For pensioners with savings, the halving of interest rates on savings accounts will wipe out the giveaways announced by the government in the Pre Budget Report.
In the Pre Budget Report, the Chancellor handed pensioners an increase in their personal allowance from £9,030 to £9,490, a rise of £460, on top of which they will get a one-off £60 in January.
Assuming they spend £5,000 on VATable items over the year, the 2.5% cut in the VAT rate will save them £125. That makes a total gain of £645 over the year or £54 per month. On top of that is a £5 per week rise in the OAP worth £260 over the year. The overall gain is £905 or £75 per month.
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Sharp drop in savings
But if a pensioner has £30,000 in a savings account, a drop from 6% to 3% in the interest they receive - with 3% a likely average rate for 2009 – will reduce their income by £900 a year or £75 per month.
So many OAPs, especially those with more in savings, will be worse off next year than in 2008 despite the government’s measures.
What could end up tipping the balance and making them significantly better off is a drop in domestic energy costs. If utilities pass on price cuts, the typical saving in a pensioner’s fuel bills over the year could be between £50 and £100 per month.
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Paying off debts
The plunge in savings rates is also encouraging younger people to pay off debts, as we reported recently. While some people are withdrawing money from savings accounts to pay off credit card balances and personal loans, many more are reducing the amount they contribute to long-term savings plans.
Prudential recently released research showing that almost one in five people in employment has reduced their contributions to pension plans. In fact the average voluntary contribution to personal pension plans has plunged from £279 per month 18 months ago to £129 per month.
Reducing longer-term savings contributions in order to pay off debt is OK so long as you reinstate your contributions as soon as you have paid off the debt, or preferably before that if you can afford to. In fact, many people should be able to do this next year as their net income improves.
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Borrowers without savings win
For most people with mortgages on earnings of under £40,000 a year, the combined effects of the Pre Budget Report give-aways and reductions in mortgage rates, fuel and food costs should be to increase net disposable income by 5-10% in 2009. So borrowers without savings are definite winners from the downward interest rate trend.
It will take several months before the improvement in net income shows up in most people’s bank balances, which is why the big drive to pay off debt is likely to continue for many more months.
The likely result is that people will only spend money they actually have in their bank accounts, which means they’ll wait for sales and special offers and that the pattern of High Street spending will become very erratic. Expect plenty more ‘bloodbath on the High Street’ headlines.
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