The UK economy fell into recession at the end of 2023, new figures released today show - but what does this mean for your personal finances?
A recession is defined as two consecutive quarters - so two three-month periods in a row - where gross domestic product (GDP) declines. GDP is a measure of the size and health of the economy. When there is a recession, it generally means there is less money being pumped into the economy and people are spending less.
This can lead to employers cutting their hours and reducing their workforce. It could also mean less chance of a pay rise and fewer jobs available. In terms of borrowing, businesses may become stricter when deciding to lend money out - which means you could find it harder to get a mortgage or credit card.
In an update today, the Office for National Statistics (ONS) revealed GDP shrank by 0.3% between October and December 2023. This followed a decline of 0.1% between July and September 2023, therefore meeting the technical definition of a recession, as we've had two quarters of negative growth. However, the data released today is just an estimate and can be subject to revision.
What to do with your savings
Savings rates have made huge improvements over the last year - and the good news is, there are still deals that pay above the rate of inflation, which is currently sat at 4%. Ideally, you should look to have three to six months' worth of essential expenses put away.
Always make sure the savings account you pick is covered by the Financial Services Compensation Scheme (FSCS). This scheme covers cash up to £85,000 per financial institution if the bank or lender goes bust.
The highest easy-access rate right now is 5.15% from Coventry Building Society, although keep in mind you can only make three withdrawals a year - after this, you're charged 50 days' interest of the amount withdrawn. Cynergy Bank, Leeds Building Society and Close Brothers all pay 5.1% and there are no withdrawal restrictions.
If you want to lock your money away into a fixed rate account, you will get a bigger return compared to regular easy-access accounts - but you can't make withdrawals whenever you like. Do keep this in mind, in case you may need to access your money in an emergency. You may not necessarily want to put all your savings into a fixed rate account without having a buffer elsewhere that you can access. The top fixed-rate account right now is from SmartSave and pays 5.21% fixed for one year.
Regular saving accounts pay the best rates - but you're normally limited to how much money you can save each month. For example, the linked Santander Edge Saver pays 7% on up to £4,000, though this includes a 2.5% bonus for the first 12 months.
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What to do with your mortgage
Mortgage rates remain higher than they used to be, following 14 consecutive base rate hikes in a row by the Bank of England. According to Moneyfacts, the average two-year fixed rate stood at 5.63% yesterday, while the average five-year fix was 5.26%.
If you're on a tracker or SVR mortgage, and you know your current rate, you can see if you could save money by switching to another deal. You should first look at what other deals are out there by using a free comparison website.
Next, speak to a mortgage broker, as they will have access to deals that are not available on the open market. It is then worth talking to your current lender to see what they can offer you. Getting a new deal with your existing lender is known as a “product transfer”.
Once you’ve compared all the different options available, take note of all the important bits of information about your current deal so you can get an accurate price comparison. This includes your current rate, the terms and length and any exit fees, as well as your loan to value (LTV).
For anyone coming to the end of a fixed-rate mortgage, you may find the deals on offer now are substantially more expensive compared to what you're paying now - therefore, it is best to start looking for a new deal as soon as possible.
Some lenders let you lock in a rate between three to six months in advance. Again, you may want to talk to a mortgage broker who can track down the best rates. If your fixed-rate deal isn't going to end soon, then you'll need to factor in any early exit penalty fees to work out if you'll be better off leaving now.
What to do with your debt
If you're struggling with debt, it is important to seek free help as soon as possible. Don't bury your head in the sand. Talk to one of the following organisations:
- Citizens Advice (0800 240 4420)
- StepChange (0800 138 1111)
- National Debtline (0808 808 4000)
If you've got credit card debt, see if you can apply for a 0% balance transfer card. This means you'll move your existing credit card debt onto a new card and pay 0% interest for a set period of time. By not paying expensive credit card interest, you'll become debt free much more quickly and save money.
These cards need to be used responsibly though - don't spend with them or withdraw money - otherwise you'll likely be charged fees and interest. You need to make sure you can pay off all your debt within the 0% period, and also see if there are any fees involved.
The longest 0% balance transfer card available right now is from Barclaycard, where you could get up to 29 months interest-free for a 3.45% fee. But you might not need the longest length card - there might be a shorter period that gives you enough time to pay off your debt but without a fee. NatWest offers 13 months at 0% and with no fee.
Typically only those with top credit scores get accepted for the best 0% balance transfer cards - or you might get accepted but not for the longest rate. MoneySavingExpert.com has a 0% balance transfer calculator which carries out a “soft credit search” and won’t be seen by lenders. Remember that all credit cards are another form of debt - so always make sure you can afford to make your repayments within the 0% period. After this, you'll start to be charged expensive interest rates.
To cut your overdraft costs, you should first see if you can switch to an account that offers a 0% overdraft. You could also look at a 0% money transfer card. These are a type credit card that pays cash into your bank account, for a one-off fee. You can then use this money to pay off a debt, such as an overdraft, or as a cheaper way of giving yourself a "loan" if you absolutely need to borrow.
During the 0% period you won't pay any interest, though you must pay at least the minimum repayment - ideally more if you want to get debt-free quicker. The longest card right now is from Virgin Money, where you can get 12 months at 0% for a 4% fee. Again, remember that all credit cards are still a form of debt and must be used responsibly.
For unsecured loans with a high interest rate, you might be able to save money by taking out another loan with a cheaper rate to pay your current one off. The idea is that you're using a cheaper loan with a lower APR to pay off the existing loan.
But a word of caution - use a free online loan calculator first to check how much you'd pay overall for both loans you're comparing - and always be wary when taking out more debt. Check as well if your existing loan provider will charge you for paying off your debt early.
If you have multiple debts - and the above methods that involve 0% interest don't work for you - you could consider consolidating all your payments into one loan so you're only paying one company. However, you need to do your research first - and always seek free advice from one of the agencies we've mentioned above before you take any action.
There can be huge fees and charges involved, so it is important to know exactly what you're getting yourself into - and taking on debt to pay off other debt isn't always the right route. Longer debt consolidation loans can spread repayments to make monthly payments more affordable, but as you're taking longer to pay off the debt, this means you'll pay more in interest in the long run.
Secured loans should only be considered as an absolute last resort - and rarely are they the best option. Some loans will be secured against your home, so if your situation changes and you miss payments, your home could be taken away.
What to do with your pension
Keep paying into your workplace pension or private pension if you can. You are auto-enrolled into a workplace pension scheme if you earn over £10,000 a year, are over 22 and below state pension age.
A minimum of 8% must be paid into the pension, with you contributing 5% and your employer paying at least 3%. Your contribution is deducted from your salary. Many people may be tempted to stop paying into their pension so they have a bit more immediate cash, but it means you'll have less income in retirement.
If you have private pensions, you might want to consider keeping them diversified so your money is spread out during volatile periods. For example, this could be company shares, property and bonds.
