M Making big financial decisions is difficult in the best of times, but when, as now, the sand is shifting beneath your feet, the challenge becomes even greater. This week the Bank of England raised interest rates again, adding to concerns about higher food and energy bills ever higher borrowing costs.
These financial pressures can make it difficult to look beyond the end of the month, let alone plan years into the future. Whether you're looking to buy a home or wondering what to do with your pension, we ask experts how to make the best choice.
Is now a good time to buy a home?
Analysts agree that home prices are likely to fall in 2023, but there is no consensus on the extent of the decline, with the gloomiest forecasters suggesting a peak-to-valley decline of more than 25% once inflation is factored in.
This week's figures showed home prices fell for the fifth month in a row in January, pushing the average cost of a home 3.2% below its peak last August. According to Nationwide's monthly survey, the cost of owning a home fell 0.6% in the first month of the year compared to December 2022.
Demand for mortgages has slumped to its lowest level since the Covid 2020 freeze, with the number of home loans approved falling for the fourth month in a row in December, Bank of England figures show. So is now a bad time to buy a property?
Dr. Stian Reimers, a psychologist who specializes in financial decisions, says, "You need to consider your alternatives now. For example, [if you don't buy a property] that's called continuing to rent? Or live with your parents and save longer? Compare the options available to you at the time you make your decision, not what might happen in the future or what has happened in the past."
Beyond that, breaking a good habit is a dangerous move. "The discipline to save into a pension is much easier than the discipline to save into an Isa, for example, as this is done through your employer," says Stone. "But once you finish it, at what point do you start again??"
One option is to reduce it to the minimum point at which your employer will continue to make contributions. If you make the decision to stop making deposits altogether, why not set a date in the future – perhaps six months from now – when you commit to start making deposits again?.
Should I take money out of my retirement fund?
If you're struggling with rising costs, it can be tempting to dip into your retirement savings if you're over the age of 55. Following George Osborne's changes to pension rules introduced in 2015, many over-55s have been able to withdraw money from their pensions, 25% of which can normally be withdrawn tax-free. There are even companies that will help you with this. But just because it's possible doesn't make it the right decision.
This could lead to a high tax burden and impact your eligibility for certain benefits
This could result in a high tax bill and affect your eligibility for certain benefits, as well as reduce the amount of money you have to live on in retirement. "Don't make rash decisions about long-term goals based on a very short time," Stone says. "For example, someone who has been in debt since they were 20. or 25. If you've saved into an annuity by the time you're 100, you may live to be 100. When he retires, you hope his pension is invested for another 30 or 40 years because it should always be invested. You shouldn't spend it – you'll need it until the end."
Stone says individuals also need to consider tax implications. "On top of your tax-free cash allowance and personal allowance, people pay their marginal rate of income tax, 20%, 40% or 45% when they make withdrawals. Those are big numbers to lose fiscally. If people decide to take more income than they need this year, they may be paying too much tax and in most cases cementing at least a 20% tax bill, which in reality means a 20% loss of value pension as it is taxed and cannot be reclaimed."
How do I deal with unexpected expenses?
Your boiler needs fixing, your car's clutch gives up the ghost, you need to fix your guttering. It's not always easy to figure out how to finance an unexpected expense. According to a recent survey by the Money and Pensions Service, 9 million people in the UK have no savings, while another 5 million have less than £100.
Some people may have family or friends they can save with an interest-free loan, but if you don't have that option, make sure you take out the loan at the lowest possible interest rate and pay it back as soon as possible.
Alex Hodges, a money expert at MoneySuperMarket, says it's important to compare the cost of different products such as a loan or credit card. "The interest rate you are offered will depend on your circumstances. So check that your credit report is up to date, and use an eligibility tool before applying to see what options may be available."
Watch out when shopping, however, as several applications can affect your credit score. "If you use an eligibility tool like MoneySuperMarket's, you can find out which products you are most likely to be approved for before you make a full application," says Hodges. "Once you apply, your credit report will be thoroughly searched. Your credit score may temporarily decrease after this search, but should return to previous levels relatively quickly."
Should I focus on paying off my debt or building up savings?
It pays to have a "flowing fund" for large, planned purchases over the next five years, Coles says. "Here's how to take advantage of interest on savings instead of paying interest on debt."
But what if you have credit card or loan debt – is it better to pay it off before you start saving? "It depends on the debt," Coles says. "If it's expensive, short-term debt, it should be your first priority, but if it's a mortgage, you should pay it off alongside building up your savings pot."
However, it adds that if you're constantly paying off short-term debt, that doesn't mean you shouldn't be saving too. "Ideally, you draw a line in the sand, pay off your [expensive] debt, and then start saving. But failing that, you may want to start building up some savings in addition to paying down debt."
Can I just do nothing?
"It's often much easier and feels much safer to do nothing. Saying, 'I'm not going to bother with it because I might get it wrong,'" Reimers says. "But of course that is a decision in itself."
Even something like transferring cash to a better-paying savings account can help improve the situation. Recent research by Hargreaves Lansdown showed that nearly 270 billion. £ languishing in accounts that don't pay interest.
Just over a year ago, when the prime rate was 0.10%, the best easy access account on the market paid about 0.71% – today Shawbrook offers 2.92%, more than four times that rate.
Cash is never designed to keep up with the cost of living
The problem, of course, is that inflation in the UK is now 10.5%. No matter where you keep your cash, it will lose value once this is taken into account.
"Cash is never designed to keep up with the cost of living. It gives you certainty and confidence that you can cover your bills and any ad hoc costs for a period of time," Stone says. "So it's really, really important that it works hard. Making sure your money is in the best paying accounts is an easy win."
Time deposits, where you lock your money away for a period of time, tend to pay better interest rates. At the moment, SmartSave has the best paying one-year fixed rate bond at 4.16. For those willing to lock their money away for two years, Atom Bank offers 4.45 percent.
Savers who want to keep some access to their money can get 3.6% by opting for a notice account. The Hinckley& Rugby Building Society offers this interest rate to savers who are willing to give it 120 days (about four months) if they want to make a withdrawal.
"Some people are wary because if interest rates go up, they may go up again and your fixed rate will look disappointing," Coles says. "You must be careful, however, that you do not let your money languish in a miserable account with easy access."
Reimers says, "It's not a very attractive decision to make: 'Do I want to lose more money or lose less money?' If the choice was, "Here's an opportunity to make some money," people might be more inclined to actually look into it and make some choices. But when it comes to minimizing losses, people don't like to make these decisions – even though they're just as important."