How to be better off in 1996

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The Independent Online
Some pounds 7 billion worth of cash from maturing Tessas will flood out into the economy, boosting retail sales by up to 20 per cent in the first quarter of 1996, transforming the economic and perhaps the political outlook. So says IFA Promotion, the umbrella organisation for Independent Financial Advisers, who presumably have their fingers on the pulses of their clients.

Their calculations are based on the fact that two thirds of all Tessa accounts were started in the first three months following their introduction in 1991 and will be eligible to take their capital and accumulated interest tax-free when they start to mature in 1996. According to IFA Promotion pounds 18.8 billion of capital and pounds 5.2 billion will be up for grabs.

The interest cannot be rolled over and much of it may well be spent. But the 2 million Tessa account holders are not the only ones who expect to be better off in 1996. Most of us who manage to stay in work should be, thanks to the Chancellor. But if you are wise you will not go out and spend it all at once, because the New Year will also bring unprecedented demands on your finances. More than ever it will pay to shop around.

Property is worth looking at for the first time in seven years. No-one is predicting a runaway rise in prices, but residential property is now cheap on most historical assumptions. Prices, relative to income, and mortgage rates are both at their lowest levels for 30 years.

Even if you are staying put, review your mortgage closely. Variable mortgage rates are still falling and Bank of Scotland Mortgages Direct has loans at 6.99 per cent for up to 85 per cent of the property's valuation. Northern Rock offers a 1.1 per cent loyalty discount off its standard variable rate for mortgages over seven years old. At current rates you pay 6.44 per cent. Most lenders are still offering special deals to tempt first- time buyers and existing borrowers who move over and remortgage their existing properties with a new lender. Northern Rock is offering a 6 per cent discount on its standard rate for a year, the Greenwich is offering 3.5 per cent off its standard rate for two years or 2.5 per cent off for three years. Hinckley Building Society offers a 0.5 per cent fixed rate until January 1997, First Mortgage Securities is offering 4.2 per cent fixed until 1998, and Yorkshire Building Society 6.25 per cent fixed for three years and Cheshire 7.49 per cent fixed until the year 2001.

Choose a fixed rate mortgage if you think rates are likely to go up, and a discount rate if you think they will be steady or fall. In doing your calculations don't forget to take account of any redemption fees your existing lender may charge, the costs of making a switch which can include a reservation fee for the new mortgage, a survey fee, a search fee and a solicitor's fee for the legal work, and last but not least the penalty fees if you sign up and opt out early. Most special offers now lock you in for five years, so a switch has to be a one-off move.

Check your insurances, and that nowadays includes a mortgage protection plan in case you can no longer earn the wherewithal to service your mortgage. Most mortgage protection plans will only pay you for around 12 months, but they will give you vital time to find another job, or failing that a buyer for the property who will pay you a proper price because you are not absolutely desperate to sell.

Household and motor insurance should be easier to find, thanks mainly to lower claims, helped by the milder winters and by the continued undercutting of premium rates by the direct sales organisations. Drop in at your local insurance broker or call some of the direct line insurers, and if you haven't joined a neighbourhood watch scheme, do so now. It might also be worth investing in a modern car alarm or immobiliser system, and having you door and window locks checked out and replaced if necessary.

But do check what happens if you need to claim. Many cut price policies are not as comprehensive as they sound, or leave big compulsory excesses for you to pay.While you are about it, check your life and health insurance and see if you can get a cheaper quote for your life assurance policies.

Time to look at the pension scene yet again. Pension contributions can be offset against tax. If your employer has a company pension scheme and you expect to stay with him, join it ASAP. If in doubt join it any way, because it is the only way you will get your employer to contribute to your pension fund. Employers usually at least match the contribution you make to the company scheme. You may well also be able to make additional voluntary contributions at little or no administrative cost.

Remember an employer is not obliged to contribute to a portable pension plan, and few do. But the chances of you working your entire career for one employer have diminished and are still diminishing. Even civil servants no longer have a job for life. So if there is no company scheme - or if you are determined to move on within a couple of years - it might be best to start that personal scheme straightaway, rather than freezing your pension and negotiating a transfer value every time you move job. How much you get out of a personal pension depends on how well contributions are invested rather than how much you put in or how much you earn just before you retire. But the experts claim that to retire on around two thirds of your final earnings you may need to put something like 6 per cent of your gross income into a pension pot in your twenties, rising to 8 per cent in your thirties, 10 per cent in your forties, 12 per cent in your fifties and 15 per cent if you are lucky enough to go on earning into your sixties.

Pension provision is even more important for women than for men, and especially for women who plan to take a break to have children. From April onwards the divorce courts will be able to take pensions into consideration in divorce settlements and order pensions to be shared when they fall due, but two pension pots will always be better than one.

Once your mortgages, insurances and pensions are checked and satisfactory it is time to see what is left to save or invest. The big event of the next few weeks and maybe months will be the battle for the billions of pounds worth of Tessa tax-free deposit accounts which start maturing in 1996. The capital can be reinvested in a new Tessa, although the interest cannot, but you have six months after your first Tessa matures to decide whether to roll it over, so don't be in too much of a hurry. Interest rates are a lot lower than they were when the first Tessas started five years ago, and there is more competition from corporate bond Peps and ordinary share Peps this time round.

The most crucial choice for investors who stick with a Tessa is whether to go for a fixed rate or floating rate account this time round. Allied Trust Bank is offering 7.5 per cent fixed for five years on pounds 9,000 rollovers, Sun Banking, a subsidiary of Sun Life of Canada is offering 7.25 per cent fixed for five years for those who think interest rates will trend lower over the next five years, or the option to start on a floating rate and switch to a fix after one, two or three years, which should appeal to anyone who thinks rates will actually trend higher between now and 2001. C&G offers 7.25 per cent on a minimum of pounds 3,000.

Most investors will take advantage of the pounds 6,000 they can invest in a Personal Equity Plan before they consider unit trusts, investment trusts or individual company shares outside the tax-free PEP shelter. The choice of trusts is now almost as great as the choice of shares. Trusts investing in UK funds will attract most money once again, and index tracker funds have the advantage of lower charges. Japan is recovering slowly after severe slump. But European shares also have their supporters on the grounds that they yield three times more than Japanese shares. European companies are also just beginning the painful but profitable process of slimming down their labour forces and shedding costs which UK companies have gone through in the last decade.

Many investors choose to invest through regular savings plan because they cannot find a lump sum. But regular savers will at least know they are getting progressively bigger tranches of stock for their monthly investment if share prices especially in the UK and US do start to fall.

IN THE NEW YEAR...

DO

Draw up some financial plans for 1996, giving top priority to the mortgage, then insurances and pension planning, then savings and investments if you can afford them.

Try to reduce your tax bills through a pension or tax-free investments.

Look for a cheaper mortgage if you haven't already got one. Likewise, check insurance premiums to see if you can get a cheaper quote without loss of cover.

Delay getting your pension sorted - you can't guarantee to get the best, but past performance and current charges will provide a guide.

Be in a hurry to renew that TESSA. You will be locked in for five years so get the best on offer.

Turn your nose up at a modest regular savings plan - investing in a PEP, unit trust or investment trust.

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