Feb

15

financial concepts: yank speak to the queen’s english

Filed Under banking and economics | 15 Comments

US & UK

So yesterday, when I pointed out the free download that was available of Suze Orman’s book Women and Money, I said that I’d explain how some of her ideas relate to British personal finance products

checking accounts = current accounts

You probably know that what are called checking accounts in the US, are called current accounts in the UK. Suze recommends that you open a new checking account with the following features:

  • no monthly fee
  • a low balance to qualify for free checking
  • free checks and check writing
  • online access and free online bill pay
  • insurance coverage

In the UK, you should actually be able to do a lot better than that. Every single bank in the UK offers at least one (and sometimes many) current accounts with those features. To that list you can also add:

  • high interest
  • FSA registered
  • telephone banking
  • the ability to set up direct debits and standing orders
  • free cash machine transactions at all banks

Currently the best accounts if you are in credit are with First Direct (it’s a high cash bonus rather than a high interest rate) or Alliance and Leicester or Cahoot. Which one you should get depends on how much you earn and deposit each month.

FDIC = FSCS

Just like the Yanks have insurance on bank deposits, so do us Brits. Every bank, building society or credit union regulated by the FSA is insured by the Financial Services Compensation Scheme (FSCS). In the event of a bank or building society failing, the first £35k that you hold in all your accounts combined at the bank will definitely be returned to you.

401(k) = direct benefit (money purchase) pension

A 401(k) scheme or similar is an employment based retirement account. The exact equivalent in the UK is a direct benefit pension, often called a money purchase pension. As in the US, these usually come with employer contributions, which may or may not be dependent on your own contributions.

There are more generous limits on contributions. You may contribute up to the lower of your annual earnings and £215k over all your pensions, including private pensions.

roth IRA = stocks and shares ISA, sort of

The closest thing that we have in the UK to a Roth IRA is a stocks and shares ISA. Stocks and shares ISAs are more flexible than Roth IRAs, which has it’s own disadvantages. You can contribute up to £7000 per year (increasing to £7200 in April) to a stocks and shares ISA, but this limit is dependant on whether you have a cash ISA as well.

Anyone over the age of 18 may hold a stocks and shares ISA, regardless of their earnings.

traditional IRA = private pension, sort of

A traditional IRA in the US, is much the same as a British personal pension, but the limits on making tax-free contributions are much more generous. They are the same as those for an employment based defined benefit pension.

In addition, you can contribute up to £2,808 before tax (which HMRC will top up to £3600) even if you don’t have any earnings, there is no age limit on this.

advance directive / healthcare DPOA = living will: advance statement and advance directive

In the UK, the way to specify in advance what you would like to have happen to you should you become incapacitated is through a living will with an advance statement and/or an advance directive.

An advance statement describes treatment that you would be happy to have, want to have or prefer not to have. It also indicates who you would like to be consulted over your treatment. It is not legally binding, but healthcare professionals must take it into account.

An advance directive is a refusal in advance of certain types of treatment. It is legally binding and must be followed except in a few cases.

anything else?

I’ve given equivalents all the American financial products that I noticed featuring heavily, but if you spot any others, let me know. I’m always happy to try to translate from yank speak to the Queen’s English.

Image by jennifrog

Feb

13

loan sharks are illegal - unsurprisingly

Filed Under banking and economics | 11 Comments

shark graffittiThis morning, I was running late (for a time management course), so I took the bus in to work. Naturally, I wasn’t awake enough when I got on the bus to pay attention to much, but as I was getting off I noticed an advert from the council about loan sharks. The ad basically said that loan sharks are illegal, and gave some advice numbers and a place to call or text to shop one in.

In case you’re not familiar with the concept, a loan shark is someone who will lend you money, unregulated and therefore illegally, and which you then pay back in weekly instalments. The interest rate is literally extortionate, and the results of non-payment is traditionally threats of, and actual, violence.

You know, I’ve never really considered that loan sharks actually exist in this day and age. I’ve seen them in tv dramas and so on, but (presumably) because I’ve lived a reasonably sheltered lower middle class existence all my life, I haven’t interacted with this end of personal finance. I wonder what else I’m missing out on, and I hope I don’t need to find out.

Image by alq666 

Jan

31

American sub-prime crisis: should the rest of us care?

Filed Under banking and economics | 28 Comments

lego townThis article will be featured in Home Finance: All you need to know about home ownership at rocket finance on Friday.

It should be no news to anyone that there is currently a sub-prime mortgage crisis in the good old United States of America. It’s been on the news, and in the papers for months already.

But, does it really matter to non-Americans? And if so, how?

what is a sub-prime mortgage?

In order to persuade a bank to lend an extremely large sum of money to buy a house, you generally used to need a few things:

  1. A sizeable deposit
  2. A verified income
  3. A house in mind, in fit condition
  4. A good credit score

In the olden days, it used to be almost impossible to get a mortgage without these things. But then, someone realised that there were likely to be people with deposits, incomes and satisfactory houses in mind, who just didn’t quite have a good credit score.

The idea was that you could offer them a mortgage at a higher interest rate than normal, to offset the greater risk of default. Then people who could afford to buy houses (they had enough income) wouldn’t be cut off from the mortgages they required. The sub-prime mortgage industry was born.

what went wrong?

Quite simply, more sub-prime mortgages holders defaulted than expected. There are various structural reasons for this, to do with mortgage backed securities and other financial products (for more information check out this explanation).

As mortgage holders defaulted, the people they owed money to had to write off lots of debt. This included British banks such as HSBC, who had a sub-prime mortgage unit Decision One Mortgage. They lost in the region of $945m and last February made their first ever profits warning (that they wouldn’t make as much money as expected).

Although the defaults had an impact, they haven’t directly had much effect over here as US sub-prime arms of British banks were generally small.

what happened next?

The number of defaulting mortgages was unexpected, and by this time, the money was owed to many different investors - particularly banks - forming part of their assets (a bit like buying a bond). They realised that they didn’t quite know how much liability they were likely to have, and what the return would be on their investments.

It is thought that this the caused banks to be more wary of making loans to each other, or make them at higher rates, as they were unsure of both there own and everyone else’s true financial position. In any case, credit is in short supply - a credit crunch.

has the credit crunch had an impact?

Yes. Most British banks raise their money for loans from the deposits of their customers, but not all do so. Some, instead borrow the money on the credit markets (effectively from other banks) and then re-lend it to members of the public.

As you can imagine, if it is harder or more expensive to buy money, but you are still lending it out, you’ve got something of a problem on your hands. Which is exactly what Northern Rock realised in September. They were forced to borrow from the Bank of England, which led to a short run on Northern Rock branches as lots of people queued up to withdraw their savings.

In order to prevent a panic (or something) the government announced that they would guarantee the deposits - Northern Rock pretty much had enough money to cover it all, but it would have been the end of the bank. This mess is still in the process of being fixed.

The other important but less obvious impact of the credit crunch is the general impact on the economy. Developed economies are somewhat linked together, and with increasing globalisation, if something effects one of the biggest world economies, it tends to affect everyone to a certain extent, especially if they are a major trade partner.

In addition, the financial sector is one of the powerhouses of the British economy, and this crisis directly affects them. This is probably one of the causes of the recent stock market slides.

any more bad news?

In a bid not to get caught out in the same way that the Americans have been, British banks and building societies are tightening their criteria for mortgage lending. People on the margins are finding it harder to get new financing. Having a good financial footing with low or no consumer debt is more important than ever, if you are trying to qualify for a mortgage. But then, it’s good practice to get rid of as much debt as possible before taking on a mortgage.

Image by yananine.

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