Morally Bankrupt Policies Are Penalising Britain's Prudent Savers

[exiges]

http://www.independent.co.uk/money/spend-save/julian-knight-these-morally-bankrupt-policies-are-penalising-britains-prudent-savers-2309855.html

The elderly parents of a close friend of mine are selling the family home they have owned for donkey’s years not because they are too infirm to live there, want to downsize or fancy a little cottage by the coast. The reason is that their savings – no matter how cleverly placed – are earning next to nothing and now they have to break into the capital of their home.

They took a look at equity release and decided it wasn’t for them – and frankly I can’t blame them. Instead they are going to release a wodge of capital by selling and moving on.

You could say eventually they would have to have sold regardless and better they make the decision when they are fit and healthy. But that misses the point that because of the pitiful rate paid to savers, combined with the hidden (from official statistics) inflation that everyone is suffering from, they are being forced to up sticks at least five years before they needed too. And it really doesn’t have to be this way for my friend’s parents.

The Monetary Policy Committee has just left rates on hold at 0.5 per cent for the 28th month on the trot. Setting aside for a minute the fact that this is helping to imbed inflation back into the economy, holding rates so very low also means there is no benefit for people to put away money, and for those who have cash squirrelled away they are actually much poorer. This has all been made worse by the fact that the banks have been given a free ride to pay savers a pitiful amount so to help in the gradual repair of their balance sheets.

It is one of the great ironies of the financial crash that those who did the right thing and set money aside have been paying the price for the horrendous mess, all because the policymakers decide that we must continue to spend rather than save. As a result, since rates were cut to 0.5 per cent, those relying on savings for income have in effect seen their wealth cut by about 10 per cent, when inflation is taken into account.

One of the most notable achievements of the last Labour government was to cut pensioner poverty dramatically, but due to the careless approach of the Bank of England in recent years, this hard-won gain is being taken back. And as opposed to paying tax – as most pensioners do – many will have been forced into the insidious arms of the means-tested benefits system.

So successful has been the policy of disincentivising thrift that the savings ratio – the amount of money we put away out of our total income – has fallen to about a fifth of the historic norm and well behind that of our nearestcompetitors France and Germany.

In turn, low levels of saving actually stultifies growth in banking because the lower the deposits held the less banks can lend out – particularly now that regulators seem interested in how much money a bank actually hold. What’s more, it has crucified the mutual building society sector as you can see from the actions of Norwich & Peterborough right.

There is also a moral dimension to all this. Not only are the responsible and best in our society – the savers – being punished, but also life options are being closed off. A little more than a decade ago I was working in a job I hated. I needed to make a radical change. Savings were key to the transition. I was able to use them to support myself as I retrained. Savings equals options, and there is nothing like the back-up you have when you are not beholden to a job to pay the rent or mortgage the next month.

Yet the MPC continues to hold rates; millions of thrifty people get poorer and the moral bankruptcy of all this is ignored.

Cashback mortgages creep back into the market

Last week saw the return of the cashback buy-to-let home loan. Platform, part of the giant Co-op financial services company, started to offer a £500 cashback incentive – as well as free valuation service – on its range of buy-to-let mortgages.

Now, £500 is hardly an indication that the UK mortgage industry is partying like it’s 2007 (cashbacks of £10,000 were not uncommon back then) but nevertheless it’s significant as it underlines the increasing competition in the buy-to-let sector. We have had firms returning to this type of lending and even the odd new launch such as Yorkshire building society.

The fact is that during the recession and to many’s surprise, buy-to-let landlords have been resilient with relatively low levels of repossession. With fewer people able to get their own standard mortgage more have stayed in rented homes boosting rent levels. At the same time, interest rates have been kept artificially low – last week the Bank rate was kept at 0.5 per cent – limiting costs to buy-to-let landlords.

The truth is that, apart from overseas investors, buy-to-let is just about the only game in town in much of the housing and mortgage market.

Is it a merger or a shotgun wedding?

If you’re a member of the Norwich & Peterborough (N&P) building society, you’ve probably had a rather large and bulky envelope thundering through your letterbox in the past few days. This contains information and a voting pack for the special general meeting to be held next month over the proposed merger of the N&P and the larger Yorkshire building society.

N&P’s management insists that this is not a shotgun wedding, but there is certainly a whiff of cordite about the whole occasion.

Essentially, N&P needs the merger badly because since the credit crunch, like many other building societies, it has seen its profit margins squeezed to within an inch of life. A mis-selling scandal related to the collapse of Keydata has also blown a £50m hole in the balance sheet. In short, the N&P needs to get big to retain its current branch network and broad range of offerings – it, unlike quite a few societies, offers a current account.

People who are members of N&P because they have a mortgage with the society have a great incentive to say yes. N&P says that it will equalise its standard variable mortgage rate between it and the Yorkshire if the merger gets the go-ahead, which in effect means a 0.35 per cent cut in rates to borrowers. That’s about £20 a month for some on a £100,000 mortgage.

Savers and investors in N&P have nothing concrete in the way of incentive to vote yes – unless holding on to to what they have is the prime concern. However, they probably will do so as the best place for the building society is in the arms of the bigger and stronger Yorkshire. But with N&P about to be swallowed up, what price all those medium sized societies keeping their independence? Not high, I reckon.

Edited July 18, 2011 by exiges

[mikthe20]

Good article. The great irony being that Merv the Swerve has been going on about "moral hazard" for a long time yet here he is punishing the prudent. Of course, it is deliberate - they are trying to force those with savings to spend it to prop up the economy. What they don't understand is that people like that mainly just tighten their belts even more. Now, let companies/banks/debtors go bust and these people with savings will actually go out and buy assets, goods and businesses and sort the economy out.

Edited July 18, 2011 by mikthe20

[inflating]

Save your breath Independent, Save Our Savers, and anyone else. The MPC et al don't give a rat's ar$e, my guess is Camoron, Oddborne and Cluck are holding hands with Sir Benny at all times. No wonder people took matters into their own hands and got out of the £

[General Congreve]

Good article. The great irony being that Merv the Swerve has been going on about "moral hazard" for a long time yet here he is punishing the prudent. Of course, it is deliberate - they are trying to force those with savings to spend it to prop up the economy. What they don't understand is that people like that mainly just tighten their belts even more. Now, let companies/banks/debtors go bust and these people with savings will actually go out and buy assets, goods and businesses and sort the economy out.

If the banks go bust though, will those savers still have savings to spend into the economy? Surely their savings will just end up in the hands of the banks creditors, who will then be the ones who get first bite of the cherry on depreciated assets.

In a way this forced sale, although unjust, will help bring house prices down. So in their efforts to keep 'asset prices' high, meaning houses of course, not all assets, the BoE are being self-defeating. As the inflation just squeezes people from the other side, as evidenced by the OP.

Really it seems the prudent will now gets shafted either way. As if they let it all go bust savers lose all their money through bank collapse and if they print to stop it going bust, savers ultimately lose all their money via inflation.

Edited July 18, 2011 by General Congreve

[inflating]

Really it seems the prudent will now gets shafted either way. As if they let it all go bust savers lose all their money through bank collapse and if they print to stop it going bust, savers ultimately lose all their money via inflation.

Oh how reassuring for us all

[General Congreve]

Oh how reassuring for us all

Yeah, sorry to be the bearer of bad news. Just please don't shoot the messenger.

[inflating]

Yeah, sorry to be the bearer of bad news. Just please don't shoot the messenger.

Oh no not at all, but just gotta love those tails they win, heads I lose, kinda Government chappies. Hopefully if that's their plan it'll backfire on the s0ds

[winkie]

But what they have lost on the interest on their savings, they have gained with the interest made on the capital of their property....it works both ways.

Ideally....houses and savings should have both risen in line with inflation, houses increased in value out of all proportion....then far more would have more savings in the bank and the banks would have more capital to lend out to businesses that create profitable growth, jobs and prosperity.

[The Spaniard]

The elderly parents of a close friend of mine are selling the family home they have owned for donkey’s years not because they are too infirm to live there, want to downsize or fancy a little cottage by the coast. The reason is that their savings – no matter how cleverly placed – are earning next to nothing and now they have to break into the capital of their home.

Have they maxed out their NS&I index-linked certificates over the last few years? Up to £60,000 per issue can be bought if they act as trustees for each other. Each certificate can be top-sliced back down to £15,000 each year for tax-free income above RPI, and rolled over at maturity.

Have they maxed their self-select stocks and shares ISAs over the last few years and stuffed them with Index-linked gilts and AAA corporate bonds?

They could easily achieve at least 5% p.a. secure tax-free income (barring systemic meltdown).

Hardly "next to nothing".

[hedgefunded]

Well as someone who has been very prudent and cautious with my money, I can confirm that I'm spending on almost nothing but essentials.

I've got a six figure sum earning little interest, and no mortgage (which I would otherwise be paying off).

Under normal circumstances I'd be spending a few quid. Nice holiday, new set of golf clubs, things for the house etc...but I'm having none of it. Even my supermarket shopping has been drastically re-evaluated.

My thinking is that I'm being bled dry, and I'm damned well not letting them have a penny more than I can avoid.

[Guest_flaps_*]

Well as someone who has been very prudent and cautious with my money, I can confirm that I'm spending on almost nothing but essentials.

I've got a six figure sum earning little interest, and no mortgage (which I would otherwise be paying off).

Under normal circumstances I'd be spending a few quid. Nice holiday, new set of golf clubs, things for the house etc...but I'm having none of it. Even my supermarket shopping has been drastically re-evaluated.

My thinking is that I'm being bled dry, and I'm damned well not letting them have a penny more than I can avoid.

Whilst not quite in the 6 figure bracket, this is pretty much what I have been doing and will continue to do so. In fact, it's quite surprising just how much you find you can cut back on, even when you thought you were doing so previously.

Of course I expect to lose it all to hyperinflation/currency collapse due to being in sterling fiat, but I don't want to have to hold physical youknowwhat, so I've just got to hope house prices collapse just before the currency, so I can buy one for cash and get it stacked full of beans and guns, just in time!

[winkie]

I thought this would be welcomed as a "boomers forced to sell up big houses " topic and that the younger generation would benefit through more houses being put on the market and prices falling in general due to a bigger supply.

There is already a supply....but who can afford these big houses, who can afford to heat and maintain these big houses...the downsizers will be buying below them so the supply stays the same unless they move in with relatives or move into a care home.....

So the article is saying that when the cash savings run out all there is left to do is spend the house.

[rantnrave]

So the article is saying that when the cash savings run out all there is left to do is spend the house.

I'm continually struck by the numbers of cars for sale as people continue to struggle financially. I guess that's the last item to go before downsizing gets considered...

[General Congreve]

Well as someone who has been very prudent and cautious with my money, I can confirm that I'm spending on almost nothing but essentials.

I've got a six figure sum earning little interest, and no mortgage (which I would otherwise be paying off).

Under normal circumstances I'd be spending a few quid. Nice holiday, new set of golf clubs, things for the house etc...but I'm having none of it. Even my supermarket shopping has been drastically re-evaluated.

My thinking is that I'm being bled dry, and I'm damned well not letting them have a penny more than I can avoid.

You are right, it is difficult making little, most likely a negative return on your investments, thanks to the criminal policies of the BoE and their counterparts elsewhere in the world.

[winkie]

I'm continually struck by the numbers of cars for sale as people continue to struggle financially. I guess that's the last item to go before downsizing gets considered...

.....where there was a car each they could be downsizing to one car per household......but once you get the free buspass somehow even one car seems like a bit of an extravagance sitting rotting on the roadside/ driveway.

[inflating]

I imagine it will. They will probably find themselves swinging from lamp posts one day.

I shall comfort myself with that thought, probably going to become my new visualisation scene for inner calm in moments of stress

[bpw]

I have no sympathy with people mentioned in the article. They are selling an over priced house to the next generation who have had no such luck. Also, any saving they did in the 80s and 90's, and early 2000s, saw huge returns of 5-10%. How many of our young so lucky? This is, and always has been, an issue of intergenerational wealth transfer and Britain's Pensioners are George Orwell's pigs. Mark my words there is nothing more greedy than a pensioner and you will all see pretty soon how they will squeal and curse to get an unfair share of the pot. Here in the USA AARP have started the war with a series of provocative ads on TV. it will get worse - a lot worse and the young will be the losers if they don't fight. In my option. Riots are coming and will be totally justified.

[miko]

I have no sympathy with people mentioned in the article. They are selling an over priced house to the next generation who have had no such luck. Also, any saving they did in the 80s and 90's, and early 2000s, saw huge returns of 5-10%. How many of our young so lucky? This is, and always has been, an issue of intergenerational wealth transfer and Britain's Pensioners are George Orwell's pigs. Mark my words there is nothing more greedy than a pensioner and you will all see pretty soon how they will squeal and curse to get an unfair share of the pot. Here in the USA AARP have started the war with a series of provocative ads on TV. it will get worse - a lot worse and the young will be the losers if they don't fight. In my option. Riots are coming and will be totally justified.

+1

I was speaking with a good friend this weekend who will be 70 next month . Her and her husband have been mortgage free for maybe 35+ years . That enabled the husband to pay into a good pension . He was lucky enough to have just one job in all his life , a job that he loved . About 20 years ago she was left a 50% share in her parents 3 bed semi , hence they moved into the place they live in now after selling their former house . This place is worth about £500k.

Her attitude was that the young do not have it any more difficult than they did explaining that a pound of mince had to last two days when they first bought a house. I tried to explain to her that with average house prices at 7 or 8 x average salary with or without the mince the average young person cannot buy their first home. She went on about the young wanting holidays , cars , gadgets ect.

No end of explaining to her that those things were now a lot cheaper than in her day but the house had gone up out of all proportion to wages made any difference.

Then after a long winded conversation I got around to the bare facts . Which were when they bought their first home they paid £2,200 and her husband was earning £750 per year. So it was just under 3x his earnings. That house today would be about £225-250k . I pointed out that that was about 10x average earnings and asked her if they could have bought their first home if it had been £7,500 i.e. 10 x the husbands wage. She had to accept this point but then went on to say how within a few years it was sold for £9,000. and they bought the next place for £11,000.

Not only did they have the benefit of cheap housing when they first started out in life but also the fariy god mother of inflation along with wage inflation that reduced their mortgage to peanuts with a few years.

Yes she does moan about the crap interest they get on their savings but as i said to her no one gets it all and her generation who did have hard times like every generation in the end have had it better than most.

[OnlyMe]

Good article. The great irony being that Merv the Swerve has been going on about "moral hazard" for a long time yet here he is punishing the prudent. Of course, it is deliberate - they are trying to force those with savings to spend it to prop up the economy. What they don't understand is that people like that mainly just tighten their belts even more. Now, let companies/banks/debtors go bust and these people with savings will actually go out and buy assets, goods and businesses and sort the economy out.

Simple, he's a liar, a squanderer, understands little to nothing about banking and has followed policies and financial meddling that created this mess and is willing to do ANYTHING to try and cover up his fault in creating this mess, regardless of how morally hazardous it is. Bankrupt of england and Kunt are rightful and well deserved attributions.

Edited July 18, 2011 by OnlyMe

[RufflesTheGuineaPig]

I have no sympathy with people mentioned in the article. They are selling an over priced house to the next generation who have had no such luck. Also, any saving they did in the 80s and 90's, and early 2000s, saw huge returns of 5-10%. How many of our young so lucky? This is, and always has been, an issue of intergenerational wealth transfer and Britain's Pensioners are George Orwell's pigs. Mark my words there is nothing more greedy than a pensioner and you will all see pretty soon how they will squeal and curse to get an unfair share of the pot. Here in the USA AARP have started the war with a series of provocative ads on TV. it will get worse - a lot worse and the young will be the losers if they don't fight. In my option. Riots are coming and will be totally justified.

+42

Sadly ythose leading the riots will be the elderly, demanding the government make good on their pensions, both public and private.

When you're 75, unemployable and facing retirement in poverty, you have nothing to lose. Worse case you live a comfy retirement at her Majesties pleasure.

[Johnny Cash]

Here in the USA AARP have started the war with a series of provocative ads on TV.

Wots AARP?

[scrappycocco]

Given up worrying about most of my deposit saved over the course of 10 years split between a few banks paying ridiculous interest because I'm damned if I do and damned if I don't. I'm resigned to the fact that a slow house price crash will be engineered via sterling devaluation; thus a double shafting for me with inflation slowly stealing my savings and house prices that won't budge where I want to buy (plus knowing my luck my rent will go up next tenancy and be blamed on inflation).

I'm just enjoying life and when all my savings are eventually stolen hopefully I'll be given the same sort of luxuries afforded to those at the bottom.

To add I'm probably the most unlucky person on here, really trying to erase this horror from my mind. I rented at the smart money stage from early 2000 because I didn't have any savings. When I had enough saved I bought near peak and then I sold at a loss thinking the house of cards would come crumbling down - it didn't. If only I was born 10 years earlier This is my final mindless rambling about house prices, life is too short.

[ken_ichikawa]

I'm just enjoying life and when all my savings are eventually stolen hopefully I'll be given the same sort of luxuries afforded to those at the bottom.

Me too, I spend money on experiences, tbh I'm quitting skydiving if nothing incredible happens in the next 6 months as it is getting boring and the experiences are exactly the same as last time......

To add I'm probably the most unlucky person on here, really trying to erase this horror from my mind. I rented at the smart money stage from early 2000 because I didn't have any savings. When I had enough saved I bought near peak and then I sold at a loss thinking the house of cards would come crumbling down - it didn't. If only I was born 10 years earlier This is my final mindless rambling about house prices, life is too short.

No you're not I'm the unluckiest person here by a very wide margin.

[Venger]

I thought this would be welcomed as a "boomers forced to sell up big houses " topic and that the younger generation would benefit through more houses being put on the market and prices falling in general due to a bigger supply.

It's a very good news story and one of the better consequences of low interest rates on savings. Oldies dominate the top of the housing market.

The elderly parents of a close friend of mine are selling the family home they have owned for donkey’s years not because they are too infirm to live there, want to downsize or fancy a little cottage by the coast. The reason is that their savings – no matter how cleverly placed – are earning next to nothing and now they have to break into the capital of their home.

[billybong]

Yet the MPC continues to hold rates; millions of thrifty people get poorer and the moral bankruptcy of all this is ignored.

The moral bankruptcy and the actual bankruptcy.