In general life more so than in finances, the coronavirus crisis has underlined what is really important. But this is also being reflected in our experience of how people are dealing with financial matters during this time.
A new polymer £20 note was issued on 20th February. I have an old-style one in my wallet that has been there since the 1st March (yes, I’m often last to the bar!) and with no pub to visit, no sport on TV, I even looked up how long it will be valid for (to save you the trouble, there is no finalised date yet, but the Bank of England will give six months’ notice when a deadline is introduced).
One thing many people are finding under the ongoing lockdown is how it is more difficult to spend money. This has shone a light on our spending habits – what is genuinely “core” or essential spending and what is “discretionary.”
The distinction between these two is a real focus when putting together a financial plan for a sustainable retirement income. Being sure that we can cover the basics via state pension, guaranteed annuity or final salary pension is a sensible approach. This then allows more scope to enjoy the more flexible benefits (and investment risks) allowed by pension drawdown plans.
In the last few weeks lots of us have discovered that quite a lot of our spending is ‘discretionary’ after all. Whether we have liked it or not, we can “live” or at least exist without buying many of the things we had become used to.
For those fortunate enough to have not suffered a drop in income, this has meant they have more excess income than usual. Here are some observations on what we have seen people doing with that surplus:
Building up savings
It is often reported that a third of UK households have less than £1500 in savings and 15% have none at all. The proverbial rainy-day fund has rarely been more desirable, but this crisis has underlined just how many people live hand-to-mouth. It is not surprising in view of the economic uncertainty that those who are able to, are increasing their savings.
If you are of working age and already have sufficient cash reserves, consider increasing contributions to your ISA or pension. More cautious clients might start overpaying their mortgage. Some retired clients are asking us to reduce their pension drawdown.
Supporting children and other family members
For all the supportive initiatives announced such as mortgage payment holidays, deferred income tax payments for the self-employed and the government’s job retention scheme, workers in many sectors are still facing a difficult future. The bank of mum and dad may well be required to help.
Charitable giving
Times are difficult too for many charities, so maintaining or extending support for your favourite worthy causes is another option. Don’t forget gift aid if you are a taxpayer. For higher rate taxpayers, donating via gift aid also allows a reduction in your own income tax bill.
Saving for children/grandchildren
The most recent Budget increased the Junior ISA (JISA) allowance up to £9,000 per tax year. So putting money away for under 18s when stock market values are lower might prove beneficial in the long term. For shorter term investments, Junior Cash ISAs pay interest rates that other savers can only dream of (National Savings Junior ISA pays 3.25%) but remember the child gets full control of a JISA at age 18.
Patronage: supporting community businesses
This surplus income itself represents lost sales for many trades that have been forced to suspend activity. But some customers are choosing to continue to show financial support. A gym-owner I spoke to recently told me that some customers had insisted on not cancelling their direct debits. He had even had new ones signing up, impressed by the free video classes he was running online, even though new customers would be unable to use the facilities for now.