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Your Money > Family Finances Articles > Three cheers for...
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By Richard Evans
Financial Armageddon is upon us - or at least that's the tone of much of the reporting on the credit crisis that erupted almost a year ago. And yes, many people are suffering severely from its effects. But not everyone. Many of us are in a position to gain from the changes in the financial landscape. So how can the crunch be a good thing? City analysts talk loftily about the crisis stemming from a "repricing of risk". But what this means in everyday language is that investors are demanding - and getting - a better return on their money. After all, it's called a credit crunch because borrowers get a worse deal and lenders get a better one. And everyone who has a bank account with a credit balance is a lender. Indeed, those who save in deposit accounts are among the most obvious beneficiaries of the crunch. So we'll start our rundown of credit crisis winners with them. Savers "Savers have emerged as the clear winner of the credit crunch, with providers eager to attract retail funds," says David Black of Defaqto, the financial data company. "Savings rates have definitely gone up since the crunch started. On fixed-rate bonds, for example, you can now get 7 per cent quite easily. The last time base rate was at its current level of 5 per cent, the highest available interest on these bonds was 5.9 per cent, and a year ago it was 6.45 per cent." Interest rates on other types of savings account have also risen, he says. But with inflation rising to 4.3 per cent it's increasingly difficult for taxpayers to earn a real rate of return, Mr Black points out. "In a non-Isa account a basic-rate taxpayer needs to find a gross rate of 5.4 per cent, and a higher-rate taxpayer 7.19 per cent, merely to keep pace with inflation," he says. It's also best to check for catches such as withdrawal penalties and interest rates that are competitive only while the introductory bonus lasts, adds Mr Black. Savers have another reason to thank the credit crunch - their money is better protected if their bank goes bust. "After the run on Northern Rock, savers have 100 per cent protection up to a limit of £35,000 in the event of bank failure," says Mr Black. Previously just the first £2,000 was completely safe; savers would get back only 90 per cent of the next £33,000. So the scheme has been both improved and simplified. And the Government has just announced plans to increase the amount protected to £50,000. But there are still some pitfalls. "If you deposit £35,000 and the bank fails six months later, you will lose the interest that you were due, as that figure is the absolute maximum the scheme will pay out," says Mr Black. "So if you're worried, deposit a few thousand pounds less." And if you split your nest egg so that no bank has more than £35,000, make sure that apparently separate institutions don't share a single banking licence and would therefore be regarded as one bank under the terms of the protection scheme. For example, depositors at Halifax, Bank of Scotland, Intelligent Finance, Saga, the AA and Birmingham Midshires are all regarded as customers of HBOS. Homeowners trading up After years of would-be homeowners scrambling for a foothold on the housing ladder, property is now a buyer's market. But it's not just first-time buyers who can benefit - those wanting to move to a bigger home will now need less cash to add to the proceeds from their current one. "If prices fall uniformly - in other words, if properties of different sizes all experience the same percentage reduction - then it becomes cheaper to buy a bigger property," says Peter Bolton King of the National Association of Estate Agents. "But have a buyer in place for your existing property and a mortgage offer in principle before you make a bid for your target," he advises. Things are also improving for some buy-to-let investors, he says. "Rents are rising because there is more demand, while prices are falling, so anyone buying now should benefit from higher yields." First timers who can raise the deposit that all mortgage lenders now demand can also take advantage of lower prices and reduced competition from other buyers, says Mr Bolton King. Pension and Isa investors If you save a regular amount into a pension, unit trust or Isa, you can actually benefit from the falls in share prices and other assets that followed the credit crunch. "Markets always recover eventually, so as long as you're not about to cash in your investments you shouldn't worry about the market falling - in fact you should welcome it," says Mark Dampier of Hargreaves Lansdown, the financial adviser. "This is because your fixed investment each month buys more shares or units when prices are lower." Unfortunately, he says, many investors are unnerved by downturns and stop the regular drip-feeding of money into their funds. "This is exactly the wrong thing to do - they should carry on as normal or even increase their investments by a few per cent a year." If you are not sure where to invest your money in these uncertain times, Mr Dampier thinks corporate-bond and "long-short" funds are good bets. The income from bonds has risen since the crunch hit, he says, with yields of over 8 per cent possible and the chance of some capital growth on top. Long-short funds, such as BlackRock's UK Absolute Alpha and Cazenove's forthcoming UK Absolute Target, operate rather like hedge funds to ride out volatility and produce positive returns whether the markets rise or fall. Annuity buyers An annuity is the means of turning the lump sum in a pension pot into an income for life. Because of the general increase in investment yields since the credit crunch, annuity rates have also risen, so you get more income for each pound in your pension scheme. "It's dead simple: annuity rates reflect the yields on long-dated government bonds or gilts. These have gone up, so annuities pay more," says Billy Burrows of William Burrows Annuities. "But before you rush in to buy one, remember that the very factors that have boosted annuity rates have also pushed down share prices, so if your pension is mostly invested in equities it may have lost value, potentially cancelling out any benefit on the annuity side. "The time to buy an annuity is when the pension fund is doing well and annuity rates are high. It's very important to watch the performance of your pension fund as well as the annuity market." The credit crisis has brought home to investors how shares can fall as well as rise, so people approaching retirement should consider switching their pensions progressively into less volatile assets, says Mr Burrows. "You should also remember the impact of inflation on your annuity income," he says. "It may be best to buy a mix of annuities including investment-linked types so that your income should rise in line with inflation. Buying 'level' annuities - where the income never rises - is an accident waiting to happen." Overindebted borrowers Even those currently reeling from the crunch could find it a useful lesson about managing money and debt. "You've got to be at least 40 to remember the last recession. If this one chastens people into managing their spending more cautiously, it's a good thing," says Mr Dampier. "People should get back into the habit of building up rainy day money for emergencies and forget instant gratification on credit cards. It amazes me how often people in their late 20s and 30s have no safety net. Many have unaffordable lifestyles that couldn't survive if something went wrong, such as a couple losing one income." Mr Dampier is also glad to see the back of the cult of property ownership at any price, which led young people with no savings to overstretch themselves to get on the ladder. "They felt enormous pressure from their peers and the media's obsession with property. Now they are forced to save a deposit, and prices should be lower when they are ready to buy." But individuals shouldn't take all the blame for the excesses of the past few years, says Mr Dampier. "Banks have been idiots lending money to people who shouldn't have had it. But now they are having to look carefully at what they lend. If the crunch brings some calm and intelligence to lending and borrowing and encourages people to save again, we can at least be grateful for that." Useful links: |
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