View the article online at http://citywire.co.uk/money/article/a466475
The reality of falling living standards
Most of us don’t need Mervyn King, governor of the Bank of England, to tell us that family finances are being squeezed and take home pay is dropping in real terms.
We don’t need Mervyn King, governor of the Bank of England, to tell us that family finances are being squeezed and take home pay is dropping in real terms.
Millions of employees have had their pay frozen while income tax thresholds and allowances have not gone up for the past two years at a time when the price of goods and services is rising at 3.7% a year, if you believe the Consumer Prices Index – much more if you live in the real world. King admitted that inflation could hit 5% later this year and said that over the past six years real incomes have not increases at all – a situation not seen since the 1920s.
Running just to stand still
Research from MGM advantage shows that a typical UK household is spending an extra £1,258 a year to maintain their standard of living compared with last year alone.
‘Rising inflation is a hot topic at the moment and it is really hitting some retired people very hard,’ commented Aston Goodey, sales and marketing director at MGM Advantage. ‘Food and non-alcoholic drinks for example, have increased by around 6.1% over the past 12 months - one of the highest rises for any commodity or service - and a typical retired household spends between 15% and 16% of their expenditure here, compared to 11% for all households.’
The elderly suffer most as they are largely unable to increase their income by working harder, doing overtime, getting a pay rise or taking on a second job. In addition they are heavily dependent on income from investments to supplement pensions. With rates for cash on deposit averaging less than 1% the situation for many is desperate.
They also often have old fashioned and draughty homes, spending more on keeping warm. But high fuel costs are hitting everyone. Uswitch’s research reveals that over three quarters of families have cut down or rationed their energy use this winter because of cost – a 7% increase on last year. Some 55%, potentially over 14 million households, have gone without heating at some point this winter to keep fuel bills down - a million more than last winter.
Worse to come... and some tips to help
All of this is happening before most of the cutbacks – particularly public sector redundancies – have yet to be implemented. Annual average household expenditure is estimated to be £35,261. The corresponding figure for a household where the main occupant is 65 - 74 is £22,017, and £16,231 where they are aged 75 and over. MGM Advantage estimates that collectively UK households need to find an extra £33 billion to maintain the standard of living enjoyed 12 months ago - an estimated additional £528.96 per person. Where will it come from? For most cutbacks are the only answer. Here are a few tips:
1. Check whether you can remortgage and save money. This is likely to be the largest item of expenditure and where you will find the largest saving. HSBC, for example, has just launched new longer-term fixed rate products. The new deals include a five year fixed rate at 4.29% with £99 fee and a seven year fixed rate at 4.69% with £999 fee. But you will need 40% deposit to qualify. Higher loan to value loans will be more expensive at between 5% and 6%. But when interest rates start to rise, you don’t want to get caught out.
2. Consolidate expensive credit card or overdraft borrowing in a personal loan. The average cost of credit card borrowing is around 19% but you can get a personal loan at around 7.5%. If you are prepared to consolidate into a further advance on your mortgage – assuming you qualify for extra borrowing – the headline interest rate may be lower at, say, around 4% but the overall cost will be higher than a personal loan if you spread repayments over ten or twenty years.
3. Check whether you can cut household bills by switching to a new provider for gas, electricity, oil, TV, broadband, landlines and mobiles. There are some good package deals around.
4. Shop around for all insurances – household buildings and contents, motor and travel policies. There are huge differences between the most competitive rates and the worst. Make sure you start looking well before the renewal date or you might find that the insurer has simply whacked the premium on your credit card, if that is how you paid last year. Getting it back is a nightmare.
5. Cut out unnecessary expenditure – taxis, for example, if you can go on public transport, cigarettes, expensive coffees and snacks, and eating out.
News sponsored by:
The Citywire guide to investment trusts
In association with Aberdeen Asset Management
Andrew Friend, acting co-manager*, and Marcus Langlands Pearse, co-manager of the Henderson UK Property Unit Trust (HUKPUT), provide an overview of the key risks and opportunities for the UK commercial property market.
More about this:
More from us
- An interest rate hike would hurt, but can we afford the alternative?
- GDP shock scotches early rise in interest rates
- Two Bank of England MPC members vote for rate hike
- What is inflation? A beginner's guide
- Fix your mortgage before rates take off
Tools from Citywire Money
From the Forums
Weekly email from The Lolly
Get simple, easy ways to make more from your money. Just enter your email address below
An error occured while subscribing your email. Please try again later.
Thank you for registering for your weekly newsletter from The Lolly.
Keep an eye out for us in your inbox, and please add firstname.lastname@example.org to your safe senders list so we don't get junked.