Past Articles for August, 2006

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Nearly 40 per cent of people told Fidelity International that rather than save they are hoping for windfall payments to enjoy a debt-free and comfortable retirement.

However, Simon Fraser, president of institutional business at Fidelity International, warned against a lack of planning: “A good retirement plan should rest on solid foundations, not unpredictable windfalls.

“If the individual relies on an inheritance which does not transpire, they will have missed out on precious time. Complacency and trusting to chance is an option that people – especially young people – simply cannot afford.”

According to the research, reliance on inheritance was highest amongst the under-35s but even in the 35 to 54 age group a third are relying on such a windfall to clear debts.

Yet Mr Fraser said that the “message was clear” that windfalls do not always happen and that people should make financial plans to avoid a retirement full of debt.

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With average graduate debt put at £22,000, the National Union of Students (NUS) and financial experts told students to budget and seek advice.

“Students are particularly vulnerable because they have no choice but to get into debt,” Sue Edwards of Citizens Advice told BBC News. “People don’t get education in financial matters and credit is very easy to get.”

With the introduction of top-up fees, students preparing to enter university can expect to pay nearly three times as much as their predecessors and thus incur greater debt.

Some universities are already offering incentives such as lower fees or even cashback deals, but the NUS said in the same report that student numbers were still falling.

However, rather than being discouraged from getting an education due to debt fears, professional financial advice is often freely available to people with money concerns.

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Prudential claims that many are ignoring the effects of inflation when planning for their future and that £1,000 today will only be worth £620 in 2026, meaning that many will be in debt for their retirement.

Head of retirement income at the firm, Aston Goodey, said: “Retirees don’t realise the impact that even modest changes in levels of inflation will have on the purchasing power of their income, and therefore it is important to seek independent advice before choosing an annuity.”

His comments come as the Bank of England battles to bring inflation back on target to two per cent, but Prudential claims that pensioner inflation was 3.9 per cent, the highest in a decade.

Mr Goodey urged people to plan ahead for their retirement and take advice for funding options to avoid later life filled with debt.

“Getting it right could mean the difference between a retirement where you watch every penny to one where you can do the things you want. Ignoring the effect of even modest inflation can have an irreversible effect on retirement income,” added Mr Goodey.

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Nick White, head of personal finance at the price comparison website, said that the First Direct cashback deal could in fact cost borrowers who repay their loan early.

“In monetary terms, on a £10,000 loan taken out over five years, the borrower could expect to get just £267.86 cashback at the end of the term, that’s just £4.46 per month,” said Mr White.

“However, for many people this ‘incentive’ is irrelevant.”

First Direct’s deal claims to reduce the loan APR from 6.9 per cent to a best buy rate of 5.3 per cent APR and is only open to existing customers.

Yet for those who repay their loan early – and Mr White said that this is common – it could cost money.

With other loans offering similar rates but offering early repayments, Mr White urged borrowers to shop around.

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Yorkshire Bank today claims that two people in three have an average of £316.15 left over at the end of the month, which could be saved in a higher-rate account.

In doing so, they are losing money that could be used to repay debts and loans, simply because they are failing to use the right accounts.

“Many of us find ourselves running short of money but sometimes we can be our own worst enemy by not making the most of what we do have,” said Gary Lumby of Yorkshire Bank.

He accused Britons of “frittering away” money, another sign of the poor money management skills which have resulted in the accumulation of £1.2 trillion of debt.

Overall, the bank calculated that Britons are collectively losing out on £1.7 billion each month by not saving in a high-interest account.

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Through the Scarborough Specialist Mortgages (SSM) brand it will offer people with adverse lending risks the chance to take out a mortgage, while claiming to give competitive rates.

“The new subsidiary is being launched in direct response to the social and demographic changes currently underway in the UK, where increasing levels of personal debt and customers with imperfect credit are becoming more commonplace,” said John Carrier, chief executive of Scarborough Building Society.

Non-conforming markets are growing in response to Britons’ debt problems, offering mortgages to those with poor credit ratings.

Although interest rates are often higher than regular mortgages, ventures such as Scarborough Specialist Mortgages will cater for this growing sector.

Last month the Council of Mortgage Lenders (CML) said that debt helping to drive the non-conforming mortgage market to grow at six times the speed of the regular market.

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The ifs School of Finance said that introducing the qualifications in England and Wales was “essential” to tackle Britons’ mounting debt problems.

“We welcome the ippr [Institute for Public Policy Research] report which provides yet more evidence that millions of adults have difficulty managing their finances and that financial education in schools would improve the situation,” said Gavin Shreeve, chief executive of the ifs School of Finance.

The ippr revealed that people can be £23,000 better off in middle age if they receive personal finance education at school.

Last November the Qualifications and Curriculum Authority (QCA) said that personal finance education will become part of GCSE maths from 2010 and in other classes from next year.

Mr Shreeve said that by teaching students now, it will improve their money and debt management skills later in life.

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According to Experian, its survey revealed that people are failing to take action to improve their credit rating because they do not know their score.

Jim Hodgkins, managing director of CreditExpert, said: “Credit scores change as your credit history changes – and you can’t estimate your current position unless you know your credit history.

“It’s in your interest to check all the details of your credit report and find out how to improve your credit score so that you get the best value for money when you take out a loan.”

His comments come as research also showed that every British person owed an average of £23,000 due to rising debt levels.

While people seem happy to take on more debt, many could be paying too much interest for loans because they may have a blip on their credit record that they could alter.

Repaying debt, checking for mistakes on the credit record, or even registering to vote can all help people get the best rate for loans, added CreditExpert.

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According to the Institute for Public Policy Research (ippr), adults aged between 35 and 49 who had financial education at school better managed their debts and were £32,000 richer than their peers.

“It pays to get clued up,” said ippr senior research fellow Miranda Lewis. “Lessons that teach young people the basics of personal finance, like how to calculate interest, household budgeting and understanding mortgages, can help them make the right financial decisions later in life and avoid debt problems.”

Evidence for the financial benefits comes from the US where children are often taught basic financial skills about budgeting and debt.

Couples with two young children were found to be the best off for receiving education but both childless couples and singletons were found to benefit from good monetary knowledge.

Last year it was announced that GCSE maths will contain financial education to help the next generation.

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