Newsletter – August 2016

NatWest and RBS are the first banks to issue warnings to 1.3 million businesses and commercial customers that they may have to start charging for bank deposits – in effect introducing negative interest rates. Whilst the norm is that money deposited in the bank receives interest in return (albeit not a lot at the moment), the banks will reverse this so that they are paid for holding the cash.

The charges will come into effect only in the unlikely event that the Bank of England sets a negative interest rate in their announcement scheduled for the week commencing 1st August, and these warning letters were to provide some “wriggle room” for the banks in this situation. If the charges were to be implemented, they would be aimed at encouraging borrowing and discouraging saving within the business sector, in order to provide a boost to the economy. Of course, it is very unlikely that rates will fall below 0.25%, but Mark Carney has indicated that this could be the case and, in so doing, has generated the effect that would be produced if rates were actually reduced, without it actually happening. A very clever man, with multiple cards up his sleeve.

Whilst, at present, it is only businesses that have been advised of this possible charge and personal customers will not be penalised, it is sure to increase the costs to consumers at the end of the business chain. And, who knows, if this course of action is adopted by all banks, what is to stop them introducing this for personal customers in the future?

The right time to borrow is definitely when interest rates are at their lowest, so if you have a credit card don’t rush to pay off your balance just yet, especially if you have money in the bank that means you are able to.

If you are in this situation it means you are at the very low-risk end of the borrowing spectrum, and using that borrowed money in this economic climate may well be more beneficial than using the money in your bank. But make sure that if interest rates do shoot through the roof or your circumstances change that you have a plan to clear your debts and remain in the ‘black’.

Long-term debt is said to be at one of the highest points in history across the UK, with the credit card companies doing little to address the issue. Any why would they? As long as their customers keep up minimum payments then they carry on making money.

With borrowing so cheap and a huge variety of companies, cards and offers to choose from, it is no surprise that people are tempted into the ‘buy now, pay later’ mentality of the credit card. This means that whilst credit cards have always been, and should always be, used for short-term debt, debts are being held for increasingly longer periods of time, with higher balances and less concern. On top of this, there is no incentive to save into cash accounts because of rock-bottom interest rates giving next to no return on your money.

Even with interest rates so low, saving should not be replaced with cheap borrowing. If you are keen to skip cash savings and avoid the cheap-debt trap, then investing offers an alternative savings route, of which you are all quite aware.

The auto-enrolment process introduced by the government for pensions has a 95% compliance rate from small businesses. The auto-enrolment scheme was meant to encourage people to save for their retirement rather than rely on state benefits, which are less than adequate for the average Brit.

As 66% of employees are reported to have signed up to the scheme, from the outside looking in it appears that this venture has been a success, despite it being quite a stretch for smaller businesses to incorporate into their policies. But is this enough? Are people educated on how much is needed to lead an enjoyable and active retirement? It is feared that some people may consider the ‘pensions box’ ticked and continue to pay the minimum possible into such schemes, only to discover that at retirement their small pots support a much lower standard of living than they have become accustomed to.

Saving for retirement is becoming more and more of a focus for young and old alike as it becomes increasingly obvious that the state simply cannot provide for our population in retirement. Therefore, it has never been more important to save into a pension, especially given the tax benefits this offers and new flexible rules that mean you have even more freedom. Whilst I am sure that few of you intend to rely on the state pension, maybe just check once again to be certain that in retirement you can continue with the jet-setting, comfortable and luxurious lifestyle you may have become accustomed to.

Following on from the previous article, one thing not to rely on to supplement your pension savings is money tied up in property.

Whilst property is a good long-term investment in most cases, you still need to be aware of the risks of holding such a direct investment. Unlike other investments, your money really is tied up and is not easily accessible – not ideal in emergency situations. In addition to this and in light of Brexit, nobody knows how the housing market will react when we really get into the process of leaving the EU. Having precious retirement money trapped in property may prove fatal if the housing markets are negatively affected to a large extent.

Whilst you could downsize to free up some money, taking into account fees etc. it is difficult to generate enough equity to make this worthwhile for some. Also, moving to a smaller home may not be what you want in retirement, especially as you will probably be spending more time at home. So the message here is to really focus on your pension, and the benefits and increased freedom and flexibility you have if you avoid using property as a pension alternative.