Unhappy New Year expected for with-profits customers

TOMORROW morning, actuaries at Standard Life's offices in Edinburgh will be working on some of the hardest calculations they have ever performed.

They will be figuring out the 2007 bonus rates that they will declare for their with-profits customers in February. The difficulty lies not so much in doing the sums but in deciding how to deliver the news to policyholders.

When it last did these calculations, Standard Life had to inform 90% of its mortgage endowment customers that their policies were not on course to pay off their mortgages.

So will it be different this year? Insurance sector analyst Ned Cazalet predicts "pretty skinny returns" in another "sticky year".

We will probably get the first indications from the insurance sector from Norwich Union in the middle of this month. The actuaries at Standard Life will be watching NU very closely when it makes its announcement, as the Norwich-based insurer also had 90% of its mortgage endowment customers on course for a shortfall at the last count.

Cazalet is expecting some insurers to give an annual return of zero (as some did last year), but some may be able to put up 2% or so.

Start a savings habit

THE current investment market is tricky, and Prime Minister Gordon Brown has already warned of the global financial turbulence he expects in 2008.

In 2007, the FTSE 100 had its worst annual performance (up 3.8%) since 2003. Equity, property and bond markets are particularly difficult to predict at the moment.

So what should we all be doing to prepare ourselves financially for what could be a difficult year ahead?

There are two commandments here: to reduce debts and to build up savings. Although these are pretty obvious steps to take, many people do not follow them.

In fact, the proportion of our income that we put into savings fell to a 40-year low (at 3.1%) in 2007.

So why, if saving is such a good thing, are we not doing more of it? One answer is that saving is something you learn from your parents, and if they did not do it, it takes an unusual person to break out of that mould.

However, if I could give just one bit of financial advice, it would be to save up a small sum. The real advantage of having at least £500 in the bank is the confidence it gives you. You do not have to wake up in a sweat in the night at the prospect of having to replace your boiler or, worse still, having to undergo a redundancy selection round at work.

It may be hard to understand for someone who has never saved, but having that buffer zone is good for the spirits. In fact, the Government based one of its major initiatives for children on this idea. The Child Trust Fund has nearly always been described in financial terms (the £250 given to all children at birth by the state, the £250 top-up they get at age seven, the extra contributions the family can make and the likely size of the fund when it can finally be touched at age 18).

But, in discussions with some of the architects of the scheme, I learnt that the biggest, most fundamental reason behind it was the psychological boost it gave to young people: instead of having nothing in the bank at 18, they would have something. And that something, even if it is just £500, gives them the freedom to make decisions for themselves.

The Child Trust Fund designers hoped that 18-year-olds would appreciate this sense of freedom enough that they would get into a savings habit for good.

So if you want to save £500 this year, the easiest way is to set up a monthly direct debit of £42 into a savings account. If you can do more, then so much the better. And if you have never saved before, I would bet that you feel a bit less anxious and a bit more self-reliant as a result.

Don't bank on it

WE WILL find out more this week about Chancellor Alistair Darling's proposals to tighten banking regulation after the Northern Rock crisis when he and the Bank of England both appear before the Treasury Committee.

Toughening the rules, of course, generally goes in the apple pie and motherhood category of things that are very difficult to argue against. But banking regulation is one of the most complicated issues in the commercial world and even experts make bad calls.

Whatever our experts in the UK say, ordinary bank customers should never believe that the problem is solved.

The advice has to be to keep a maximum of £35,000 deposited in any one bank or building society as this is the top amount you are guaranteed to get back under our present rules if the institution fails.

Teresa Hunter returns next week