The week that wrecked our personal finances
Regardless of your income level or political leanings, one thing currently unites almost all of us as a nation — collective panic about the state of our personal finances.
In the seven days since last week’s “mini” Budget, the cost of living crisis is fast turning into a full-blown financial one. I am sure readers are deeply troubled by this, yet our government appears indifferent. The question is, for how much longer can they ignore our distress?
As mortgage rates soar and pension funds wobble, the new chancellor’s “gamble” of borrowing to fund unnecessary tax cuts is a bet that Middle England now finds itself on the losing side of.
In the second quarter of this year, more than half a million people withdrew a total of £3.6bn; a 23 per cent year-on-year increase. This is the first time quarterly withdrawals have exceeded £3bn. The average sum taken out was £7,000 (compared with £5,800 in quarter one).
Experts sense that many people in their 50s and 60s are accessing pots for the first time to tide themselves over. But if older workers want to build their savings back up again in future years, they could be snared by the Money Purchase Annual Allowance (MPAA). Withdraw too much and this permanently cuts your annual pensions saving allowance from £40,000 to just £4,000, and is one future tax tweak that the government should consider.
In the wake of the financial crisis, the broken annuities market caused retirees to enter riskier drawdown plans where their money remains invested in the markets — and these are nervous times for such investors.
As interest rates rise, however, annuities are making a sudden comeback. Rates are now at their highest level in a decade, rising 42 per cent this year according to Helen Morrissey, senior pensions analyst at Hargreaves Lansdown.
Even so, the income on offer is pretty thin. Someone aged 65 with a £100,000 pension can now buy a level annuity income of £6,994 a year. That’s up from £4,900 a year ago — but it’s not linked to inflation.
As rates rise further, she expects more retirees to take a “mix and match” approach by annuitising in stages, securing enough income to meet their needs and continuing to take investment risk with the rest.
Like many of you, I have been prudent all my life, living within my means and prioritising saving for the future over spending today. As the mood of panic rises further up the income distribution scale, people are in danger of making knee-jerk decisions with their life savings, and could lose faith in the financial system altogether.
Hitting the slots in Las Vegas would be the last thing on earth that a sensible financial goody two-shoes like me would ever recommend. But I feel like this government has done it for us, taking additional risks with our money when rising inflation and quantitative tightening loom large over our future financial security.
I am lucky to have time on my side. I’ll hopefully have another 20 years (at least) of being able to earn money and rebuild my investments.
However shortlived this gamble for growth turns out to be, our personal finances will bear the consequences for years to come.
Claer Barrett is the FT’s consumer editor: [email protected]; Twitter @Claerb; Instagram @Claerb
This story originally appeared on: Financial Times - Author:Claer Barrett
