The term savings fixed rate will be uncomfortable for many of the over-55s if a new report from Aviva is to be believed.

The report concludes that around 25% of over-55s are having to take the unwanted step of dipping into their income-generating savings in order to pay for life’s unexpected expenses. And for those whose financial plans embody the savings fixed rate schemes, there could be a tightening of the purse strings in the future.

The report revealed that the majority of over-55s (92%) have faced unexpected expenses in the last five years. What’s more, for this age group, the biggest financial fear is the rise in the cost of living. Some 64% cited this as the thing that keeps them awake at night. And given that this worry has gone from 18% of those asked in May 2010, to 64% in the latest survey, then this demonstrates the sense of panic and bewilderment caused both by the effects of the recession and the Government’s plans regarding the austerity measures.

And when it comes to financing those unexpected expenses, most of the over-55s dip into their emergency savings funds to foot the bill. A quarter use income-generated savings to fund the payout; some 17% cut back in other areas to make savings; just over 10% organised a loan, or paid by credit card; and, 6% sold assets.

Aviva’s Clive Bolton, a director of the company focussing on retirement, said about the findings of their report:
“Over the last thirty years, people have generally seen retirement as an opportunity to relax after a long working life and enjoy the fruits of their labour.

“However, when you consider that for a savings pot of £16,296, you would get an annual gross income of just £117 from the standard branch based notice account, you can understand why many over 55s are very worried about their finances. In fact these figures reveal that one in five over 55 households is struggling to get by on almost a third of the national average income.”

She went on to explain that:

“Retirement income is also relatively fixed which is why any rise in the cost of living is particularly concerning for this age group. This coupled with the fact that people often have to pay for unexpected expenses for which they have made no provision highlights how vitally important it is to build up retirement savings over your entire life.

“The Aviva research shows that as longevity increases individuals will spend longer in retirement. As such we want to help them plan their retirement finances so that they can enjoy the best possible lifestyle in their later years. At Aviva we offer a range of saving and investment solutions, as well as access to financial planning tools, to help individuals save for both planned and unplanned future expenses.”

In short, a worry for anyone with savings fixed rate plans.

Guest Article by Neil Camp

The latest interest rates remain unmoved; staying at 0.5% for the 18th consecutive month.

It was in March 2009 that the rates first dropped to their lowest point ever, but news of the latest interest rates have coincided with calls that they must now be increased in order to curb inflation.

The Monetary Policy Committee’s decision this month to leave rates where they were surprised no-one in the City.

But the clouds on the horizon include the CPI inflation figure for July which was 3.1%; way above the 2% target set by the Bank of England.

Furthermore, for the third month in a row, the minutes of the last Monetary Policy Committee meeting revealed that one member, Andrew Sentance, had voted again for a rate rise.

And there was good news for fans of the Bank of England’s quantitative easing scheme which has so far seen some £200 billion committed to its ideals. The Bank confirmed that they were continuing with QE and that it may well be further expanded.

Graeme Leach, chief economist at the Institute of Directors, said:
“The Bank of England has held fire for another month, but we think the quantitative easing gun is about to be reloaded and the order to shoot given. Whilst above target inflation has stopped the MPC pulling the trigger on a further extension in QE this month, the economic threat from weak money supply growth looms ever larger.”

Other independent forecasts, including the National Institute of Economic and Social Research, have confidently stated that the Bank of England will keep interest rates at the current record low until the middle of next year, but if inflation becomes an issue, this may well look optimistic.

And as another negative, observers point to a sluggish UK rate of growth, with a not unreasonable 1.2% in the second quarter is expected to be eclipsed by a worse figure in the third quarter, giving rise to fears of a double-dip recession.

The CBI spokesman, Lai Wah Co, came out with the following view:
“In recent weeks there has been more talk about the need to expand monetary policy, amid concerns about how quickly growth momentum will fade in the coming quarters at home and abroad. However, economic indicators still suggest the UK recovery is on track, although we expect it to be bumpy and slow.”

And the British Chambers of Commerce applauded the fact that the latest interest rates remain unchanged. Their chief economist, David Kern, said:
“The government’s tough deficit-reduction measures, although necessary to repair the public finances, will increase the threat of an economic setback. Since sustaining the recovery must remain the priority, it is absolutely vital that the MPC maintains the current low level of interest rates until the middle of 2011 at the earliest.”

Guest Article by Neil Camp

The recent report from the Financial Services Association (published 13.07.10) made the point that the share of interest only mortgages has been increasing.

It said that at the peak of the market, over 30% of all mortgages taken out were interest only.

And what worries the Financial Services Association, is that many people taking out interest only mortgages do not have a suitable financial vehicle to pay them off once they are due. A large number of people rely on house inflation, or other plans (such as a windfall, or hoped for inheritance) to see them through at the end of the mortgage term.

These findings were part of a larger report which made a number of observations. Most worryingly was that nearly half of all households with a mortgage had either no money left, or indeed had a shortfall, every month after the payment of the mortgage and living costs.

This has encouraged the Financial Services Association to enforce lenders to ensure that people can actually afford the mortgage they are thinking of signing-up, has signalled the virtual ending of the self-cert mortgage (where people verify their own income) and told financial institutions to be more aware of possible problems with their borrowers should they start falling behind on payments. It stated that those borrowers with a damaged credit history were very vulnerable.

As for arrears charges for those that fall behind on their mortgage payments, the Financial Services Association conducted a review, as part of their report, and discovered that there was a wide variation in penalty fees across the market.

The Financial Services Association reminded lenders that mortgage rules exist which state that arrears charges should be based on reasonable costs incurred by the lender as a result of their customers being behind, rather than linked to punishing penalty charges. In other words, the charges should mainly cover the administrative cost of being in arrears.

The Financial Services Association is asking the mortgage industry and consumers for further views on interest only mortgages and the state of the industry in general. Responses should be completed by 16 November, 2010.

Guest Article by Neil Camp

It’s quite appropriate that the Bank of England’s new way of trying to save the U.K. economy, quantitative easing, sounds like a brand of laxative.

The economy is literally bunged up and the Bank of England is hoping that an initial £75 billion will help matters, and if not, a further £75 billion will be made available.

So what is quantitative easing? It’s not quite a matter of simply printing new notes, as many critics are trying to suggest. That’s been recently tried in Zimbabwe and doesn’t work, causing rampant inflation. But the big problem for the U.K. is deflation, not inflation.

Quantitative easing is all about flushing vast amounts of money into the system.

Now, a few basics. The Bank of England controls the flow of money into the U.K. economy. It effectively sells money to the country’s financial institutions at a given rate: the interest rate. By repeatedly lowering the interest rate – at the time of writing it’s 0.5% – it has tried, and failed, to get the banks to pass cheap money onto its customers, both personal and business.

So, the main problem is the lack of credit. This is desperately needed by companies to fund their businesses and people to fund their daily lives, and the reduction of interest rates have not relaxed the credit supply log jam.

But quantitative easing is not about giving money away for free at the ATMs. The new money is effectively swapped for assets, both good and bad, which are handed to the Bank of England by the financial institutions in exchange for the bundles of cash.

Now, the great fear is that the banks will gladly hand over assets, a number of them toxic, in return for the cash which they will then use to rebuild their balance sheets. So, what you might find is that having received £75 billion, the banks are solvent again, but their customers are still starved of credit.

Furthermore, quantitative easing doesn’t have a great reputation, with the Japanese having used it to little effect in the 1990s. But, experts put that down to the Japanese using the tactic too late, a case of trying to shut the door long after the horse has bolted. It led to what the Japanese called a lost decade, as it struggled to cope with deflation.

So, the Bank of England has struck quickly, playing what pundits see to be the last card in the pack. If it works, it will stimulate the dying economy. It if doesn’t, it will have wasted billions of money which could have been used elsewhere. And it might cause sudden and rampant inflation from which it will take generations to recover.

But what might turn out to be the biggest criticism is why the Bank of England, and behind them the Government, doesn’t make the money available through a financial institution that will guarantee it goes to the right people.

The Government controls Northern Rock and, in effect, HBOS, so why cannot they be given the money and ordered to distribute it via loans and credit.

Cynics might say that Bank of England is stuffed full of bankers whose primary concern is to help other bankers, despite what the Governor might claim. Others might say that the Government cannot favour one institution over another and that legal claims from those left out of the bonanza might follow.

One thing is for sure though, if it doesn’t work, we may all have to await financial Armageddon.

Guest Article by Neil Camp