The Great Debate UK

Budget will force ‘squeezed middle’ to muddle through

By John Evans, CEO of Incahoot.com. The opinions expressed are his own.

It’s a cold November morning last year, and in the Today programme studio Ed Miliband sits across the desk from John Humphrys.

John: “So Mr Miliband, can you tell us exactly what you mean by the ‘squeezed middle’?”

Ed: “Well John, we mean those above and below the median salary and, in particular, those earning less than £45,000 and therefore on the basic rate of income tax. This is a separate group from what we would normally call the ‘middle classes’.”

If that definition seemed vague, five months later we are getting a clearer picture of who falls into this group – and it’s clear they will suffer the most when the Budget is announced.

While some of the Budget’s finer details will only be revealed on 24 March, what appears certain is that favourable tax breaks will only benefit the wealthy, and the less well off.

It’s not such good news for those earning from £40,000 to just under £44,000. The reduction in the higher-rate threshold will mean basic-rate taxpayers with incomes just below the current £43,875 figure will become 40 percent taxpayers this year. I’ve seen figures bandied about in the press that lowering the threshold to £42,375 could add around 700,000 individuals to the 40 percent tax bracket. This would push the total number of higher-rate taxpayers to nearly 4 million.

Rubbish rates – what is a saver to do?

-Rachel Mason is PR manager at Fair Investment Company. The opinions expressed are her own.-

The base rate is going to be stuck at 0.5 percent for years to come, according to experts, so where does that leave savers?

Yes, the base rate needs to be low for any real economic recovery, and many mortgage holders can’t believe their luck, with many seeing their payments plummet. But there is always a flipside, and with a low base rate comes low savings rates.

With inflation up at 5 percent (as measured by the Retail Prices Index) it is impossible to get a savings account that even maintains the value of your money, let alone increases it, so what should savers do in such a low rate environment?

Well, unfortunately, since National Savings and Investment’s withdrawal of its tax-free index-linked certificates, virtually all savings accounts are paying interest rates below RPI inflation.

So what can you do? Well, if you are looking for a purely cash account, realistically, the only way of securing a relatively reasonable rate on your savings is to go for a fixed rate savings account – the best ones at the moment are offering around 3.15 percent, when fixed for one year, and 4.90 percent when fixed for five years.

With a fixed rate, you know where you are for the entire term, whereas often with variable rate accounts, providers offer what seems like a good deal but they can pull the rate at any point, so you may only get the advertised rate for a few months. If you can afford to leave your money alone for a few years, it may be well worth fixing for a longer period of time, because analysts are predicting interest rates to stay low for some time.

from UK News:

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Battle over wages: the male-female wage gap

- Alison Steed is the editor of the personal finance website for women and families MyMoneyDiva.com. The opinions expressed are her own. Reuters will host a “follow-the-sun” live blog on Monday, March 8, 2010, International Women’s Day. -

Women have often been given a bad deal when it comes to work, whether we like it or not.

That, to me, is encapsulated in the fact that despite there being an Equal Pay Act in place in the UK since 1970, women still earn on average 17 percent less per hour than men for doing the equivalent role in the workplace, according to figures from The Fawcett Society.

Let’s not get confused here. This is not about women working part-time when men are working full time. This is the average gap for men and women working full time.

If you want to talk part-time, no problem – the figures actually get worse. The average woman is being paid 36 per cent less – more than a third – than a man doing the equivalent part-time role. When you get into London, this rises to 45 per cent – almost half, according to The Fawcett Society.

So what is going on here? A number of things really. Experts estimate that 40 per cent of the pay gap is down to old-fashioned discrimination on the part of employers. Add to that the reality that women are still, in many cases, primarily responsible for the role of caring for the family, and it makes it hard to do the extra hours that some men can take for granted.

I’m sure plenty of people will disagree with what I am saying, many will agree – but let’s get one thing clear. This pay gap is still here because of two things: the government is not enforcing pay equality at present, even though we have had 40 years – and governments of a variety of hues – who could easily have sorted it out.

Second rate annuities can harm your income

-Bob Bullivant is chief executive officer at Annuity Direct. The opinions expressed are his own.-

There are two distinct phases in building a pension – first comes the process of building up a pension fund – the so called accumulation phase. The next part is actually turning the money saved into an income for life – or pension, the so called decumulation phase.

When it comes to buying an annuity there are many things to consider and getting any of them wrong can have serious implications for your pension income. The first thing that needs to happen is a proper forensic review of your existing pensions. This will include a report on any penalties that might be imposed by your pension company.

These might include early retirement penalties or in the case of with profit funds market value adjustments. The report will also consider if you are entitled to a guaranteed annuity rate as part of the policy as guaranteed rates are often much higher than rates generally available in the open market. Older policies may also have life assurance cover or premium waiver benefit attaching to them and if so then the impact on the cover of taking the pension must be understood.

Add all of this together and it becomes clear that there are many potential pitfalls. The interesting thing is that if you want to move pensions before retirement the FSA insists on all of these issues being investigated. The same requirement does not apply at retirement and so you are very much on your own unless you take professional advice.

Armed with all of this it is time to move to the next phase. This is where specialist skills are required to get the right income. There are a number of ways to generate income in retirement including income fund withdrawal which is a highly complex area and the rules about adviser selection outlined below apply equally to this area. For anyone wanting guaranteed income in retirement the selection of an annuity must be done with great care for the simple reason that it can only be done once. Obtaining the best rate and most appropriate options is therefore essential.

Once again there is a need for careful selection. Anyone with a health or lifestyle issue or who is a smoker should complete a medical questionnaire. There are over eight providers in the market for enhanced annuities and it is important that all of them see the questionnaire. There can be a significant difference between the top and bottom rate as a result of a provider’s view of medical conditions. Recently, one provider took such a stark view of a medical condition that it offered £7800 more per year than other providers.

Budget boost for savers

–Fay Goddard is chief executive of the Personal Finance Society. The opinions expressed are her own.–

As predicted, Budget 2009 was heavy on figures and forecasts and hard on the highest earners. Unsurprisingly it is the latter that the press has picked up on. We all knew that there would be a new top rate of income tax – though some were taken by surprise at the rate of 50 percent and the speed at which it will be introduced.

This wasn’t the only hit taken by those on big salaries with restrictions on pension tax relief for those on over £150K and personal allowances for those earning over £100K. These changes will be of concern and mean that financial advisers will need to review the position of their affected clients. However, advisers will have breathed a sign of relief as the rumoured removal of all higher rate tax relief on pensions did not materialise.

There was better news though for savers. The rise in ISA limits is a welcome move and will be available immediately for those over 50, with everyone else having to wait until next year. Whilst I assume this is aimed at providing some immediate assistance to those who rely on their savings to generate income, with interest rates so low, the increase will not deliver much benefit. At least some pensioners will also receive additional tax credits though.

Help for families came in the form of increased child tax credit, and for those who lose their job in these troubling times statutory redundancy pay has been increased.

Those looking to buy houses under £175K will continue to benefit from the stamp duty holiday – this was extended by a further six months until the end of the calendar year but there was little else to stimulate the housing market.

The devil will be in the Budget detail

– Fay Goddard is chief executive of The Personal Finance Society. Any opinions expressed are her own. —

Though it’s a cliche to say that a budget is eagerly awaited you can be forgiven for saying so this time around. This year all eyes and ears will be focused on the Chancellor’s economic figures and forecasts. The big question is how will he balance the books – cut public spending or raise taxes? In the run up to an election cuts are ideal but needs must. What will it mean for personal finances?

One of the big questions being asked is whether Chancellor Alistair Darling will do anything to help the plight of savers. Some of the hardest hit by the drop in interest rates have been pensioners relying on savings generated income. It seems likely they will receive some support with whispers suggesting an increase in the pensioners’ tax allowance but this will do little for the majority affected. There is also speculation that the ISA limit of £7,200 will be raised in an effort to attract more savers. Action savings is a delicate balancing act as the Chancellor is understood not to want to reduce consumer spending in such a way that it slows the recovery.

Deflation? It’s inflation you need to watch

– David Kuo is a director at the financial Web site The Motley Fool. The views expressed are his own. –

What are consumers supposed to make of the latest inflation numbers? Do we have inflation, deflation or a bit of stagflation?

Truth is, it depends on who you are and what you do with your money. The Retail Prices Index or RPI tells us that prices today are exactly the same as they were a year ago. The Office for National Statistics reported that RPI was unchanged at 0%.

But be very careful when bandying around the term “prices”. The RPI includes elements of housing costs. So it is better to talk about the cost of living rather than prices. Prices have risen compared to a year ago, but the total cost of living as measured by RPI has fallen because of the disproportionately large drop in mortgage costs as a result of lower interest rates.

The proof, if proof was needed, that prices have risen from a year ago, can be seen from the Consumer Prices Index (CPI). Instead of 0%, as measured by the RPI, prices as measured by the CPI are 3.2% higher. The CPI does not include housing costs, so it is a better measure for people on fixed-rate mortgage deals, and also for people in rented accommodation.

The upshot is that if you have taken on mortgage debt and chosen to spend rather than save, then you are worse off as a result.

However, it’s worth bearing in mind that both the RPI and CPI are broad measures of inflation. Consequently, the extremely large basket that is used to gauge inflation may not necessarily reflect the true changes in the cost of living that you may experience. Put another way, if we don’t buy exactly the same things that the ONS puts into its basket then we will experience a different rate of inflation.