29 June 2010

Absolute Returns - for those interested in investment detail!

Many people with money to invest are really not interested in investing. If leaving your money in a savings account was at all viable over the long term then I think that many would go for that option. But the trouble is, as we know, (a) savings rates are poor, particularly at the moment (and over the long term they do little better than maintain their value against inflation), and (b) investments go up and down.

The big question is whether there is any middle ground. One possibility here is the growing range of "absolute return" funds. A good investment will tend to out-perform a market index such as the FTSE 100 - that's a "relative return". But out-performance may just mean it doesn't fall as far, but you still lose value which is not good if you were planning to spend that money shortly, or if your financial plan assumes a constant increase in value. Absolute return funds, on the other hand, aim to keep on going up, whatever the markets are doing.

Of course, that comes at a price, and when markets are rising you would not generally get such a big increase in value. And it is still an investment after all, so all the funds that I know of still have the possibility of falling in value - absolute return is an "aim" not a guarantee.

There are lots of different ways of achieving an absolute return, some more complicated than others. A recent survey (Citywire) identified 11 different strategies. The general rule of diversifying your investments would apply here, too, so using more than one absolute return fund with different strategies would make sense.

Other general rules of investing also still apply - funds should be selected with the investor's attitude to risk in mind, and with an eye on asset classes, too.

Not More Budget Stuff

I certainly haven't ignored the recent Budget - it was one of the most significant ones recently for financial planning. However, I have summarised it's importance elsewhere - see the home page of the main website - http://www.primetimefinancial.co.uk/ for that.

It's also covered in our new printed newsletter which has just been sent out. Let us know if you would like a copy - www.primetimefinancial.co.uk/contact-us

21 June 2010

Reality Revealed - Public Sector Pensions

I'm glad to see that public sector pensions are into the news. They need to be! We have moved on from thinking about "classes" in society (working class, middle class, upper class), but we now have a two-tier society - those with a public sector pension and those without.

That may be a bit harsh since the various public sector schemes do vary from each other in terms of how valuable they are, but I certainly believe that public sector employees are generally unaware of the value of what they have, and of the cost to the rest of us!

The BBC's Stephanie Flanders has provided a great analysis of the current situation:
www.bbc.co.uk/blogs/thereporters/stephanieflanders/2010/06/some_of_the_truth_about_public.html

These are the key points from that blog (and elsewhere) for me:
  • Most public sector pensions are "unfunded" - in other words it will be down to our children's taxes to pay for the pensioners in years to come, depending on how many pensioners there are (the exceptions are the local government scheme and the MPs' scheme)
  • The greater the number of people in the public sector and the higher their wages the more the schemes are self-funded (i.e. by today's public sector workers' pension contributions paying today's pensioners)
  • The shortfall in funding has to be picked up by the Treasury (that means the rest of us who pay taxes), so, reducing the number of people in the public sector will actually make that aspect of public finances worse!
  • It's not fair (or contractually possible) to change employment benefits that have already been accrued by staff (and certainly not fair to pensioners already receiving a pension!) so the cost of funding public sector pensions will unavoidably increase massively whatever we do due to the large number of those who joined the public sector 30-40 years ago now retiring
  • That liability would - if bought on the open market rather than being guaranteed by our taxes - cost around £26bn in a year (according to the recent Office of Budget Responsibility report)
  • And the benefit to public sector employees? - a public sector pension could be worth an additional 30% - 40% on their salary - that would be the "real" cost if it were paid for up front like private sector schemes must be

11 June 2010

Savings for Children

One approach to putting money aside for children is to use the "Designated Account" method.

You could, of course, simply have in your own mind that a particular savings or investment account is destined for a child or grandchild. In some cases it will be possible to record that fact by having a "designation" on the account - just a second name for it, really. But the account will be taxed as yours - the investor - because it really is still yours!

On the other hand, if you make the designation "irrevocable", then you are creating a trust - a "bare" (or "absolute") trust to be strictly correct. The provider of the investment account needs to know about it, because the child is the beneficial owner, and when they reach 18 they will become entitled to it.

Because you - who provided the money for the account - do not have any access to it (you cannot surrender it) you have no tax to pay. (It is a gift for Inheritance Tax purposes, but in most cases it will be exempt.)

The mechanics will vary but an account provider should be able to help.

7 June 2010

Useless Financial Products

Which? Money Quarterly has come up with an interesting list of its top ten useless financial products. Here's what they think, with my comments ["PTF"] where there is anything worth adding! I'm very glad that they recommend going to an independent financial adviser for expert help.

Mobile phone insurance: Most people are already covered by their home insurance

Extended warranties: These are too expensive to ever be worthwhile. Cost: Up to half the cost of the product itself
[PTF comment: I always think that the harder someone tries to sell you something the more important it is to them to sell it - and less valuable to you! - certainly agree with that one]

Structured products*: Can be confusing, complex and costly - put your money into an Isa
[PTF comment: Care is certainly needed - there is more awareness these days on the "counterparty" who backs the product - but I don't agree that they are useless products - they have a place in a larger portfolio at least]

ID fraud cover: Most losses will be met by your bank

Payment protection insurance: Choose income protection, and avoid over-priced PPI
[PTF comment: yes - Income Protection is the most under-used life insurance - it replaces (some of) your income if you are ill - essential unless your employer pays out generously. That way YOU can decide what payments to keep up.]

Secured loans: Are risky - only take out unsecured loans

Store cards: Have high interest rates - try a Which? Best Rate credit card instead

Debt management plans: Ditch this expensive product and get free debt advice from CCCS, the National Debt Line or your local Citizens Advice Bureau

With profits: Can incur high charges, so invest your money in stocks and shares Isas
[PTF comment: I would tend to avoid With Profits plans for a new investment / pension (although there are still a handful of good products around). The case is less clear if you have such a product already - worth reviewing at the very least.]

Packaged accounts: Often not worth the money, so replace with a Which? Best Rate current account

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