Financial optimism?

Think back to the heady days of August last year. The UK was bathing in a glow of Olympic glory that went beyond just sport – optimism, it was said, was sweeping across the nation.

One of the reasons for such optimism, particularly for anybody running a small business or wanting to buy their first home, was that the Government was about to launch a scheme that would encourage the banks to start lending to those who had struggled to access credit since 2008. The ‘Funding for Lending ‘scheme is a well intentioned plan that has seen banks receive a £13bn injection from government, that boosted their coffers so they could start lending to those who could not previously access credit.

The two primary groups that were set to benefit were first time buyers looking for mortgages and cash strapped businesses that need funding to help stimulate growth. Helping both of these groups was intended to provide a valuable boost to the economy.

Delivery

The scheme is well intentioned then, but well executed? Maybe, maybe not. 

Many will insist that the Funding for Lending scheme has been a success, and to back this up, a year long extension has also been recently announced. On the other hand, savers remain disillusioned, due to historically low interest rates and unattractive high street savings products - the prospects of better rates for savers look bleak for the foreseeable future.

So a year on, that post Olympic optimism is a distant memory for some.

Whilst Funding for Lending means that borrowing is not only being encouraged, but actively subsidized. Savers however, see no light at the end of the tunnel. As a result of balance sheets being inflated by Funding for Lending cash, many banks appear to be no longer competing to attract savers money. As a result, this has caused interest rates to plummet and has seen many investors’ funds, including in Cash ISA, lose value in real terms due to the effects of inflation.

This vicious circle of low interest rates, savings failing to keep pace with inflation and the resultant lack of motivation to save, perhaps masks another potential issue that lies around the corner – a huge savings gap.

With an ageing population and one with ever increasing life expectancy - medical advances and healthier lifestyles will see more people not just living beyond 80, but beyond 100 – savings may simply not be enough to maintain many people’s standards of living in retirement. The possibility exists that some people will live longer after they retire than they spent working.

If the current position persists, it is not being overly dramatic to suggest that for many, the dreams of a comfortable retirement could turn into an impoverished reality.

Intervention

The Government has recognized the problem and has attempted to kick-start saving for retirement with the new Auto Enrolment incentive, which obliges employers and employees alike to consider pension provision and to make definitive plans for the future, although many are likely to contribute just the minimum required levels.

Whilst this is a step in the right direction, it should perhaps be tempered with a note of caution, as the possibility exists that many could develop a false sense of security that their financial future is taken care of by saving a modest amount.

To achieve the lifestyle we want in retirement means that we need to make a commitment sooner rather than later and we should aim to save without compromising the lifestyle we desire today. This often involves some careful thought and planning to try to find a real return to combat the effects of inflation.

To assist with your planning seek out professional advice on alternatives to low interest bearing cash deposits and make sure you have your own strategy in place for your medium to long term future.

Nathan Glister, Financial Planning Consultant, Fairview House

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