The Times - UK (2021-12-18)

70 Saturday December 18 2021 | the times

Money

IN THE

SUNDAY TIMES

TOMORROW

plus

How couples really

handle their money

special report

The year

Jill Insley won

£2.5m for readers

Forget rates, it’s price rises that will really hurt

A

nd so the game has begun.

We don’t get many changes

to the Bank of England

base rate these days, and even

fewer rate rises — two in the past

14 and a half years — and so

when it does change, as it did this

week, what happens next can come

as a surprise.

It goes a bit like this: the Bank

raises the rate and immediately

every mortgage lender in the land

passes on the full rise to anyone on

a variable deal. Luckily that is only

2.2 million of the 11 million home

loans in total.

That means most people won’t

notice the rises until they come to

the end of a fixed rate. Meanwhile,

though, savers get nothing. Even

with a rise as small as this week’s

0.15 percentage point, savings

accounts will barely budge.

Part of the reason is that some of

this rate rise has already

been priced in: mortgage

rates started tilting

upwards in

September the

moment it looked

like inflation was

taking hold in the

UK and are now 0.3

percentage points

higher on average.

Savings rates followed,

to a lesser extent.

The other reason is that

if you’re a saver you are persona

non grata in the financial world,

despite the fact that all of us need

to keep some savings in cash, if

only to tide us over for a rainy day.

The irony is that bad weather is

coming, and not just from the peril

of swathes of the country having to

isolate from Covid. Wait until

inflation really bites.

Rises in the cost of living are now

a substantial threat to every

household and we’ve barely begun

to notice it yet. It’s quirky that

some second-hand cars have

climbed 30 per cent and are

now more expensive than

the newer versions. And

what a hoot, crisps are

really expensive (if you

can actually find

some).

But as time ticks on

it becomes less of a

novelty and more of an

issue that poses real

peril to your money.

We’ve become incredibly

spoilt. Prices of household

goods have been so cheap for so

long. Competition among

supermarkets has kept food prices

phenomenally low.

And decades of money-printing

by central banks have made it so

easy to make returns on the stock

market (heck, even a fund manager

can do it). But risks are rising now.

You’ve probably already noticed

how expensive it is to fill your car.

You’ve not had your winter energy

bill yet, and in April energy bills

will inevitably rise again. The

weekly shop, well, that’s crept up a

little hasn’t it?

When you need a fridge, a TV, a

toaster or a dishwasher, just wait

and see what has happened there.

Little by little, then a lot by a lot,

you’ll be poorer. The minutes from

the Bank’s monetary policy

committee are a terrifying read:

supply problems are everywhere

and likely to get worse, which

means prices will rise even further.

Nowhere does inflation matter

more than with your savings, which

will be worth less every day you

keep them in cash. That means

taking more risk, in a stock market

that is already at inflated values. So

what do you do? Risks are

everywhere when inflation bites,

you just have to decide which ones

you can stomach.

@jimconey

James

Coney

Money

editor

Comment

0.25%

the Bank of England

base rate — up from

0.1% on Thursday

Dad wants me

to be a saver,

so should I get

him a present?

I

f most parents were truly honest,

they’d tell their twentysomething

children like me not to buy them

anything for Christmas.

They might want a small,

inexpensive but thoughtful gift, but

given the relative impossibility of this,

perhaps they should just admit that

they would be fine getting nothing.

It’s not that I don’t want to buy

my parents a present. Every year,

I head out on the hardest gift-buying

expedition of the season: getting

something for them that expresses

my love and gratitude when most

things they would want or need they

have already bought for themselves.

If they haven’t already, it’s because

it’s out of their price range, which

means it is definitely out of mine.

My best gifts over the years include

a shot measure for my mum, who

struggles to work out an appropriate

amount of gin for her gin and tonics,

and a glasses chain for my dad, who

spends about 20 per cent of his time

searching for his reading specs.

The more expensive, flashy items

that were given alongside these gifts

have been used far, far less.

The problem these days is that you

have to spend lots of time with your

parents to know what inexpensive

items they need, and if you no longer

live under their roof, this isn’t easy.

Most parents certainly do not want

their adult children — who like me

may be desperately trying to stash

away money for a house deposit and/

or saving to get married — to splash

the cash on something both parties

know they cannot really afford. Yet it

can be hard to remember this in the

lead up to the big day, when adverts

showing families blissfully

unwrapping the ideal present are

everywhere and the pressures of

creating that perfect Christmas Day

begin to build.

But it is crucial that young adults

put less pressure on themselves these

days. And maybe it is time for parents

to curb their expectations too.

Inflation hit 5.1 per cent in

November, the highest rate in a

decade. While the rising cost of living

affects everyone, those on lower

salaries (who are typically younger)

feel the pinch more because they tend

to spend more and save less of their

income and are much more affected

by rises in transport costs.

Rising taxes mean that younger

graduates will soon give away more

than 42.25 per cent of any pay rise

before it hits their pockets. Those who

earn more than £27,295 already pay a

marginal tax rate of 41 per cent —

20 per cent income tax, 12 per cent

national insurance and 9 per cent on

student loan repayments (let’s face it,

it’s a grad-tax) — and this is about to

get worse because of the additional

1.25 per cent for the social care levy.

Many young people in this position

say that the high tax rates, along with

the 5 per cent that is automatically

deducted for a company pension

(although, of course, this is

important), is hampering their ability

to save for a house deposit.

If a graduate on £30,000 saved

10 per cent of their take-home pay

each month, it would take them just

under 11 years to save the

£25,000 needed for a 10 per

cent deposit on a £250,000

home (slightly below the average.

Forget ever buying in London or the

southeast of England). The new social

care levy cuts their take-home pay by

£31 a month. If they cut their savings

by the same amount, it would take

more than 13 years to save the

£25,000 — and that’s without

factoring in house-price rises. Over

the past year the average price of a

home has risen

£24,000,

meaning a

10 per cent deposit became £2,400

more expensive, and the mortgage

you would need got £22,000 bigger.

At these rates of growth, every month

you save, the house you dream of gets

a little further away.

On top of that the pandemic has

been brutal for young people, forcing

them to work in tiny flats —

sometimes on the edge of a bed

because there is no other space.

They’ve been locked out of the

workplace, where they miss the

chance to learn from more senior

colleagues. And a pay rise? Forget it

if you are in the private sector.

It’s this precarious financial

situation that means young adults are

forced to rely on their parents far

more than previous generations.

Ironically, this makes it even harder

to fight the urge to splash out on gifts

for them at Christmas: we are so

grateful for the help they give us.

I moved flats a few months ago

(I still rent). At one point, I paid about

21 weeks worth of rent in one go. The

new landlord wanted six weeks of

rent as a deposit, as well as the first

month upfront. I had to pay all of this

before I moved, when I was still

paying rent on my old flat, and I had

a similar deposit tied up with my

former landlord. I’m lucky, and my

parents helped me to bridge the gap.

There’s also the hundreds of

twentysomethings who have moved

back home to save money for a house

deposit because it is near impossible

to pay rent and save upwards of

£27,000 at the same time. Or those

who have asked their parents to give

or lend them money for a deposit.

How could you not at least try to

buy a great gift for parents who have

dipped into their pensions or life

savings just so that you can get on the

property ladder?

This year, I’ve tried to practise what

I’ve preached. I spent hours racking

my brain for ideas that would not

break the bank, but will hopefully be

thoughtful enough to make my

parents feel appreciated.

Spoiler alert: Mum and Dad, if

you’re reading this, stop now.

I’ve bought a garlic crusher for my

dad, who I often see laboriously

chopping away at cloves, unaware

of the beauty of this simple device.

My mum will be getting earrings —

they are not super expensive, but

she recently had her ears repierced

and I know she is looking to revamp

her selection.

The total is less than £30, which is

far less than I’ve typically spent, but

I’m hoping that this, combined with

a fun poem in their card (free) and an

extra effort to spend quality time with

them over the holidays (also free), will

send the right message: thank you

for everything, guys, and merry

Christmas. Oh, and while you’re here,

I need to pay off the remainder of my

wedding dress next month. Any

chance of a small loan?

Modern

Money

Imogen

Tew