Money: After the goldrush, time to take stock

Financial consumers had a vintage 1997 but they can't bank on a re-run next year

Can 1998 be better? In many ways financial consumers have had a such a good 1997 that it is not easy to see how 1998 can match up.

The stock market has soared so high that when it did hit problems these still left it well up on the year. Windfall mania reigned for much of 1997. Five building societies and three insurers produced handouts, and more were announced. Many thousands of canny - or lucky - savers will have become more than pounds 5,000 richer this year by pocketing a selection of the giveaways, while generally the free shares turned out to be worth much more than predicted.

Holiday makers have been cheered by the strong pound - which at best breached 10 French francs and 3 deutshmarks. Savers finally got higher interest rates and continuing competition in a range of areas, including credit cards and pensions, provided better value than ever before.

The main bad news was for borrowers. Home owners may have benefited from rising property prices, particularly in London, but someone with a typical pounds 60,000 mortgage might now be paying pounds 70 more a month than a year ago thanks to rising interest rates. That said, these increases were from historically low levels.

Mortgage borrowers are also an obvious loser next year. Many lenders are already due to increase their rates in the new year following the last rate rise, and the Bank of England will almost certainly push up base rates by a further 0.25 per cent early in 1998.

Some lenders believe that will be the last increase in base rates. Equally, however, rates may well not fall again for a while and could rise yet further to around 8 per cent. Meanwhile, headline mortgage rates may very well breach 9 per cent in 1998. Fixed-rate offers should stay low, reflecting the expectation that interest rates will fall again in the future. But there will also be many thousands of borrowers coming off maturing fixed rates next year who face"payment shock" as they are switched on to standard variable rates 2 per cent or more than the rate they were paying.

To add to the bad news, there is the planned reduction in mortgage tax relief (Miras) from 15 to 10 per cent in April. It is also a good bet Gordon Brown will announce the phasing out of Miras altogether in his March Budget, even if the abolition does not kick in immediately.

The flipside of rising mortgage rates is yet higher interest on savings accounts. The savings market has become increasingly competitive this year, with the likes of Tesco and Sainsbury's Bank launching instant access accounts paying high rates on balances as low as pounds 1, and as some of the remaining building societies have tried to differentiate themselves from converting societies like the Halifax. There should be more of the same next year.

Standard Life, Britain's biggest mutual insurer, is set to become the latest new player to launch a high-paying telephone-operated savings account. On pounds 1,000 it plans to pay 6.9 per cent - high, although it can still be beaten (try the C&G's similar Instant Transfer account).

Next year may also see the re-emergence of mainstream accounts paying as much as 8 per cent. But in the meantime there are still plenty of poor-paying savings accounts on the market, and rarely has it been more important to shop around to ensure you are getting a decent rate.

Shares tend not to like rising interest rates, and even if rates do not move much higher the UK stock market will still be hard pushed to produce anything like the returns of this past year. Despite Asian stock markets taking a drubbing and shaking the confidence of shares in the UK and other big markets such as the US, many PEP and other stock market investors will still have ended the year up 20 per cent or more. But with such rises already pocketed it would be difficult to see shares as "cheap"; equally, economic growth is set to slow next year and further investment knocks and panics should not be ruled out.

But while shares as a whole may not wow, investors are probably best off hanging on to their windfall shares. Takeovers and special payouts could be afoot that will give even better value.

Nor have we seen the last of the windfalls. There are already three separate handouts due in 1998 from Birmingham Midshires, First National building societies and Australian Mutual Provident, the insurer; and others will almost certainly be announced during the year. Nationwide building society, which last year defeated an election challenge by "carpetbaggers" to get it to sell out, faces a similar battle in the elections to its board of directors in 1998. If the challengers win, it could precipitate a mass sell-out by most of the remaining big names of note. Meanwhile Bradford & Bingley has already been giving the impression of softening its "diehard mutual" stance.

Among insurers, Friends Provident, Scottish Provident and NPI remain among the top tips to be taken over. Probably the best way to get a stake in any payout with these insurers is to invest in what is known as a "with- profits" bond, requiring pounds 2,000 to pounds 3,000 in each case.

Finally, expect 1998 to feature more financial companies taking up some of the good ideas of 1997. For example, more deals to allow customers of different banks to use each other's cashpoints at no charge and more credit cards offering genuine benefits to people who pay off their bills in full each month (Alliance & Leicester's Moneyback card was an obvious example this year).

Watch out, too, for bad news on the tax front. The first really important self-assessment deadline is 31 January - fail to send back your return in time and you will automatically be fined pounds 100. In addition, both the capital gains and inheritance tax regimes may face some tightening.

THE WAY IT WILL BE AND THE WAY IT WAS

1998

Savings

Some accounts will offer interest of 8 per cent or more, and there will be a good choice of "best buys" for smaller savers offering above 7 per cent. More windfalls already pencilled in from the Birmingham Midshires and First National building societies. Top tips to demutualise in '98: Nationwide, Bradford & Bingley and Skipton. Expect more.

Borrowing

Base rates set to rise again in the spring to at least 7.5 per cent; could peak at 8 per cent. Mortgage rates may well go to 9 per cent although fixed-rate deals are expected to stay low. Miras tax relief due to be cut to 10 per cent from April and complete abolition may come in March Budget. Credit card competition should continue to offer opportunities for borrowers to keep interest costs down.

Investing

Scope for more stock market panics and even crashes. Returns will almost certainly be less than in 1997. Bonanza PEP sales a possibility in spring as plans for Individual Savings Accounts become clearer.

Tax

31 January deadline for self-assessment tax forms to be returned. Miss it and you will be charged an automatic penalty of pounds 100 as well as interest on the unpaid tax. Capital gains and inheritance tax regimes may be tightened.

Insurance and pensions

"Stakeholder" personal pensions expected to take shape, but probably not available until at least 1999. Competition from the likes of Tesco and Direct Line expected in personal pensions, but Chancellor may reduce tax perks in spring Budget by doing away with tax-free lump sum at retirement. Australian Mutual Provident to hand out free shares worth pounds 2,000 or more; expect more windfalls.

1997

Savings

Five building societies handed out windfalls worth, typically, pounds 1,500- plus to more than10 million savers. Base rates rose, new players like Tesco and Sainsbury's launched attractive accounts, some mutual societies set out to prove they could beat the converters, and the converters had to raise rates once people were no longer locked in.

Borrowing

Base rates have risen five times under New Labour from 6 per cent to 7.25 per cent, and headline mortgage rates went up around 1.5 per cent over the year - the Halifax now charges 8.7 per cent. Fixed-rate deals are as cheap as they have ever been. More credit card competition - including a US idea, the cashback card (from Alliance & Leicester).

Investing

Storming - with the UK stock market up around 25 per cent despite panics in the latter part of the year. October's long-awaited "crash" now looks more of a stumble, although Far-Eastern stock markets have had big problems.

Tax

New Labour talked of a 10 per cent income tax band but pensions lost some of their tax breaks and the abolition of PEPs (due in 1999) was announced. Wrestling with self-assessment started and 3 million have yet to send back their forms.

Insurance and pensions

Three windfalls from mutual insurers: Norwich Union, Scottish Amicable and Colonial. More cheaper personal pensions launched. Pensions mis-selling saga dragged on and on (and continues).