Amid all the excitement of the stock market swinging around like something out of The Jungle Book and looters roaming the streets, the most common question that I have been asked over the past few weeks is "what does it mean for my bank balance?"
Reports of billions being wiped off global stock markets are very frightening, but the crisis is not one that affects everyone equally. Depending on what stage of life you are at, the events of the past few weeks will have a very different effect on your quality of life. The following guide should help you to assess the damage (and the bright side), and help you understand what to do about it.
Born yesterday
If your son or daughter has just been born, you could be forgiven for feeling pessimistic. But babies born this year have a lot to be thankful for. For a start, they have a 30 per cent chance of living to 100, thanks to scientific advances and improved nutrition.
Their parents also have a golden opportunity to invest in the stock market while it is in the doldrums, with the hope that their little one will have plenty to be grateful for when he or she grows up. Although you have just missed out on the Child Trust Fund, the Government has confirmed that this will be replaced by the Junior Isa, which has a tax-free limit of £3,600 every year.
Time is on your side so most advisers will suggest you put money into stocks and shares, which usually outperform cash over this time frame. Fidelity, which confirmed it will be offering a Junior Isa, said that if the full allowance was invested every year from birth until the age of 18 with an assumed growth rate of 5 per cent and the allowance was adjusted for an inflation rate of 2.5 per cent, this Isa would be worth £101,336.52 at 18.
How he wins: the parents can invest in the stock market at one of its lower ebbs – let's hope things get better.
How he loses: high life expectancy means that saving for the future is vital. The parents will lose child benefit from 2013 if either is a higher rate taxpayer, which means there may be less to invest.
Action to take now: why not give your child long-term financial security by setting up a pension? Thanks to tax relief and the joys of compound interest, they could have one worth over £1 million at a cost to you of £2,400 a year over the first 18 years of their life.
Teenager
It's not hard to understand why today's teens feel angry and alienated. They are facing the prospect of leaving university with huge debts, while the Educational Maintenance Allowance, paid to lower-earning families to keep children in further education, is also being cut. The parents may be facing the loss of child benefit, too, while the gloomy economic predictions out last week will do nothing to improve the chance of a Saturday job once teenagers reach 16.
How he wins: hard to say – the Government may rethink the cuts to some youth services after the rioting last week.
How he loses: continuing instability in the economy will make it harder to get part-time work, while youth unemployment is rising.
Action to take now: parents should be working to give their children a basic understanding of money before they go to university. Teenagers may be offered credit cards, and will be in charge of large budgets when they hit 18.
Student
Today's students will miss out on the vast increase in student fees, but will still leave university with an average debt of £5,600 per year of study, according to student finance experts Push. Graduate unemployment is high, and living costs are rising – basics such as food and fuel are more expensive every week. On the plus side, current interest rates keep borrowing low for the indebted.
How she wins: low interest rates are good news – the student loan is the cheapest long-term debt you will get; students are unlikely to suffer from lower savings rates.
How she loses: student loan repayments are uprated in line with inflation, which is still at more than twice target. Loan costs are uprated in line with RPI inflation, which tends to be higher than the other measure, CPI.
Action to take now: make sure you use student debt wisely. Take up the maximum amount of student loan you can get – if you don't need it, it will make money in a high interest account. Use your interest-free overdraft in a similar way.
Young family
While young families are penalised by rising inflation, loss of benefits and the threat of unemployment, it's not all bad news. Many young families still have larger mortgages than savings pots, meaning that the probability of continuing low interest rates is a godsend. The Bank of England indicated last week that rates could stay at 0.5 per cent for another two years. The stock market woes will have affected pensions, but young families have plenty of time for their investments to recover before retirement.
How they win: continuing low interest rates.
How they lose: threat of unemployment, child benefit loss for higher-rate taxpayers.
Action to take now: check you are on the best possible mortgage. Rates are at their lowest for 23 years, so this could make a huge difference to your monthly outgoings.
Nearing retirement
Bad news, I'm afraid. Your pension will have lost money, while annuities – which could buy you a lifetime income with your pension pot – have also become more expensive. Figures from Saga show further falls in quality of life for the over-fifties as savings income falls and inflation rises.
How he wins: older workers may still have benefited from final salary pension schemes and rising property values.
How he loses: lower interest rates lead to erosion of savings while stock market falls are bad news for pensions.
Action to take now: check that your pension is in the right sort of fund for you and make sure you shop around when buying an annuity – especially if you have chronic health problems, as this can make a huge difference to income.
Younger retiree
If you've already bought your annuity with your pension pot, you'll be largely unaffected by stock market gyrations. However, rising inflation is a problem if you're trying to live off income. Low interest rates are unlikely to be much compensation.
How she wins: you will have gained from rising property prices in the past 10 years – many pensioners are sitting on substantial property wealth.
How she loses: inflation is eroding income at every turn.
Action to take now: make sure your money is working as hard as it can. Long-term products, such as National Savings & Investment's inflation-linked bonds are useful for making sure your money isn't losing value, but you can only invest a maximum of £15,000.
Older retiree
Like those who are slightly younger, you'll have benefited from property price rises and are unlikely to be vastly exposed to the stock market. However, rising care home costs are on the horizon and many older retirees face the prospect of selling homes to pay for care.
How she wins: no exposure to stock market falls.
How she loses: a place in a care home now costs up to £30,000 a year, twice the average pensioner's income, according to figures published today.
Action to take now: make sure you are claiming correct benefits, particularly if you, or a relative, is in a care home. Those with assets of more than £23,250 will not get help towards care costs. In most cases, this figure will include the family home. But there are circumstances in which it is disregarded – the most important being if a spouse, partner or relative aged 60 or over is living there.
Source: http://www.telegraph.co.uk
Reports of billions being wiped off global stock markets are very frightening, but the crisis is not one that affects everyone equally. Depending on what stage of life you are at, the events of the past few weeks will have a very different effect on your quality of life. The following guide should help you to assess the damage (and the bright side), and help you understand what to do about it.
Born yesterday
If your son or daughter has just been born, you could be forgiven for feeling pessimistic. But babies born this year have a lot to be thankful for. For a start, they have a 30 per cent chance of living to 100, thanks to scientific advances and improved nutrition.
Their parents also have a golden opportunity to invest in the stock market while it is in the doldrums, with the hope that their little one will have plenty to be grateful for when he or she grows up. Although you have just missed out on the Child Trust Fund, the Government has confirmed that this will be replaced by the Junior Isa, which has a tax-free limit of £3,600 every year.
Time is on your side so most advisers will suggest you put money into stocks and shares, which usually outperform cash over this time frame. Fidelity, which confirmed it will be offering a Junior Isa, said that if the full allowance was invested every year from birth until the age of 18 with an assumed growth rate of 5 per cent and the allowance was adjusted for an inflation rate of 2.5 per cent, this Isa would be worth £101,336.52 at 18.
How he wins: the parents can invest in the stock market at one of its lower ebbs – let's hope things get better.
How he loses: high life expectancy means that saving for the future is vital. The parents will lose child benefit from 2013 if either is a higher rate taxpayer, which means there may be less to invest.
Action to take now: why not give your child long-term financial security by setting up a pension? Thanks to tax relief and the joys of compound interest, they could have one worth over £1 million at a cost to you of £2,400 a year over the first 18 years of their life.
Teenager
It's not hard to understand why today's teens feel angry and alienated. They are facing the prospect of leaving university with huge debts, while the Educational Maintenance Allowance, paid to lower-earning families to keep children in further education, is also being cut. The parents may be facing the loss of child benefit, too, while the gloomy economic predictions out last week will do nothing to improve the chance of a Saturday job once teenagers reach 16.
How he wins: hard to say – the Government may rethink the cuts to some youth services after the rioting last week.
How he loses: continuing instability in the economy will make it harder to get part-time work, while youth unemployment is rising.
Action to take now: parents should be working to give their children a basic understanding of money before they go to university. Teenagers may be offered credit cards, and will be in charge of large budgets when they hit 18.
Student
Today's students will miss out on the vast increase in student fees, but will still leave university with an average debt of £5,600 per year of study, according to student finance experts Push. Graduate unemployment is high, and living costs are rising – basics such as food and fuel are more expensive every week. On the plus side, current interest rates keep borrowing low for the indebted.
How she wins: low interest rates are good news – the student loan is the cheapest long-term debt you will get; students are unlikely to suffer from lower savings rates.
How she loses: student loan repayments are uprated in line with inflation, which is still at more than twice target. Loan costs are uprated in line with RPI inflation, which tends to be higher than the other measure, CPI.
Action to take now: make sure you use student debt wisely. Take up the maximum amount of student loan you can get – if you don't need it, it will make money in a high interest account. Use your interest-free overdraft in a similar way.
Young family
While young families are penalised by rising inflation, loss of benefits and the threat of unemployment, it's not all bad news. Many young families still have larger mortgages than savings pots, meaning that the probability of continuing low interest rates is a godsend. The Bank of England indicated last week that rates could stay at 0.5 per cent for another two years. The stock market woes will have affected pensions, but young families have plenty of time for their investments to recover before retirement.
How they win: continuing low interest rates.
How they lose: threat of unemployment, child benefit loss for higher-rate taxpayers.
Action to take now: check you are on the best possible mortgage. Rates are at their lowest for 23 years, so this could make a huge difference to your monthly outgoings.
Nearing retirement
Bad news, I'm afraid. Your pension will have lost money, while annuities – which could buy you a lifetime income with your pension pot – have also become more expensive. Figures from Saga show further falls in quality of life for the over-fifties as savings income falls and inflation rises.
How he wins: older workers may still have benefited from final salary pension schemes and rising property values.
How he loses: lower interest rates lead to erosion of savings while stock market falls are bad news for pensions.
Action to take now: check that your pension is in the right sort of fund for you and make sure you shop around when buying an annuity – especially if you have chronic health problems, as this can make a huge difference to income.
Younger retiree
If you've already bought your annuity with your pension pot, you'll be largely unaffected by stock market gyrations. However, rising inflation is a problem if you're trying to live off income. Low interest rates are unlikely to be much compensation.
How she wins: you will have gained from rising property prices in the past 10 years – many pensioners are sitting on substantial property wealth.
How she loses: inflation is eroding income at every turn.
Action to take now: make sure your money is working as hard as it can. Long-term products, such as National Savings & Investment's inflation-linked bonds are useful for making sure your money isn't losing value, but you can only invest a maximum of £15,000.
Older retiree
Like those who are slightly younger, you'll have benefited from property price rises and are unlikely to be vastly exposed to the stock market. However, rising care home costs are on the horizon and many older retirees face the prospect of selling homes to pay for care.
How she wins: no exposure to stock market falls.
How she loses: a place in a care home now costs up to £30,000 a year, twice the average pensioner's income, according to figures published today.
Action to take now: make sure you are claiming correct benefits, particularly if you, or a relative, is in a care home. Those with assets of more than £23,250 will not get help towards care costs. In most cases, this figure will include the family home. But there are circumstances in which it is disregarded – the most important being if a spouse, partner or relative aged 60 or over is living there.
Source: http://www.telegraph.co.uk
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