This year did not turn out the way any of us expected. The Covid-19 pandemic ended up affecting all aspects of our lives, and this applies to personal finance, too.
When reviewing the big consumer money moments of the year, 2020 started as it meant to go on – with bad news.
New year, new charges
In January, banks came under fire for collectively increasing their current account overdraft charges to around 40%, from typical levels of around 10%-20%.
This was because the Financial Conduct Authority (FCA), the City watchdog, brought in rules designed to curb what it saw as unclear and unfair overdraft charges.
Banks previously had a patchwork system of fees and charges, and responded to the FCA plans by charging a clear, single – but very high – interest rate. This surprised even the regulator, which encouraged banks to show restraint as the pandemic started to take its economic toll.
Although many banks have now quietly started charging 40% fees again, the heat of the earlier furore has been lost as bigger coronavirus news took over the personal finance arena.
March base rate cut
On 11 March, the country saw the first major financial impact of the Covid-19 outbreak as the Bank of England cut the base rate from 0.75% to 0.25%, the lowest level in history.
Then, eight days later, the Bank cut the rate again, to 0.1%, where it has remained ever since.
The cuts were meant to make it cheaper for businesses and individuals to borrow money to spend, therefore boosting the economy.
The news was good for people wanting loans, such as homeowners, especially those with tracker mortgages with interest rates that follow the base rate.
But the news was disastrous for savers. The base rate is factored into the interest banks pay on savings deals, and cuts to it are almost always passed on to consumers.
Savings rates then fell to record lows, despite a blip in the autumn when rates on short-term fixed-bonds rose temporarily.
Tom Adams, of financial analysts Savings Champion, said: “The double base rate cut meant many existing rates were slashed to the bone. That was obviously very bad news.”
But 11 March was also significant for another, more positive reason – one Budget policy was to increase the Junior ISA annual savings cap from £4,368 to £9,000.
Scams on the rise
Unfortunately, the Covid-19 pandemic offered the perfect cover for fraudsters interested in tricking consumers out of their money.
Scams included offering fake personal protective equipment, pretending to be connected to genuine government support schemes, or posing as legitimate financial companies to con pensioners out of their retirement funds.
Summer savings – but for who?
As lockdowns continued into the summer months, more good news followed for some. Enforced time spent at home meant many households were able to save much more money as they were not spending cash on costs such as commuting and leisure activities.
However, this proved to be a tale of two classes. The top fifth of households by wealth cut spending on goods and services by 41% (£195 per month), compared with 30% (£75) for the poorest fifth, according to the Institute for Fiscal Studies (IFS) in July.
In addition, the IFS found richer households experienced less of a fall in their income.
But among poorer households, spending falls were much smaller, and drops in income larger. On average, this led to a £170 per month decline in bank balances between March and September, relative to normal times.
Andrew Hagger, of financial analysts Moneycomms, said: “A lot of people have saved a lot more money. But the big problem is: where do you put it? People can struggle to find anywhere to put their money where there is a decent return.”
July was also good news for homebuyers, who were exempt from paying stamp duty on the first £500,000 of any property in chancellor Rishi Sunak’s ‘mini-Budget’.
Spending Review – more questions, few answers
Fast forward to November and the chancellor unveiled his hotly anticipated Spending Review, with Sunak warning that the country’s “economic emergency has only just begun”.
But while the government did announce a lot of extra spending to help tackle the impacts of the pandemic, it gave no hints about how the country’s existing £394 billion borrowing bill for Covid-19 will be paid off.
Ideas for how to do this have been suggested by several think tanks and policy institutes, but none are positive for consumers.
The Wealth Tax Commission suggested a one-off tax on assets such as pensions and property. The Pension Policy Institute said the chancellor could look to lower future state pension payment increases.
Meanwhile, in July, Sunak asked the Office for Tax Simplification to review capital gains tax, leaving many investors afraid this could be increased to help pay for Covid-19.
The Spending Review was also bad news for pension savers, as the Treasury confirmed that how it measures inflation on government gilts will change in 2030.
While this sounds dry, the impact is huge. Around 6.4 million people have defined benefit pensions that rise in line with the current metric, Retail Price Inflation.
In 2030, this will change to be in line with a generally lower metric, the Consumer Prices Index plus housing costs.
The Association of British Insurers (ABI) trade body thinks the move will cost pensioners between £96 billion and £122 billion.
Another seismic change to the savings landscape came when National Savings and Investments (NS&I) made a series of cuts to its top savings deals.
In late November, NS&I cut rates on its Direct Saver, Investment Account, Income Bonds, Direct ISA and Junior ISA, wiping billions of pounds of interest off the deals.
But the move was not just bad news for NS&I customers. Because the Treasury-backed savings institution is so enormous, anything it does has the potential to change the entire market.
When NS&I cut its rates, it sparked a copycat move from rival savings firms, some of which were flooded with disaffected NS&I customers.
Adams said: “It’s hard not to attribute some of the current low level of savings rates generally to NS&I cutting its own rates.”
Mini-bond marketing ban
But good news crept in as the year drew to a close. In December, the FCA confirmed it would extend its ban on marketing mini-bonds to retail investors from January 2021.
Mini-bonds are perfectly legal, but are not covered by the Financial Services Compensation Scheme. This means if the company providing them goes bankrupt then investors can struggle to get any of their money back.
The regulator had brought in a temporary marketing ban on the deals in January 2020. At the time, the FCA said it had “serious concerns that speculative mini-bonds were being promoted to retail investors who neither understood the risks involved, nor could afford the potential financial losses”.
— to www.ii.co.uk