The National Institute of Economic and Social Research has warned that recession will occur as a result of the cut back in household spending.

They forecast an economic contraction of 0.1% in 2012, with growth of 2.3% next year, assuming the eurozone sovereign debt crisis can be resolved in time.

These predications are slightly more pessimistic than official government forecasts, which predict modest economic growth in 2012 followed by stronger growth in 2013 and 2014.

Regardless of which forecasts you believe, a brief period of recession is looking increasingly likely following the publication of ONS data for the final quarter of last year, showing negative GDP growth.

Two consecutive periods of a contracting economy are the technical definition of a recession.

Assuming we are once again about to be blessed with a recession, what steps can households take to position their finances?

Fear of redundancy and unemployment, and its resulting loss of earnings, is clearly one of the most frightening aspects of any recession.

We expect the impact of any recession to be unequally distributed in 2012. Some sectors will perform poorly and others will do better, taking advantage of opportunities as they arise.

Understanding the unique risks as they apply to your employer is a good first step as you plan for a recession. How can you make your unique skills and experiences invaluable to your employer in tough economic times?

From a personal financial planning perspective, two of the most important steps are to cut short-term debt and boost emergency savings.

Unsecured debt, including credit cards and personal loans, are often the most expensive forms of borrowing. When recession strikes and jobs are lost, keeping up with debt repayments can be very difficult.

Every household should have an emergency fund of cash savings which will cover three to six months of committed expenditure. With a recession looming, this is a good time to consider increasing the size of your emergency fund.

Heading into a recession is also a good time to review your household budget and consider where savings can be made.

Making cuts to your expenditure at an early stage may not help the wider economy; it will free up more of your income to direct towards debt repayment and savings.

Photo credit: Flickr/tiptoe

In their Green Budget, the IFS has concluded that the chancellor can temporarily cut taxes without risking an interest rate rise.

They also warned that a substantial tax cut could damage investor confidence.

Looking at predicted government borrowing this year, the IFS believes it will be around £2.9bn less than the official borrowing forecasts. However, the continuing eurozone sovereign debt crisis could see this level of borrowing increase.

Whilst the official economic growth forecast for 2012 is 0.7%, the Green Budget includes a much lower forecast of 0.3%. If the eurozone crisis comes to a head this year, it could result in a “deep recession” for the UK in 2012 and 2013, according to the IFS.

The IFS Green Budget is published each year ahead of the Budget, with suggestions of what the chancellor might include.

We will need to wait until the Budget on 21st March to see if any of the recommendations made by the IFS are included.

Photo credit: Flickr/HM Treasury

£1m a year sounds like a lot of money. In fact, it is a lot of money.

I suspect that many of us would be happy to receive that level of remuneration for our work, even if that meant additional responsibilities and pressures to justify the wage.

In our experience as Financial Planners, there is no typical way in which large salaries like this are spent.

Expenditure will differ depending on chosen lifestyles; many higher earners are surprisingly frugal when it comes to their money.

The traditional image of an expensive car, massive property and expensive foreign holidays is usually a long way from the reality of how higher earners spend their income.

Of course a large part of a big salary like this will go on income tax and National Insurance contributions. In the 2011/12 tax year, someone earning £1m a year of salary will pay £478,000 of income tax and £23,381 of National Insurance contributions, leaving them with net earnings of £498,619.

This is before the additional of taxable benefits in kind, with things like a company car or private medical insurance quickly increasing the total tax bill each year.

Tax can also be saved through the payment of pension contributions or investments in tax efficient investment schemes, although this also reduces the available net income.

With what is left over, the net income is often spent on property and running the household. Money is also often spent on private education, with much of the Financial Planning work we do used to determine whether a private education is affordable.

Any feeling of wealth tends to be relative to not what you earn but what you get to keep.

Someone on a salary of £1m may feel no more or less wealthy than someone earning £100,000 or £25,000 a year, if their net income disappears each month on committed expenditure.

Working towards a defined set of goals which are documented within a regularly reviewed Financial Plan is essential regardless of earnings level.

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The tax would apply to homes with values in excess of £2m, with a tax of 1% on the value over this level.

Whilst the Liberal Democrats are keen to see this wealth tax introduced, and claim to have the support of some Conservative MPs, it is understood that senior Tories including George Osborne are opposed to the introduction of a mansion tax.

Leaving aside the ideology of taxing wealth rather than income, would a mansion tax be right for the UK?

If applied in addition to council tax, it could result in an additional £1.7bn a year being raised for the public finances. The Institute for Fiscal Studies estimate there are between 30,000 and 40,000 properties in Britain valued in excess of £2m.

If introduced, the tax would apply to the value of a property in excess of £2m, so the owners of a property valued at £2.5m would be liable for a mansion tax of £5,000 a year.

It is likely that the focus of such a tax would be on the owners of property in London and the South East, where the largest concentration of high value properties can be found. Agreeing on a common valuation methodology for property would be a challenge as would agreeing on whether inflationary increases in value should be taxed.

In our experience, the owners of properties valued in excess of £2m tend to own them as a result of years of hard work. It seems unfair to subject the owners of such properties to tax on their wealth when they have already paid tax on their incomes.

Where we can see a meaningful application of a mansion tax is for foreign owners of high value UK property who have not historically contributed to the UK Treasury through income tax.

It will be interesting to see how this call for a mansion tax develops over the next few months.

We feel it is unlikely to be included in the Budget on 21st March but it could be used by the Liberal Democrats as leverage to get one of their other proposals introduced, such as an increase in the tax-free income allowance to £12,000 from the £10,000 originally agreed by the coalition.

Photo credit: Flickr/Xerones

I have been making some new year resolutions (losing weight, getting fit, etc) and thought I might need some financial resolutions. Do you have any suggestions?

This is the time when we all start to think about the year ahead and what we want to achieve.

I think all resolutions should be SMART ones – specific, measurable, achievable, realistic and time-bound. That way, they are more likely to be kept, so here are some financial resolutions I think are doable for most people.

Organise your financial paperwork. Get one of those expandable box files and label the contents. Each time you get a piece of financial correspondence, action what is required and then file it safely in the box.

Not only will you feel more organised but you will also know where all your financial paperwork is and be able to access it easily.

Some will suggest you scan the paper and keep it on your computer. Same thing, just different media.

The second resolution is to make a budget plan. Here, you may well find a computer spreadsheet is the easiest way to do things. Month by month, estimate what you are going to spend. Some of these expenditure items may be known and fixed quantities, others may be estimates but you can use last year’s payments to get a feel for this. You may need to increase the estimates to take care of inflation.

Use the spreadsheet to compare your expenditure against income and this will help you to avoid overspending.

You may then need a separate spreadsheet to list your savings, investments and pension arrangements. You can even add to this the details of any life insurance, income protection and critical-illness cover that you have. Don’t forget to add in details of any benefits that you get from employment as well.

To this spreadsheet, add the value of any other assets you have (your house, for example) and then detail any liabilities that you have. This can start to help you determine the net value of your wealth (assets minus liabilities).

You can put in as much or as little detail as you choose but I would advise you to go for as much detail as you can.

The next thing to add to your spreadsheets is a simple list of your financial goals and objectives. When do you want to retire? What plans do you have for property purchase or moving home? How much do you think you need to accumulate to have the lifestyle you want?

None of the above will cost you anything other than some time and effort (apart from the expandable box which might cost £10).

You may think my motives for suggesting these resolutions are less than honourable because if you get all this information together you might want to book yourself a review meeting with an independent financial adviser but even if you don’t do that at least you will have achieved a goal of getting yourself organised.

If I were a gambling man, I bet that being in control of your finances, if you do all of the above, will last longer than your diet or keep-fit regime.

This is the largest monthly fall in the pace of price inflation since December 2008 when VAT was reduced.

The Retail Prices Index (RPI) has also fallen in the twelve months to December, from 5.2% to 4.8%.

Whilst price inflation remains stubbornly high and above the government target of 2% for CPI inflation, there are now strong indications it is falling in line with Bank of England expectations.

The publication of inflation figures next month, for the year to January 2012, will be particularly interesting as they will see the increase in VAT to 20% fall out of the calculation and inflation should once again fall quite sharply.

Recent news of domestic energy price cuts due to wholesale price falls should also feed through into lower price inflation this year.

Looking at the contributions to this inflation fall in December, the ONS says the largest downwards pressures came from petrol, gas and clothing.

Our outlook for price inflation during the rest of the year is for it to continue falling back towards the government target.

This should start to provide some respite for savers, who have been suffering at the hands of low interest rates and high price inflation eroding the real value of their money.

A fall in price inflation should also enable the Bank of England to consider a further round of quantitative easing to help kick-start the UK economy which is probably already in a technical recession this quarter.

Inflation remains a very real long-term planning concern, particularly for those in retirement who need to ensure the value of their pension income keeps pace with the rising cost of living.

What we have seen in recent years is the impact of short-term high price inflation. A return to lower levels of annual price inflation should not cause us to forget about how destructive even low levels of inflation can be when compounded over the longer term.

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The widely expected announcement today follows the latest Monetary Policy Committee meeting for January.

A more interesting announcement, if no change can be described as ‘interesting’, is that the Bank will not yet extend it’s asset purchase programme of quantitative easing.

Back in October they announced an extension of £75bn to this programme of QE.

With the UK economy appearing to deteriorate and ongoing concerns over the euro sovereign debt crisis, we expect to see this QE further extended in the early part of 2012.

Investors, savers and borrowers can comfortably plan for the year ahead based on continued low interest rates.

The latest industrial output figures from the Office for National Statistics today showed a sharp downturn in the manufacturing sector last November. This combined with continued reports of tough trading conditions for retailers is likely to dominate thinking at the Bank.

Higher interest rates now, whilst benefiting savers and appeasing those who believe price inflation needs bringing under stricter control, would damage the already fragile economic recovery. We need to wait until the Budget in March to hear the latest official economic growth forecasts for the UK, but they are unlikely to be anything but very low.

We look forward to reading the minutes from this latest Monetary Policy Committee meeting when they are published later this month in order to gauge a better understanding of when further QE could occur.

Photo credit: Flickr/Michael McDonough

The figures show that families with children will face an average fall in income of 4.2% between the period 2010-11 and 2014-15.

This will result in an average income drop of £1,250 a year for families with children. By comparison, average household income will fall during the period by £215 a year.

Families with three children will face the biggest fall in household income due to tax and benefit changes. They should expect to see their income fall by a total of 6.8% between 2011 and 2015.

Many households face an income squeeze due to high price inflation and relatively static wage inflation. Whilst there are signs that price inflation is starting to fall, the damage this has done to household incomes over the past year is noticeable.

Managing in an environment of falling household income, regardless of the cause, can be helped with Financial Planning including a lifetime cashflow forecast.

A properly constructed Financial Plan will contain an analysis of your household income and expenditure, helping you to understand where savings can be made and how financial resources should be best allocated in order to achieve lifetime goals.

Photo credit: Flickr/martinbamford

After successfully implementing the certification for three of my clients (Independent Financial Adviser firms) I decided to go for the certification myself when I returned to giving financial advice.

In my view there is more to being a professional financial planner than simply delivering best advice; it’s as much about best practice.

I really believe in the ISO 22222 standard because it provides an internationally agreed benchmark which not only enables consumers to identify financial planners who possess the right knowledge, skills, ethics and experience to deliver the desired level of service but also enhances the transparency and efficiency of the process for personal financial planning.

To achieve the standard, an independent assessor spent one day with me to carry out the official assessment of the documentation I was using and the internal processes and procedures required in the process of delivering personal financial planning.

I also had to demonstrate ethical competency at each of the six steps of the financial planning process which are at the heart of the ISO 22222 standard.

The standard is very much about operating on a continual improvement basis. This is something I have embedded within my working practices particularly as the industry moves forward with regulatory change.

Reassessments follow a three year cycle with an annual review focussed on key areas; this ensures that there is no room for complacency.

In my experience this standard has been well received by new and existing clients, and professional connections.

International and British Standards are recognised amongst our professional partners, especially those within the legal profession who themselves have achieved Lexcel, being their very own professional standard of excellence.

With the increased focus on professional standards generally, ISO 22222 (for the individual) and BS 8577 (for the firm) are the quintessential achievements for the 21st century professional individual or firm.

Michelle Hoskin, Director at Standards International, said:

“It was our pleasure to award Catriona Lumiste with her ISO 22222 certificate. With her forward thinking and best practice approach to her work she fully deserves the recognition that this international standard brings.

The assessor was very impressed with her client centred approach to providing financial planning and advice”

Now that I am part of the Informed Choice team, I look forward to delivering financial advice and planning to the same standards achieved as part of my ISO 22222 certification.

According to some new research, 26m of us in Britain will make New Year’s Resolutions for 2012.

Top of the list is likely to be sorting out finances and cutting back on expenditure.

This is the first time since 2008 that personal finances have topped the list as the most popular New Year’s Resolution, suggesting that the current financial climate is influencing our personal goals for the year ahead.

The research from gocompare.com found that 49% of us named sorting out finances and reducing outgoings as their most important resolution for 2012.

This was followed by getting fit/taking more exercise (46%), losing weight (45%) and eating a healthier diet (33%).

Despite these good intentions, 41% of resolutions will be broken by the end of January and 86% within six months, based on findings from previous years.

What is the best way to sort out personal finances and reduce outgoings in 2012?

The answer will depend on your current position and what you are hoping to achieve. The creation of a bespoke Financial Plan is certainly a good place to start.

Creating a Financial Plan is something that you can do yourself or engage with a professional Financial Planner to create on your behalf.

At its simplest, a Financial Plan consists of a snapshot of your current financial position (assets, liabilities, income and expenditure) along with a description of your goals and the steps you will take to achieve them.

By making your financial goals ‘SMART’ (specific, measured, achievable, realistic and time bound) they become easier to achieve and it is much easier to measure your progress.

A good Financial Plan is one that is reviewed on a regular basis.

By involving your family or a third-party such as a Financial Planner in the construction and ongoing review of your Financial Plan, you stand a much better chance of achieving your financial goals over the longer term.

Rather than going it alone with your resolutions to sort out your finances or reduce your outgoings in 2012, why not speak to an Informed Choice Financial Planner to help define your goals and establish a robust plan of action?

A meeting with one of our experienced Financial Planners is at our expense and with no obligation.

You can get in touch via our website or give us a call from 3rd January 2012 on 01483 274566 when the office reopens for the New Year.