Searching for a better return?

Rates of return available to savers today are generally dismal.  So many advisers are promoting ‘structured products’.  These use modern financial innovation, based on derivative securities, to enhance the returns from fixed interest products or to reduce the risks associated with equity investments.

The usual structure of these investments is that the issuer puts most of your money in a fixed interest investment and uses the balance – after paying commissions and costs – to buy an option or series of options from an investment bank.  In effect, you are making a bet with the balance of your funds on what happens to stock markets.  You could just do that yourself anyway.  Find a secure home for most of your savings and take some risk with the rest.  If you are tempted by one of these structured products you should ask yourself that question and review that alternative.

There are two kinds of risk in structured products.  The first is the risk that the issuer can’t pay.  Deposits up to £50,000 – soon to be increased – are secured by the Financial Services Compensation Scheme if the issuer fails.  But structured products may not be. … Continue Reading

Using the value of your home to support your retirement

Equity release – the facility to raise cash by taking out a lifetime mortgage against the equity in your home – generates much debate.

Is it a necessary evil to be used as a last resort or a respectable way of topping up one’s retirement income?

Much of the media has been unrelentingly hostile to equity release, arguing that it is an expensive, complex product which rips off the elderly, who may not understand its implications for inheritance or its interaction with state benefits.

These are all valid arguments. Equity release is expensive and the most you are likely to be able to raise is 50% of the value of your property. … Continue Reading

The destructive power of inflation

Einstein is reputed to have said that compound interest is the most powerful force in the universe. He could equally well have said that inflation is the most destructive.

Oil up 15%, bread 4.9%, coffee 9%, VAT 2.5% these are a few of the price rise that have recently made the headlines. The floods in Queensland have sparked warnings of disruption to sugar production and extreme weather in the Ukraine and Argentina is driving up the price of wheat.

This is inflation out in the open, it stares you in the face every time you fill up the car with petrol, it’s talked about in the news and it’s all over the papers. Generally speaking though we tend not to notice inflation; when you are working and earning a living you are to some extent carried along on an inflationary tide as over time your wages more or less rise along with it. … Continue Reading

Why have a crash if we don’t learn the lessons? Part 4 – Making it pay to save

So what of the future? Well, austerity, higher taxes and job losses may leave us with less money, but it gives us even more reason to accumulate a nest egg. That is the paradox of saving: when we most need to do it we can least afford it.

We may all be in this together, but financially, we’re all on our own. Youngsters need savings to pay off student loans. We need savings to buy a home. Savings to provide an income in old age and savings to pay for care in our dotage.

But, the banks need us to save too. The new banks insist they will rely only on retail funds. So we’re back to the days when if seven of us don’t save, the eighth one can’t have a mortgage. And that can’t be seven Chinese savers. We can’t expect foreign countries with trade surpluses to keep bailing us out via the money markets. In future, Mum & Dad must put cash in the high-street bank so that someone else’s kids can borrow it – and the bank must therefore pay those parents a rate sufficient to persuade them to save. … Continue Reading

Why have a crash if we don’t learn the lessons? Part 3 – More banks?

What has government learned from this experience? That we need more banks and more competition. Even though it was competition that made Northern Rock offer mortgages higher than the house value, and made Abbey lend five-times borrowers’ incomes – or invented incomes.

But just as the answer to the problems caused by low interest rates is even lower rates, the answer to the reckless competition among banks is even more competition.

The government view is that Britain has four large banks – which are too big to fail but too few to compete. Is the number the problem? Just four major supermarkets account for the vast bulk of Britain’s grocery sales but their rivalry is cut-throat. They have probably done more to suppress inflation than the Bank of England has.

So more banks, is not necessarily an answer. Remember, in those “good old days of old-fashioned banking values” that people want to recreate, we had 200 building societies – and they operated as a cartel. … Continue Reading

Why have a crash if we don’t learn the lessons? Part 2 – Some lessons we did learn

I am old enough to have witnessed enough economic crises to need a second hand to count them, but what makes this latest one unique is the slashing of interest rates. In every other crisis I know, high interest rates either caused the crash or were the supposed solution for it. This time, prudent savers are being penalised while the profligate borrowers are rewarded. What sort of lesson is that to take away from a financial crisis?

If people did not save when rates were higher, why will they save now? The savings ratio was already negative when the crunch came, forcing Britain to rely on emerging economies to finance our borrowing binge. What we used to call the Third World now has a first mortgage on Britain.

The money we spend on their exports has returned to buy UK gilts, shares, property – even our football clubs. Other countries are doing our investing because we aren’t saving.

But it was not just the public’s false confidence in the future, or our appetite for must-have consumer goods, that turned us against saving before the crash. The returns were so poor. Even tax-breaks could not make unattractive investments look appealing. … Continue Reading

Why have a crash if we don’t learn the lessons? Part 1 – Muddled messages

What you may be asking can a journalist – someone with all the popularity of an MP but without the expenses to compensate – have to tell savers about the financial crisis?

If we are so clever, you may wonder, why didn’t we predict the crash of 2007?

Well the simple answer is that we did and the crash of 2006, and 2005. The Press is so bearish we have forecast five out of the last three recessions. We had to be right sometime.

Short-selling could have been invented for the media – if only we knew how to do it.

Actually, journalists might be better informed if they were active investors. Relying for advice on wealth from financial writers who have no wealth of their own is like asking people to read a motoring column written by someone who cannot drive or a wine page penned by a teetotaller.

But yes, the press is naturally gloomy. Having witnessed one crash, the lesson we learned was to keep warning our readers to expect another – a double dip, a bear market, a fall in house prices or simply higher borrowings costs. Show us a silver lining, we’ll find a black cloud for it to go round. … Continue Reading

Reply to the Government’s petition response

In January of this year Save Our Savers submitted a petition on the Downing Street web site. It read:

We the undersigned petition the Prime Minister to take identifiable and specific measures which will benefit savers and pension funds, thereby encouraging a culture of saving rather than borrowing in the UK

The Government has just responded. The response however totally, and some might suspect, deliberately misses the point.

Yes, they say, we know people haven’t saved; we know that the level of debt has made the UK particularly vulnerable to financial instability. We agree we need to “encourage people to save and invest”. We intend to “foster a culture of personal responsibility” with “better financial planning”. We will even provide a free annual financial health check.

Well, if we hadn’t exercised personal responsibility and successfully planned our finances we wouldn’t be losing out now. The reality is that no amount of financial planning can overcome a Government that puts its need for low interest rates and inflation before returns on peoples’ savings. Savers do not need an annual financial health check we need a return on our savings. … Continue Reading

Government response to Save Our Savers petition

Shortly after our launch in January this year, we published the petition below on the No 10 web site;

We the undersigned petition the Prime Minister to take identifiable and specific measures which will benefit savers and pension funds, thereby encouraging a culture of saving rather than borrowing in the UK.

Despite the clear economic and social benefits of a thriving savings culture, savers have been persistently ignored in their efforts to provide for the future and the UK now faces a worsening savings crisis. The frenzy of spending and borrowing that was a major factor in the collapse of UK banking has hit prudent savers hardest and there is an urgent need to create policies that support saving in the UK.

With the announcement of the election the site was closed to all new petitions and all current ones were immediately put on hold, but in that time we collected 3,110 signatures. … Continue Reading

Do you have faith in the Government to reward you for saving?

By choosing to put money aside to spend later rather than sooner, savers are not only sacrificing what they could have now; they are taking a risk. They are gambling that their savings will be worth at least as much in the future as when they first put them aside.

Of course it is every saver’s responsibility to invest their money wisely and get the best return they can.  But this is only part of the answer. The highest paying accounts cannot accommodate everybody’s savings and as any prospectus will tell you, the value of your investments can go down as well as up. In short there will always be winners and losers and as long as there is a level playing field, there are no legitimate grounds for complaint. However, all this operates within and is dependent upon the economy as a whole and there’s the rub.

Ultimately by saving you are putting your faith in the Government. Will it support savers or not? Will it, through its tax and welfare policies penalise people for having saved? Will it enable savers to at least maintain the value of their savings in line with inflation?

Promoting greater personal financial responsibility while devaluing savings is dishonest … Continue Reading