Find out how the stock market turmoil will affect you.
The stock market’s been on a roller coaster ride for the past week or so with the financial turmoil in the US and Europe spreading to the UK. Share prices have lost billions of pounds and there could be worse to come.
But how will current events affect your savings, investments, pensions and mortgage?
What’s happened?
To recap, last weekend saw credit agency Standard & Poor's strip the US of the valuable AAA+ credit rating it had held for the past 70 years.
Shares were already nose-diving and this move did nothing to improve confidence after days of US politicians squabbling about the best way for the US to repay its debts.
Meanwhile on this side of the pond, debt problems for Greece, Portugal and Ireland threaten to engulf Italy and Spain.
All the uncertainty saw the FTSE100 yo-yo all week and dropping 100 points on four consecutive days for the first-time ever.
We recommend visiting our sister site, The Motley Fool, if you own shares. But even if you don’t own shares, what’s going on could still affect you.
Mortgages
The good news first: Economic recovery becoming a more distant dream means interest rates could stay at the record low of 0.5% for even longer. Homeowners have already had two-and-a-half years of low rates and this looks set to continue for the foreseeable future.
At the moment, there are some bargain fixed rate mortgages to be had – although those already on competitive tracker or variable rates may well want to stick with the mortgage deal they currently have.
Those that want to be sure of their mortgage payments for the next five years need look no further than Chelsea building society’s five-year fixed rate at 3.39% with a £1,495 arrangement fee for those with 30% deposit. Monthly repayments on a £150,000 mortgage would be £742.
Will fixed rate mortgages fall even further? It’s possible but they’re unlikely to fall much below what they are now.
However, one potential downside is that if banks continue to write down debts from Greece, and other struggling EU countries, then they might have less to hand out in mortgages. However, the UK Government is keen for banks to keep lending in an effort to avoid a second credit crunch.
Savings
Although cash savings are a safe haven in times of stock market vitality, you’re unlikely to get a decent return on your cash. Rock bottom interest rates mean paltry returns for savers are likely to continue for the time-being.
When Northern Rock and the Icelandic banks crashed in 2008, there was real panic about the security of savings.
However, the banks that may be affected this time – such as Italy’s Unicredit and Intesa – aren’t big players in the UK.
The Financial Services Compensation Scheme has been bulked up since the last crisis and now guarantees the first £85,000 of savings per individual per institution.
The standard advice is if you have more than £85,000 is to spread it around different accounts at providers which are not in the same banking group. You can check who owns who on the FSA website.
Pensions
The closure of final salary-based pensions means more and more pensions are dependent on the stockmarket. Stockmarket falls means annuity rates fall too and people buying an annuity (a pension income) will get less for their money.
However, many pensions now automatically switch investors out of shares and into safer havens such as cash and bonds, as they reach retirement age. This protects their gains.
Young people saving for their retirement shouldn’t worry too much as they will hopefully have time to ride out the storm.
Worst hit will be people approaching retirement as they won't be able to make up the losses. If you’re retiring soon it’s a good idea to talk over your options with an independent annuity adviser.
Investments
Experts recommend that investors hold their nerve and sit tight but this isn’t easy while watching thousands of pounds being wiped off your investments. But selling now could crystallise your losses.
The important thing to remember is that investments rarely result in short-term gain. Think long-term and remember that equities generally outperform cash over the longer-term of 10 years or more.
More experienced investors tend to see big falls in the market as a signal to buy. This is because you can buy into the market more cheaply and there is greater opportunity for your investments to grow. So now could be a good time to plough spare cash into your stocks and shares Isa or other funds.
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