Should Consumers be Prepared for a Base Rate Rise?

interest rate riseThe Bank of England’s Monetary Policy Committee (MPC) has once again chosen to keep the base rate at its historic low of 0.5%. The latest predictions suggest that the rate could now stay there for another year before finally rising from the low point it has maintained until 2009. Nonetheless, the latest vote has once again raised concerns about what the impact will be on consumers when the rate finally does increase, and questions about how much preparation the average consumer should do.

Concerns relate to the section of consumers who have debts, and most particularly mortgages. The long period for which rates have remained at their lowest ever level has led to a large number of mortgage-holders in the UK who entered while rates were affordable and have never had to face an increase. There are fears that this class of borrower may have become complacent and be ill-prepared to afford increased repayments when rates do eventually pick up.

There are also concerns about the way this could impact the wider national economy. With households having debt worth 135% of their total income and rising and higher levels of unsecured borrowing than before the financial crisis, many experts believe that the section of the population that is most vulnerable to a rate rise could also have enough collective debt to create serious national economic repercussions. Other experts, however, point out that while the size of the average mortgage is higher than pre-crisis levels, this could be offset by the fact that the percentage of households that actually have a mortgage is lower than it has been for some time.

On the individual level, the size of the impact that a rate rise would make on any given person or household is heavily dependant on circumstances. However, it is unlikely to be disastrous for the majority of people, especially given the Bank of England’s caution in introducing a rate rise and their recently-repeated intention to roll out increases slowly. Recent research suggests that the average consumer is well-positioned to deal with this kind of gradual rise. Those who have stretched their finances as far as possible to secure a mortgage they can only just comfortably afford may find themselves strained, and those who are already seriously struggling with debt will find it hardly helps their situation. For most borrowers, however, it is likely to be more an inconvenience than a big financial burden.

Nonetheless, this does not mean that being prepared is a bad idea. Whether current predictions that a rate rise will take place in about a year’s time are correct or not, at some point the base rate will increase. If you are at all concerned about the affordability of your mortgage or other borrowing should rates increase, then have a look at your situation and work out just how much you could afford and where you might be able to find financial leeway if necessary. Whether you are actively concerned or not, you may wish to consider remortgaging while rates are still low if you have the option, thereby securing yourself current rates for a longer term with your new deal.

“Dip in Living Standards” for Out-of-Work Families

The Joseph Rowntree Foundation (JRF), an anti-poverty campaign group, has warned that families who are out of work are facing a significant drop in their standards of living. This is a result of cuts to the benefits these families receive, leaving them without the income needed to achieve an acceptable standard of living.

Couples who are out of work and have children are currently facing “a decade of sharply declining living standards,” the JRF has warned. By 2020, the organisation predicts, a couple who are looking for work and have two children will fall short of the level of income they would need for an acceptable standard of living by £221 every week.

Pensioners will fare rather better, and will have the amount of money they need for acceptable living standards, albeit narrowly. Retirees will exceed this threshold by £15 a week. All of these calculations are made using the JRF’s own estimates of what will be an acceptable level of income by 2020.

Following on from Chancellor George Osborne’s July budget, which announced a number of key changes, many groups are set to become better off by 2020 than they are now. Pensioners, those in work who do not have children, and families where both parents are working full-time are among those who are likely to find themselves in a stronger financial position in five years. However, families with more than two children and single parents will either see their standards of living hold steady or decline, the JRF’s research suggests.

Two of the key measures at play – both announced in the July Budget – are the introduction of a National Living Wage, and significant cuts to certain benefits such as tax credits. The former will create a noticeably and fairly sudden increase in wages for families in lower income brackets, but the latter will offset some of these benefits in many cases and could lead many people to become worse off. Shortly after the Budget , the Institute for Fiscal Studies (IFS) predicted that the changes it contained would lead 13 million families in the UK to be left out of pocket, each losing an average of £260 per year.

According to JRF chief executive Julia Unwin, “the wage rise comes hand in hand with changes to in and out of work benefits. Families will only be able to make ends meet if they have two parents in full-time work, but those who are able to find extra work will face a difficult juggling act as they try and make longer hours fit around family life.”

Ombudsman Reveals Which Banks Attract Most Complaints

The financial ombudsman has revealed that it is the Bank of Scotland that is the subject of more complaints than any other bank. The first half of this year alone saw the ombudsman deal with over 20,000 complaints relating to the bank.

Barclays and Lloyds were also singled out as banks attracting a lot of complaints from consumers. Together with Bank of Scotland, they were named the three “most-complained about” of all financial firms in 2015 so far. Over the first six months of the year, this trio collectively gave rise to roughly 60,000 new cases for the financial ombudsman. 20,288 of these were in relation to the Bank of Scotland, followed by 20,021 complaints about Barclays and 19,818 surrounding Lloyds Bank.

NatWest attracted special mention for the rapid increase in the number of complaints it gave rise to. The initial six months of 2015 saw complaints relating to NatWest increase by more than half compared to the previous six month period. NatWest gave rise to 11,549 complaints in total in the initial six months of 2015 – a 51% increase on the 7,663 complaints in the latter half of 2014.

In total, the first half of the year saw 173,994 new cases taken on by the Financial Ombudsman Service. Compared to the second half of last year, this is an increase of 8%. Over half of these complaints related to mis-selling of payment protection insurance (PPI) as part of the ongoing multi-billion-pound scandal surrounding widespread use of questionable selling tactics by banks and other lenders. Chief ombudsman Caroline Wayman said: “Complaints about PPI continue to make up over half of our workload. And though the number of new PPI cases has reduced in the first half of this year, the decline has not been as steady or as marked as generally expected.”

However, complaints relating to other financial products are on the rise, jumping by 45% in the first half of this year thanks largely to an influx of new cases relating to packaged bank accounts. These are a kind of current account offered by some banks such as NatWest and Lloyds which offer the account holder a benefit package in exchange for a fee that is usually paid monthly. The kind of benefits on offer often include insurance products such as card protection, travel insurance, or gadget insurance. Concerns have been rising for a couple of years now about the misselling of these products, particularly the misselling of card insurance as a paid extra when the bank already offered card protection to the customer in question as standard, and now complaints about packaged accounts have reached 400 every week.

Fuel Prices set to Rise

Falling international oil prices have in recent months led to significant reduction in fuel prices, with the RAC predicting at one point that they may even fall below the £1 per litre mark. Motorists have naturally welcomed lower fuel prices, but now it seems that the cost of running a vehicle is once again set to rise.

The drop in oil prices – and consequently in petrol and diesel prices at the pump – hit in late summer last year and continued through the winter. Motorists have had time to become fairly acclimatised to more affordable running costs. However, new figures have revealed that, for the past four months, prices have been slowly but steadily creeping upwards and could soon increase further to surpass the levels seen before the slump.

Fuel costs hit their low in February, with a litre of petrol costing 106p from the average pump. A litre of diesel cost 113.29p at the time of the February low point. However, the RAC has revealed that by the middle of this month, the price had crept back up to 117p for a litre of petrol or roughly 121p for a litre of diesel. This reflects recovering crude oil prices. Oil cost as little as US$45 per barrel at the start of this year but have crept up to a little over US$62 now.

Another motoring organisation, the AA, released data last month showing that the rise in prices has led to a reduction in fuel sales. Based on information from HM Revenue & Customs, the organisation reported that March experienced the lowest ever level of petrol consumption even though prices were still significantly below pre-slump levels.

So far the price rise, while a disappointment to motorists, is little more than a recovery from the slump. However, it seems that prices could continue to increase through the remainder of the year, perhaps surpassing pre-slump prices significantly. The International Energy Agency recently issued a report in which it was predicted that the rest of of 2015 will see an increase in demand for crude oil at a rate “faster than previously expected.” If this predictions move true, higher demand is likely to translate into higher oil prices, which in turn translates into a continued rise in the price of fuel.

Concerns on the impact that this might have on motorists’ budgets are compounded by fears that the freeze on fuel duty could soon reach an end. Rates were frozen for almost the entire tenure of the previous parliament, and before the general election the Conservative Party promised it would remain this way for a while yet. However, there have been some reports suggesting that duty may be pegged to inflation, allowing rates to be increased on the basis that they are remaining frozen “in real terms.”

Osborne Calls Emergency “Stability” Budget

Following the Conservative victory in the UK’s general election, George Osborne has announced a new budget to be delivered on the 8th of July this year. The unusual move of delivering an extra budget is, he said, part of the government’s efforts to “deliver on the commitments we have made to working people” as soon as possible.

Previously, Osborne delivered the annual budget on the 18th of March. Through an article in national newspaper The Sun, he acknowledged that inserting an extra budget mid-year was an “unusual” step to take. However, he said that it was down to a desire to make “promises made in the election into a reality” with the minimum of delay.

The “stability budget” to be held in July will, Osborne claimed, concentrate with “a laser like focus” on improving UK living standards through raising economic productivity.

The chancellor has given a rough outline of the plans he expects to deliver in this budget in a conference outside 11 Downing Street. However, he would not yet go into any details of pertinent issues such as plans to make £12 billion worth of cuts to welfare. During the election campaign, the party provided details of how £2 billion worth of cuts would be achieved, but the remaining £10 billion remains unaccounted for in the details so far released.

While Osborne would not go into specifics about how the government’s goals would be achieved, he was happy to outline what the main goals are. The budget will, he said, represent a continuation of a “balanced plan” from the government to reform welfare, reduce government debts, and invest in the National Health Service. The welfare reforms, he said, would focus on efforts “to make work pay.” However, he refused to give any indication of where or how they would make the planned £12 billion of cuts to welfare funding. He only said that the government wanted to create “a welfare system that’s fair to the people who pay for it” but would “always protect the most vulnerable.”

Osborne also said that the government will increase NHS funding each year, continue cracking down on tax avoidance, and help to create new jobs including an extra three million apprenticeships.

Labour’s Caroline Flint, shadow secretary for energy and climate change, said that the Tory election campaign has involved a number of “uncosted promises.”

“It will be interesting,” Flint continued, “to see who is going to pay for those uncosted policies when they bring in the budget in July.”

2015 Election: Financial Policies of the Major Parties

The three main parties and a host of minor ones are now battling for votes as next month’s general election approaches – an election which has been called one of the hardest to predict in many years. They have very different policies on many important issues, so the election results could have a significant impact on many aspects of the UK. Perhaps one of the main ways that the election result could affect everyday life for the average UK household is through their policies on financial matters such as taxation.

Labour, the Conservatives and the Liberal Democrats have always decidedly dominated election results, and are widely considered the three main parties. These three key players in the UK political scene have the following policies on matters of finance:

Labour

Labour’s big plans for the UK economy as a whole involve reducing the UK’s levels of national debt “as soon as possible” and bringing about a situation of budgetary surplus. In order to keep the national debt in check and ultimately bring it down, they would cease new borrowing for government spending. They also plan to lead a campaign against tax avoidance, with UK overseas territories that refuse to cooperate with these efforts threatened with a place on an international blacklist.

Regarding the issues that more directly affect the average household, Labour plans to bring back the 10p bottom tax rate, which would result in an income tax break for 24 million UK citizens. The party would drop the Married Couples’ Tax Allowance in order to fund this. They would also introduce the much-talked-about concept of “mansion tax,” levied on properties worth more than £2 million, raising an estimated £1.2 billion. Furthermore, Labour would bring back the top 50 rate of income tax for those earning more than £150,000 annually, tax bankers’ bonuses and cut every government minister’s pay by 5%.

Conservatives

The Tories hope to get rid of the UK’s deficit by 2018, and by 2019/2020 they hope to follow this with an overall surplus in the budget. Their plan is to bring this about through cuts in spending rather than through new or increased taxes.  NHS spending would not be in line for cuts. Rather, the Conservatives plan to increase health spending.

By 2020, the Tories hope to cut income tax for 30 million UK citizens. The personal allowance would be raised to £12,500 a year, and the 40p top rate of tax would take effect from £50,000 a year rather than the current level of £41,900.

Liberal Democrats

The Lib Dems plan to get rid of the deficit by April 2018 through “strict new fiscal rules.” Like Labour, the Liberal Democrats plan to bring in a “mansion tax,” which would operate in bands much like council tax.  UK banks would be subject to an extra 8% corporation tax rate, raising £1 billion a year to help get rid of the deficit.

The Lib Dems plan to raise the personal allowance to £11,000 in April of next year, and bring it to £12,500 by 2020. They would raise capital gains tax to 35%, from the current rate of 28%.

Hourly Minimum Wage to Increase by 20p

The National Minimum Wage is to increase by 20p per hour, the government announced recently. The rise will take effect from October, and will boost the minimum hourly rate that businesses can pay employees to £6.70 from the current level of £6.50. Prime Minister David Cameron claimed that this increase would provide minimum wage workers with “more financial security.”

Younger workers, who are subject to different rates, will also see an increase in the National Minimum Wage from October. Workers aged 18-29 will see minimum wage rise by 17p, taking the rate up to £5.30 from its current level of £5.13. 16-17 year olds will receive an 8p increase, from £3.79 at present to £3.87 after October. Overall, these increases represent a rise of roughly 3% for minimum wage workers in both the 18-20 and 21+ age categories, and 2% for those aged 16 and 17.

The biggest boost is being received by apprentices. This group is also subject to a separate minimum wage rate. Specifically, the minimum wage for apprentices is significantly lower. This fact is designed to reflect the fact they are receiving training and a qualification as well as monetary compensation for their work, but has nonetheless been criticised by many as too low to be liveable.

Currently, apprentices are subject to a minimum wage rate if £2.73 per hour, assuming they are in the first year of their apprenticeship or are under the age of 19. This will rise by 53p to £3.30 an hour from October. This is an increase of 20%, meaning that apprentices are receiving a proportionally much larger boost than those who are subject to other minimum wage rates.

The increases that have been announced for minimum wage rates are essentially in line with recommendations that have been made by the Low Pay Commission. The one area in which the government deviates from these recommendations is in the increase for apprentices. Where the Low Pay Commission recommended an increase of only 7p per hour, the government decided to introduce the significantly larger 57p increase to the minimum hourly rate.

The increase of 3% to be introduced for adult workers, meanwhile, is being hailed as the biggest minimum wage rise for seven years in real terms. Nonetheless, not all quarters are enthusiastic, with some believing that the increase should have been greater. Unions believe the rise will not be sufficient to tackle “in-work poverty,” while Labour points to the way that inflation has “eroded” the value of the minimum wage in recent years.

HSBC Aided Tax Avoidance Worth “Hundreds of Millions”

HSBC, a familiar name in banking on an international scale, has helped clients to collectively avoid hundreds of millions in tax according to a joint investigation by media outlets around the world. The investigators have seen details of accounts representing a large number of the bank’s clients in order to substantiate the allegation.

The data examined by the consortium of media outlets was leaked in 2007 by a whistleblower. It contains details of accounts belonging to 106,000 HSBC clients. Overall, the data covers clients in 203 different countries, including 7,000 in the UK. After its release, it was passed on to more than 50 media outlets including the Guardian and the BBC’s investigative programme Panorama.

The bank will now be the subject of criminal investigations in France, Belgium, the US and Argentina. It currently faces no investigations in the UK, where the bank is based. According to a statement, HSBC will be “co-operating with relevant authorities” while such investigations are ongoing.

In regard to the nature of the accusations, HSBC admits in a statement that some of its clients have been aided in tax avoidance by HSBC’s policies. Specifically, the bank admits that secrecy policies have been taken advantage of by certain clients in order to hold accounts that were not declared for tax purposes. However, the bank insists that since this took place, it has “fundamentally changed.”

However, HSBC is accused of more than just passively implementing secrecy policies that aided tax avoiders. After the 2005 introduction of the European Savings Directive, designed to allow Swiss banks to take money directly from undeclared accounts on the taxman’s behalf, HSBC wrote to customers offering ways around the new measures. This is just one of a number of ways in which the bank is accused of taking a more active role in assisting with tax avoidance.

Neither the holding of offshore accounts nor the avoidance of tax is necessarily illegal. However, deliberately hiding money in order to avoid paying tax that is rightfully due is an illegal practice, and offshore accounts are frequently used as a means to achieve this.

In 2013, the authorities in France concluded an examination of the data released by the whistleblower. They decided that almost all (around 99.8%) of French citizens featured in the data were probably involved in tax evasion. Meanwhile in India, finance minister Arun Jaitley has said that investigations will be launched into all Indian citizens featured on the list. Jaitley did, however, warn that the list may also contain legitimate accounts.

As well as to the various media outlets and journalistic bodies that have been analysing and investigating the list, the leaked data has also been in the hands of HMRC since 2010. However, though the data seems to identify over 1,100 who have evaded tax that they legally owe. However, only one prosecution has so far been made.

Prime Minister Pledges Tax Cuts Ahead of May Election

David Cameron has stated that the people of the UK “deserve tax cuts” and that there is an “economic, moral and practical case” for reducing the amount of tax they pay. The Prime Minister’s comments came as part of a speech given in Hampshire, in which he outlined his pledges on the subject of taxation ahead of the general election in May.

According to the Prime Minister, his party’s plans for taxation would see the personal allowance – the amount an individual can earn each year before they start paying tax – raised to £12,500 by 2020. This, he said, was fitting for a country that is “thoroughly in favour of work and effort.” The term of the coalition government has already seen the personal allowance raised from £6,475 when the current parliament was formed in 2010/2011 to 10,500 in the current financial year.

The Liberal Democrats have also pledged to ensure the personal allowance reaches the £12,500 by the time the next parliament ends in 2020. Though the pledges are identical, the parties disagree on where it originates within the current coalition government. Both parties seem keen to claim themselves as originators of the idea, with the Liberal Democrats also claiming to be the ones behind tax cuts during the current parliamentary term.

The Prime Minister insisted that the pledge to raise the personal allowance was “not just a vague promise” but that “we have a track record.” He went on to point out that, since his party came to power as the larger part of the coalition in 2010, tax cuts have delivered a £700 saving for 24 million people, and removed 3 million people from tax entirely. However, the Liberal Democrats seem to feel this is really their track record, claiming that they have “fought tooth and nail” to reduce tax as part of the coalition with the Conservatives.

Regarding the way a Conservative government would approach taxation if elected in May, the Prime Minister said: “We should start from the proposition that it is people’s money not government’s money and we should leave them with as much to spend as we can rather than frittering it away on wasteful government projects.”

He claimed that the Conservative party’s tax plans would remove a further million people from the need to pay any tax at all, with nobody working a 30 hour week at minimum wage required to give money to the government.

The government has also pledged to raise the threshold at which people are required to start paying tax at the 40% rate from £41,900 to £50,000 in a bid to help earners in middle income brackets. This would, he said, support “aspiration.”