23 July 2010

Good News - Banks Fail Stress Tests!

Stress Testing the Banks
Seven out of the 91 European banks which were stress-tested failed those tests. So what are the stress tests and why is that good news?

The tests pose several scenarios, like "What if a country like Greece fails to repay its debt? Where does that leave the banks? Which of them are exposed to that debt and have to call on their own capital?"

The big problem we are all suffering from in the financial world is ongoing uncertainty. If the European regulators had said "everything is fine - no need to worry", no-one would have been sure whether to believe them - so more uncertainty. But at least now we have some hope that we know where the problems are.

Five of those banks are in Spain, one in Germany, and one in Greece.

20 July 2010

Annuities – The Product you Bought But Never Heard of

At the time of your selected retirement age, insurance companies will send out some information to holders of money purchase pension plans. This gives information on the pension income available from your fund.

Recent rule changes mean that the option of taking your pension money to another pension provider must be stated (the “Open Market Option”). In reality the easy route for most people is just to tick the box and take an income from the same insurance company. That suits the insurance company, since, apart from anything else, they will take a percentage of your fund for the privilege of setting up your pension. What you are actually doing is buying an “annuity”.

An annuity is a financial product like any other but for some reason our regulators do not require any advice at this vital stage of life. As a result, by just ticking the box, many people are getting the second or third best option. Annuities seem to be viewed by the Financial Services Authority as risk-free, but that certainly isn’t the case. It is possible to buy a totally inappropriate annuity – perhaps with no provision for a spouse if the purchaser dies first, or perhaps with no allowance for a reduced life expectancy for someone who has health issues (which could get you a higher income).

Currently, Government more or less forces everyone to take an annuity at some stage (this is under review, but any change may only be useful to the most wealthy pensioners). If they are doing that, then the least the FSA can do is to make sure people know what they are buying and take a conscious decision. Isn’t that what the FSA exists for?!

More on annuities and other retirement income at http://www.primetimefinancial.co.uk/retirement-income-info

19 July 2010

National Savings Withdraws Savings Certificates from Sale

From today, National Savings & Investments (NS&I) are pulling their Savings Certificates from sale. That includes the Index-Linked variation which were helpful in protecting against inflation.

It's a sign of these volatile times really. As a government agency, their mandate is to match inflows of money against outflows (within reason - and that means within £2 billion!!), and their various products have proved too popular, so there has been too much money coming in. It's easy to guess why that might be - even with unattractive interest rates (not that 2.5% tax free was too shabby) the attraction was government-backed security.

The result is that the search for good returns on savings remains difficult.We'll shortly be launching our "Campaign Against Lazy Money" to help address this.

6 July 2010

Lifetime Cashflow Planning

I'm getting excited about this - it's the ability to map out your cashflow for the rest of your life (in broad terms, of course). There are big questions which people ask (or perhaps they don't but should do), including:
  • Is my money going to run out before I die?
  • Can I afford to spend a bit more?
  • Am I saving enough for a reasonable income in retirement?
  • Is there going to be a big Inheritance Tax bill for my estate to pay?
  • What will happen if I need to pay for long term care?
By looking at expected income and expenditure, growth on investments, and the result on the value of your assets you can start to get some answers.

There are some nice software tools around which can help, but they do tend to be a bit more complicated than I think is needed, and more expensive! A simple Excel spreadsheet version should do the job quite nicely. Watch this space!

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