• Chances of an interest rate cut in 2021 are now at 50%
• The 3rd March Budget now looks less likely to include tax rises
• We can expect another bulge in cash savings
• But the lockdown will mean greater financial hardship for many
• Watch out for scams activity
• Funds for cautious lockdown investors
• It’s a good time for a root and branch review of your finances
Laith Khalaf, financial analyst, AJ Bell:
“Markets are now pricing in a 50% chance of an interest rate cut this year, based on the economic damage that will be done by another lockdown. That’s up from 30% just a week ago. The next Bank of England policy meeting is at the beginning of February, so the MPC members have time to take a deep breath and see how the next few weeks go.
“The sanguine response of the stock market suggests there is still a high degree of confidence that vaccines will make this lockdown a final push for the line, so much will now depend on the roll-out of immunisations, as well as the effect of social restrictions on the spread of the virus itself.
“The Prime Minister has signalled that we are looking at the back end of February at the earliest before restrictions can be eased. That puts the Chancellor in a tight spot, seeing as the Budget has been scheduled for 3rd March. An economy that is just beginning to emerge from lockdown is not going to be in great shape to bear the tax rises the Treasury has to push through to balance the books.
“The new lockdown therefore means less chance the Budget will be a platform for fiscal repair and more chance it will be about keeping the wheels of the economy turning. But while tax rises may be delayed, they are still very much in the post. With the end of the tax year now in sight, savers shouldn’t look a gift horse in the mouth by spurning their annual ISA and pension allowances, which run out on 5th April.
“Of course, a renewed lockdown will increase financial pressure on many businesses and individuals. The FCA found that the first national lockdown pushed 2 million people into financial difficulties and we can expect that trend to raise its head again. As we know the pandemic has created a two-tier nation though, as those who have kept their jobs and income have found their finances improved by the imposed frugality of lockdown. This means we can expect cash accounts to bulge once again, as spending options disappear.
“One thing which will be in plentiful supply in the coming weeks will be time and so lockdown at least provides an opportunity to conduct a root and branch review of your finances to really get a headstart in 2021. Hopefully getting this out of the way will leave you with more time later in the year to focus on more enjoyable activities, as and when they become possible again.”
Interest rates and cash savings
“Interest rate markets are now pricing in a 50% chance of the Bank of England cutting rates this year, with a 50% chance they will remain on hold. The worsening economic picture as a result of the new lockdown has shifted these odds from 30%/70% respectively over the last week.
“Irrespective of whether or not there is a cut in 2021, savers should brace themselves for ultra-low interest rates for the foreseeable future. Unfortunately, inflation is expected to rise this year, slowly and to a modest level, but that means cash is going to lose more of its buying power while it’s sitting in accounts paying miserly rates of interest. Over £150 billion was saved into cash accounts last year, as consumers found themselves with nowhere to spend their money thanks to lockdown. We can expect a similar bulge as the current lockdown hits.
“Savers shouldn’t just let this cash build up in their current account, which is likely to be paying a pitiful amount of interest. Instead think about moving that money into a savings account and shop around for the best rates on offer. As part of the process it’s worth considering fixed term accounts, which tend to offer a bit more interest if you’re willing to lock your cash away for longer. Typically six months, one year, three year and five year terms are available. If you’re thinking about locking your cash away for longer, then you might consider putting some of it to work in the stock market.”
Funds for cautious lockdown investors
“UK stocks have largely taken the news of a lockdown on the chin, mainly because the writing has been on the wall for some time. If you were happy with your portfolio before the announcement, then there is little reason to tinker with your existing holdings.
“In the short term the big risk for domestic stocks is that the vaccine roll-out is too slow, or less effective than hoped, therefore requiring restrictions to be in place for longer. This can be mitigated by making sure your portfolio is diversified, both in terms of its geographical spread, and its sector exposure.
“For those who want to allocate more money to the market, but are cautious about doing so, a regular saving plan helps to smooth the journey, by drip feeding money into stocks gradually. It’s also possible to invest in funds which are more conservatively managed, like Personal Assets Trust, or Janus Henderson UK Absolute Return. These funds won’t shoot the lights out when markets are roaring upwards, but they will provide downside protection when negative sentiment dominates.”
Dealing with debt
“If debt is an issue, there are concrete steps you can take to make things better. First focus on using any spare cash to pay down expensive debt you have, such as credit cards or loans. Find the debt with the highest interest rate and start paying that off first, before moving to the next highest rate.
“Unfortunately some people won’t be in a position where they have spare cash to funnel into paying off debt. If that’s the case your focus should be on reducing the cost of any debt. Those with better credit records will find they have more options open to them, but moving your debt to a 0% credit card or a personal loan on a cheaper interest rate could be an option, and means you can use more of your monthly payments to pay down the actual debt rather than just servicing the interest.
“If your finances have already been affected by the pandemic there is lots of help you can get from the bank, such as payment holidays on loans, credit cards and mortgages. Be careful with the payment holidays though, as you’ll still pay the interest so it can cost you more in the long term.
“If you’re really struggling to see a way through, there are lots of free debt advice services available across the UK who can help, such as www.stepchange.org or www.debtadvicefoundation.org”
Keep an eye out for scams
“Lockdown brings with it an opportunity for scammers to find ways of trying to take advantage of an increasingly vulnerable population. So be wary of unsolicited emails and phone calls, particularly if they are asking for money, or personal details.
“During the first six months of the pandemic, 2-in-5 people reported being targeted by a scam, with the figure rising to almost half (45%) for those aged 55-64**. This points to scammers targeting those who have recently gained access to their pension savings. Knowing the tell-tale signs of a pension scam – which include unsolicited investment offers, ‘guaranteed’ returns and ‘opportunities’ to access your retirement pot before age 55 – will leave you better positioned to avoid becoming a victim.”
**Survey of 2,031 UK adults conducted online by AJ Bell and Find out now on 23 September 2020
