Kate Hughes: Society is beginning to learn about the human cost of debt
Saturday 31 July 2010
The trickle of good news pointing to economic recovery means many of us are looking forward to improvements in our money situations, from the potential for a new job to improvements in investment returns. It certainly feels like things are getting better, so the news this week that a father facing bankruptcy killed his family and himself is particularly affecting.
Just a few days earlier, research from the UK's leading debt charity the Consumer Credit Counselling Service (CCCS) reported that debt problems have far more negative impacts on their clients' lives than we might imagine, often because they have fought to keep their worries a secret. Only a third of debtors had shared the problem with their partner. Ten per cent of people said they told nobody, giving reasons such as "shame", "embarrassment" and "it's quite difficult to acknowledge that you are an adult and unable to manage your finances". The charity found that relationship breakdowns, nervous breakdowns and even heart palpitations are not uncommon.
And just to be clear, this is a largely a legacy of recession, not of extravagance. Only 15 per cent of people had a debt problem because of overspending, but almost half had run into the red because of redundancy, a pay freeze or reduced working hours, a relationship breakdown or having children.
"This busts the myth that recklessness with credit is the main cause of debt problems," says Delroy Corinaldi, of the CCCS. "Rather, it is life itself, over which we often have no control. Such people need practical support to guide them through this crisis."
While it is not surprising that debt problems have a negative effect on people's lives, the extent of the human misery uncovered in the survey is shocking. "There is a lot of focus on the economic implications of the personal debt crisis but we are only starting to understand the human cost of debt problems," Mr Corinaldi adds.
Speaking of life happening to you, the great and the good of the pensions world have got together to work out ways to help combat the effects of rising inflation on retirement income. It's a timely question given the latest predictions for further hikes in the retail and consumer prices indices – the official measures of inflation – and plans announced last month to abolish the obligatory annuity purchase at age 75. The problem is, for those retiring imminently, high inflation will compound the effect of falling annuity rates as we live longer. Twenty years ago a pension fund of £100,000 would have secured an annual income of £15,600 for life. Today it buys just £5,860.
Many people don't realise that they will face a considerable drop in their living standards because of the potential for inflation to rise, warns Chris Evans, CEO of MGM Advantage. "It is important that retirement income is backed by real assets that can keep pace with that inflation challenge.
"The open market option [which allows people to shop around for the best annuity rate] should be the default option at retirement," suggests Tom McPhail, head of Pensions Research at Hargreaves Lansdown. "It could make a huge difference to people taking control of their pension fund. But the biggest problems are lack of engagement and comprehension."
This is a real bugbear of mine. Thanks to the recession, we are now a society that increasingly shops around for the best bargains, and over half of us have made a conscious decision to seek out the best deals in this "age of austerity", according to Santander. We can do it with food, electrical appliances and car insurance, but when it comes to comparing the best annuity deals there is a huge and very expensive block.
Of course your current provider is hardly going to be keen on highlighting the fact that you could take your pension pot elsewhere for a better deal. But the reality is that it could add 30 per cent to the value of your retirement income. Financial difficulties are hard enough when you're of working age as we've seen, and climbing out of that pit while you're earning is tough. But having money worries in old age is disastrous. And far too many of us are sleepwalking into just that situation. www.cccs.co.uk
Kate Hughes is a freelance financial journalist.
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