers to buy an annuity.
Tresman says some clients opt for income drawdown - taking enough from a pension pot to cover daily living expenses, while leaving most of their money invested in the hope that markets can recover.
Traditionally, DC pension savers approaching retirement are told to move money gradually away from riskier equity holdings and into lower risk areas like bonds and gilts, possibly gilt funds - typically by 10% of fund value per year in the decade up to retirement.
Tresman fears this crisis is so severe that the traditional way of managing a pension - letting experts worry about it - may no longer be adequate.
"We are in uncharted waters," he says. "Anybody approaching retirement should get expert advice to see where their money is invested, and whether they can delay taking a pension for a year or two in the hope that markets recover."
:: INFORMATION: Punter Southall (0207 839 8600); FSC Investments (0190 242 2333); Hargreaves Lansdown (0117 900 9000).
POUNDNOTES
:: Although the 0.5% cut in Bank of England base rate should help homebuyers, there are doubts if these benefits will extend far below the best-quality buyers who only ask for fairly conservative percentages of purchase price.
"With further Bank base rate cuts expected over the next few months, it is still too soon to buy a fixed-rate mortgage," says Ray Boulger at leading brokers John Charcol.
"We continue to recommend trackers, preferably one with a droplock option enabling the borrower to lock into a low fixed rate just before the cycle turns and rates begin to climb again."
:: Fierce competition in the equity release market, following the decision of many older homeowners to sit tight until storms pass, has led to a dramatic fall in their interest rates, says Key Retirement Solutions.
Current rates on equity release loans start as low as 6.03%, more than 1% below some of the rates available in 2003.
Dean Mirfin at Key Retirement says a borrower looking to remortgage a sum of £98,791 would pay £293,909 if they stayed with a Northern Rock loan charging 7.3%.
But if they switched to a Just Retirement on 6.49%, the cost over 15 years plunges to £256,285 - saving more than £37,600.
"After an initial period, exit fees may no longer apply for some plan providers, so consumers can make a true saving which is not eaten away by fees," Mirfin says.
Contact Key Retirement at 0800 531 6010.
:: Although HBOS might be trying to help its four million credit card customers by allowing them to make a minimum payment of only 1% on their outstanding balances, Simeon Linstead of price comparison site uSwitch.com is warning that there could be a sting in the tail.
"It doesn't seem that all customers will benefit from the change, and some people would be better off under the 2% minimum repayment ruling," he says.
"For instance, a consumer with an average balance of £1,384 will actually end up paying £3.23 more interest in the first year under the new minimum repayment terms - this increases to £51.39 on a balance of £10,000."
:: The cost of personal loans is climbing, while all eyes focus on shares, with some rates up by as much as 9%: up to 36.9% APR for loans of £1,000-2,999 and 25.9% APR for loans of £5,000-7,499, according to Louise Bond at uSwitch.com.
Current best buys for £10,000 borrowed over five years include Your Personal Loan.co.uk at 7.60% APR, followed by the AA at 7.70%, Moneyback Bank and Lombard Direct at 7.80% and Abbey at 7.90%.
"Personal loan best buys are changing every day, demonstrating how unpredictable and volatile the current climate really is," Bond says.
:: HIGH FIVE SAVERS:
Phone No Rate Account Period Deposit Interest paid
Anglo Irish Bank 0845 455 2222 7.05% (F) Fixed Rate Bond One Year Bond £500 On maturity
Coventry BS 0845 766 5522 6.60% Sixty Plus Post-Save None (R) £500 Yly
Secure Trust Bank 0121 693 9111 6.57% 60 Day Notice 60 Days £1,000 Quarterly
Whiteaway Laidlaw Bank Ltd 0161 833 5444 6.56% 60 Day Bonus 60 Days £1,000 Yly
West Bromwich BS 0845 338 7295 6.56% Crown 30 Day Notice 30 Days £1,000 Yly
:: TOP FIVE BORROWERS:
Phone No Rate Period Max% Adv Fee Incentive
First Direct 0845 610 0100 5.49% for two years 80% £999 Yes
Britannia BS 0800 013 2322 5.64% for three years 80% £999 Yes
Marsden BS 0800 801645 5.69% to 30/09/13 75% £949 Yes
First Direct 0845 610 0100 5.79% for two years 80% £598 Yes
HSBC 0800 494999 5.94% for term 90% £499 Yes
Code:
*F - Fixed
*P - Operated by Post
*B - Operated by Post/Telephone
*T - Operated by Telephone
*W - Operated by Internet
*H - Operated by Internet/Telephone
*S - Available only to those aged 50 or over
*R - Available to those aged 60 and over.
:: Source: Money£acts - Tel: 0160 347 6476 (All rates subject to change without notice)
