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In the buffer zone

I am worried that we are in recessionary times and I may lose my job. Am I right to be worried and what I should do to prepare financially?

A recession is a contraction phase in the economic cycle which happens when real gross domestic product growth is negative for two or more consecutive quarters.

This has not yet happened during this credit crunch in the UK and eurozone and GDP in the US increased by 0.5 per cent in the second quarter of 2008.

However, if the UK interest rates are not cut, the oil price remains high and the Bank of England is correct in its economic forecasting, the UK will most likely fall into a recession.

There are a number of ways that you can protect yourself and your family from recessionary times. In basic terms, this means that you must become more financially cautious.

The starting point is to reduce debts, cut costs and build up a cash buffer in a high interest account. It is estimated that the average household savings rate is at its lowest for 50 years and the Office for National Statistics reports that the average household savings in the UK are just £750.

Homeowners such as yourself could possibly reduce the cost of their single biggest debt by remortgaging.

However, with the credit crunch being one year old, there are not the mortgage deals around that there were two or three years ago.

Be aware that lenders are still very cautious about how much they will advance and who they will lend to but the good news is that swap rates, which are linked to the pricing of fixed-rate mort-gages, have been falling.

We need to ensure that your investments and pensions are in the right place to suit your outlook and are able to endure the prevailing stockmarket volatility.

Investment advice is currently on as wide a piste as I have ever seen.

Capital growth recommendations include funds investing in emerging markets, China, India and absolute return funds, which are all far more riskier than traditionally recommended growth funds.

As you move towards requiring more income as a result of retirement or unemployment, we can look at income-generating products.

Until the downturn in UK equity income funds comes to an end, to achieve higher yields we may need to consider alternative investment classes such as structured products, hotel rooms, traded life policies, real estate and other alternative investments that are regularly producing a higher yield than gilts or the stockmarket.

These again can be more risky than traditionally recommended income funds.

The move to riskier investments to achieve capital growth or high income is a result of market volatility and the difficult economic circumstances as we teeter on the edge of a recession.

May I suggest that while interest rates are high and you are worried about your job prospects, there is nothing wrong with holding the majority of your savings in cash at this stage of the economic cycle.

Life insurance premiums have fallen in recent years and I may be able to find you a cheaper policy offering the same or even more comprehensive benefits.

Beware of cashing in endowments and other savings plans early as you may be penalised.

We also need to check that you are paying as little tax as possibleAs you are a higher-rate taxpayer, you should consider transferring assets to your non-taxpaying wife. This needs to be outright and unconditional. If you move £40,000 of your investments into her name, you will save nearly £9,000 a year.

You should specifically move the assets you own jointly but in unequal shares as you have not informed HM Revenue and Customs about the fact that your wife owns a bigger proportion of some of these invest- ments and so you are taxed equally.

Do also consider using your children’s personal allowance, currently £5,435, which exists from the day they are born and their annual capital gains tax exemption that may be used by investing for growth in the child’s name.

I will advise you separately about the inheritance tax implications.

Remember that if income of more than £100 gross arises to a child from money that has come from a parent, it will be taxed on the parent while the child is under 18 and unmarried.

These recommendations are for difficult economic times but they should form the basis of everyone’s financial planning.

Kim North (kim@tech is founder of Technology & Technical


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