If the UK is moving ‘towards’ recession and the economy is shrinking, what does this mean for consumers with savings, pensions, investments and mortgages?
What should I do about my investments?
Fear of recession and the financial impact of higher energy and food prices have caused nearly two thirds of all private investors to stop investing, or to sell their holdings, according to the latest confidence index from the Association of Investment Companies.
But if you are investing for the long term, selling up with the FTSE 100 index near at a 5-year low is not advised – as you will be better off waiting for equity markets to recover.
Private client investment manager Citi Quilter is telling investors to “Be patient, expect lower interest rates and lower than expected inflation.” Chief investment officer Duncan Gwyther said: “From an investment perspective, we’re reaching a stage where holding cash may not necessarily be the best option. So the question is: how much risk do you want to take?”
What should longer-term investors do?
Longer-term investors with more capacity for risk can now find opportunities in equities, said Gwyther. Some of the most successful fund managers are also advocating holding UK and US shares for the long-term. Anthony Bolton, former manager of the Fidelity Special Situations fund, has forecast that the market sectors that first entered a bear market will now be the first out: financials and consumer cyclicals. Warren Buffett, chief executive of Berkshire Hathaway, last week revealed that, despite rising unemployment, he is moving back into US equities – as prices look attractive and “fears regarding the long-term prosperity of the nation’s many sound companies make no sense”.
Emerging market equities remain high risk, though, and will require a longer time frame for recovery. ”In the short term, investors can buy UK, US or European equities - all of which have fallen heavily - and expect a return nicely above 10 per cent when markets recover – and they can get this without going further afield to emerging markets they understand less well,” said Gary Dugan of Merrill Lynch Global Wealth Management.
And for shorter-term investors?
Shorter-term and more risk-averse investors should consider government bonds. Quentin Fitzsimmons of Threadneedle said that rapidly falling inflation and a UK base rate below 3 per cent in the next 9 months would make 10-year gilts attractive, and deliver “big capital gains in long-only bond funds”. Gwyther said locking into a fixed coupon on gilts could prove beneficial if deposit interest rates fall next year.
Will my pension be affected by a recession?
If you have a personal pension or are a member of a defined contribution ‘money-purchase’ occupational scheme, the value of your pension fund will have been hit by falls in equity and corporate bond prices, caused by fears of recession.
But if you have more than five years to go until retirement, advisers suggest continuing your contributions as markets are expected to recover in the long term. Consultantcy firm Hymans Robertson said: “Recession now looks inevitable and household spending is going to come under huge pressure. We suggest the following three-point plan for people who are still some years from retirement: First and foremost, keep saving. Keep your head in troubled times - selling out when markets fall could lock you out of any recovery. Finally, plan ahead.”
If you have less time before you stop working, though, you might want to consider phasing your retirement, by using only part of your fund to buy an annuity to produce income, and keeping the rest invested in an income drawdown plan or an alternatively secured pension (ASP). Another alternative is to continue working while waiting for pension fund values to recover – data from the Office of National Statistics this week showed that more people are choosing to do this, pushing the average retirement age for men up to a record high of 64.6, and the average retirement age for women up to 61.9.
If you have a defined benefit occupational scheme, your pension benefits will not by affected by a recession or stock market falls, as the income you receive will be determined by your final salary.
But if you work for a employer whose solvency may be adversely affected by recession, advisers suggest checking how much of your pension will be protected if the company goes bust. The government’s Pension Protection Fund (PPF) will only cover 90 per cent of your employer’s pension up to a maximum of £27,000 per year. If you are expecting to retire on more than that, Killik & Co suggests taking advice on a possible transfer to a personal pension.
What is the outlook for savers?
Things are starting to look very gloomy for savers following the 0.5 percentage point base rate cut earlier this month and another 0.5 percentage point cut expected in November. “But it might not be as bad as it looks,” said Michelle Slade, analyst at data provider Moneyfacts.co.uk. “Although several savings providers have reduced their rates and most will probably follow in the coming weeks we don’t expect them to reduce them again by the full amount in November. They still want to attract savers and they are not going to be able to do this if rates come down too far.”
What rates are available at the moment and is it worth locking into something now?
Some of the best rates for those wanting to lock in includes Anglo Irish which is offering a one year bond at 7.05 per cent and a seven day notice account paying 6.55 per cent and has the full backing of the Irish government. Market Harborough Building Society offers a one-year variable rate bond paying 6.25 per cent. If you don’t want to lock in the Stratus No Notice account from West Bromwich Building Society offers 6.56 per cent and Intelligent Finance has an Isaver paying 6.4 per cent.
What about the effects of inflation on my savings?
Savers have been warned that they need to to top up their savings if they want to keep pace with rising inflation – which is now running at 5.2 per cent for the Consumer Prices Index, and 5 per cent for the Retail Prices Index. Michelle Slade said “At the moment it is very hard for savers to beat inflation. Anyone paying a basic rate of tax would need to earn 6.5 per cent on their savings - something that is just about doable - but a higher rate tax payer would need to earn 8.63 per cent, which is just not on offer anywhere in the market.” However she said inflation is expected to start coming down.
What about mortgages?
Although further cuts to the Bank of England base rate will benefit homeowners already on tracker mortgages, brokers say new mortgage rates are unlikely to mirror changes to the interest rate until funding pressures ease for banks.
Following the most recent cut to the base rate, only a quarter of mortgage lenders reflected the full half per cent reduction in their standard variable rates and many removed the most competitive tracker rate mortgages from the market. Halifax, Abbey and First National all raised the margins on their tracker deals by 0.5 per cent.
“Even if there is another cut in interest rates it’s unlikely we will see much of a decline in SVRs or tracker rates,” said Ray Boulger, senior technical manager at John Charcol, the broker. Until three month LIBOR, the rate at which banks lend money to each other, falls, banks are expected to be reluctant to pass on interest rate cuts to borrowers.
A number of lenders, such as Abbey and Halifax, have reduced fixed rate deals in the last fortnight in response to the sharp fall in swap rates, but these have been marginal.
Lenders are also expected to reduce the risks on their mortgage books by widening the 1 per cent average spread between rates for those seeking high loan to value mortgages in favour of those with a large deposit or equity.
And energy bills? Should I fix in or wait to see what happens?
“Don’t be tempted to fix your energy bill, you will have to pay a premium and most deals include an exit penality of between £50 and £100,” says Joe Malinowski of energy comparison company The Energy Shop. Wholesale energy costs have risen by 119 per cent over the past five years but they have now started to drop with the price of oil and analysts are predicting modest falls in rates early next year. Malinowski said: ”The falling oil price has improved the outlook for energy bills and we expect gas bills to come down by 10 per cent next year. The outlook for electricity is uncertain in the short term because of supply issues but in the longer term we expect a drop in bills.
If I can still afford to go on holiday where should I go?
The pound’s slump against the dollar and euro has made the prospect of a weekend break in Manhattan or Paris more expensive and travel operators say they expect a recession to result in a greater number of households favouring holidays in the UK.
The alternative, for those who don’t mind long winter nights, is Iceland. The krona’s decline means a glass of wine in a Reykjavik restaurant now costs £4 rather than £6 and hotel rooms are 40 per cent cheaper than they were last year. The only drawback for British visitors could be the chilly reception from the locals, most of whom are convinced that Gordon Brown has been the architect of their country’s downfall.
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