17 December 2009

Motorways and the Meaning of Life

I was driving down the motorway the other day wishing I could go faster, when the question struck me … Why do I want to go faster, anyway?
After you have been driving for a while it’s easy to get fixated on the speed (bear with me if this doesn’t apply to you!!), because you want to go as fast as possible.

But actually the goal of most journeys is not to go as fast as possible, but to get somewhere, safely and, yes, as soon as possible. And there are other ways of arriving sooner, like choosing a better route, knowing where you are going, or – best of all – leaving earlier! Speed is not the goal.

The same applies to your finances – particularly in retirement. You can get fixated on the performance of an investment – is it growing as much as it can? … could it be giving me some more income? Should you try to find a better interest rate? etc., and you end up serving your money.

So here’s a little reminder... Money is not the goal.

So what is the goal? Well, living the life you have chosen for yourself is. Whether or not you set goals or targets for your life isn’t the issue (“Millionaire by the age of 30” – that sort of thing). But the fact is there are things in life which you want to do, which you find enjoyable, fulfilling, and so on. And at best, Money is a tool to achieve the life you want.

So don’t let any financial adviser (including me) tell you that you cannot surrender an investment when you need it, because its value is down; or that you must invest for at least five years even though you would be happier knowing you had access to it.

Remember - Life is the goal – Money is a tool to achieve the life.

23 November 2009

Thanks, Grandad!

NOTE: Since publishing this post, Child Trust Funds have been replaced by Junior ISAs.

If you are currently retired, then you are in what has been described as the “golden age” to be retired. Whether it feels like that or not, there are certainly some benefits available now which weren’t in the past, and others which won’t be in the future.

Health – therefore length of life – has improved greatly in recent years. To illustrate the point – in 1911 there were only 100 centenarians in the UK; but in 2008 there were 9,600. (I don’t think the Queen still sends out a telegram does she? Otherwise she would be very busy!) That results in a better quality of life in retirement now than in the past.

Secondly, the present generation of retirees have (on average) a better income than future generations are likely to have. And if it doesn’t feel like that to you, imagine what it will feel like to future retirees without much of a pension plan, and a state pension reducing in value!

What this all means is that some people in retirement are in the fortunate position of wanting to pass on their wealth to future generations. Often that means grandchildren heading for university, or looking forlornly at raising a large deposit on a house.

So what are possible ways of passing on money, tax-efficiently? Well, without going into the details, here are some ideas.

1. Child Trust Fund
Children born since 2002 are given a voucher for £250 to invest in a CTF with an extra payment of £250 made at age 7. This can be added to each year by other people (like grandparents) up to £1,200. CTFs are tax-free like ISAs, and the money is available to the child at 18, although admittedly this approach won’t go far towards a house.

2. ISAs
Always worth considering, but a child cannot have a cash ISA until age 16 (18 for a stocks and shares ISA). So the grandparent would have to consider their own ISA as being for the child.

(See my blog on Limited Offer by HM Government for more on tax-efficient saving.)

3. Trust Arrangements
Various types of investment in trust are possible, including “Bare” (where the child is entitled to the value of the investment at 18), or “Discretionary” (where some control may be retained). Tax treatment is dependant on the type of investment and needs careful consideration.

4. Children’s Bonus Bonds
National Savings & Investments provide this tax-free investment. It’s for a 5 year fixed term, and the current issue gives an interest rate of 2.5%. See NS&I Children's Bonus Bonds.

15 November 2009

High Finance, Low Finance

Most of my time as a financial adviser is spent with investments, pensions, mortgages, and so on. Apart from the fact that I can make a living at doing that, it can be very satisfying helping someone organise their finances to achieve their goals, or have themselves a better life in some way.

That may mean:
• Increasing income from investments
• Helping people to see that they can afford to spend more
• Increasing what will be left to family by reducing the likely Inheritance Tax bill
• Enabling a house move with a new mortgage
• … and so on

But that satisfaction can also be achieved at the other end of the market – those with little in the way of assets. I attended a training course the other day which was about helping people to budget. The process of doing a simple household budget is not always easy for people, and yet it can potentially have an even bigger life impact than advising on investing a sum of money.

The concept of a budget is foreign to many people, perhaps especially to those who need it most – those who have low incomes and many demands on their money.

Wouldn’t it be good if basic finances were taught at school instead of … well, fill in your own subject to drop from the curriculum there. But the point is that it is a key life skill which many never acquire, and so end up in debt, encouraged by those who want to lend to them at high rates.

My two regrets are (a) that those who need help sorting out a budget do not tend to seek advice until things are going wrong, and (b) in spite of the satisfaction available, it is not an area which helps a financial adviser make a living! Nevertheless, I hope to be able to make use of that training course from time to time. There's plenty who need it.

2 November 2009

Don’t Pay Tax! … if you don’t have to

The National Audit Office has estimated that around 3.2 million older people do not claim available tax allowances. Average income could be boosted by 4% they reckon.

That includes around £200m too much tax paid because people did not have savings income paid gross when they were entitled to.

Here’s a link to use, including one to the R85 form which will get you tax-free savings income (if you are entitled!).

Reminder: This is not personal advice - you should take your own advice from a qualified financial adviser before making any decisions. Information given is my personal opinion and not that of any organisation I am connected with.

31 October 2009

Liberate your Wealth – Equity Release

What we are talking about here is raising some money by using the value in your house. Why might you want to do that? Well, you may want to do some home improvements, or to help your family out, or simply increase your income. All these are possible.

In the right circumstances it seems to me to be a great solution. There really is no point living in poverty in an expensive house which you own but cannot benefit from.

In the past, Equity Release has had a bad name, let’s admit it. But these days it is fully regulated; advice has to be given by advisers with a specialist qualification, and companies who operate in this market are mostly members of the trade organisation – SHIP – who have their own requirements to be followed by members.

It shouldn’t be the first thing to consider – moving into a smaller house may give a better result, and leave your family with more of a legacy, for example. And you have to bear in mind that raising a sum of money may have an impact on state benefits.

There are two basic approaches – with Home Reversion Plans you sell your house but have the right to live there for as long as you want. While Lifetime Mortgages are just that – a loan secured against your house. You do not have to pay interest each month, because it gets rolled up, thereby increasing the loan. It is paid back after you die or move out when the house must be sold. This reduces the value of what you would otherwise pass on to family.

Depending on your age, with a Lifetime Mortgage, for instance, you may be able to borrow between 20% and 50% of the value of your house. If you want an income, you would take it a bit at a time rather than as a lump sum, so that the outstanding loan doesn’t grow so fast.

Reminder: This is not personal advice - you should take your own advice from a qualified financial adviser before making any decisions. Information given is my personal opinion and not that of any organisation I am connected with.

28 October 2009

6 Simple Ways to Reduce Inheritance Tax

Of course, you may not expect to have an Inheritance Tax (IHT) bill at all. But if you think you might have, and if you don’t want to rely on the Conservatives (a) being elected, (b) doing what they say they will (increasing the IHT allowance), and (c) doing it before the end of your life(!), then here are some ways to reduce a future liability.

The tax is a hefty 40% so is worth avoiding if possible (yes, tax avoidance is legal – it’s tax evasion which isn’t!). And the big problem on this (arguably immoral) tax is that it applies to gifts made up to 7 years (or even 14 years in some cases) before you die. So if you receive a gift from someone who subsequently died, the tax man may may come to you and ask you to pay 40% tax on that gift – even if you’ve now spent it. Not good! But getting off my soapbox …

  1. Nil Rate Band – this is currently (in 2009/10) £325,000 per person. Up to this level of assets you have no IHT worries. What’s more, if you are widowed, you will probably be able to use your late spouse’s Nil Rate Band as well.
  2. Annual allowance – You can give away up to £3,000 per year (reducing your estate’s value) without paying IHT.
  3. Small gift allowance – In addition, you can give as many small gifts up to £250 as you like, provided they are to different people, and they don’t overlap with the Annual Allowance.
  4. Gifts on marriage – allowances if you are related in certain ways to someone getting married.
  5. Regular gifts out of income – If it can be shown that you have been making a regular gift which is (a) part of your normal expenditure (is “habitual”), (b) is made out of your income (not out of capital), (c) allows you to maintain your normal standard of living, then it would not be liable to IHT.
  6. Gifts to charities, or in “the national interest” – not liable … simple; as is the case if you die on active service (yes, IHT applies to the young as well as the old).
Those are the simple things you can do to reduce an IHT liability. Beyond that it starts to get a little more complicated, with various sorts of trusts, for example, and/or loans which create a debt on your estate, including Equity Release plans. They are certainly worth looking at if you need to, but that’s for another day.

Reminder: This is not personal advice. It is my personal opinion and not that of any organisation I am connected with. So there.

12 October 2009

Limited Offer by HM Government? – Buy Now!!

There’s no doubt that UK finances are under pressure. With all the support given for banks, and with falling tax revenues due to the recession, public finances will be in a right state for years to come.

Politicians will continue to debate cuts without doing what’s needed soon enough (as usual). But undoubtedly the pressure is to increase taxes.

While it is always possible that legislation will apply retrospectively, it is certainly best to take full advantage of any tax breaks which are available here and now. So here’s a few which you should be considering before they (maybe) disappear:

  • Use your ISA allowance – while you pay into an ISA out of taxed income, income is free of income tax, and growth is free of capital gains tax (but watch out for Inheritance Tax). I haven’t heard any hint that this tax break is going to be removed, but it is wise to use it up to your annual allowance anyway. The only exception might be for older people (life expectancy less than, perhaps, five years); since ISAs have to be sold on your demise (they cannot be transferred to anyone else) and the markets might be down when your executors are forced to sell, alternatives may be better.

  • No more Tax Free Cash? – when you start taking a pension income, you are typically entitled to a tax free sum (25% of your pension pot in a money purchase scheme, different for final salary). This is now called a “Pension Commencement Lump Sum”, and while it is still tax free at present, does that change of name herald the removal of its tax free status?

  • Pension contributions – these currently qualify for basic rate tax relief, with HMRC “returning” the basic rate tax you have paid to the pension provider to add to your investment. Even if you are not an earner or are already receiving a pension but are under 75 you can make a contribution and take advantage of this. Higher rate relief is also currently available, making pension contributions particularly tax-effective for higher rate taxpayers. There are, though, limitations on relief from April 2011; is that the start of withdrawing this tax break? It has been suggested that it is: Telegraph. Within the limitations, it is best to make pension contributions sooner rather than later, particularly for higher rate taxpayers.

  • Gift Aid donations – these work similarly to pension contributions (believe it or not). The charity reclaims the basic rate tax, the giver can reclaim any higher rate tax. Use it while it’s still there!

  • Capital gains tax increases? – CGT was reduced in 2006 to a flat 18% (in most circumstances). This means that investments (including property) that are subject to CGT can be better than those subject to income tax. That looks to me like an opportunity for a cash-strapped Chancellor to claw back a bit of tax. Realising capital gains sooner rather than later looks like a good plan – and preferably within the annual CGT allowance.
Of course, there are always ways of being tax-efficient in your affairs, but these are some of the ones which may be particularly vulnerable to taxation changes in future.

28 September 2009

An iPhone or a Comfortable(-ish) Retirement?

One of the roles taken by financial advisers is to arbitrate between two people - the client when they are in retirement, and the client today. That's because many people will spend money today without giving a thought to providing for their retirement.

Let's face it, a new phone now is far more important to most people than being above the poverty line in twenty, thirty or forty years time.

There's no doubt that pension income will be squeezed in years to come. The amount of help from the Government in the form of the State Pension is unlikely to increase, while the state retirement age certainly will, meaning longer working lives. That's simply because the country cannot afford the status quo (politicans are reluctant to take this on board, but it is certainly the case) - but that's a whole other topic.

So we are left with making sure that we have made our own plans for a pension income, either from employer schemes or from personal contributions. With ever-changing employment patterns the most reliable way is to have a personal pension plan.

If you pay for an iPhone or its successor on a monthly contract throughout your life (say £40 per month starting at age 30), you will have paid around £20,000 by the time you retire (let’s ignore inflation here). If, instead, that money goes into a pension plan then you will have secured an income of perhaps £3,000 per year. Not much, but at least you will be able to run a car!

Now, I'm not against iPhones (or eating out every night, or having two expensive holidays a year, or anything else that you can afford and which gives you a good standard of living today), but I am against depriving somebody – you in retirement - of the basics of life.

If you have read this far then I guess you are not one of the 15% of the population who have given no thought whatever to retirement planning. But you may be one of the 31% who are relying on an inheritance to fund their retirement (numbers from Friends Provident). The message is: “there is a better way”!!

22 September 2009

Structured Products and Artificial Christmas Trees

Our children used to enjoy the annual trip to buy a Christmas tree. But realistically, artificial ones do have some advantages even though they don’t smell like the real thing.

Structured Products are a class of investment products with the same feel to them as artificial Christmas trees. They are offered by a range of providers, and the key thing about them is that the return you get (whether as income or capital growth) is in some way dependent on the performance of an index, such as the FTSE 100. They will also have a fixed term before maturity.

As such, you are not generally investing directly in the underlying assets (and you may not know what that is - although it’s worth finding out), and you are dependent on the good services of the product provider (and anyone else they partner with) to provide the security of your money. That’s why it doesn’t smell like the real thing.

Having said that, they do provide some insulation from exposure to the stockmarket, and so are a suitable next step up from deposits in some circumstances.

Just to give you a flavour, Structured Products include:
  • Income products, which continue paying a pre-defined income unless the FTSE 100 falls below a certain level
  • Growth products, which promise a certain return unless an index falls below a certain level
  • “Kick out” plans where the product matures and gives you a pre-determined return at the end of year 1, or year 2, or … if an index has grown sufficiently.
There are a different set of risks in investing in these products – arguably less than investing in equity-based unit trusts, for example. So it pays to do your research, particularly to know who gets their hands on your money – the “counterparty”.

If an artificial Christmas tree does the job, and doesn’t drop any needles, it may be worth a look – just like Structured Products.

Here’s one place you could take a look: Structured Products list
Update August 2010: This page no longer includes Structured Products.

15 September 2009

My Name's Bond

It gets pretty confusing when you talk about “bonds”. The trouble is that “bond” doesn’t mean much more than “investment”. Although to be a bit more precise it’s an agreement to pay a sum of money, with or without interest, on a certain date.

So some savings products are called bonds, because they have a fixed duration and fixed interest rate. Also insurance companies offer “insurance bonds” (which do not, actually, fit the definition). But here we shall be talking about “corporate bonds”, and we are considering these because they are, in some cases, an alternative to savings products.

Corporate bonds are investments (the “bond” bit) which can be bought from companies (the “corporate” bit). The agreement is that the company will pay a fixed interest rate for the life of the bond – which will be a number of years – and then repay the original capital on maturity (provided the company is still in existence). So corporate bonds fall into the “fixed interest” category of investments, along with others like Government gilts.

Most retail investors – that’s you and me – will buy corporate bonds via unit trust funds (or OEICs) where the fund manager buys a range of different companies’ bonds. For that reason, the interest paid out of the fund is not fixed as far as the investor is concerned – all very confusing!

So why am I talking about corporate bonds as an alternative to savings? Corporate bonds are generally very reliable in paying their interest, and in returning the capital value at maturity. They are generally pretty stable and unexciting as investments – just what you want when looking at alternatives to savings.

The irony is that, due to the upsets in credit markets, corporate bonds have been rather more exciting recently. Interest rates (or “yields”) have been unusually high (10% or more in some cases), and the capital values have been rather more volatile than usual, too.

That all goes to emphasise that values can rise as well as fall, as can yields. That’s why I describe them as a step up from savings. But provided you are willing to take a touch more risk (now there’s a big subject to cover), then corporate bond funds may be for you. They can be included in the stocks & shares component of an ISA, too.

2 September 2009

Losing Interest

If you have looked at the interest rates available for savers lately, then you will know that they are not much to write home about. If it’s any consolation – and I don’t see why it should be – then you are helping the banks and building societies to “rebuild their balance sheets” following the effects of the Credit Crunch.

Whatever that means, it’s costing us dear, and it’s a particular problem for those in retirement who rely on savings for some of their income. That’s because the bills the income is there to pay never seem to go down in quite the same way.

So what can you do? The first thing to say is that you should always keep some money readily available for emergencies, even if that means accepting very low interest rates. How much to keep will depend on your lifestyle – how reliable your income is, and how regular your spending patterns are – but it seems to me that somewhere between a quarter and a third of your annual income is usually about right. With current low interest rates you might feel like erring on the side of less rather than more, though, and keeping just that basic mimimum in a savings account.

If that amount really is going to be readily available, then there’s not much you can do as an alternative to low savings rates. So be prepared to search around a bit to find the “least worst” – there are some well-known websites which will tell you the best interest rates available. Don’t get tied in for long periods, though – you don’t want to be sat with a blown-up boiler (or even with the opportunity of a great holiday), waiting for your savings to become available!

A bigger question is what to do with anything beyond that basic minimum. It is certainly worth working to find the best home for additional money. I’ll be looking at a couple of options, although they require a step up from savings.

31 August 2009

What this blog is about ... and what it isn't

If I said I find money exciting you might get the wrong impression!...

So let me just say that our finances are an important part of our lives, and I am very keen to see myself and others taking full advantage of our financial circumstances. What comes first at every turn is life in all its fullness, and our finances should be a servant of the life we want to live.

The trouble is that many people end up being confused, bored or annoyed by financial stuff. Then they don't give it the attention it needs, and end up losing out.

That's what this blog is about. I don't promise to make everything exciting, and I don't expect to suddenly make you rich, but I can at least give you some pointers to take full advantage of what you have. Plus, I hope that that information will be interesting to read. My aim is that you will end up with a better chance of turning your life goals into reality. And if you haven't defined your goals, perhaps it will just help you enjoy life more!
So the blog is about practical information for personal finances.

What it is not about is personal advice. I am an independent financial adviser, authorised to give advice in a number of areas, but only based on a full understanding of someone's personal situation. That is clearly not possible in a blog, and nothing in this blog or in any replies I may make to readers' comments should be construed as personal advice.

Happy reading!! .. and do let me have your comments.

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