Regardless of your income level or political affiliation, one thing currently unites us as a nation: collective panic over the state of our personal finances.
In the seven days since last week’s ‘mini’ budget, the cost of living crisis is quickly turning into a full-blown financial crisis. I’m sure readers have big problems with this, but our government seems indifferent. The question is, how much longer can they ignore our suffering?
With mortgage rates rising and pension funds faltering, the new Chancellor’s ‘gamble’ to borrow to fund unnecessary tax cuts is a gamble that Central England is now on the losing side of.
As a result, households will spend hundreds of euros per month extra on mortgages much faster than expected. People’s happiness is now directly related to the length of their fixed income deal.
With the smell of a real estate crash in the air and now new threats to triple pensions, older voters are unimpressed – dangerous territory for the ‘Trussonomics’ experiment.
The intervention of the Bank of England has calmed the waters for the time being, but ministers show no sign of remorse for the catastrophe this has caused to our personal finances.
Of course, we can’t blame all the market declines on the new residents of 10 and 11 Downing Street, but Liz Truss and Kwasi Kwarteng turned the decline into a disaster in a week.
Those who check their company pension, Sipp or Isa are likely to see a double-digit decline in value in recent months. Add to that the prospect of sharp falls in real estate prices and more expensive mortgage payments, and we all suddenly feel much poorer.
Economists have urged the Chancellor and Prime Minister to reassure the markets and communicate “the plan” more clearly – but what about reassuring the people who voted for you?
As much as I want to collect words of comfort for the readers, I cannot lie. We’ve already faced some incredibly tough years and the events of the past seven days will no doubt make them even more difficult. But we also have to accept that the days of easy credit and QE-driven asset inflation are almost behind us.
This means it will be much more difficult for people (and policy makers) to perpetuate two widespread financial myths; the first is that real estate prices will continue to rise forever.
The sudden price revision in the bond market is driving up mortgage interest rates. If they get to 6 percent, the average household refinancing a two-year deal would see monthly repayments rise more than 70 percent from £863 to £1,490.
However, only buyers with a decent amount of equity who pass the affordability tests can make the best deals.
With people already worried about losing their homes, solutions need to be found faster to help borrowers restructure their debts. This may sound premature, but with the prospect of widespread distress, the way this is handled will be the difference between a correction and a crash.
The second myth is that tin-plated pensions (less generous than the gold-plated variety) will be enough to fund the kind of pension enjoyed by previous generations.
As real estate prices have risen, releasing stock has been the retirement card for millions to get out of jail, but this is not sustainable.
The Bank of England’s move this week bolstered the finances of final-pay pension schemes, which have been rocked by the rapid price revision of gilts. However, the majority of employees today save in defined contribution (DC) plans, where the risk in retirement is very “for us”.
Millions have been prompted to sign up automatically, but this still doesn’t solve the problem of people not saving enough. Politicians have been behind this for years, but they will no longer be in office by the time today’s workers realize the yawning deficit.
We already know that the cost of living is driving employees to cut or stop their pension contributions, but this week’s news showed how private investors are now accessing their pensions in record numbers.
Recommended
In the second quarter of this year, more than half a million people took out a total of £3.6bn; an increase of 23 percent year-on-year. This is the first time that quarterly withdrawals have exceeded £3 billion. The average amount withdrawn was £7,000 (compared to £5,800 in the first quarter).
Experts note that many over-50s and 60s are picking up pots for the first time to overpower themselves. But if older workers want to rebuild their savings in years to come, they could get caught up in the Money Purchase Annual Allowance (MPAA). Withdraw too much and this will permanently lower your annual retirement savings from £40,000 to just £4,000, and is a future tax adjustment the government should consider.
In the wake of the financial crisis, the busted annuity market caused retirees to embark on riskier winding-down plans that kept their money invested in the markets – and these are nervous times for such investors.
However, with interest rates rising, annuities are making a sudden comeback. According to Helen Morrissey, senior pension analyst at Hargreaves Lansdown, rates are now at their highest level in a decade, rising 42 percent this year.
Yet the income offered is quite meager. A 65-year-old with a pension of £100,000 can now buy a parallel annuity income of £6,994 a year. That’s over £4,900 a year ago – but it’s not linked to inflation.
As interest rates continue to rise, she expects more retirees to take a “mix-and-match” approach by annuating in stages, earning enough income to meet their needs, and continuing to take investment risks with the rest.
Like many of you, I have been careful all my life, living within my means and prioritizing saving for the future over spending today. As the mood of panic continues to rise on the income distribution scale, people are in danger of making rash decisions with their savings and could lose faith in the financial system altogether.
Recommended
Hitting the slots in Las Vegas would be the last thing a sane financial goody two-shoes like me would ever recommend. But I feel that this administration has done it for us, taking extra risks with our money when rising inflation and quantitative tightening have a major impact on our future financial security.
I’m lucky to have time on my side. I hopefully have another 20 years (at least) to make money and rebuild my investments.
As short-lived as this gamble on growth turns out to be, our personal finances will bear the consequences for years to come.
Claer Barrett is the consumer editor of the FT: claer.barrett@ft.com; Twitter @Claerb; Instagram @Claerb