Once again extreme volatility has gripped stock markets the world over & the losses posted this week have been monumental. But how exactly does this drama affect your household finances? We explain.
Once again we've seen huge losses on stock markets around the globe prompting fears of a double dip recession in the UK, US and countries across Europe.
Slow growth in many of the world's major economies, and widespread concern about the financial stability of Greece and other countries within the Eurozone have all played a contributing role.
Here we explain what this all means for your finances:
Your pension:
If you're looking to retire soon
Unfortunately the losses posted this week could have a dramatic effect on your retirement fund if you are planning to cash in your pension in the very near future.
For this reason it's important to get advice as to what your options are so speaking to an Independent Financial Adviser is a good idea.
If you have a pension fund that applies lifestyling you may have been protected from the turmoil to some extent. It's possible that some, or even all of your pension savings had previously been transferred into lower risk investments with the intention of protecting any gains as retirement approached. This is something worth checking when you're assessing the impact.
If your pension savings have been hit then you may be faced with the tricky decision as to whether you should work for longer and wait for your pension fund to recover.
Annuity rates have tumbled too so cashing in your pension pot now may result in a lower than expected income with which to fund your senior years. Again, if buying an annuity is something you're looking at doing imminently then it's a good idea to get independent financial advice as soon as possible.
If you're a long way from retirement
If you have many years left to work before you retire then this week's events shouldn't be too much cause for concern.
Yes, they are likely to have impacted the size of your pension pot. However, as a pension is a very long term investment, the odds are that at at some point in the not too distant future your pension pot will return to growth once again.
In fact, fund managers often take a downturn of this nature as opportunity to speculate in areas they'd previously been unable to afford. As such, your pension pot may ultimately end up benefiting, although this is in no way guaranteed.
Your investments
Should you buy?
Unfortunately there's no easy answer to this as it depends entirely on your financial circumstances and long term goals.
Investors with cash often see a sudden downturn as an opportunity to pick up shares at bargain prices in the hope that they'll make huge gains in the long term.
Needless to say, this is a risky strategy as there's always potential for share prices to fall further, so this is something you need to be prepared for before you part with any cash.
If you do decide that now is the right time to invest then only speculate with money that you have spare, make sure that you're taking full advantage of your Investment ISA allowance so you maximise any gains, and ensure that you spread your investments so that you end up with a diverse portfolio that helps to mitigate risk.
If you're new to investing then take a look at our action plan: How to start investing in shares. Otherwise you can use our share dealing comparison to find the best account to trade with.
Should you sell?
Investing should only ever be taken as a long term strategy and there's no denying that it sometimes needs nerves of steel.
While it can be tempting to bail if the share price of a company you've invested in falls significantly it's important to bear in mind that doing this will realise your losses, whereas playing the waiting game could see your investment rise in value once again.
Unfortunately, there's no certainty either way but selling when the market hits bottom shouldn't be done without serious consideration.
Speaking to an IFA is likely to be the most sensible thing to do if you're unsure of the best course of action. They'll also be able to help you make sure that your investment portfolio is meeting your investment needs and help you to restructure it if needs be.
Your savings:
At the moment UK banks appear to be relatively stable so there isn't any imminent danger to your savings. However, it still makes sense to take precautions.
Savings under £85,000
The Financial Services Protection Scheme (FSCS) covers all deposits in UK banks and building societies up to a maximum of £85,000 or £170,000 for joint accounts.
Consequently, if you have less than £85,000 in savings all of your money will be fully protected and returned to you should anything happen to a bank that you have an account with.
Savings over £85,000
If you have savings that total over £85,000 you need to check that they are 'safe'.
The FSCS compensation limits apply to 'institutions' authorised by the FSA as opposed to individual banks.
This distinction is important for those with high value savings as the recent spate of takeovers between UK banks has meant that many now share FSA licences, and therefore FSCS compensation limits.
For this reason you need to make sure that you don't hold more than £85,000 in sole-named accounts, or £170,000 in joint accounts with any one FSA registered institution.
Read our article: Which Banks Count As One Under the FSCS? for more information and to find out which banks share a licence.
Savings in foreign banks
Any savings you have in banks based outside of the European Economic Area (EEA) but authorised to provide accounts in the UK will benefit from FSCS protection.
However, there are a number of banks from within the EEA that aren't protected. Instead they operate under a passport scheme and this means that you would have to claim money back from the protection scheme that operates in the country they're registered with instead.
All countries within the EU have to provide at least a €100,000 (roughly equivalent to £85,000) limit, so theoretically you should still be protected by the same amount but this is something to bear in mind.
You can check the FSA's list of authorised financial institutions to see which are UK regulated and therefore benefit from FSCS protection (they're listed as 'Banks incorporated in the United Kingdom' and 'Banks incorporated outside the EEA authorised to accept deposits through a branch in the UK'), and which operate under a passport scheme ('Banks incorporated in the EEA entitled to accept deposits through a branch in the UK').
Savings in offshore accounts
Furthermore, the FSCS doesn't extend protection to offshore accounts in banks outside of the European Economic Area or those based in the Channel Islands or Isle of Man. As such you'll need to check that the protection scheme that applies to any money you have in offshore accounts tis sufficient for your needs.
Your mortgage:
Uncertainty on the stock markets has meant fixed rate mortgage rates have remained low because it's become less expensive for the banks themselves to borrow.
There's no certainty as to how long these cheap deals will be available so if you're looking to take out a mortgage or remortgage to a new deal in the near future then investigating your options now would be no bad thing.
The general consensus is that the Bank of England will have to keep interest rates low for at least the short term future so big rate rises aren't expected any time soon. However, this isn't guaranteed.
If you're on a variable rate mortgage, or tied into a deal that's coming to an end in the next couple of months you should consider whether you could afford your repayments to rise. If you'd struggle to pay any more than you do now it may be worth taking out a fixed rate mortgage while low rates are available.
Take a look at our mortgage comparison to compare the best deals available, and check out our action plans: How to get the best mortgage deal and How to get the best remortgage deal for more information.
