Your guide to survival in 1996

It may not be a vintage year for personal finance, but there are good signs. Steve Lodge steers you through the opportunities and pitfalls

THERE'S A lot to look forward to financially in 1996. Most of the recent mortgage rate cuts will take effect from February. In the first few months of next year more than 2 million savers will each see up to pounds 14,000 unlocked from maturing Tessa accounts. More building society windfalls are expected to be announced by the spring, potentially earning millions of savers and borrowers pounds 500-plus each of shares or cash.

Price competition will continue among sellers of financial products such as PEPs. In the summer a million-plus National & Provincial savers and borrowers will get their payouts from the takeover by Abbey National. The 10 million with the Halifax will probably have to wait until 1997 for their windfall.

Of course it will not be all good news. This year may not have felt that good, but it has been an exceptional year for investors, with stock markets in the UK, US and Hong Kong soaring. Wall Street has led the pack, rising more than 30 per cent. Returns are unlikely to be as good next year, although for investors with strong nerves, Japan and south east Asia could be rewarding. On a more mundane but, arguably, more important level, interest rates on savings accounts are likely to be cut further.

Our table gives a view of how next year might work financially for various sets of people, and how last year might have felt. Below are some opportunities to resolve to take advantage of, and pitfalls to watch out for.

q The Alliance & Leicester and Woolwich building societies are strong tips for pounds 500 windfalls in the early part of next year. To obtain society windfalls generally, you need an account which makes you a member, therefore allowing you to vote on any change of status. To open a membership account with the Alliance & Leicester you'll need at least pounds 1,000. With that sum you can open a Tessa (only possible for those without Tessas) otherwise you will need pounds 5,000 to open a Bonus 90 or Bonus 180 account. The Woolwich requires less of a stake - pounds 500 in its Prime Gold instant access account.

q Interest rates on savings accounts face cuts in the New Year, so - bonus-hunting aside - don't keep building society and (especially) bank balances unnecessarily high. Variable-rate Tessa accounts with no penalties for closing can be worthwhile even if you don't think you will last the full five years required for the interest to be tax-free. After-tax rates are typically the best around. "It's a case of heads you win a little or tails you win a lot," says Charles Levett-Scrivener of the independent financial adviser Towry Law.

q If you can put money aside for five years or longer, consider PEPs and other stock market investments. The stock market should outperform a building society over five years, and a PEP is a tax-free, flexible way in. Trouble is, the short-term outlook is unlikely to be as healthy. Amanda Davidson, of independent adviser Holden Meehan, suggests spreading any money you earmark for a PEP over a number of months to reduce the risk of putting it all in just before a stock market setback, or even a crash.

q Expect more price competition on PEPs in the spring, traditionally a strong period for sales because the pounds 6,000 annual investment limit is on a fiscal- year basis. For example, M&G, one of the biggest investment companies, has already announced it will launch a new low-charging PEP in February that looks straightforward and good value. Direct Line, the low-cost motor insurer, is also launching a PEP. In addition, if you know the PEP you want, in many cases you may well be able to get it cheaper from a discount broker such as Chelsea Financial Services in London, or Premier Investments in Guildford, Surrey.

q Investors should start to focus on the approaching general election, which may mean a Labour government in 1997 or even earlier. Michael Hughes, head of economics and strategy at the City stockbroker BZW, says this means uncertainty for the UK stock market, and sees it as "a year to go abroad". Investment trust manager Fleming says political worries could lead to a 10 per cent setback for the stock market. Making use of existing tax breaks should be a priority in any run-up to a Labour government - PEPs, pensions and inheritance tax are key areas. Equally, you can probably feel thankful for any takeover offers for privatisation shares you own - you will almost certainly get a good price for an investment that might flounder under a Labour government.

q Japan and South-east Asia are many tipsters' favourite markets for 1996. Returns of 20 per cent-plus are bandied about by some analysts. Schroders' Far East unit trust, which invests in both Japan and Asia, is a favourite fund of Amanda Davidson. But be warned that these markets are very risky.

q Take your time deciding what to do with maturing Tessa money. Savers have six months to roll over a full pounds 9,000 into a new Tessa account and this may be with any building society or bank, not just your current Tessa provider.

For people wanting income from their savings, a corporate bond PEP might provide a suitable home for Tessa interest that cannot be reinvested. It may offer a higher income than a Tessa, although at the expense of fluctuating capital.

If you don't need the income, stock market PEPs should offer a better return in the longer term.

WILL IT GET BETTER?

1996 1995

Savers Interest rates to fall Rates fell, although N&P

further, but more society announced windfalls

windfalls coming and and C&G paid out.

Tessas start to mature.

Borrowers Mortgage rates lowest in Mortgage rates down,

a decade and housing but housing market

market may be on turn. stayed in doldrums,

Investors Returns likely to be lower Excellent year: UK up

generally, but Japan and more than 15 per cent;

Asia could be good US up more than

performers. 30 per cent.

Buyers More price competition Price cuts in PEPs, life

in PEPs; life insurance insurance, car insurance

cheaper. Shop around. and other products.

Consumers Tax cuts from April, but Employment insecurity.

continuing uncertainty

over employment.