270 lines
8.7 KiB
Plaintext
Executable File
270 lines
8.7 KiB
Plaintext
Executable File
finance
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personalfinance
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consumertips
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7077807
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-----
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# Britain is out of recession at last - but are you?
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## While the nation's output of goods and services grew in the final quarter
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of last year, according to the latest official figures, many people will be
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wondering whether their own finances are actually in better shape.
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By Richard Evans 9:33AM GMT 26 Jan 2010
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[Comments][1]
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For many the answer will be no.
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Recovery can bring its own problems; for a start, rising demand tends to stoke
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inflation, which could prompt the Bank of England to raise interest rates -
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good news for savers, but not something that hard-pressed home owners would
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welcome.
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"The danger is that, with a return to growth, Britons will underestimate the
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hardships of recovery," said Stephen Barber of Selftrade, the stockbroker.
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So what are the prospects for our personal finances as the economic recovery
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takes hold?
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### Tax
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With Britain borrowing record amounts of money, many expect public spending
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cuts or tax rises - or both - as the Government attempts to balance the books.
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Income tax could have to rise by as much as 5p in the pound, said Mark Dampier
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of Hargreaves Lansdown, the asset manager.
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## Related Articles
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* [Out of Recession: tips for consumers to survive the recovery][2]
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27 Jan 2010
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* [Why rates must stay below 1pc][3]
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26 Jan 2010
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* [Shares to benefit from the recovery][4]
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26 Jan 2010
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* [Britain limps out of worst recession in decades][5]
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26 Jan 2010
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* [Recovery will be painfully slow, householders warned][6]
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26 Jan 2010
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* [Skipton slaps extra £2,000 on mortgage bills][7]
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21 Jan 2010
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"We have been living through a phoney war, mainly because of the electoral
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cycle. No political party has the heart or the courage to tell it as it really
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is," he said. "So we won't get a real Budget until after the election and this
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will probably be worse than the infamous 1981 Geoffrey Howe Budget. So the
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real war will begin probably some time in July.
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"What can we expect? I strongly suspect that the big tax takers - basic-rate
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tax and VAT - will rise, VAT to 20pc and basic-rate tax by 2p to 5p in the
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pound."
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He added: "The high level of government and consumer debt makes me feel quite
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pessimistic. It took over 300 years for us to have £380bn worth of public
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debt. It has taken this government 12 years to bring it to £850bn. Reducing it
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will mean a huge shock to our finances - the recession is not over for most of
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us."
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Adrian Shandley of Premier Wealth Management said: "After the election taxes
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will rise and, if this is coupled with a rise in interest rates and inflation,
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individuals could find themselves much worse off, with higher mortgage
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payments, higher taxes and a lower real value of their wages."
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### Interest rates and inflation
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Commentators are divided on the likelihood that interest rates will rise from
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their current unprecedented lows. Mr Dampier said official rates were unlikely
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to rise this year because a tough post-election Budget "would equate to a
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significant interest rate rise".
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But he pointed out that you don't need the Bank of England to put up official
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rates for mortgage costs to rise. Lenders are by and large able to change
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their standard variable rates at will, while Skipton Building Society recently
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**[abandoned a pledge to keep its SVR within three percentage points of Bank
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Rate][8]**.
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"Money is very expensive at the moment even though base rates are at a
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311-year low," Mr Dampier said. "While for home owners with a tracker mortgage
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2009 probably proved to be rather good in terms of income, I think for the
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consumer who has kept their job the recession is only just about to start. I
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believe people are going to be in for a real shock. They have got used to a
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standard of living that goes up every year. I expect that standard of living
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for the next four or five years to fall."
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Ros Altmann, a governor of the London School of Economics, said interest rates
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would have to start rising at some point. "They cannot possibly stay at these
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low levels as the economy picks up," she said. "But I fear that the Bank of
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England might keep rates too low for too long. This leads to a significant
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risk of rising inflation - indeed inflation is already well above the official
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target - and once inflation takes hold it may not be easy to bring it back
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under control."
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Higher interest rates might seem like good news for savers, who would finally
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see better returns on their money, she said. But if inflation rose faster than
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interest rates, pensioners' and savers' incomes would not keep up with
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increasing household bills. "Rising rates also means higher mortgage rates,
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which will put further pressure on many households' incomes."
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Vicky Redwood of Capital Economics, the consultancy, said rises in interest
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rates looked unlikely. "So at least mortgage costs should stay low. But house
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prices still look overvalued and could start to fall again, leaving more
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households in negative equity," she added.
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### Investments
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While you would expect the end of a recession to be good news for the stock
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market, it's worth bearing in mind that markets generally look ahead, so much
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of the good news will already be "in the price". So instead of simply
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expecting the FTSE100 to soar, investors may have to be selective if they want
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to profit, experts say.
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"A return to growth does not mean a return to pre-credit crunch investment
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strategies," Mr Barber said. "Investors would do well to build portfolios
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which are both defensive and which take advantage of the new opportunities in
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Britain and across the world."
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Mr Dampier agreed, saying: "I think it becomes a real stock picker's market.
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There are some areas of the stock market - high yielding defensives and
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special situations - which I think could blossom through a difficult time in
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the economy. But the general indices may well tread water."
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Bond investors may have to be more careful, Ms Altmann warned. "As the Bank of
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England begins to unwind its policy of quantitative easing, it will have to
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try to sell gilts. This will push bond yields up and prices down. Bond
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investors would lose money, while rising yields could also unsettle the stock
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market later on."
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### Jobs
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An immediate improvement in employment prospects is unlikely, experts say. Ms
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Redwood said: "Jobs will remain hard to find, with employers likely to remain
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nervous about hiring when the economic recovery is still sluggish. In fact, we
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expect unemployment to start rising again and it could even reach 3m.
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"Even if employment holds up, that is only likely to be because firms are
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controlling costs by cutting or freezing pay instead. For many people, it will
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still feel very much like a recession."
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Ms Altmann agreed. She said: "Companies will not suddenly rush to recruit new
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staff until they are more confident that the recovery will last, so
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unemployment is likely to stay high and pay will not increase much if at all
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for most of us."
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### Household bills
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There is further bad news for consumers when it comes to council tax and
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household energy bills. "We can expect council tax to rise further as we are
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paying for the public sector pensions," Mr Dampier said. "Utility bills will
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continue to rise, not only because of rises in commodity prices but also
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because of environmental taxes."
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[X][9] Share & bookmark
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[What are these?][10]
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* Share: [Share][9] [ ][11] [ ][12]
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[Tweet][13]
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http://www.telegraph.co.uk/finance/personalfinance/consumertips/7077807
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/Britain-is-out-of-recession-at-last-but-are-you.html
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Telegraph
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## [Consumer Tips][14]
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* ### [Finance »][15]
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* ### [Personal Finance »][16]
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* ### [Recession »][17]
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[![pensions-calculator][18]][19]
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### [Pensions Calculator][19]
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[![currency exchange][20]][21]
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### [International Money Transfer Service][21]
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[![find an independent financial advisor][22]][23]
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### [Find an Independent financial adviser][23]
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Related Partners
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* [10 ways to keep your ID safe][24]
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* [Save money on your international currency transfers][25]
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In finance
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[![][26]][27]
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### [Don't follow the herd][27]
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[![Cartoon of Sherlock Holmes and Doctor Watson investigating a tax code][28]
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][29]
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### [10 ways to beat the taxman][29]
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[![Cartoon of couple planning pension][30]][31]
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### [Pension countdown][31]
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[X][9] Share & bookmark
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Digg Fark LinkedIn Google Buzz StumbleUpon Y! Buzz
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[What are these?][10]
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Share:
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* [ ][9]
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* [ ][11]
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* [ ][12]
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* [Tweet][13]
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* Advertisement
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![][32]
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Please enable JavaScript to view the [comments powered by Disqus.][33] [blog
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