Financial Review

Debtors hang on to their savings
People are needlessly shelling out around £9 million a day in interest on debts they could afford to pay off using their savings, a study has found. More than a quarter of people across 13 European countries are holding both non-mortgage debts and cash savings, rather than using one to pay the other. A study by ING Bank found that in the UK as much as £3.2 billion a year is spent on debt interest by people with savings. Those in this situation owe just under £4,000 on credit cards and personal loans but have more than £4,500 in savings.

While saving is worthy, with interest rates in the doldrums people are losing badly by holding debts and savings concurrently. The theory is that people think of their money in separate accounts and attribute different values to it depending on where it came from. For example, money received unexpectedly, such as a gift, is more likely to be spent than money they earned themselves.

Generally accepted wisdom is that people should have around three months’ earnings in reserve. The ING study found that the Spanish have the most savings compared with their debt, with €6,000 in savings compared with €3,000 of debt on average. Across the 13 European countries surveyed, around €23bn a year is being paid in debt interest that could be paid off by savings.

Redundant NHS staff play musical chairs
Despite the Government promising to get a grip on public spending the number of NHS managers re-employed after receiving redundancy has doubled. One in six managers who have received a redundancy payout are now back working in the NHS.

Labour has accused the Government of “handing out cheques like confetti,” despite a pay freeze on health service employees, including doctors and nurses. Between April 2010 and the end of March 2013, the NHS had spent a total of £1.4bn on redundancy payments for 32,089 staff. The average payout was more than £43,000. Over 2,200 managers secured six-figure golden goodbyes, with many moving to another position or part of the NHS after just a month.

The NHS has urged managers to wait at least six months before taking another job in the service, but it is powerless to act as NHS rules mean staff must wait only four weeks after redundancy before they can move to a new position. In one example a husband and wife secured over £1m in redundancy payments, before both moving immediately to a neighbouring health authority. There is no suggestion that any of these redundancy packages or appointments were outside the NHS rules.

HMRC to raid tax dodgers’ accounts
Tax dodgers who refuse to pay could have their bank accounts raided by HMRC after tougher powers were handed to the Revenue. This is part of a wider international effort to clamp down on individuals and companies that avoid tax.

“Public tolerance for those who do not pay their fair share evaporated long ago,” claimed the Chancellor, George Osborne.

Anyone owing more than £1,000 in tax or tax credits could see their bank account raided if they have been contacted several times and are able to pay. At least £5,000 would be left in an account, the Chancellor said, as he boosted HMRC’s debt collection powers. This brings Britain into line with France and the United States, which both have similar systems.

Companies that shift profits overseas to divisions based in offshore tax havens will also be affected, with the Chancellor saying that HMRC will block transfers of profits between companies to avoid tax. This heavily criticised technique has been used by a host of overseas firms such as Thames Water, Npower and Starbucks to reduce their UK tax bills.

In addition, anyone using a tax avoidance scheme disputed by HMRC will have to pay the tax and penalties deemed due while the scheme is being investigated, and this will be applied back to 2004.

Confidence grows
Confidence in the economy among consumers hit its strongest level in at least three years in February as pressure on people’s wallets eased. A survey by Lloyds Bank into spending power saw the bank’s measure of consumer sentiment lift by 130 points in February, giving the highest reading since November 2010. Just 27% of people think the country’s financial situation is poor, the lowest level since the survey began, with the boosted sentiment coinciding with falling rates of inflation.

Action needed to end shock mobile bills
The mobile phone industry is being urged to take steps to help customers avoid shock bills as consumers are left powerless in the face of problems with their providers.

According to a report from Citizens Advice, 28,000 complaints about mobile phones and contracts were filed last year, while a further 102,000 people sought help online about shock bills, phantom charges and billing errors. Citizens Advice said providers could help people by sending them text messages with reminders about the costs and any limits they have, as well as creating tools to allow people to keep track of their charges, calls and data use.

A recent survey by the European Commission showed that half of tourists in Europe were so terrified of huge mobile phone bills that they refused to use their handset on holiday. This is despite the fact that since last year the cost of calls and internet use in the EU has been cut. Calls now cost, at most, 20 pence a minute to make, or 6p to receive. Text messages are 7p each and downloading one megabyte of data is capped at 38p.

Three counters 0800 numbers rip-off
A decision by the mobile phone company, Three, to make all 0800 numbers free on its calling plans has highlighted how calls to these and other national numbers impose a heavy cost for mobile phone users. It has been estimated that calls to 0800, 0845 and 0870 numbers cost phone users more than £600m a year, because they are excluded from free minutes contracts and treated as premium numbers. In a survey by YouGov three-quarters of people did not know what they were being charged for apparently free 0800 numbers.

Three is now making calls to 0800 numbers free and to 0845 and 0870 numbers 5p a minute – but there are no signs of other mobile phone companies following their lead.

Budget levels music playing field
The 99p music download could end after a tax crackdown on online retailers such as Amazon and Apple. The cheap one-click service, blamed for killing CD sales, flourished under previous laws that allowed retailers to pay minimal VAT. But now that loophole is being closed in a bid to raise £300m for the Treasury.

A measure announced in the Budget will force online companies to pay VAT in the UK. Currently Apple and Amazon sell through Luxembourg, where VAT is levied at just 3%. But new rules coming into force in January would force them to apply the full 20% for sales made into the UK. The law will apply to electronic books, smart-phone applications and games. This could see songs currently sold at 99p being offered at £1.16 each and the online price of thousands of other items is also expected to rise.

Apple’s iTunes store is likely to be hardest hit – it is thought its music download service had UK sales of around £1bn last year.

Inheritance tax take revised up
The Office for Budget Responsibility (OBR) has revised its calculation of how much inheritance tax will be paid between now and 2018 by £800m, just three months after it last issued the figures. In December, the OBR said inheritance tax take would rise dramatically over future years, from £3.1bn in 2012-13 to £5.6bn in 2018-19. Now, it appears IHT will raise some £100m to £200m more per year than previously thought.

Publication of the latest figures coincided with a claim by David Cameron that the Conservatives remained committed ro raising the threshold for IHT to £1m. The threshold is currently £325,000 per person, where it has remained since 2009.

Will pension pots become borrowing collateral?
Pension savings could increasingly be used as collateral for borrowing earlier in life because of Budget changes, MPs have heard. The new system will abolish the requirement for people to buy an annuity – a retirement income for life. From next year millions reaching retirement age will be able to spend their pension pot in any way they want.

Paul Mortimer-Lee, global head of market economics at BNP Paribas, told the Treasury Committee he was concerned people could be encouraged to borrow money when they were of working age, using the money they would receive on retirement to pay back these loans.

The Institute for Fiscal Studies has claimed that pension savings are already being used by some people as collateral for borrowing and it says this will grow with greater flexibility for drawing down pensions.

Lower petrol prices drive down inflation
A fall in petrol prices pushed the UK inflation rate to a new four-year low of 1.7% in February. This makes it the second consecutive month that the Consumer Prices Index rate has been below the Bank of England’s 2% target, having been at 1.9% in January. Inflation, measured by the Retail Prices Index (RPI), fell to 2.7% in February from 2.8% the month before. Average petrol and diesel prices fell by 0.8p a litre between January and February, compared with a rise of 4p a year ago.

The fall in the rate of inflation means that the gap between pay increases and the rise in prices is narrowing. Average total earnings rose 1.4% in the three months to January, compared with a year ago, according to the ONS’ latest figures. Public sector workers saw a rise of 0.9% but private sector pay growth was 1.7%, meaning it is now matching inflation.

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