H: Jayne Constantinis, host.
S: Steve Langan, Hiscox UK.
C: Charissa Gooch, ‘Working Wealthy’ Case Study.
H: Hello, I’m Jayne Constantinis and welcome to the Personal Finance Show. With the recession still evidently biting, it seems there is a crisis of confidence amongst affluent workers in the UK. Despite there more than 2.5 million UK house holds now classified as wealthy, the tough economic climate has left its mark on the spending habits on this group of professional workers, with a lack of confidence impacting their perceptions of wealth and their appetite for risk. But what does it really mean to be wealthy today? Well, joining me to discuss this and more is Steve Langan from Hiscox UK, the specialist insurer behind a new study into the working wealthy. Also joining Steve is Charissa Gooch, who as a professional worker is classified as one of the working wealthy, to discuss the to impact the recession has had on her spending. Welcome to both of you. Now Steve let me begin by asking you this... this term ‘working wealthy.’ Um, what does it actually mean? What does... what does being wealthy mean, these days?
S: Well wealthy, obviously is a relative term because I’ve never met anyone who thinks of themselves as wealthy, there is always someone else out there who... who appears more wealthy than you are but the absolute monetary definition of wealthy in today’s Britain is someone who earns on average £93,000 a year. Now that can flex up and flex down but it’s very much... these 2.5 million people are professional white collar workers in professional jobs, ah... middle senior management jobs and we can work through a very wide variety of businesses throughout the UK.
H: And that’s you Charissa. *Laugh*
C: Apparently so, yes.
H: How do you feel about the term ‘wealthy’? Is it something you feel comfortable with?
C: Well I agree with Steve, I think everyone’s perception of what is wealthy is very different. Urm... and whilst I recognise that, you know, I am very fortunate, in that I can afford to buy things and do things that I want to do. I certainly wouldn’t classify myself as wealthy or on the rich list so to speak. So I think it differs really, yes.
H: So tell us Steve about this report, the Hiscox Wealth Review and what findings did it reveal.
S: Right, well the £93,000 that I mentioned, that’s actually just the top 10% of people in the UK so it focuses very much specifically on a very small part of the UK. We did this report 18 months ago at the height of the boom market in January 2008 and at that point we found everyone was optimistic to the point of giddiness, were optimistic in terms of what they wanted to invest in, were optimistic in terms of the prospects of the future. Fast forward 18 months time and there couldn’t be more of a different picture that we are seeing out in the UK nowadays. Despite the fact that the working wealthy in the main have actually managed to either to hold on to most of their income or in many cases almost half those working wealthy... because of the reduction mortgage rates are actually technically wealthier than have been 18 months ago. There has been a complete collapse of confidence around that, which has been driven obviously by the big macroeconomic factors in the world today. So...
H: And, while we are talking wealth is it about income purely or is it about assets as well, is it a combination of the two, is it about disposable income?
S: It’s a combination of both those things. I think the other interesting thing that has changed in 18 months... over the last 18 months is in 2008 wealth was absolutely defined as possessions and cash. Wealth nowadays for the working wealthy, is assets and cash but it’s also wellbeing which is very interesting because it goes back to very origins of the word ‘wealth ‘which meant a more holistic view of wealth and that is a major, major change.
H: That’s very, very interesting. Now this word ‘confidence’ that keeps coming up time and time again, Charissa, how do you feel about your financial position and stability and so on?
C: I certainly... I certainly think that has been a shift. I mean, personally speaking a year ago... two years ago, I wouldn’t think twice really about buying certain things where as I am much more cautious, I would say now. My spending patterns have probably changed in that I don’t go out as much to eat, we’ll have friends over for dinner to socialise or, you know, I’m cutting back slightly on holidays and weekends abroad and I think you’re just very conscious of the cost of things more than perhaps I was you know a year, two years ago.
H: And is this a common pattern in among your peers and in your friends?
C: Yes certainly, I mean, I work in the legal profession and our profession as much as any has been hit by the recession. I’ve been very fortunate I’ve stayed in stable employed throughout the recession but I’ve got friends and family who have been impacted and they... they obviously, you’re conscious of the fact that finances may be an issue for them and you’re probably less conspicuous of your spending as well.
H: Mmm, that’s interesting, and Steve is it about job security, is that... what is at the heart of this crisis of confidence?
S: Well I think it is partly job security but you have got to bare in mind that there are over 90% of the working wealthy are still in employment relative to 18 months ago. So for the vast majority they are in good employment but it is... it is about the future, but it is about where they invest their assets, they invest their disposable income and where you can do that because it becomes much more difficult for people to realise good return on those investments say, as it was, 18 months ago. And I think in addition to that, you have then got is a general down grading of the notion of wealth in the psychology of the working wealthy which is something that we are concerned about because we obviously don’t want people to be under insured relative to the assets they have. But the psychological change in those 18 months is amongst the most marked I’ve ever seen in any research.
H: So there is something going on here with people not wanting to admit, almost, either to themselves of to others. You said Charissa that you are less conspicuous in your spending. What is... is there something going on in our society that perhaps wealthy is a not a desirable thing to have, perhaps.
S: I mean, yeah... I mean if you pick up the papers ever single day and the bankers tend to be at the top of flaying-ness if you like *laugh* but I do think there is a trickle down effect with people thinking ‘gosh, I’m actually quite wealthy’ but where as 18 months ago it was about, you know, fine art, fine wine, fine living. A lot of that is changing now people are looking at less risky assets to put into more, as I was saying earlier, more stuff rather than third party investments, stuff that people can tangibly hold on to and keep sight of.
H: You mentioned insurance, that’s obviously, you live and breathe that every day. So what are people doing then? Are they saving money by not insuring or just not insuring for enough?
S: Well, we see two things happening in the market at the moment, on the one hand people are quite rightly shopping around so they are actually getting the best value and the great thing about the market today is that there is plenty of provision out there for insurance and the internet through the aggregate sites allows you as an individual to check what’s available out there. What we are concerned about though is that people are just taking the cheapest option and they are thinking in line of the times, if you like, that people are actually saying ‘well that I’ll cut back on insurance.’ If you cut back on insurance you are invariably making a false economy because insurance is like everything else, you get exactly what you pay for and if it looks very cheap and looks too good to be true, it probably is. So you, certainly for the working wealthy, what you need is specialist insurance that understands the working wealthy, that understands how they collect their assets, invests their assets and therefore gives the best provision.
H: Is that something you can identify Charissa, you talked about less conspicuous spending but then Steve is also taking about people buying things that are of real value and will perhaps hold their value longer term rather than making slightly riskier investments. Is that apparent in what you can see?
C: I don’t believe I’ve probably bought more things, invested in that way but in terms of... I think you do think about where your money is going a lot more and you are saying about insurance you know I would be very careful that what I did own was adequately protected. But I certainly would be thinking am I getting, you know, value for my money when looking at buying things or taking out cover or that kind of thing.
H: I mean it has become almost cool now for people even who have quite a lot of disposable income to shop around. You hear about people shopping at the Pound Shops who could clearly afford to go to a big department store. There is a sort of movement, isn’t there, back towards thriftiness?
S: Well I think... is it thriftiness or I think is it just people getting a back to understanding value and I think 18 months ago the concept of value was a very ,thing in fact it’s not very cool to be seen that way and I think obviously, is this thing rebalancing and quite rightly, should rebalance into a point where people are looking more intelligently at what they do and how they do it. If you can get it, in terms of quality, just as good at Aldi then should go to Aldi but likewise, you know, it would be a false economy to spend your life shopping Aldi I think, all the time you know, there are things... you know it’s about intelligent approach I think, to risk.
H: Lets take a couple of questions, lets get one from Greg Jones which I think you have touched on but let’s have it again, if you wouldn’t mind. As the author of this report, what do you consider the meaning of wealth to be? Touch on the business of wellbeing again because that is really interesting.
S: I think it moves back to the origins of the word wealth and I’m a historian by trade so I’m going to put my hand up here on point at the moment but it’s an old English word meaning a much more holistic view of wealth and I think the best saying I’ve ever heard about wealth and I think it’s absolutely applicable today, is what Benjamin Franklin the 18th Century American said, well he said... well, and I’m kind of quoting I think; wealth is not... is not his that has it, but wealth is his who enjoys it. And his definition of wealth is holistic wealth. It was wellbeing, it was friends and family, it was your assets and possessions and things that you have acquired as a result of your success but it was a much more holistic view of it and I do think in the working wealthy that we are seeing a much more holistic view of what wealth means now a days.
H: Interesting, let’s also answer Edward Haile’s question which I was going to come on to. Let’s think about what the impact... he wants to know what the impact of this lack of spending is going to be on the individual but also on our prospects for getting out of this recession.
S: I mean, I’m not an economist but I follow the bones that everyone else does. I think what we believe you are going to see is a mini boom in the run up to Christmas with the low VAT levels but when that kicks back in the New Year and the new tax levels kick back in, even those who are not caught by those tax levels we will be... become even more prudent so I think 2010 is... it’s going to be very tough. I think people are going to be just as cautious, I think that psychology will still be quite suppressed and hopefully in 2011 will come out the back end of it.
H: Charissa, what would it take for you and your peers I’m sure that these are issues debated around your dinner table at home, what would it take for you to feel more confident about the future?
C: I think it’s really intrinsically linked to the job market, um, because it is people’s concern about holding down a permanent job. And um, therefore, you know how much disposable income do I have, and therefore, whilst, as I said earlier, you know I am in a good place, I have been able to hold my job down to date but you know, if things continue as unfortunately as you know Steve thinks they may have another debt next year and I don’t think anyone has ruled out that idea and if that’s the case then you know, we are faced with more redundancies more people loosing their jobs then it’s going to continue the element of caution we are exercising at the moment and the fear, if you like, um, that’s causing us to exercise caution more often is just going to continue, you know for the next while. I’m sure it will be something we see quite a lot amongst... well, certainly amongst my peers.
H: There is that sense of sort of battening down the hatches isn’t there.
S: There is a bit of that and I don’t think that’s necessarily a bad thing and I think it’s an understanding of what we have and what you hold, how much you value it, make sure that’s properly covered for an insurance point of view but from a broader point of view I think the approach is exactly the same.
H: We were just talking earlier about buying things, things of real value. We’ve got a question here from Alice, or a point. ‘If saving my money isn’t the best way to protect what’s mine what do you recommend I do?’ Sorry I know, it is slightly a different point isn’t it. ‘If saving my money isn’t the best way to protect what’s mine what do you recommend I do?’
S: Um, I’m not a financial adviser so I am speaking very personally here. No, I mean, I think it’s a case of spreading the risk. So there are some things you should take a punt on and some things you shouldn’t take a punt on. I think it’s an intelligent approach to that. Um, it’s about looking for the best returns, it’s being very wary of things that seem to promise the earth or have numbers in the shop window that suggest me thinking ‘gosh that looks too good to be true’ because again it almost most certainly is. So a prudent, balanced risk approach will usually pay dividends in the intermediate and the long term.
H: We often hear this term don’t we; ‘spending our way out of a recession’ You know that is at an individual level but also for the whole UK economy. What’s your feeling about that?
S: As you walk around these mass of shopping malls you think Britain is just a series of shops and businesses that service shops. There is some truth in that, I think in terms of retailing dynamics the UK is far and away the most advanced in Western Europe varied by contrast to Germany or Italy or France but there is only so far you can spend your way out of recession and I what will happen with this slightly down beat psychology we are seeing I don’t think it is going to take us much further than after Christmas, when VAT kicks back in, when the higher tax rates kick back in and again, I make this point I think that tax rates will materially impact those who are directly effect but will psychologically affect those who are close to that level which is the majority of the working wealthy.
H: There is something in that isn’t there, even if, as you were just saying, you haven’t been directly affected say, by redundancies but every time you hear that a friend or a an ex-colleague or what ever... it’s kind of chipping away at the confidence, isn’t it.
C: Oh certainly, yes, and, you know it’s very difficult times. I haven’t experienced a recession in my working life before and it has hit home quite hard, yes.
H: Have you done the thing that we were talking... you were talking about earlier, of sort of looking at your household bills including things like insurance, and say... and thinking where can I cut back, where can I make savings and actually go and talk to your providers?
C: Yeah, I think that we... I haven’t done a detailed assessment such as that but I am much more conscious of where, you know my money is going and what I am spending it on but, um, yeah I wouldn’t say that I have sat down and gone through each of my bills but it’s coming back to that same theme really. I say I exercise more caution over spending and I make sure I have a good understanding of you know, of where my money is going am I getting value for money.
H: Because of course, we are being bombarded aren’t we with offers of cheaper this, cheaper this, combined these utility bills and so on. Are you finding a lot of people are getting in touch with you and asking to...
S: Yeah, we are a bit and there is a kind of contrast with this as well which people are much less believing of so called experts because we believed the experts 18 months ago and looked what happened, the whole economy blew up in our face. So people are asking those questions but they are being much more sceptical around those questions as well which I think, again in the long term can only be a good thing, quite frankly.
H: And so, give us a picture of, if you can... I know you are not and economist you are a historian, you can quote liberally from another American presidents if you like, of what you... where you see things turning around next year you think is going to be bad again, when do you think this confidence will start to return?
S: I mean, I think turn around will be next year. I think as we speak, Gordon Brown is saying what he is going to be doing at the macroeconomic level but I do think those things have to happen, I do think there will be a crunch in the quarter half of next year and then I think at that point, we will gradually get ourselves out of it. I think the great thing... the thing that makes me optimistic about the UK economy is, it is the most diverse economy in Europe relative to other manufacturing economies and I do think that we are kind of entrepreneurial spirit that exists in the UK. Something like 93% of people in Britain work for small businesses. I mean, it is a small business economy, it is an entrepreneurial economy and even coming out of the redundancies we are seeing people starting up new businesses and therefore you can see already the real, deep roots of economy are beginning to kind of rock, even behind this difficult back drop.
H: But it’s interesting you say that because in the news recently has been that we are lagging behind in coming out of the recession.
S: Now are you are getting into deep economics.*laughs* If you look at the infrastructure, the real infrastructure in Europe economies it ain’t that sound. The Euro is helping enormously at the moment.
H: So final word Charissa if you would, about your attitude and how that’s going to be impacted by the recession, where’s the confidence going to come from?
C: For the time being, I think my attitude is going to stay the same you know, I’m going to exercise caution, I’m going to look at things that I buy, things that I invest very carefully before taking that step. I very much hope we emerge from the recession sooner rather than later because I think everyone accepts that you feel... it’s much nicer to feel positive about finances and to be in that... in those boom times when you know, we are fortunate enough to be able to sit there and think ‘well actually I can go on that holiday’ and I don’t have to worry too much about it.
H: And final word from you Steve about protecting the things that are important to you.
S: Make sure you don’t down grade the insurance for those things that you have. Don’t let it let if follow the general downward trend and the confidence levels. Make sure that you are properly insured, that who are you are with gives you the right level of cover for what you have and don’t pay too much for it.
H: Thank you very much to both of you for coming in to talk to me and I’m afraid that’s all we’ve got time for today. Thank you for joining us. If you would like to see a copy of the full 2009 Hiscox Wealth Review then you can visit the website which is Hiscox.co.uk/wealthreview. Thank you for watching. Bye bye.
