We are the prime target for politicians struggling to restore the public finances. Is there any escape?by Andy Davis / June 19, 2013 / Leave a comment
“Britain’s middle classes are routinely labelled the “squeezed middle” but that squeeze is far more than simple financial pressure” © Phil Disley
Looking back, I can put my finger on the time when a clutch of appealing illusions I had carried unquestioningly with me throughout my adult life began to fall away. It was late 2009, just two years into the financial and economic debacle that still surrounds us, but long before I or most other people finally realised that what we thought was just another temporary downturn—albeit a bad one—was in fact something totally different. It was game over. An old way of thinking and doing things was finished.
That autumn my wife was pregnant with our first child, the realisation was dawning that we could no longer put off facing up to the steady advance of my mother’s dementia, and a happy and supportive relationship with my employer, which had lasted almost 15 years, suddenly become the exact opposite. By the following spring I had an infant son, a disorientated mother living among strangers behind locked doors and a cheque instead of a career. A lot of things that had been quietly taking care of themselves for years suddenly needed attending to. In the process of getting to grips with them and starting to plan a financial future for three generations of my family, the extent of my previous blissful ignorance became painfully obvious.
Life is a lot easier and less stressful if you like your job and the company you work for. The money turns up every month and the seasons roll round. Colleagues can become good friends over the years and the social life of the office is something you miss when it’s gone. But for all its attractions, I would have to be utterly desperate before I took a salaried job again (which I fully acknowledge puts me among a very fortunate minority). The first big illusion I left behind that spring was that any company would ever really care for me, as opposed to the role I was being paid to carry out. Perpetuating this comforting illusion is a key function of middle management and stupidly I allowed almost 15 years of positive experience to lull me into believing it. This turned out to be a profound mistake and one I won’t make again.
No one who has their eyes open should put their faith in the company they work for—by all means trust individuals you work with and know well, but on no account allow yourself to believe that the institution has any interest at all in you as an individual. It doesn’t, and moreover it is not the institution’s job to care about you. It’s yours.
Being a financial writer, I’ve naturally come across other, more impersonal ways to view the true balance of power that exists between companies and the people that work for them. Hunt around online and you can find charts that show labour’s share of profits at long-term lows and capital’s share looking healthier than ever, or charts that show real wages (after taking inflation into account) going nowhere while the cost of living steadily rises. They’re all telling the same basic story—the widely held belief that holding down a salaried, professional job offers a relatively low-risk way of making a living, while working for yourself is a much more high-risk strategy, is not necessarily correct. The truth is that both approaches nowadays carry big risks, but the people who work for others have far less control over the risks they are taking. The recompense for that used to be security and relative peace of mind—nowadays, I’d choose greater control over my own destiny and the inevitable anxiety that goes with it any day of the week.
Britain’s middle classes are routinely labelled the “squeezed middle,” but that squeeze is far more than simple financial pressure; in fact, some aren’t squeezed in that sense at all. Certain fortunate people I know still have well-paid jobs and have seen their monthly mortgage outgoings tumble to extraordinarily low amounts thanks to rock-bottom interest rates. But I don’t detect any great sense of well-being and optimism from them. They still sound anxious and uncertain about the future when I speak to them and, having gone through the process of unravelling my mother’s finances after she went into the care home, I can see good reasons why they should be.
About a month before I left my job, we had moved my mother into a home close to where my sister and I live. Then began the task of working out what savings and investments she had and how we would come up with the £30,000-plus per year that her residential care was going to cost.
I grew up thinking my parents were comfortably off and once we tracked down the paperwork this belief turned out to be broadly true. As part of the wartime generation, she had worked hard, saved and owned property through its long bull market with the result that, at 85, she had a teacher’s pension, property she owned outright and a decent sum in personal investments. What she didn’t have was enough income to meet her monthly bills.
How could this be? She had apparently done everything right but was still well short of being able to pay her way in the world. The reason will, I suspect, be depressingly familiar to many others who have been through the same process with their parents. From what I could discern, my mother must have had a financial advisor at some point—at least this was the most obvious explanation for why her money had been spread across a roll-call of the UK’s leading fund management groups (all the big names got their share), and why all of it was invested in equity funds that held shares in the same narrow list of large companies. The other things these funds had in common was that none paid out any regular income to her and they all charged at least 1.5 per cent a year in management fees, around a third of which would be handed to the advisor who had channelled her money into these funds and then departed the scene.
Where was the ongoing duty of care that I would expect from someone who was still taking half a per cent a year of her money? Where was the evidence that her advisor was thinking about her changing needs and helping her to prepare for them? Nowhere, of course. Once the sales job was done, that was the end of the story and another of those appealing illusions went by the wayside. I had been interested in investment for a long time and instinctively felt it was something I’d rather do for myself given that I had been a financial journalist and, unlike many others, I didn’t find the prospect particularly intimidating. Trying to fix the ludicrously inappropriate situation that my mother’s advisor had left behind convinced me that entrusting your most vital interests to the tender mercies of the financial services industry is an extraordinarily risky thing to do. Yet for most people, who don’t want to or can’t do this kind of thing for themselves, there is little choice.
It was an accident of poor timing that meant we had to overhaul our mother’s financial arrangements to try to secure her a low-risk income from her investments at about the worst moment in living memory to attempt such a manoeuvre. Ever since the depths of the financial crisis in early 2009, interest rates on bank deposits and returns from “safe” government bonds have ranged between low and pitiful. The result is that it now takes far more capital than before the crisis to create the same quantity of income, which leaves those who must live off their savings and investments in a terrible position.
The only realistic choice we had in trying to ensure our mother’s income would meet her needs was to put her money into investments that were riskier than I would have liked but that offered a higher level of return. I don’t feel at all comfortable with this responsibility but there’s not much I can do about it. The bills turn up every month and even one of those final salary, public sector pensions that certain right-wing newspapers enviously deride is not enough to meet them.
Why have we had to take these risks with a very old woman’s life savings in order to ensure she can afford the care she now needs? The simple answer is that we, along with millions of others, believed that the people we elected, trusted and paid to manage this country’s financial affairs knew what they were doing. They clearly didn’t. People like her are just so much collateral damage and there is no one but us to pay what it will cost to plug the vast hole that has opened up beneath our feet. Quite simply, we are the sitting ducks with incomes and assets. That means more taxes, fewer benefits, worse services and lower returns (coupled with higher risks) from our savings and investments.
Since I have now run very short of institutions in which to trust, I take a rather different view of the world from the one I used to hold. I guess you could call it middle-class survivalism.
These days, I’d far rather rely on myself and my family than on any of the institutions I used to believe would “be there for me” when I needed them. Risky and uncertain though it is, I’d rather work for myself and choose more of the risks I take in life than put my future and that of my dependents in the hands of an employer who—when push comes to shove—gets paid not to care about me. I would far rather make my own mistakes in deciding how to manage our money than pay for the privilege of having someone else to blame when things go wrong. And I will never again lock up money in the pensions system so that I can be forced to buy an overpriced, underperforming annuity with it and condemn myself to an inadequate income in perpetuity. It’s not that I don’t want to provide for my old age—I do. I just don’t want to wear the straitjacket of a conventional pension. I’ve put enough money on that particular horse already and in the interests of spreading my risks I need to find other ways to tackle this problem. Once you’ve lost faith in the orthodox choices, that’s the only way left to go.
I should probably qualify that last statement a little. We are paying into low-cost, self-invested personal pensions on behalf of our children who are still very young (eight, six, three and one) on the basis that the more long-term saving we can do for them now, the longer the money will have to grow into something worthwhile for their old age. The contributions qualify for tax relief at 20 per cent (a good deal for them since they pay no tax) and once a year I invest the money that has built up in very low-cost index-tracking funds. It might sound a quixotic gesture, but one of the few things I do still believe is that long periods of time can enable even small investments to produce worthwhile returns, provided you keep the charges to a minimum. I’ll probably never know whether that faith is misplaced, since by the time our eldest child reaches retirement age I will be at least 105, but I’ll go on my way knowing I did what I could.
The other goal of this exercise, of course, is to find more ways to pass on wealth from one generation to the next—not just by bequeathing what we have left when we die (inheritance tax permitting), but also by doing some of the hard work of saving for their old age well in advance, so that when they reach adulthood they will have greater scope to spend or save the fruits of their own labour as circumstances dictate, rather than racing against the clock to amass a pension fund from scratch.
Doing this helps to dispel some of my worry that our children will not enjoy the same standard of living that we have. Looking back one generation, I suspect I’m probably at least as well off as my mother was at the same point in her life and quite possibly more so, for two main reasons. The first is that she worked all her career as a school teacher, excelling at a vital job that was never going to make her fortune, while I went to work in the press and enjoyed the considerably greater benefits that flowed from that decision. The second is that I was fortunate to enter the property market during the greatest credit boom in modern history. Access to abundant cheap mortgage finance on terms that were exceedingly lax enabled me to multiply my equity many times over in a very short period of time.
Like many others, I suspect, I have a strong sense of before and after about the financial crisis. Life before it was one way, life after feels quite different, but not necessarily worse in every respect.
The branch of Northern Rock in the town where I live has recently been rebadged as Virgin Money, but every time I walk past it I’m still reminded of the most surreal financial experience of my life. Back in about 2004, I remortgaged my then-home with the Rock and was told, to my surprise, that although I was only after the amount I needed to replace my old loan, I was “entitled” to a vast additional sum which in effect I could treat as an overdraft facility, to be drawn down as and when I saw something I fancied. Being a staid and boring sort, I was utterly horrified at the prospect of having that much easy credit on tap but I couldn’t just turn it down—the bank had to give me the full amount and I could then give back anything I didn’t want. And this was how I found myself in a branch of Northern Rock, signing a cheque for just shy of £200,000 and handing it to the cashier, just so I could borrow the amount I actually wanted.
The money was real enough—it showed up on my bank statement for a few days and then vanished again—but the experience was utterly unreal. The world we lived in back then was full of strange occurrences like this one, all of them made possible by the belief that we were on some kind of golden escalator that would carry us ever higher. It didn’t and it couldn’t, and I am not at all sorry to have left this weird world behind. Although it might feel that way, I don’t think my life is any more precarious or risky now than it was then. I just think I’m a bit more aware of the risks that were always there, hiding under the comforting illusions that I had carried, unquestioned, along with me.