Photograph: Christopher Thomond for the Guardian
Toby Helm and Kate Kellaway
Christmas food handouts double as millions face ‘financial precipice’
Debt-ridden households could kill off economic recovery when interest rate rises, says Resolution Foundation
￼Volunteers at food banks aim to tackle ‘hidden hunger’ – that affecting people who refuse to accept free food because they think it carries a stigma.
The number of people who will turn to food banks for sustenance is expected to double this Christmas, as a new report warns that millions more families face a financial “precipice” due to high personal debts, flatlining wages and future interest rate rises.
With three new food banks opening every week in the UK, the charity that oversees Britain’s 292 emergency outlets, the Trussell Trust, says it expects to feed 15,000 people over the Christmas fortnight alone, almost double the number last Christmas.
At the same time, a study published by the Resolution Foundation, an independent thinktank, says millions of households with low to middle incomes will be pushed close to the edge if they are unable to reduce their debts, including mortgages, before the cost of borrowing returns to more normal levels.
Volunteers who are giving up part of their holiday to help run food banks – from students to pensioners and representatives of local businesses – will be out in record numbers across Britain this week, distributing food to those who cannot afford a decent Christmas. Their aim is also to tackle “hidden hunger” – that affecting people who refuse to accept free food because they think it carries a stigma.
The Resolution Foundation report exposes how millions of families, unable to pay off debts, are facing a crisis if interest rates are pushed up in coming years to keep inflation down.
Matthew Whittaker, senior economist at the Resolution Foundation and the author of the report, On Borrowed Time?, said: “Debt levels are a major concern for a substantial number of families struggling under a burden of repayments, even as things stand.
“There is a very real prospect that borrowing costs will rise more quickly than incomes and that lenders will become less flexible over repayments. Many households are already in a very exposed position, even with interest rates on the floor, so even small changes in the financial outlook could have a dramatic effect.
“All this threatens to make the burden unbearable for many debt-loaded households, particularly those on lower incomes. This would be dangerous at any time, but it looks especially so in the current era of frozen wages, under-employment and faltering living standards.”
Figures published last week by the Bank of England showed that 3.6 million households – 14% of the total – now spend more than a quarter of their income on debt repayment, including mortgage costs. The Bank also says that up to 1.4 million households (12% of those with mortgages) are in special measures with their bank, having asked for temporary deals from their lenders.
The RF report shows that debt is distributed unevenly across income groups, with those in the poorest 10% of households spending on average 47% of their monthly income on debt repayments, compared with 9% for the richest 10%.
It also highlights how 2.4 million households with a mortgage (one in five) are spending more than 25% of their gross income on mortgage repayments alone – at a time when interest rates are at just 0.5%. Before the debt boom of the 2000s, only 15% of households were in this position, even when interest rates were as high as 7%.
The debt problem is likely to be all the more serious for struggling families because wages and household incomes are likely to stagnate over the next few years. The RF suggests that the average full-time wage will rise no higher in real terms than its 2000 level of £26,200 until at least 2017 – down from a peak in 2009 of £29,000.
Few economists expect interest rates to rise in the near future – almost certainly not in 2013 – but after that the Bank of England would be under pressure to raise rates to see off the threat of inflation were the economy to show signs of recovery.
The report notes the delicate balance that the Bank – under its newly appointed governor, Canadian Mark Carney – will have to strike between controlling inflation through raising interest rates and creating a risk of mass mortgage default and increased bankruptcy rates, which could combine to derail any nascent recovery in the economy.
The report says: “The prospect of interest rates rising and forbearance [special arrangements people set up with banks to help them through] being removed while incomes continue to stagnate heightens the risk of future defaults. Such an outcome may yet slow down, or stall, economic recovery: at some tipping point the micro issue becomes a macro one. In this eventuality, we may find that the green shoots of recovery just sprouting in the UK economy prove to be living on borrowed time.”
Peers in the House of Lords have blamed forthcoming financial reforms for worsening an ‘advice gap’ that could leave the poorest stranded at retirement.
Originally posted on Citywire.co.uk by William Robins on Nov 28, 2012 at 11:08
Peers said in a debate last night that the retail distribution review (RDR) reforms, combined with high pension charges, would hurt savers with small pension pots.
The RDR reforms will abolish the payment of commission to financial advisers and require them to hold higher qualifications from the end of this year.
Cross-bench peer Sally Greengross, who led the debate, said the RDR would lead to those on a modest income being priced out of the advice market.
‘There is a big chance that [the poorest] are exactly the set of people who will receive no advice at all, as costs are made transparent and IFAs follow more high net worth clients,’ she said.
‘We must narrow the advice gap. Much more should be done to ensure consumer information is delivered but that must be from a consumer, rather than a compliance, perspective.’
She added that a fragmented government savings policy, split between the work of the Treasury, the Department for Work and Pensions and the FSA, was contributing towards the problem.
Tory peer John Patten added that it was possible for cost-effective investment and advice options to be made available to savers with small pots. ‘We could use the buying power that a million people would have to negotiate for good advice or a better deal when they invest,’ he said.
‘There may be market driven options. They have £2 billion to invest – the market could come up with a process to get a better deal for pensioners.’ Government whip Tina Stowell said the Department for Work and Pensions would consider his idea.
Patten also harshly criticised charges taken from pension pots. ‘These charges have just abolished any chance of getting these rates. People talk about the magic of compound interest but [there is a] tyranny of high charges.’
Labour peer Patricia Hollis added that self-interest among pension providers was also hurting the drive to create a savings culture.
‘I argued for small pots to be transferred to Nest [the National Employment Savings Trust] but this was batted away by the self-interested howls of the industry who would lose money under management,’ she said. ‘In much the same way they have batted away any early access to a slice of pension savings that would also help transform savings culture.’
‘Many will be left with a portfolio of small pots which will be inaccessible to them at retirement. Those pots have gone AWOL, stolen by the structure of the pension industry we have helped to create.’
Labour peer Lord Lipsey added that the Financial Services Authority had failed to engage politicians in its efforts to reform financial services with the RDR.
‘I did not get a briefing from the FSA – this is extremely neglectful. It’s the FSA’s RDR that’s created the advice gap. Surely those here have a right to hear from the FSA. I don’t know whether this is FSA incompetence or FSA contempt of Parliament.’
Lipsey, who is the president of the Society of Later Life Advisers, said it would be wrong to assume advisers would not write unprofitable business at retirement as ‘winning the trust’ of a pensioner could mean getting other work, such as on inheritance tax issues, later on.
Nine million use credit cards and payday loans to cover monthly household bills
By Tara Evans, 12 September 2012 Reproduced from www.thisismoney.co.uk
Almost a fifth of people are using costly forms of credit each month to help pay household bills, according to new research.
Some 7.5million people use credit cards with a further million turning to controversial payday lenders, according to estimates by bank Santander.
The figures signal a trend of households to turning to expensive forms of credit that add to their financial squeeze when the times comes to repay the money.
Debt: Millions of people are turning to high forms of credit to help pay monthly household bills
Debt: Millions of people are turning to high forms of credit to help pay monthly household bills
Typical credit cards interest rates are about 19 per cent (APR), but more worrying are payday loans which often charge eye-watering rates of about 4,000 per cent.
The short term loans are designed to bridge the financial gap before payday but if people are unable to repay they face extortionate levels of interest.
The amount being borrowed each month adds up to £3.6million, or an average £259 for each borrower, according to the research.
There are also 4.2million people that turn to lower cost borrowing, Santander claimed, with around 17 per cent of those who borrow to make bill payments dipping in to an arranged overdraft.
Reza Attar-Zadeh, banking director at Santander, said: ‘In an ideal world, household bills should be one of the first costs to be covered when payday arrives, but as the research highlights, this isn’t always possible.
‘The cost of living is going up, driven in part by the rising cost of household bills, and as a result, millions of people are regularly borrowing money to make ends meet which cannot be sustained in the long-run.’
The research also revealed that despite 28 per cent of people looking into alternative payment sources to help cover bills, only 32 per cent regularly check for cheaper deals on services like utilities or TV subscriptions.
While only a quarter of people bother to check that they have sufficient funds in their account by scheduling bills or direct debits just after payday.
Younger bill payers are more likely to borrow money to cover bills, with 38 per cent of people aged 18-34 doing so.
This is compared to 30 per cent of those aged 35 – 54 and 17 per cent of over 55s.
More people in London use loans to cover bills than anywhere else in the UK, with 33 per cent doing this in an average month.
In contrast, the lowest is the North East, South West and West Midlands where just 22 per cent are doing so.
Fewer than one in 10 people over 30 have never owed any money to anyone, researchers found, even when they stripped out mortgages from the picture. Eight in 10 are still indebted, and the average response to a question asking them to rate their financial stability was that it was “fairly bad”.
Mark Pearson from myvouchercodes.co.uk, which carried out the research, said: “Without a mortgage thrown in to the mix, to see that so few people over 30 hadn’t experienced debt was a bit of a shock.
“It’s best to avoid debt at all costs if possible, as what starts as borrowing a few hundred pounds on a credit card can quickly escalate into loans, overdrafts and more. Always be wise when it comes to borrowing and only ever do it if you know you’ll realistically be able to pay the money back.”
The company asked respondents to its survey how long they felt they would owe the money for. Nearly a third (32pc) felt that they would continue to owe it indefinitely, with 27pc suggesting that they would owe it for the foreseeable future.
Those respondents who had adult children themselves were asked if their children were in debt, and nearly half said yes, a third were unsure, and only 23pc could say a firm no.
Recent figures from the Office for National Statistics show that the ratio of consumer debt to disposable income has risen for the first time since 2008, and the Consumer Credit Counselling Service, a charity, suggests that this will get worse in the coming months.