From pensions and savings to holidays, we look at how the latest market turmoil will impact on your finances
1 Your pension
If you are retiring this year Greece has been very, very, bad news for you. There is an ongoing slow-motion collapse in annuity rates, and this week it got a little worse. When a man aged 65 swaps £100,000 in his pension pot for an annuity – a regular monthly income for the rest of his life – the sum will be just £6,000 a year. That compares with the £14,000 a year that someone retiring in 1990 earned from a savings pot of £100,000. If the pensioners wants to build in 3% a year cost-of-living increases into the annuity, the rate he’ll get for that £100,000 will be a paltry £4,150 a year.
But why blame Greece? Because the surprise status of the UK as a “safe haven” for international money during the crisis has pushed the interest rate on government bonds (known as gilts) to historic lows – and the price of gilts has a strong influence on the price of annuities.
This week the return on 10-year bond yields, which reflect the cost of borrowing by the government, fell to 1.87% as investors fearful of the enveloping euro crisis reduced their lending to Spain and Italy in favour of the UK, Germany, the US and Japan. The fall in gilt yields this week beat the previous low of 1.92% in January, and is the lowest level since Bank of England records started in 1703.
This week Canada Life cut annuity rates, and others are expected to follow, says Billy Burrows of Better Retirement Group. “It’s another nail in the coffin for UK savers. The retired have been paying the price for the banking crisis through lower savings rates, now people reaching retirement are paying the price for Greece.”
What’s more, the outlook for men is much worse for women – because on 22 December an EU directive will force pension companies to equalise annuity rates between males and females. Men, who suffer shorter longevity than women, receive better annuities as a result, but after 22 December these will be cut, while those for women will be increased.
The options for those approaching retirement are grim; work for longer and defer retirement (and if you get ill in the meantime, there’s the silver lining of better rates as the insurer assumes you’ll die earlier) or buy a temporary annuity. These can be bought for a fixed period, usually with a minimum of five years and a maximum of the period until age 75 is reached. But as Gemma Goodman of annuity brokers Alexander Forbes says, there is no guarantee it’ll be better value; at age 75 annuity rates may be even lower.
A PricewaterhouseCoopers report this week suggested that babies born today may have to work until 77 before they qualify for a state pension. Given the ever-shrinking value of annuities, it may be worth younger adults considering alternative ways of saving other than a pension – such as Isas or property – where you do not have to buy an annuity at retirement.
2 Your investments
The stock market continues to fall heavily in response to the Greek crisis, with speculators assuming a disorderly default, and its hit on the banks could lop as much as 5% off the GDP of Europe. The FTSE has lost 1,090 of its value since it hit a high of 5,965 as recently as 16 March, wiping £190bn off the value of the UK’s biggest companies, much of it still held in pension funds.
Investors who have stock market-based Isas invested in Europe have fared a lot worse. Over the past year some giant funds have lost as much as a quarter of their investors’ money. Invesco Perpetual European Equity, a £1bn fund, is down 26%, while the £200m Artemis European Growth fund is down 25.8%. Even over five years the average fund invested in Europe has managed to lose 16.5%, with some down as much as 40%.
There have been few safe havens from the Greek crisis. Gilts have had, once again, a good crisis. The average UK gilts fund is up 4.8% over the past three months, and investors who have held for the past five years are enjoying gains of 58%. Most corporate bond funds have also held their heads above water, but almost everything else has been in negative territory. Interestingly, China has been worst, performing even more poorly than mainland Europe. Analysts say that when investors become risk-averse money pours back into safer territories, leaving emerging markets exposed.
But gold has been the odd man out during the latest phase of the Greek tragedy. Its price this week dropped to about $1,530 an ounce, its lowest level for nearly nine months, and 20% below its $1,895 high in early September 2011. Investors have preferred the safety of US dollars and US treasury bonds to the traditional safe harbour of gold. Some people also argue that in times of extreme economic stress investors sell gold to get their hands on cash.
The good news is that virtually all commodities have fallen back in price in recent months, although that has as much to do with softening of the Chinese economy as problems in Europe. Since September wheat is down from $8 a bushel to $6, coffee is down from $2.80 to $1.77 a pound, and sugar has fallen from $850 a tonne to $570. Whether we’ll see these falls reflected at Sainsbury’s or Tesco is another matter. Meanwhile, copper thefts from Britain’s railways should become less attractive; the metal is down in price from $9,600 a tonne last July to $7,700 this week.
3 Your savings and mortgage
Relief for savers suffering from paltry returns on their building society accounts remains as far away as ever. The latest fall in gilt yields brought by the Greek crisis will help keep interest rates in Britain low for longer than anyone imagined back in 2009 when Bank of England base rate fell to an historic low of 0.5%.
Savers who want a better return on their cash may have to start considering riskier alternatives – such as “retail bonds” from the likes of Tesco, which, although not offering any guarantees under the government’s compensation scheme, pay interest of 5%-8% a year.
There’s better news for mortgage holders, though – except those on pricey long-term fixes. Last week the latest meeting of the Bank of England’s monetary policy committee kept interest rates on hold once again, and economists are virtually united in forecasting near-zero rates through to 2014. “Interest rates seem set to remain at their current level of 0.5% until at least late 2013 and very possibly into 2014. Interest rates are clearly not going to be raised for some considerable time to come given the fragility of the economy and the need to counter extended tight fiscal policy,” said Howard Archer of IHS Global Insight.
The outlook suggests that those on existing tracker mortgages or low-standard variable rates – such as Nationwide’s 2.5% base mortgage rate – should cling on for as long as possible. For new buyers the best tracker rates are on offer from First Direct, which has a mortgage that tracks the Bank’s base rate plus 2.39% for life, giving a rate of 2.89% for now. However, it is only available to those able to put down a deposit of at least 35%, and comes with an arrangement fee of £499. If you can only afford a 15% deposit HSBC’s tracker at 3.99% is top of the table. It has no arrangement fees.
4 Your car
The problems in Greece are at least providing some relief to motorists, with fears of slowing global economic growth pushing the oil price down substantially over the past six weeks. In mid-March Brent crude was selling for $125 a barrel, but this week it fell to a six-month low of $108 amid renewed concerns that a breakup of the euro would send economic shockwaves around the world.
The fall has sparked a price war at the supermarket petrol pumps, with Asda cutting its prices four times over the past four weeks. On Tuesday this week Morrisons cut its price to 132.9p for unleaded and 137.9p for diesel. Then on Wednesday Asda undercut Morrisons, offering unleaded for 0.2p less at 132.7p. The price reductions mean the cost of unleaded is now 8p below its March peak.
Asda said it “always aims to lead the way when we get the chance to cut prices because of a drop in the global cost of oil,” and took a swipe at rival supermarkets, which vary their petrol prices around the country. “Unlike other retailers we do everything we can to reduce prices for all of our customers wherever they live. Research taken from PetrolPrices.com shows some retailers get away with charging their customers more for fuel – as much as 8p a litre more – in towns without an Asda nearby.”
According to PetrolPrices.com the average price for a litre of unleaded in the UK is 138.1p, but some petrol forecourts are charging as much as 155p a litre.
However, prices will nudge back up again in August with the 3p rise in duty announced in the budget.
5 Your holiday
Most holidaymakers heading to France, Spain or Italy will benefit from the euro’s slide against sterling, falling to €1.25 this week and with some currency experts forecasting further declines to €1.30. But what if you are heading for a fortnight on a sunny beach on a Greek island, only to find that the country has crashed out of the eurozone? Will your holiday be at risk? Bob Atkinson of travelsupermarket.com says: “The issue will be around how your tour operator interacts with the hoteliers in Greece, and what the terms of their contracts say. They should all have plans in place that will allow you to continue with your holiday.
But what if the hotelier has gone bust? “If you have booked an Atol-covered package your tour operator is obliged to organise alternative accommodation, or if there is no immediate alternative, a holiday on a different date or a full refund.
“If you have booked independently, you may still be covered provided you paid by credit card and the deposit was £100 or more, you paid by Visa or MasterCard debit card (and can do a charge-back), or have travel insurance which includes end-supplier failure in its cover,” says Atkinson.
He recommends that Greek-bound travellers hold off buying euros until the last minute. “Unless the whole banking system goes into meltdown you are also likely to be able to use credit and debit cards, although it’s impossible to say which currency your transactions will be made in until it actually happens.”
Brits with holiday homes in Greece, and an account at a local bank, would be wise to swap their euros for sterling. That probably also applies to ex-pats in Cyprus, which is independent of Greece but whose banking system is closely entwined with the country.
In the worst case (and still highly unlikely) scenario – contagion from a Greek collapse across to other Mediterranean countries such as Spain and Portugal – British retirees abroad will want to make sure they have very little of their assets deposited in local banks.