Money: Don't be afraid of the euro

Edmund Tirbutt looks at the likely consequences for financial planning

IT IS usually a waste of time to worry about an unknown future. But when it comes to financial planning it can be positively foolish, resulting in selling assets at the wrong time and paying unnecessary charges.

The launch of the euro across most of Europe on 1 January next year will have a massive effect on everyone in the UK whenever we travel abroad (see box for the most obvious changes). But no one knows what the big picture will be. Experts are divided about the long-term effects of the single currency. Opinions span the spectrum: some predict a period of unprecedented stability and prosperity, while others fear that there will be economic chaos.

Private investors should try not to lose too much sleep over the possible personal finance implications of the UK either joining, or refusing to join, the single European currency. Even if we do elect to join, we won't be going in until at least 2002.

Anyone who sticks to the rule that they are investing for the long term, and adopts a broad spread of risk, should find themselves able to make their financial plans flexible enough to cope with most eventualities. Fiona Price, senior partner at Fiona Price & Partners, a London independent financial adviser, says: "It's very difficult and possibly hazardous to make plans on the basis of one economic position. The idea is to build up a portfolio of different savings and investments that offer different advantages with regard to tax, possible economic change and alterations to your own circumstances."

Those who have held well-diversified portfolios for the long term have survived the effects of major economic upheavals. Most who bought shares just before the 1987 stock market crash, for example, will not be too far short of doubling their money by now.

An even more relevant example was when Britain switched from a system of fixed exchange rates to floating exchange rates in 1972. Roderic Mather, director of BWD Rensburg, stockbrokers, says: "In many ways one could argue that the move involved as much potential trauma as the idea of joining or abstaining from a single currency.

"It produced a fair amount of volatility in the UK stock market around the time, but the market eventually took the entire episode in its stride. There was less in the way of global investment in those days, but portfolios diversified between different asset classes were not too badly affected."

Most predictions as to how the British or continental European economies will perform following the launch of the single currency are little more than guesswork. There is much to be said for not making any asset allocation changes at this stage. You should have an annual financial review with a professional adviser so changes can be made when more information becomes available.

The possible exceptions to this rule are aspects of financial planning that are highly sensitive to future interest-rate levels. This will include fixed-rate mortgages, gilts and other fixed-interest investments, and retirement annuities.

The only assumption that it seems reasonable to make about the entire single currency episode is that it should result in a sustained period of lower interest rates. The consensus is that UK base rates will average around 4 per cent if we join and around 5 or 6 per cent even if we don't.

Many financial planning experts are advising against taking out fixed- rate mortgages for periods of longer than three years as this could mean becoming locked into unattractively high rates.

Some, however, point out that fixed rates reflect money market expectations that rates will fall, and argue that five-year deals at around 6 per cent represent good value considering they are 2.5 percentage points below many variable rates.

They stress also that fixed-rate mortgages remain valuable as they allow you to plan your outgoings with certainty.

Retirement planning is another area to be considered. Lower interest rates mean lower gilt yields, leading in turn to lower annuity rates as conventional annuity providers cover their commitments primarily by investing in gilts.

At first glance this sounds like bad news for those nearing retirement who have personal pension plans or who are members of a company scheme that operates on a similar "money purchase" basis. They have to use the pot of money they have built up over the years to buy an annuity - a regular income for the rest of their lives. The level of this income is determined partly by annuity rates at the time of purchase.

But this is also partly influenced by the size of the pot of money available to buy the annuity. This should rise in value to offset the effects of falling annuity rates. This is because rising gilt prices, which go hand in hand with falling gilt yields, have traditionally been accompanied by rising equity prices. Furthermore, equities have always tended to outperform gilts in the long term. Billy Burrows, managing director of William Burrows Annuities, says: "Those who have been hoping annuity rates will rise should not defer taking their pensions any longer, but at the same time people shouldn't be looking to bring forward retirement dates.

"Rising fund values should counteract falling annuity rates and there's no point in having to pay tax on your pension when you can leave it to roll up tax-free."

It is possible, of course, that fund values and annuity rates could fall together, so there is much to be said for not having all one's eggs in the same basket. Anyone coming up to retirement should consider other, more flexible, forms of pension arrangement such as phased retirement and income drawdown. Both of these schemes allow you to leave the pension fund relatively untouched, so you are not forced to buy an annuity at a time when rates are poor.

It is, of course, possible that lower interest rates will never materialise: events do not always follow the scripts written by the experts. If interest rates do soar unexpectedly, those who have just started taking their pension may find they do not lose out quite as heavily as they feared.

That is because annuity rates have declined steadily throughout the 1990s. The hope that they may return to the attractive levels of the late 1980s is becoming increasingly forlorn.

Insurance companies have been adjusting their mortality tables to allow for the fact that people are living longer. And a number of insurers now offer impaired life annuities providing attractive annuity rates to those with a shorter-than-average life expectancy.

This "cherry picking" of some annuity customers (who traditionally subsidised those who lived for many years in retirement) has stopped the standard annuity providers from offering generally attractive terms.

You can't avoid the euro ...

q From next year you will be able to pay in euros when you go on holiday in Europe. There won't be any euro money - you'll use your credit card (Mastercard and Visa) and debit cards (carrying the Maestro and Cirrus symbols).

q Until 2002 you will still be able to pay in local currency instead of euros. After 1 July 2002 there won't be any local money: each national version of the euro will be slightly different and will carry the international symbol on one side and a local design on the other.

q Citibank and Cater Allen are planning to have bank accounts run in euros ready for 1 January 1999. Other banks are expected to follow. The accounts are aimed at UK residents who are European nationals or UK citizens who are frequent travellers in Europe.

q Thomas Cook is planning to issue euro travellers' cheques from early next year.

q The countries signed up to join the euro at launch are: France, Germany, the Netherlands, Spain, Austria, Belgium, Finland, Ireland, Italy, Luxembourg and Portugal. Holding back for the moment are the United Kingdom, Denmark, Sweden and Greece.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search

Simon Read: Frozen in time - the expat British pensioners who deserve a better deal

I had dinner with the pensions minister Steve Webb this week. There was a wide-ranging discussion about the new pensions freedoms starting in April, and changes to the state pension. Crucially, I also got to ask Mr Webb whether he had any plans to have another look at the injustice that is frozen pensions.

Number of serially under-performing investment funds has increased by a fifth, survey reveals

The new Spot the Dog survey shows that even famous fund managers, holding billions of pounds of our money, can make mistakes

Mark Dampier: We always bring down Britain. But there's plenty in the tank

While the health of the economy is not insignificant, Mark Dampier finds it incredibly unpredictable in terms of its impact on the stock market

If you haven’t switched supplier or tariff in the last 12 months then you could almost certainly save money by doing so

There are easier ways to save hundreds on your energy bills

A new free app is aimed at the three-fifths of Brits who have never switched supplier

Worse hit are loyal customers with long-standing accounts – their loyalty is rewarded with lower interest rates than more recently-launched accounts

Savers are being let down by banks and building societies, says Financial Conduct Authority

Regulator’s investigation into the market found that around £160bn was held in easy access savings accounts that pay interest lower or equal to BoE base rate

What to do if you're facing repossession: However far you fall, you're not on your own

Helen Fisher had to become a 24-hour carer, and then she faced repossession. But going to the right places for help changed everything, writes Simon Read

Simon Read: Information is power. And it's in the wrong hands when people are cold-called by companies that know they're in debt

In debt? You're likely to be targeted by unscrupulous companies that hope to profit from your misfortune. They may try to pretend to be your friend by offering what they call "help" – but almost certainly that help will come with a cost and leave you worse off than you were before they got in touch.

Mark Dampier: So you've got pension freedom... will it end up as a cold shower?

In less than three months' time radical changes to pensions will take effect, providing investors with more freedom. Yet for those who prefer to make their own investment decisions, the choice of funds available is overwhelming. And an income drawdown account is also not particularly easy to manage.

The move marks the culmination of a long campaign by debt charities and insolvency firms and follows a call for evidence launched by the Minister last August

Bankruptcy rules to change, Business Minister announces

The minimum amount for which you can be forced into bankruptcy is being raised from £750 to £5,000

Three-quarters of parents say being unable to afford to heat their home adequately is hitting the health of their children

Family well-being and health hit by heating costs

A shock report reveals that fuel poverty is affecting desperate families – and their children

Many people have no understanding of pensions

Are you ready for pensions reforms?

Most people are too confused to know how to use their pensions for a secure income

At a rate of 7.5 per cent, the wind is blowing behind ethical investors

A new initiative has financial and ethical virtues, says Simon Read
Ticket to cry: many passengers have been penalised with exorbitant and unnecessary rises

Simon Read: Inflation is riding the slow train. So why have we been given a one-way ticket to travel on the fares express?

I struck a chord with many of you when I wrote a piece earlier this week about rising train fares. It seems there is an army of travellers who feel they've been ripped off by increased transport costs.

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Compliance Assistant

    £13000 per annum: Recruitment Genius: This Pension Specialist was established ...

    Ashdown Group: Market Research Executive

    £23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

    Recruitment Genius: Technical Report Writer

    £25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...

    MBDA UK Ltd: Indirect Procurement Category Manager

    Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...

    Day In a Page

    Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

    Isis hostage crisis

    The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
    Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

    Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

    Maverick artist Grayson Perry backs our campaign
    Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

    The runaway buccaneers and the ship full of gold

    Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
    Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

    Assisted Dying Bill: 'I want control of my life'

    This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
    11 best winter skin treats

    Give your moisturiser a helping hand: 11 best winter skin treats

    Get an extra boost of nourishment from one of these hard-working products
    Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

    Isis stands strong as its numerous enemies fail to find a common plan to defeat it

    The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
    Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

    Virtual reality: Seeing is believing

    Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
    Homeless Veterans appeal: MP says Coalition ‘not doing enough’

    Homeless Veterans appeal

    MP says Coalition ‘not doing enough’ to help
    Larry David, Steve Coogan and other comedians share stories of depression in new documentary

    Comedians share stories of depression

    The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
    Has The Archers lost the plot with it's spicy storylines?

    Has The Archers lost the plot?

    A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
    English Heritage adds 14 post-war office buildings to its protected lists

    14 office buildings added to protected lists

    Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
    Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

    Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

    Scientists unearthed the cranial fragments from Manot Cave in West Galilee
    World War Z author Max Brooks honours WW1's Harlem Hellfighters in new graphic novel

    Max Brooks honours Harlem Hellfighters

    The author talks about race, legacy and his Will Smith film option to Tim Walker
    Why the league system no longer measures up

    League system no longer measures up

    Jon Coles, former head of standards at the Department of Education, used to be in charge of school performance rankings. He explains how he would reform the system
    Valentine's Day cards: 5 best online card shops

    Don't leave it to the petrol station: The best online card shops for Valentine's Day

    Can't find a card you like on the high street? Try one of these sites for individual, personalised options, whatever your taste