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.

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