When Savings Got A Bad Name

When I was young, my parents and grandparents drummed it into my head that I should always save some money. I followed their advice when I could, starting my first bank account as early as possible and setting money aside.

Their advice certainly helped me buy my first home soon after I started work as I had plenty for the deposit. Bizarrely, I followed the advice of a rugby playing mate and went for a 100% mortgage and a whopping life insurance policy on an interest-only mortgage despite being single - his advice was to blow my savings on material things that had no long term value. Later, after meeting and marrying an Independent Financial Adviser (IFA), I got things back in check. But it was only when she opened my eyes to what I would need in retirement without the buffer of one of those super company or public service pensions that I started to really save.

Over the last 10 years or so, there has been a huge focus on getting credit in Britain. Banks and credit card companies have fallen over backwards to literally throw cash at us, not just to buy homes but to fund a fantastic lifestyle of flashy cars, superb holidays, up to date whizz gadgets and big TVs and much more. We have never had it so good as we used our own financial instruments to supplement our dwindling (on average) household incomes. In the meantime, our level of real savings has been negative. It was almost crazy to save, in fact, so cheap was the money thrown at us.

Pensions probably fared worst but savings generally have been negative in comparison to our monthly income. Beyond my pension, my wife and I save with ISAs regularly and this year we cashed some of those in at a lowish point and then bought back in using a scheme I had no idea existed called OICs. By doing this we have fared very well and the OIC alone has increased nearly 40% so we have not lost anything during the crisis and our savings are still tax free.

It struck me though, that savings seem to be the last thing on everyone's mind. Although the level of debt on credit cards has actually come down by the odd percent for the first time in ages, outside mortgages, Britons have over £1 trillion of unsecured loans. In trying to kick start the economy, one of the first things that was focused on was rekindling the 'Asset Backed Security Market', or housing markets to us mere mortals. While it made sense to get money into people's pockets in the short term by leveraging their assets, it was clearly exactly the same plan that had got the nation into a financial mess. So long term, there has to be a plan to get Britain saving more.

The problem is that it is not as easy as it sounds - we all know the score. Just when I think I'm on top of things, the washing machine breaks down or the carpet gets stained, the floor needs repairing, the lounge suite is suddenly wearing. With all the juicy sales on all year round these days, there is a temptation to think we are getting a bargain all the time and if we don't spend we will miss out. Saving in a disciplined manner is a hard task in our current environment of materialism fuelled by cheap credit. At least when interest rates were high we could see our savings grow and we borrowed less. Now, my Halifax building society account offers zero interest on our balance and we have had to go elsewhere to get something for our small monthly savings - it's crazy.

The whole market seems geared against savings. There is little focus nationally on pensions and saving for retirement and my wife's IFA business has changed dramatically over the years with structuring and restructuring credit as being her main business versus investment and retirement planning. She firmly puts this down to the attitude of Government, banks and people - it cannot be any one of those alone, it has the right combination and time. At this time, saving for the future is not a priority generally and the whole market is geared toward lending more.

In her opinion, as it is mine, the whole credit crunch was an accident waiting to happen.

Warren Buffett calls it 'capitalism overshooting periodically'. At the height of the crash he invested $5bn into Goldman Sachs and is now sitting pretty. My meagre funds went into the OIC. I am no Buffett but thanks to equally sage advice I have ridden out the storm well. Like Buffett, my pension is down around 25% still, as are his overall assets, but in reality my whole financial situation is as good as it could be in the face of what we have experienced and my pension is clearly for the long term. I am now focused on saving as much as I can. We reduced overall credit card debt to zero by releasing our Halifax savings to make sure we paid no interest while I have been putting as much as I can into my pension.

But how many others have done the same? In fact, the whole panic that has gripped us has seen the focus shift toward getting credit back to previous levels. Britain will soon get back to borrowing more and saving less. Surely, at some point that vicious upward spiral has to end and let's hope it is not as spectacular as last time.

My point here is not a swipe at the Government who have their share to blame. It is not even at the banks who fuel their cash by lending more in their bizarre world of finance. It really is a swipe at us, the public. It really is time to save and invest as the future could get nasty if we don't. Pensions should be brought to front and centre for every working individual and, personally, I don't think retirement planning should be voluntary. I think there should be massive tax incentives to save, instead we get tax on pension dividends, I think insurance premiums should have no tax attached, I think there should be no tax on savings generally.

Realistically, the Government should plan long term - the more we save, the less we will burden the state in our old age. It just makes sense.

Current finances in the country are a mess and it will take a bold Government that thinks long term in this way. However, it really is not rocket science. The more we all save today, the less vulnerable we are to downturns, the less of a burden we will be on the State and the less the system will incentivise us to borrow as banks will see the profit in investments over debt in the end - hopefully.

I have a feeling that pigs may fly first, but I live in hope.

Market Indicators

It's a weird situation when on the one hand we are all starting to get very uppity about banks awarding their slim numbers of superstars obscene levels of bonus again after clocking up such massive losses and toxic debt and, on the other, we are talking of a second wave of the economic slump.

But that's how the financial system works. There is no doubt that banks took the brunt of the Credit Crunch effects and at least 6 high street names had to be rescued from bankruptcy while many have had to ring-fence toxic debt so that the taxpayers can take the liability off their hands to get on with the important business of paying a small percentage of their staff enormous money after culling many people from their customer-facing ranks who did not lose a penny in profit or bad debt. That's modern banking for you. It is also true, that as the financial system recovers, plenty of vast profits will be made out of thin air as the banks and institutions start playing their silly, high risk games again.

Meanwhile, back in the 'real' world, the slump continues. Quantitative Easing (QE) has been surprisingly extended by the Bank of England and its Governor, Mervyn King, has warned that Britain could suffer a 'debt deflation trap' which sounds about as appetising as trapped wind. There are also fears from other clever economists that Britain may suffer a 'lost decade' much as Japan did as we continue to try to revive our staggering economy. It is perhaps worth noting that Japan was one of the few developed nations to have used QE in recent years along with an extended period of 0% interest rates and their economy stagnated for a decade.

The members of our Monetary Policy Committee which meets to consider such matters and sets the Bank of England's interest rates amongst other things, are the pillars of the financial world. Hedge Fund managers, economists, bank board members we get them all. However, there seems a growing body of concern that the apparent green shoots of recovery are a mirage and that they are a false dawn of a wider recovery. There is opinion that we may well get three successive quarters of economic upturn indicating the technical end to the recession. But in the 1990s, Japan also experienced the same.

Such a recovery could be caused by short term effects only, such as more cars being bought due to the scrappage scheme or perhaps we get a restocking effect after destocking so temporarily boosting output. But there are concerns that the second half of 2010 could be more difficult than the period we are now in and so it brings into sharp focus the gravy train in the banking industry - as always the banks pay on short term gains and do not consider the long term, and there is a real danger that they will pay for merely an economic bounce that was inevitable rather than a long term revival of the system. It's like a salesman getting paid for sales which come in on their own every month and so not having to make a single call to get new ones.

Some of the reasoning behind the gloomy outlook revolves around things like VAT. The temporary farce of lower VAT will have ended next year and indeed the Conservatives, who are looking increasingly likely to be in power after next May, are planning a hike to potentially 20% which is equally stupid, if not more so, as it a form of tax which disproportionately hits poorer people.

But, in my opinion, it will be the tax burden in general, the increase in the jobless, and so the drain on the Welfare State, and the cuts in spending on Public Services - none of which have really bitten us hard yet - that will slow the economy more emphatically. As the state magnet is set to 'high' to remove more tax money from our pockets, the unemployment figures should have peaked at over 3m in the UK by the end of 2010 and so the burden on the State will be huge in terms of benefits, plus the number of people able to pay tax will have been reduced. All in all, it could be a 'Perfect Storm' to depress spending generally and while the banks whoop it up right now, they too will feel some of that pressure so paying bonuses right now for anything is seriously misguided if inappropriate anyway.

Sants in His Pants

If you want a giggle on bank bonuses, listen to the BBC interview with Hector Sants, CEO of the FSA, who tries to make out that he knows what he is talking about when it comes to regulation of bank bonuses. He says the question of bonuses is, in fact 3 questions. 1) Are banks disproportionately skewing rewards for more high risk transactions, 2) are banks paying too much of their profits to too few people and 3) are the size of the individual bonuses too much? He is right on one thing - that is 3 questions. The answers have always been 'YES' to all 3 - so it is a case of 'No sh*t, Sherlock' as that is exactly what happened before and is happening again.

He looked very excited as he thought the FSA could intervene in answer to the first two questions but question 3 was one for the banks themselves and the public to resolve. I am sorry, I don't get that.

You see, the FSA is on the one hand destroying the whole Independent Financial Services industry by imposing incredible regulation on the army of small businesses that give independent investment advice to small businesses and consumers, reducing commissions and restricting what they can and cannot say without immense bureaucracy. In the last year, it is estimated that 30% of small mortgage brokers and IFAs have either left the industry or gone broke. Meanwhile, accountants and lawyers who get involved in the giving of such advice for fees and are not regulated by the FSA so do not have to tell people, for example, that taxation has changed after a Will has been written, are protected from the consequences of their lack of or bad advice, yet are paid for it - and the fee size is unregulated. It is also pushing more of the financial advice back towards those institutions who have a vested interest in selling only their own products, like banks, building societies or insurance companies. Pretty soon, only large mortgage brokers and firms who focus on the corporate market will be left.

The army of local, independent financial advisers who are more ethical than ever, will soon be destroyed because the FSA has ruled exactly how little they should earn. Then we get Hector Sants saying the exact opposite for the bunch of former colleagues he worked with in the City.

That is why we should not pay him the £1m per year salary and bonus that he earned even though he sat by and watched the biggest financial disaster since the Great Depression. He does nothing to curb it as he is one of them. It is one rule for one industry that is public facing and one rule for the other that lives in its own dreamworld of high finance and it is the crux of the reason why banks and their bonus culture will not change.

It is because there is an in-built belief that small people are not important and there should be no curb on the fabulously wealthy, as 'wealth creation' is seen as good while servicing the public is second rate - it is a sentiment shared at the highest level in Government by former PM, Tony Blair, and current Business Secretary, Peter Mandelson. That is why, when banks fail they chop staff at the public end of their businesses while keeping the high-flying traders in place to get more bonuses.

Until we change that culture fundamentally, we will never rid ourselves of the problem in the world of finance. That will mean changing all the past bankers on Monetary Committees, Boards and Regulators as they are all part of the problem - they are not of the 'real' world.

Small Businesses - What The Budget Meant

I think most people would agree that the budget speech made by Alistair Darling this week was pretty depressing. It is hard to dress up what is a very serious situation that Britain is in but I cannot help feeling this was an opportunity missed to focus on some key areas that matter to small businesses.

It's a very important point. Small businesses employ over 13 million people and constitute around 95% of all companies in Britain. We are, in reality, the engine room of the UK economy as by proportion of our size, we pay more tax into the system than any other part. However, the figures for small companies failing right now are staggering - literally hundreds per week fail.

Most small businesses are failing on two counts - a lack of new orders and a lack of cash. It is very difficult in a downturn for the Government to conjure up more orders, although there were some things they could have done, but they can give access to more cash. After all they have given £ billions of it to the banking sector which had caused much of the problems.

That said - here are some highlights of the budget and business generally worth noting from this week.

The Budget Highlights

- Corporation Tax

The first big area is that any company making losses will have the ability to claim more of the tax back that they have paid over the last 3 years. This is an important consideration when filing this year's accounts and how much loss has been accrued.

- Capital Allowance

The main business capital allowance has now risen from 20% to 40%. This is a big concession for those businesses who have invested in machinery or new technology and is also a good incentive to think about capital vs. overheads.

- Strategic Investment

£750 million has been ear-marked for strategic investments in emerging technologies. It is well worth getting up to speed on this as your business may qualify particularly if you are working in the arena of more carbon or environmental friendly technology.

- Credit Insurance

Up to £5 billion of extra cash has been committed to cover trade credit for those businesses who have experienced a reduction in the level of cover. I think there is an opportunity missed here as we have seen from the Enterprise Loan Guarantee scheme that banks have abused the system and I think credit insurers will also. I think insurers will use this extra cover to merely cover their existing book more. The issue for many companies is that they are having to find new clients and they will need new cover in order to deal with them and this has not been forthcoming. Once again I think this is putting money into the wrong area and all it is doing is maintaining existing sales.

- Safeguarding Jobs

I have to admit I thought this was just a soundbite with not a scrap of credible detail to tell us how 500,000 jobs will be saved. I think most small businesses would like to know where they can apply today in order to avoid redundancies they may be making but somehow I don't think either the Chancellor or PM has thought this through, but it was carefully designed to sound as if they were doing something.

- Work Experience

Some £250 million is set aside to help people in certain industries to get job experience. Precious little detail has been given but this could be of real importance in the coming months as this can help provide business with a helping hand on staff levels without having to hire or pay contractors.

- Statutory Redundancy Payments

The minimum payment per week of service is now £380, up from £350, and this is an important factor when costing out job cuts. Also, the maximum pay out is now moved up from £10,500 to £11,400. Unions had fought to get this higher as redundancy is actually a very cheap option in the current business climate and not enough thought is going into the process by managers.

- Environmental Initiatives

If you are a low carbon industry, then there is good news. The Government has pledged a further £1 billion to be invested in low carbon businesses. A further £405 million is available to support low carbon manufacturers and if you are into offshore wind projects, you have hit the jackpot as £525 million will be spent on them.

An interesting little extra is that £525 million will be spent on energy efficient projects in homes, firms and public buildings. For all builders reading this blog, I would get up to speed on this as this could be a lucrative new business opportunity in the coming year.

- Childcare For Workers

Many firms encounter the difficulty of childcare for employees. While the new initiative to compensate grandparents in their pension for caring for grandchildren does not seem much, it actually may filter down. Hopefully more grandparents will get involved as their sacrifice of time may be compensated and this may take the strain financially off some workers who have to pay significant sums in order to provide nanny services. It may also ease pressure on working hours as grandparents tend to be more flexible. I have real hope that this may help.

- Government Savings

Tax loopholes are closing and there is an aim to raise £1 billion via this. For those firms and individuals who have been using such loopholes, I dare say this may up your fees to your clever accountants and lawyers to find the next 'loophole'. If the Government hits anywhere near this figure I will be very surprised.

Public spending is coming down in 2011 from 1.1% to 0.7%. The figure seems innocuous but if you have a business depending on this spend, then find something new to do.

£9 billion in efficiencies are planned - I assume this will mean clearing out dross in vast new departments like Dept. of Business Secretary and the Office of the Deputy Prime Minister but how the stupid policies of increasing bureaucracy and Government via Assemblies have backfired just as everyone thought they would. So much money is absorbed by all this, it is a tragedy that we have to go back and save it. If only they would completely overhaul public sector expenses then I am sure we could save a ton more.

- Housing

Some good news for the building industry as more stopped housing projects will be restarted as £500 million will be ploughed into these but it does include £100 million for local authorities to build energy efficient homes. For those with businesses around armed forces camps, £50 million has been specifically set aside to upgrades of their homes.

- Property

Lots of mixed messages here on holiday or second homes and the detail needs to be gone through, but for many who had bought second homes and hoped to get some rental income then they are going to be sadly disappointed about how that will get treated for tax. Also, there is more of a potential hit when selling. What this does on the buy-to-let side needs to be teased out. For many who bought their second homes and planning the financials based on existing legislation, this will be a major blow and some would argue a very unfair one. I can see a need for sound advice from agents and accountants here and for all second property owners I would go back and look at the Terms and Conditions from your advisers at the time of purchase particularly if you were lured in by some 'glossy' adverts and sales speak offering 'guaranteed returns'. The industry, sadly, is not noted for it.

- Duty Increases

Travel is once again targeted with an increase on fuel duty of 2p per litre from September and I have to say this is once again a very hard tax. The cost of travel is heavy enough as it is and public transport is so overly expensive in Britain that people have no choice but to use cars. This is a big cost to individuals and to business as this cost will be passed on to customers. Via staff mileage allowances or cost of delivery, costs rise and have to be absorbed or passed on. This really is a stupid extra cost at this time as it will penalise business and individuals.

Naturally the perennial duty rises on alcohol and tobacco are high. I got lost as to why this is done - either this is a problem area in society, draining the NHS, or it is a good thing, either way the tax is neither punitive nor helpful.

- The Car Industry

Good news at last for the beleaguered car makers and their dealers who have suffered a greater than 30% drop in sales. The Government announced a £2,000 scrappage scheme for cars over 10 years old to be given as a credit against a new car. Already 8 out of 10 leading car makers have committed to the scheme which extends only to the first 300,000 cars bought under the scheme. The caveat is that the industry has to provide £1,000 of the £2,000. I cannot help feeling that again an opportunity has been missed as scrappage has worked well on the continent to support sales - dealer discounts are already heavy so will we end up paying more because the dealers will withdraw the discounts to favour this scheme? I wonder.

- Personal Tax

For those earning above £100,000 a year, their personal allowance will be halved while those earning above £150,000 a year will have their allowance removed and see all earnings above that taxed at 50% - together with NI changes this constitutes over 60% tax for some earners. It will mean that firms may well look at alternative ways of rewarding their top earners with greater dividends offered or stock options or deferred bonuses. There has been much howling about this as 'manifesto reneging' and even Tony Blair believes it is folly. Some are concerned it will cause a new drain on top talent. Who knows, but it is something that I think all companies will get 'creative' about and I don't think it will raise as much tax as Ministers think as those around the various marks will simply take the offending portion as something new.

A nasty piece of work is the scrapping of the top rate tax relief on pension contributions. I would suspect that most companies who care about this will simply put it as an employer contribution instead and take it off the salary bill. I just think it sends all the wrong messages about savings.

With this, at least the ISA limit has gone up for personal annual tax free savings to £10,200 (for over 50s this year and everyone else next year - why wait?). For the clever minded there are OIC schemes which allow you to use Capital Gains allowances in the same year to maximise tax free investment. Get good advice from your IFA on all this as my wife (who is an IFA) has just done the same for me.

There is also going to be a reform on tax on profits earned abroad - watch out for this one.

I recently got into an argument on the Linked In IOD Forum with an accountant who asserted that we should 'Choose how much tax we pay' and the statute allows this. He defended the likes of Philip Green saying he had done nothing against the law.

That's as maybe but I think that those wealthy people who deliberately go out to avoid paying a fair tax on what they earn are morally corrupt. So much so, I have opted out of that discussion group and it's the last reason I needed to opt out of the IOD which seems to be a knocking shop for such people.

That said I still believe that people should use their allowances and the tax system allows you to be sensible about your future. So those high earners earning around the £100,000 and £150,000 thresholds can take a 'salary sacrifice' and put the offending part of their salary into their pensions. Of course, that means it cannot be spent but it is about time that we had a good reason to save for retirement. Also, this needs to be clarified as new tax rules may frown on such an option - which I cannot see any wrong in doing.

Another scheme I have seen is deliberate tax avoidance which is setting up a limited company and taking the earnings as dividends and so tax is lower and using non-earning spouses and children's allowances. I think, again, this is wrong but according to the IOD accountant, perfectly legal.

Entrepreneurs

There has been much uproar that this was budget against entrepreneurs, in that it discourages people from taking risks. I don't see the logic in this - The Sunday Times Rich List has JK Rowling worth over £400 million yet she pays full tax and lives in Scotland. For the person willing to get up and work hard on their ideas, you will still be rich at the end of it. Maybe a bit less so, but rich.

Here's my logic. An entrepreneur in the UK starts here not initially to get rich but to make an idea work. For that they need market conditions, customers, access to markets and an environment ripe for their product or services' success. If they went to Cyprus to make that happen I would assert that they have less chance of success. If they went to the US, probably the same unless you have experience of the US markets. The simple fact is, entrepreneurs use the markets they are in to create their success - no market, no success.

Peter Hargreaves, the Financial Advice magnate, says he is going to Monaco or the Isle of Man - fine, go there. To get that rich on the back of financial advice then he probably gave interesting advice and I wonder if the majority of his clients are as rich as him to be able to make the same choice. But he has made his millions and he could not have made it without his customers who are here in the UK. No market, no success. So what does he want? To live in the Isle of Man and then start up another high earning business? He couldn't do it without having his customers at his doorstep, unless he was creative enough to know how to do it - and then he wouldn't be bleating about it.

So it seems that these people want more than being rich despite the fact it is normal, honest, tax paying people like you and I who have made them rich by buying their products and services. Perhaps if they had told us that before they touched us up for our money we would not have bought from them. Stelios is a prime example of this, always bemoaning 'Fat Cats' like Barclaycard who took a percentage of his take or the airport charging for things. He made millions and declares himself non-dom to avoid paying tax. So who exactly is the fat cat?

It is infuriating to think that such rich people think the country owes them more than they deserve and the customers they sell to. Makes you wonder why we buy their products with that kind of disdainful attitude. Remember that the next time you want a pension or walk into an Arkadia store like TopShop.