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It's Time To Start Saving

Families Need Savings To Ease The Pain Of Spending Cuts crack

That was the message when the Chancellor ushered in a “sober decade” ahead with £81 billion of spending cuts outlined in his Comprehensive Spending Review (CSR).

Millions of households face a steep drop in income - and savings painstakingly collected by older people are already being rescued.

While the bank of mum and dad gives sons and daughters a deposit for their first home, the Financial Times says some grandparents are offering to pay the child benefit which better-off families will lose from 2013 - worth £88 per month for the first child, and £57 for each subsequent child.

As the FT explains: “Up to £3,000 per year can be passed on to grandchildren without becoming liable to inheritance tax, although larger regular payments are permitted if they are made from income.”

With vouchers for Child Trust Funds set to end, older people are also investing in monthly investment plans, savings accounts and pension schemes for grandchildren. By so doing, they may cut the potential inheritance tax payable on their estates when they die.

But how will the great majority of households, who can’t rely on money handed down the generations, cope with the squeeze? Households on £50,000 a year could lose about £10,000 in the foreseeable future.

Kevin Mountford, head of banking at finance website moneysupermarket.com, says: “The CSR will have a huge impact on consumers’ finances; purse strings across the country will inevitably have to be tightened.”

“The threat of unemployment will weigh heavily on the minds of many families, working in both public and private sectors.”

“While it might be too late to take out specific insurance to cover unemployment, consumers can plan to reduce the impact of a sudden loss of earnings. If you have any debts, look at ways you can pay them off or at least reduce your outgoings by consolidating existing debts.”

“Consumers should also build a rainy day fund - ideally three months’ worth of earnings, but anyone worried about job security should consider increasing this amount to six months to tide them over.”

Next, look closely at mortgages, a major outlay for most families.

As lenders chase new borrowers in a shrinking market, fixed rate and tracker mortgages are getting cheaper and fixing for five years could head off rate rises which must come eventually.

“With many lenders willing to pay valuation and legal costs, the only stumbling block in switching is the arrangement fee, ranging from nothing to nearly £2,000.”

“If you are remortgaging, and might at some stage need to move for a new job, avoid a mortgage which imposes a heavy early repayment charge.”

“Some lenders allow these mortgages to be portable, subject to meeting the lender’s criteria which might be more onerous than when you first took the mortgage out. It is generally better not to have this penalty lurking over your head.”

Next, pensions: Mr Osborne’s confirmation of the rise in the state retirement

age for men and women to 66 by 2020 makes it more important than ever to build a private pension, not least to cover that gap for many workers between retirement and when their state pension kicks in.

“By making regular contributions to personal pensions, including self-invested ones, and ISAs which offer a tax-free wrapper and are usually easily accessible, confident investors can build up savings to supplement their core pensions and provide them with increased flexibility to move to part-time working in the run-up to retirement or possibly to stop work altogether before they reach 66.”

Andy Gadd, head of research at Lighthouse Group, a national network of financial advisors, says: “In simple terms this means individuals in their late-fifties have only eight or 10 years to prepare for a delay in receiving their state pension.”

“Meanwhile, younger individuals should prepare for the likelihood of getting a state pension even later than 66 in future government proposals.”

Consumers ought to carry out their own household CSR with websites available to keep prices of standard products as low as possible.

Areas of obvious potential saving, says
moneysupermarket.com, include:

• Credit cards
• Car insurance
• Home insurance
• Personal loans
• Energy bills