Winter could well bring with it a financial chill

Sep 4 2010 by Vinay Bedi, The Journal

As the spectre of spending cuts and a double dip recession looms, finance expert Vinay Bedi, advises on how we should give our finances an autumn makeover.

THE summer holidays are over and the nights are about to draw in. But cold winter evenings are likely to be the least of our worries once the Government’s austerity drive gets into gear.

Life is about to get tough and it would seem that many people are already bracing themselves for the difficult times that lie ahead. Record numbers of households fear their standards of living will suffer as inflation outstrips pay rises, according to recent research, which found that some 86% of people expect the cost of living to rise in the next 12 months. Inflation is not the only potential worry. Huge public sector cuts will hit the pockets of many households with tens of thousands of jobs under threat.

The coalition Government plans to reduce the public finances by a total of £113bn by 2014-15. It is not only job cuts that will tighten the public spending purse – Chancellor George Osborne has warned that around £30bn in savings will come from tax measures.

He had already given us a heavy hint of what Britons should expect in his emergency Budget in June. Capital gains tax was immediately lifted from 18% to 28% for higher rate taxpayers, VAT is to increase from 17.5% to 20% in January, child benefit has been frozen for the next three years and child tax credit will soon disappear for parents with a combined income of more than £25,000. What’s more, National Insurance contribution hikes due from April 6 2011 will also make a dent in many people’s take home pay.

With difficult times lying ahead, now could be the time to give your finances, from your household bills to your savings and investments, an autumn makeover.

For starters, it may be worth considering paying down your debts wherever you can and check to see whether you are paying over the odds for your household bills. It is estimated that one in 10 of us is paying too much for our gas and electricity. With your thermostat likely to go up a notch or two in the coming weeks, it could pay to shop around for a better tariff and there are plenty of comparison websites to help you on your way.

Don’t pay any more tax than you need to so check that you are making the most of your tax-free Individual Savings Account (ISA) allowance of £10,200. An ISA is simply a wrapper in which investments such as cash, shares and stock market funds can be held to avoid capital gains tax and to reduce income tax.

Good financial planning suggests it is wise to start with a cash buffer before moving onto riskier investments such as shares and funds, although the latter has a greater chance of delivering higher returns. It might pay to get specialist financial advice before you take the plunge.

If you are a non-taxpayer, or you are saving for a child, remember that your cash savings outside of an ISA account will be taxed at the basic rate of income tax. Completing form R85 from HMRC and handing it to your bank or building society will ensure that the interest is paid gross.

Pensions might not be your subject of choice when you are out with friends, but it would be foolish to brush it under the carpet altogether. Many people seriously underestimate how much money they need to salt away for a comfortable retirement – and the coalition has already given strong hints that public sector workers may have to compromise on their final salary pension arrangements. Meanwhile, final salary pension schemes in the private sector continue to close.

The Government is wasting no time in trying to get Britain’s finances in order and given the gloomy outlook it might be prudent for you to go through your own books to prepare yourself for the age of austerity.

:: Vinay Bedi is divisional director of investment manager Brewin Dolphin in Newcastle