Fitter finances

The four point plan to getting your money in shape

A credit crunch, turbulent stockmarkets, house price deflation and various murmurings from the financial sector about a challenging year ahead, is testament enough for many to look at ways to baton down the hatches. So what areas should you consider?

Point 1
Although there is continued pressure on the Bank of England to take action by reducing interest rates that would result in lower borrowing costs for many mortgage−holders, the credit crunch has made it more difficult for the remortgaging process.

If you currently have an expensive non competitive mortgage deal with no redemption penalties, you could save a considerable sum of money by remortgaging to a more competitive home loan deal. This is an option that should be investigated sooner rather than later, as you could end up paying thousands of pounds more than you really need to.

Currently, if you find yourself in a situation where you have to cut your monthly payments, you could consider extending your mortgage term. Your existing lender may allow you to do this, with some permitting extensions on terms of up to 40 years. This really should be a last resort and professional advice should always be taken first before you proceed with this option.

Alternatively if you have a repayment mortgage you could consider moving to an interest only loan. This would effectively me that you only pay the interest off the loan and not the capital. The onus is then on you to arrange a repayment vehicle that would repay the loan amount at the end of the term. This is one option to consider if you need to increase your cash−flow in the short term. It’s important to remember that if you take this course of action you should move back to a repayment basis as soon as your finances permit.

Point 2
If you are concerned that stockmarkets may continue to remain turbulent for the foreseeable future and want to reduce the exposure and risk of your pension fund to equities, what should you consider doing?

One possibility could be to switch out of your existing scheme’s equity fund into its bond fund. Alternatively, if you are in the run up to retirement you may wish to consider reducing your risk exposure by completely moving your money into your scheme’s cash fund. This should then be continually reassessed on a regular basis to make sure that your fund choices are consistent with your risk reward profile.

A pension should always be viewed as a long−term investment.

Historically exposure to equities has shown that, over the longer term, they have consistently out performed cash. It’s important to remember that if you are a long way from retirement, you could be considerably disadvantaged by not having the appropriate allocation of your pension invested in equities.

Point 3
Stockmarket investors may wish to consider moving some of their money into more cautious investments, such as cash or bonds.

However, the key thing to remember is not to panic and in some instances to do nothing as history has shown that this is usually the best course of action in such situations. If you have entered a market at its peak and then exit at the bottom, tempting as it might be to withdraw money when markets drop sharply, this crystallises your losses.

Point 4
You may consider that depositing your cash in a savings account is a safer option. Institutions affected by the credit crunch may decide to maintain higher savings rates in an attempt to attract more depositors’ cash and increase reserves.

It’s worth remembering that if a bank collapses, the maximum that the Government will currently guarantee to savers is £35,000, so spreading your money across a number of different institutions is a safer approach take. Following the run on Northern Rock this quickly led to the Chancellor publishing a consultation paper on the depositor protection regime. Within weeks he had also issued a 100 per cent guarantee on the first £35,000 of savers’ deposits in the event of a bank collapse. This replaced a regime which previously offered 100 per cent protection only on only the first £2,000, followed by 90 per cent on the subsequent £33,000.

The government−backed National Savings & Investments also offers a range of savings products, but has recently reduced rates on some of its most popular offerings.

Levels and bases of, and reliefs from, taxation are subject to change