23 December 2011

Pay Less Inheritance Tax!

The majority of us give to charities during our lifetime. But only around 7% include charities in our wills.

From April 2012 there is an added incentive to do that, particularly if you will have an Inheritance Tax (IHT) bill to pay. That's because if you give at least 10% of your estate* to charity, the IHT tax rate will be reduced from 40% down to 36%.

Practically speaking, your will can be worded to refer to a percentage (10% or more) to ensure that it meets the threshold. You could reserve a suitable sum of money with a whole of life assurance policy, or another investment (possibly written in trust) or simply leave the money to be found from your assets.

* 10% of the "net" estate after deducting nil rate band, etc.

15 December 2011

How to Recover from a Poor Investment Experience

Many people have not had a good experience with their investments in recent years. Here's one reason.

The investment industry tends to focus on "relative performance" - if your investment fund has done better than average then they are happy, even if that means a 10% fall in value.

Now, if you consider yourself to be an investor, that's fine; you are aware of the underlying reasons for investment performance, and are willing to ride out the difficult times for the prospect of bigger returns over the longer period. But for many real investors who simply want to see a growth in their savings above what they might get in the bank, that is just not satisfactory. Good relative performance doesn't pay the bills!

But there's no doubt that the higher the level of certainty in an investment, the higher the cost, one way or another. So here's some possible antidotes to poor performance, including what the cost is:

"Absolute Return" funds
Rather than relative performance these are funds which aim for an absolute return using various strategies - although that's not guaranteed.
Cost: long term performance is unlikely to be as good as more traditional funds.

Structured Products
Products which offer a pre-determined return but with conditions (e.g. performance of the FTSE 100).
Cost: There's still a chance the condition won't be met (although some are positioned to make this very unlikely), you generally need to hold the product for 5 or 6 years, and you are reliant on the credit-worthiness of the underlying provider of the return - normally a bank.

"With Profits" Funds
The subject of much heated discussion, these are multi-asset funds provided by insurance companies. Performance is, to some extent, insulated from day to day market movements, and if chosen carefully, a good fund will provide slow but steady growth. [Either you let the market choose the performance, or an insurance company!]
Cost: Long term performance will be worse than more direct investments; the return you get is decided by the insurance company; some companies' funds have performed badly for some time.

Products with Guarantees
Typically an insurance bond provided by an insurance company, these offer various levels of guarantee on your investment's performance.
Cost: You have to pay for the guarantee one way or another - either with higher product charges or by giving up some investment performance.

12 December 2011

What can you achieve with trusts?

Trusts have various benefits to financial planning. Here are some things that you can use them for.
Give money to children, but don't give them access until they are 18 (or possibly older ages)

Pass the benefits of a life assurance policy to the beneficiaries promptly without waiting for probate on the deceased person

Avoid Inheritance Tax on your investments - various options here, depending on the situation - some provide limited ongoing access to the investments for your own use

Avoid a future Inheritance Tax liability on a pre-retirement pension fund by passing it to the children not the spouse ("spousal bypass trust")

Pass assets to grandchildren (e.g. for education) - skipping a generation who have their own assets / IHT liability

Trusts are basically simple - you are creating a new legal identity which can own something. But they can get complicated when considering taxation, so it is always worth taking professional advice in setting one up (and in managing its investments if it has any, since the trustees have a legal responsibility towards the beneficiaries).

4 December 2011

A Generation Retiring into Poverty?

I read some interesting views on the future of pensions from the Cass Business School recently which I generally agree with.

After the current generation of would-be retirees - those in their 50s and 60s - there will be a generation of people who will have an impoverished retirement. That probably means those currently in their 30s, and 40s who don't see the need (or aren't capable) of saving sufficiently for retirement. The generation behind that will have learnt some lessons and will have saved enough to see them through, partly through the Government's auto-enrolment plans - but don't think that will be the whole story because it won't. And retirement age will have increased to match longer lives by then.

The reason it will take that long is that attitudes have to change. Politicians will not be much help in this since they are fundamentally ill-equipped to deal with such a long term structural problem.

2 December 2011

More people are giving to charity

It was good to hear today that more people are giving to charity in spite of the economic news, according to a survey for the Charities Aid Foundation, although the average amount being donated is down.

The key thing for me is to make that giving effective. And that means regular, targetted, and tax-efficient.

Regular because that's what benefits a charity the most; targetted because no-one can afford to help with every need in the world; and tax-efficient because if the government has provided tax breaks to encourage charitable giving it's worth using them.

For more information see our website: Effective Charity Giving. This covers Gift Aid, and a number of other tax-efficient ways to give, including how to reduce your Inheritance Tax liability.

1 December 2011

Do you need life insurance?

I used to think of life insurance salesmen as being only one step above doorstep double glazing salesmen! But that didn't stop me believing that life insurance of various types was A Good Thing (as well as double glazing!).

Life insurance - or more generally "financial protection" - is most important for younger people with families to protect, perhaps. But it is also relevant in the second half of life. Mortgages often last for the whole of a working life and even into retirement these days. And you don't want your spouse to lose their home if you die just before you retire because they can't afford the remaining payments.

Cover for health is also worth considering - such as "critical illness" cover (I can say that from personal experience), while for self-employed people particularly, Income Protection cover can provide valuable cover.

"Whole of life" cover can also be a good way of dealing with an Inheritance Tax liability, or perhaps to ensure that there is sufficient cash available to pay for a good funeral (which are increasingly expensive).

I don't think of myself as a life insurance salesman(!), but I am a financial planner who firmly believes that selecting the right set of financial products is important for a secure future - and that includes financial protection.

How to get a pension like a public sector worker's

There are some interesting numbers on public sector pensions in this article in This is Money. To get an equivalent pension to a reasonably well paid state worker (£40k on retirement), contributions of £600 a month for the whole of a working life would be needed (the article says - and that feels about right to me).

This would amount to somewhere between 20% and 30% of income going to pension contributions (my calculations).

No-one's saying that public sector workers aren't worth their salt (I hope). Nor that (as usual) negotiations couldn't have been handled better. So there is certainly some sympathy around, but in these straitened times we all need to be aware of the cost of what is being provided in order to keep things as fair as they can be. And it isn't fair that everyone else has to contribute at the expense of their own futures.

2 November 2011

How to Choose Your Investments

The classic way to select investments for a portfolio draws on "Modern Portfolio Theory" which results from research in the 1960's and 70's. It recognises the trade-off between risk and return (where "risk" generally means volatility), and also the benefits of diversification.

Diversification is a big factor which is often not considered in an "amateur" portfolio. For example, if you add a higher risk investment to a portfolio, it could actually reduce the overall risk!

But there are several problems with the approach:
  • It is based on historic data, typically over the previous three-year period, and that is often insufficient to give a balanced view
  • It takes no account of the future, and we all have some view on what is likely to happen
  • It demonstrably doesn't work during times of crisis, when the benefits of diversification disappear because all asset classes end up perfoming in a synchronised way (e.g. going down together - like they did on 2008!)
So a theoretical approach may have improved the overall quality of investment portfolios. Nevertheless, investing remains an art rather than a science, and perhaps the best thing that financial advisers can do for their clients is to help them understand that.

25 October 2011

The "Corporate Greed" Protests

I have many sympathies with the protests about corporate greed going on in New York ("Occupy Wall Street") and in London, Rome and elsewhere. The fact is the world is suffering a great deal at the hands of financial mismanagement, and it appears that little has changed to bring any culprits to book, nor to prevent something similar happening again.

Unlike other protests against policy, it is not possible to finger the Government for the most significant stake in causing the problems (though many would say that regulation targeted at what matters was missing). So protesters cannot target the Government and ultimately elect another one that promises to do better, and they are left aiming at big corporates while disrupting normal life.

But what does "big corporates" mean? Apart from the chief executive of a big corporate like a bank - who takes responsibility just by virtue of being the chief executive - who else could be called "responsible"? Any employee, even senior ones, will not feel that they are responsible for corporate greed. They were and still are just doing the job they are paid for. The trouble is, corporate greed is the result of the attitudes of us all.

So I have a confession - I am responsible for corporate greed... just as the protesters are. While I am sure that there are dodgy practices in corporate Britain which are harmful, much of what goes on is only a result of our consumer expectations.

The New York protest was described by the New York Post as "a post-adolescent sleepover complete with face paint and pizza deliveries". While it may not currently be a coherent protest movement which is going to have an immediate impact, I do hope that it represents the beginning of a collective realisation that the direction that society is currently headed in is not a recipe for unmitigated worldwide happiness, even for the rich part of the world in which we live.

17 October 2011

Public Sector Pensions - Some Myths

Public sector pensions are in the news. For the sake of fairness to everyone else, something has to be done about them. There are no good solutions, and the situation is complicated by the fact that there are actually a number of different public sector pension schemes - some funded (i.e. with a pot of money to pay pensioners) and some unfunded (where the taxpayer has to cough up each month for next month's pension payments - that's the principle anyway).

Overall, it's better to have an understanding of the facts rather than hearsay. So here's some myths to put to bed (thanks to Fiona Tait of pension experts Scottish Life).

1. Public sector pensions are better in order to compensate for lower salaries. Untrue.

This is no longer true. Office for National Statistics figures show the average public sector worker is paid 4% more than the average private sector worker in terms of gross pay. In terms of total reward the difference is even greater, at nearly 13% in favour of the public sector, and it is suggested this is understated.

2. The changes are not necessary; public sector pensions are well funded. Mostly untrue.

The majority of the big public sector schemes are not funded. There is no pension fund as such, so the cost to the government, hence the taxpayer, of providing pensions will continue to increase.

3. The government is stealing our [current] pensions. Untrue.

The proposed changes will only apply to future pension benefits. Benefits that have already accrued will not be reduced. Existing benefits will continue to be related to a worker’s final salary even after they have moved to the proposed new career average scheme.

4. Public sector members are being unfairly picked on. Untrue.

The reforms outlined in the Hutton report are aimed at public sector schemes but the ‘saving more and working longer’ scenario applies equally, if not more, to private sector schemes.

5. Public sector workers will have to pay more, work longer and get less. Mostly true.

Not all members will be worse off. Final salary schemes are most advantageous to workers who benefit from regular promotions and salary increases. Those with a more even pattern of earnings may receive more from a career average scheme.

6. Public sector schemes are relatively low. Mostly untrue.

It is likely that those in receipt even of modest pension incomes do not appreciate how much they cost to provide, or how good they are in comparison with the private sector.

The average NHS pension payable from age 60 would require a defined contribution fund of nearly £300,000. Since the average pension fund is worth £24,330, people in the public sector are getting a relatively good deal.

7. It is all the fault of the bankers. Mostly untrue.

It is true that the government has financial problems that affect its ability to keep increasing the funding of pensions for its employees. However, the question is also whether it should, even if it could. The main reason for the increasing cost of public sector pensions is increasing longevity.

8. Public sector workers will leave their schemes if the changes go ahead. Unlikely.

This is difficult to call but it would not be a good choice. Members who opt out will find it difficult to match the level of benefits of their current scheme in a private arrangement (see above).

14 October 2011

Investment Diversity - What Works?

When reviewing an investment portfolio it's always tempting to look short term. You could research how a particular fund (or share) has performed over the last 6 or 12 months, look at how its asset class (equities, fixed interest, ...) is likely to perform in the near future and then make decisions on that basis.
If you take that approach to its logical conclusion you will end up with one investment in your portfolio which you regularly change to chase performance. There's no doubt about it... that approach doesn't work. Doing that you would be missing out on the main benefit of a diversified portfolio.

But the downside of diversification is that you are always likely to have some of your investments performing poorly. At least, it will feel like they are performing poorly - until you remember that you cannot judge performance over the short term (I'm assuming you are a long-term investor here). And since no-one has succeeded in predicting which types of investment are going to perform the best over the next period of time, that means those investments are positioned to take advantage of the next change in investment fortunes.

Of course, you still need to ensure that your choice of investment (unit trust fund, investment trust fund, share, ...) is fundamentally sound - there is no point in picking an investment which has never performed well and expecting it to give you significant growth at some point in the future, just because it never has in the past.

So if you (or your adviser) have made good decisions in the past, don't be hasty to undo that, even if values are going down. Check that nothing fundamental has changed (like investment mandate or fund manager) and then put the lid back on and leave it to cook a bit longer!

10 October 2011

Paying Commission for Advice

I recently saw a post on a local online forum where someone was saying that their financial adviser didn't charge for the advice. Instead they just took the commission from the product provider.

Do people not realise who is actually paying the commission? Them! It is deducted from their investment, regular premium payments, or whatever.

With commission payments it is the product provider who is deciding how much the investor is going to pay. Paying your adviser on a fee-basis is much better for you - you can agree with your adviser what the cost will be rather than being landed for it!

(Did I mention that I am a fee-based financial adviser?!)

6 October 2011

Pensions - Is this you?

  • Only 55% of those with a defined contribution pension scheme know that they are contributing.
  • 28% don't know how much, or even if, they are contributing.
  • 38% don't know how much their employer contributes.
Scottish Widows Workplace Pensions Report 2011

1 October 2011

Which is worse - dentist or photographer?

I'm due to have some pictures taken professionally this week to replace the (slightly dated and slightly amateur) ones I use at the moment.

I'd much rather be anonymous but I guess people like to see who the author of the blog, newsletter, etc. is, so I'm going to bite the bullet and try to look as though I'm enjoying the experience.

11 September 2011

Pension or ISA?

Let's say you have a sum of money from a generous aunt to invest. Or perhaps you have simply managed to build up some spare cash from your income. What is the best thing to do with it - add it to a pension plan or put it into this year's ISA?

Both are tax-efficient in their own way: Pensions on the way in - reclaiming the tax you will have already paid on that amount, and ISAs on the way out - being free of Income Tax or Capital Gains Tax on any income or growth.

Both have restrictions, though. There are limits to pension contributions, and you can (in most cases) only take the majority of it out as an income after age 55 (which will be taxable), rather than as a lump sum. The main exception (other than dying!) is if you have other secure pension income of at least £20,000 pa which gives some more options.

ISA restrictions are simply that there is an annual allowance for contributions.

So the answer is that it depends. If you are close to retiring and improving your potential income in retirement is more important than having a lump sum to surrender, then go for a pension contribution. For more flexibility an ISA contribution may be more appropriate for you.

6 September 2011

The Euro Struggles On

I continue to be amazed at the naivety in Euroland (see my July post about why the Euro will never reliably work in the current format).

Politicians don't yet see the magnitude of the problem, it seems to me. There is a classic investment cycle which tracks investor attitudes, and one of the stages is "Denial" which is pretty much where politicians are. There will have to be some more pain before there is serious action (like allowing a country to (properly) default on its debt.

In the meantime investors should avoid dodgy countries, and banks with exposure to them. Not very easy to find out, though. Personally, I'll just avoid banks!

Apart from a default or two (like Iceland did), economic growth would be a way out, but there doesn't seem to be too much of that around the world. Otherwise inflation is the economist's friend (but not the investor's).

What is NOT possible is devaluation - at least not in a selective way. Whoever thought it could work??!!

2 September 2011

Hedging and Ice Cream

Hedging your investments has long been possible for professional investors. But there are also possibilities for retail investors, too.

What are we talking about? Normally, if an investment goes down in value the investor will lose out - on paper at least. But if you can find an investment which goes up when something else goes down, you can (at least) reduce your loss.

Here's a simple example (although you might say it's more about diversification than hedging, but it illustrates the point)... If you invest in an ice cream manufacturer you will do well on sunny days but badly on wet days. So why not "hedge" your investment by also investing in an umbrella manufacturer. That way, one part of your portfolio increases in value whatever the weather!

Professional investors - including discretionary managers who look after retail clients' money - will hedge by doing things like buying and selling "options". That way they profit if an index like the FTSE 100 goes down, reducing the overall loss in the portfolio.

But you can also make use of structured products to do something similar. By picking products which give different returns for different outcomes (the FTSE goes up a lot, up a bit, down a bit, etc.) you can secure some growth whatever the markets do (within certain constraints).

30 August 2011

Investment Reviews

Reviewing investment funds is pretty difficult at the moment. Long term performance trends are swamped by the falls across the markets in early August, and it is certainly not worth making decisions on the basis of such widespread volatility. Reviews aren't done solely on the basis of performance, of course, but even if you look at the fundamentals of where and how the funds are invested, you will find wide-ranging opinions about where you should / shouldn't be invested.

So it's time to stick to our guns, point out to clients that they are in this for the long term, and then come back to do some annual reviews when things are a bit calmer.

19 August 2011

Do you need a new investment strategy?

Conventional wisdom says invest in equities (shares-based investments) for the capital growth you need for pensions, etc., etc.. Historically there is no doubt that this is a good strategy, and it is not difficult to show that equities out-strip other types of investment over the longer term.

In the words of Dominic Rossi - Global CIO for Fidelity - Equities have been offering "jam tomorrow" for some time now. And after three recent bear markets (2000, 2008, and the present drop - if we are in another one) along with massive ongoing volatility, it is only sensible for investors to ask if they are doing the right thing.

It's foolish to dive in with a knee-jerk reaction (although there are plenty of fools around), but I am inclining to think that with unreliable capital growth, a greater emphasis on investing for income is a safer strategy. That doesn't mean you need to actually receive a regular income from your investments, since that income can be re-invested. But it does mean that there is some ongoing reason for the value to grow.

Investing for income could mean "equity income" funds, which derive their income from dividends, or it could mean "fixed interest" investments such as corporate bonds which pay a regular income. With falling values, the yields (income) on offer can look attractive. And anything that appears attractive in today's bleak investment landscape is worth a look!

15 August 2011

The Washing Machine Gives Up

Personally I am "reasonably adventurous" when it comes to investment risk. In other words I can still sleep at night if there is a reasonably large fall in investment value, largely because I know I will not be surrendering any investments any time soon.

 But I am NOT risking anything when it comes to having access to cash for miscellaneous purposes (like the washing machine which gave up yesterday). And I am certainly not going to put anything except short term expenditure on a credit card - that's a mug's game. That's where a "Piggy Bank fund" (or "emergency fund") comes in.

I often recommend to my financial planning clients that they should put such a thing in place. Even if it's not a separate account it's worth earmarking some cash somewhere which you can easily get to and which doesn't get spent from month to month. A quarter or a third of annual income is my usual first suggestion, although in view of low interest rates that may be a little high if income and expenditure are fairly stable.

28 July 2011

Debt and Scary Americans

The thing that scares me about the current American debt ceiling crisis is Americans!

A bit of background:
- If American politicans do not agree to a raised government debt ceiling by 2nd August then world financial markets are likely to be upset (quite apart from the American public sector)

- Early in the 20th century, every issue of debt (including its purpose) needed to be approved by politicians, but this has gradually been eased, so that now only the overall debt ceiling is set

- The debt ceiling has been rising massively over the years, and one day will have to come home to roost (but politicians only have short term interests, of course)

- Debt issues are basically Treasury Bonds which investors buy (the equivalent of UK Government Gilts), effectively giving a loan to the Government which must be repaid at some point. Issuing even more debt at that point to the next investor is one way of repaying it. (A giant Ponzi scheme?)

The trouble is that Americans can be an insular lot. Only 37% have passports (State Dept, Jan 2011). And most would not be aware of the impact of their politics on their financial world, let alone on the global financial world.

And while there are certainly people in the US who know what they are doing with the national finances, because the political masters have to listen to the public, that does tend to limit their room for action.

Continually increasing the debt ceiling is not sustainable. But there has to be a better way of dealing with it than holding the world to ransom at the 11th hour.

On the other hand, perhaps Americans are better placed to hold the global financial world to ransom than the Chinese. Only 1.7% of them have a passport. Then again, the Chinese government doesn't need to listen to its people, so perhaps that's irrelevant!

22 July 2011


As I've said before, my advice to clients who don't like seeing their investments going up and down in value is "don't look!". But the fact remains that volatility in investment values has been very much present over the last six months or so, even though cumulatively there has been little movement up or down.

Fidelity (fund managers) produce some useful information on investment markets, and they have just released a "volatility tool" which is very helpful in understanding the impact of what is happening. In investment terms, when we talk about "risk" we generally mean "volatility". But by holding an investment for a longer time, the volatility evens out and, in effect, the investment becomes less risky.

Here's some key numbers which are rather interesting. Limiting ourselves to UK equities, the highest growth in one year over the last twenty was over 50%. And the biggest loss in one year was 34%. That's pretty volatile (= risky)!

But if you extend the window to five years, the highest rate of return is down to 20% per annum, and the biggest loss is also down - at less than 7%. Much less risky.

So my advice not to look at your investments is not so silly after all. The fact is, values go up and down, but provided you are invested in the right place (now there's a big proviso), volatility will even out and give you the right results in time.

14 July 2011

The Euro Future

We are all now experts on global finances! Perhaps not ... but we are at least aware that there are problems with some countries in the Euro zone. Ireland was "bailed out" not long ago, Greece was before that and is in the spotlight once again. Portugal, Spain and Italy are all wobbly as well it seems.

I do find it amazing (as a non-global finance expert) that anyone ever thought the Euro could work. What it has done is to remove the single major control that every country has on its economy - the value of its currency. It's like taking the gear lever out of your car!

That's all very well if the economies of all countries in the Euro zone are roughly in line. But Germany is light years away from Greece, for example, in terms of productivity, exports, tax receipts, etc..

The main country-specific indicator which remains is the interest rate available on its bonds (the equivalent of "Gilts" in the UK, or "Treasury Bonds" in the US). The riskier these are perceived to be the higher the interest rate they have to pay to encourage people to buy them. Irish bonds (2 year) are now over 16%, Portuguese are over 18%, and Greek bonds will pay you 29% !!

That means that the market is pretty much expecting a default - in other words, investors will get a good interest rate for a while, but may not get their capital back at the end.

Fortunately, that doesn't directly affect most UK individual investors. But there's no doubt that the ongoing uncertainty is one of the factors holding the stockmarket back - and that does affect most of us one way or another.

8 July 2011

Don't Use Your Pension Money...

...without thinking about it!

I have been looking in more detail at the various options available to take a pension income in retirement from a "money purchase" (or "defined contribution") pension. Although the majority of people buy a lifetime annuity there are certainly other options to consider.

The option I have been revisiting is known as "temporary annuities" (or "fixed term annuities"). Instead of paying an income for life these products pay an income for a fixed term - perhaps 5 years. At the end of the term you will get back a sum of money (normally a guaranteed amount) which can be used to buy a further annuity, for instance.

Apart from any other benefits of flexibility it means that if your health has deteriorated you may be entitled to an "impaired life" annuity which will give you a higher income.

Given the time that we are all likely to spend in retirement, it is well worth keeping as flexible as you can be to take account of changing circumstances.

30 June 2011

Public Sector Pensions - My Key Points

Here are some of the most important points for me in the public sector pensions debate.

As ever, these comments are in no way a reflection on individual public sector workers who, like anyone else, should always take advantage of any financial benefits on offer by their employer.
  • The country has not been able to afford many of the pensions that are on offer for some years. Increasing longevity is significant... a baby born one year later than a sibling has a life expectancy 2-4 months longer (depending on whose figures you use). That year on year increase has to be paid for by an increase in contributions (taxpayers) or a reduction in benefits.
  • Private sector pensions (which have a government-imposed duty to be able to pay their pensioners) have been subject to big changes for a number of years, with final salary schemes closing and higher contributions being needed to maintain the expected benefits in retirement. Those public sector pension schemes which are unfunded (not all are) have no such duty - simply expecting (presumably) to increase taxes in future generations to pay the higher costs. So all that is happening now is that public sector schemes are beginning to catch up with the real costs of providing the pension benefits.
  • According to Lord Hutton, a teacher's pension pot is 14% down to the taxpayer, and 5% down to the individual employee.
  • Private sector workers should not have to forgo their own pension savings in order to fund other peoples'.
  • Changing from final salary to career average will most significantly affect high fliers who have come up through the ranks, but lower paid workers may be better off.
  • A public sector worker who starts on a salary of £20,000, sees their pay rise by 4.5% a year and works for 40 years will, according to Hargreaves Lansdown, have an annual pension of £19,920 based on a career average scheme. This compares to £7,960 a year that a private sector worker will get from a defined contribution scheme based on 10% contributions. A worker who joins the new scheme, the National Employment Savings Trust (NEST), can expect a yearly pension of £5,000.
  • To look at it another way, a teacher receving a salary of £32,000 will get a pension that is the same as a private sector worker who has built up a pension pot of £500,000. To build up such a pot would require contributions of 20% to 30% of salary over 40 years (depending on your assumptions but that's based on a starting salary of £25,000). The teachers' pension scheme requires contributions of 6.4%.
  • It is not the case that public sector workers get a good pension to make up for lower salaries  (although admittedly it is difficult to compare apples with apples). Average total pay (including bonuses) in the private sector was £455 per week according to recent labour statistics. Meanwhile, equivalent pay in the public sector was £473 per week. And in the three months to April 2011 total pay in the private sector rose by 1.6% on a year earlier but total pay in the public sector rose by 2.2%.
  • It is not fair to move the goalposts by changing someone's pension entitlement (including retirement age) without reasonable notice - and here I have in mind both the accelerated increase in womens' state pension age and the delay in retirement for all public sector workers. Ideally, changes should not be made once you are in an employment. But to be realistic, just as no one can expect an employer to tell them in advance what pay rises they will get over their whole career, neither can they expect the accrual of pension benefits to remain static. It would certainly not be fair to change some pension entitlement which had already been accrued (and that is not proposed), but to change what will be accrued seems to me to be acceptable if necessary, providing sufficient notice is given. And therein lies a current debate - is 10 years long enough to revise your plans, for instance? I'm inclined to say it is, especially given the magnitude of the financial crisis we continue to be in and which private sector workers are already having to accommodate.

27 June 2011

If you're lucky you'll have a pension

Apparently 8% of people are relying on winning the lottery to fund their retirement (according to the National Association of Pension Funds).

That links to the slightly wacky suggestion from Saga's director Ros Altmann (who usually talks sense) that a lottery should be attached to regular pension savings. If you save into a pension regularly you would eligible for a £1m lottery win which would be drawn once a month!

Might make pension saving a bit more attractive to a lottery generation!

23 June 2011

Trivial Pursuit of Pension Money

The aim of pension planning is generally to build up as big a pension fund as possible. But for various reasons some people don't end up with a fund which is going to provide anything meaningful in the way of an ongoing income.

For people like this, taking the whole of their pension as a lump sum may be the best option - particularly if their spouse has a good pension which will switch across to them if the spouse dies first.

This is known as "trivial commutation" and applies if you have less than 1% of the value of the Lifetime Allowance across all your pension funds (if you have more than one). Until April 2012 the Lifetime Allowance is £1.8m so that means £18,000 is the limit for trivial commutation. (The Lifetime Allowance reduces to £1.5m in April 2012, so the "trivial commutation" limit is changing to be a fixed sum of £18,000 from then rather than a percentage).

There are a number of other restrictions on trivial commutation, including that all must be done within a 12 month period, and also you must be between 60 and 75.

As with taking other pension benefits, you can take 25% of the amount tax-free, while the rest is taxed as pension income. That may mean you end up paying too much tax initially since the insurance company will deduct tax without being aware of your available allowances. So they should also issue you with a P45 as proof of tax deducted which will enable you to reclaim the overpaid tax from HMRC.

9 June 2011

Don't use your pension!

... until you are 75.

Just occasionally, a detailed legal judgement can have a big impact for quite a few people. That could apply to a recent case relating to pensions ("Fryer & Ors v HM Revenue & Customs" if you wanted to know!). To cut a long story short, from April 2011 the law has been changed so that any pension benefits which are not taken when they could be but are left as an investment to grow, no longer run the risk of being subject to Inheritance Tax.

The effect of that is that if you have enough assets (such as other investments or other pension income) so that you do not to need to take an income from a particular pension plan, then you are most likely to be better off leaving it for the time being. That pension plan will not be subject to Inheritance Tax, and, if you were to die prior to age 75, the whole of that pension plan could be passed on tax free to your beneficiaries.

Before you reach 75 it would probably make sense to (at least) take the tax free cash lump sum from the pension, because after 75 the remaining fund is subject to a 55% tax charge on your death.

It all goes to show that you shouldn't just do the obvious thing. Ask someone who knows!

17 May 2011

Inflation-linked National Savings Certificates are back

They haven't been available for a while and reports say they may not be on offer for all that long. But that doesn't necessarily mean they are a good thing to go for.

They give you a tax-free return of RPI + 0.5%. And you can hold up to £15,000. The fact that they are linked to the RPI inflation index rather than the lower CPI (which would have given a lower return) is a good thing.

They may be particularly tempting for people who appreciate the Savings Dilemma - that the returns they are getting on savings at the moment are unlikely to keep up with inflation - so they are effectively losing value. So to have something linked to the rate of inflation has got to be a good thing - hasn't it?

The problem comes from the fact that these are five year investments, and that inflation may well peak in the next year and then fall (although no-one including the Bank of England has been good at predicting inflation). If general savings rates improve within five years then you would find yourself stuck in the back row, and linking to inflation may not be such a clever move.

But if a safety net or back-stop to cover a worst-case scenario is what you need in your portfolio, then they could be a good option.

It all goes to show that there are no easy answers at the moment.

23 April 2011

Welcome to 1981

A Royal Wedding, spending cuts, rising unemployment, special taxes for banks and North Sea oil producers, inflation worries, and a new government trying to convince people that its plans are the best way forward. Welcome to 1981!

An unknown future
The interesting comparison with 2011 came from Fidelity and reminds us of the challenges we were facing in those early days of the Thatcher government. There are some differences, though. Our concerns about inflation increasing are from a current relatively low base of 4 percent, whereas we were at 12 percent in 1981. Although today's inflation perhaps feels worse, particularly since it applies to things we can't avoid like food and fuel.

Our approach to our present predicament is pretty much the same as it was then - cut the public sector back to size and raise taxes where possible. The public response is also similar, although on a lesser scale so far than the unrest of 1981 - remember Toxteth, Brixton, Moss Side. Compare that to the US approach which also was the same back in Reagan's 1981 - cut taxes to stimulate spending and think about how to repay the resulting deficit some time in the future.

After the 1981 Royal Wedding a long term bull market started which was great for investors. Whether the same thing happens this time around remains to be seen, because there are still major structural issues in the financial world which may prevent that. We could still see big repercussions from the Euro problems. Spain may be the next problem and it's a bigger economy than any of the others which have so far been rescued, and the Greek "fix" was only temporary and is likely to come back to bite. Budget issues in the US could also have a negative global impact, with S&P's recent downgrade of America's credit outlook a warning sign - you just can't print money for ever.

All in all, challenging times for savers and investors which emphasise the need to avoid putting all eggs in one basket ... Oh, and to take professional advice!

15 April 2011

Junior ISAs

Junior ISAs are not quite with us yet (legislation expected later in 2011), but they look like being a worthy replacement to Child Trust Funds. The big difference, though, is that the Government will not be making any contributions!

The limit looks like being £3,000 per year (which of course could be contributed by other family members). A sizeable pot could be built up by the time the child is 18 - perhaps even £80,000. And therein lies one danger - or some would think so. What is an 18-year old going to do with £80,000? Invest it sensibly, spend it wisely, or something else?!

Sounds like a good opportunity for some trust-based financial planning instead, perhaps limiting access for a few more years.

31 March 2011

Equity Release Experience

I'm still convinced that Equity Release plans will have an increasingly important role to play in retirement finances. Increasing costs, longer lives, and the reducing value of pension income is likely to squeeze more and more people into thinking about other options like Equity Release.

Sometime the need is to cover the essentials of life, while for others the incentive is is "something extra". Here is LV='s experience of the main reasons why people choose Equity Release:
  • Maintain standard of living - 28%
  • Home improvements - 23%
  • Pay bills / clear debt - 20%
  • Mortgage repayment - 15%
Like every other financial product, Equity Release is not suitable for everyone. It may be suitable for some people only after they reach a certain age, while certain types of Equity Release product may not be appropriate for all - but it is an important tool in the financial planning toolbox.

16 March 2011

The Lighter Side of Tax Relief

The Office of Tax Simplification was set up to review tax reliefs, exemptions and allowances. Here are some of the more "interesting" results...

Tax relief is currently given on breakfast provided for cyclists on a designated cycle-to-work day. Proposal: scrap.

Do you remember Luncheon Vouchers? Up to 15p per day they are currently a tax free benefit. Proposal: replace with a fixed allowance.

By a historical quirk (there seem to be lots of them!), Divers are always treated as self-employed for income tax purposes (apparently). Proposal: scrap.

Income tax relief is provided for players in the Champions League Final - a condition of hosting the game specified by UEFA, apparently. Proposal: keep (demonstrating that football has an even greater influence on the Government than Europe).

Late night taxi journeys can get you tax relief provided you are "later than usual". Proposal: scrap.

Black beer (from Yorkshire) and Angostura bitter (from Trinidad) have been exempted from excise duty since 1930 due to their supposed medicinal benefits. Proposal: scrap.

Free coal for miners and their widows - currently tax free. Proposal: scrap.

Insurance premium tax relief is provided for Channel Tunnel rail services. Proposal: keep, because this is also provided for cross-Channel ferries.

3 March 2011

Financial Protection for over 50's

We generally think of financial protection - life insurance, health insurance - as being for younger people. It's certainly true that a young family with a mortgage have the greatest need for life cover in case the breadwinner is no longer there, for example. But there are situations where policies are also useful for older people. Here's some examples.

Self-employed people of any age don't have an employer who will keep on paying them if they are off sick. Their own sickness cover can easily be provided by purchasing Income Protection Insurance (previously called Permanent Health Insurance). Like most similar insurances the cost increases as you get older, but particularly if you have dependants it would be important to have.

These days, many people have mortgages continuing up to (and sometimes beyond) retirement. It will depend on circumstances, of course, but if a breadwinner dies and their spouse has no income of their own, potentially they could have to sell the house. So Term Assurance whose cover ends when the mortgage ends may still be the best approach. It can also be used to cover other loans, as well - who will finish paying for the car or the conservatory if you die prematurely!

Critical illness policies inevitably get more expensive the older you get, since the likelihood of making a claim increases. Nevertheless they have their place, particularly if you take one out earlier in life.

Whole of Life policies are likely to have a different purpose. These pay out only on death, whenever that may occur. In particular, for older people they can be useful to pay Inheritance Tax. It may be impractical to reduce an IHT liability to zero (most of the estate's value could be in the house, for example). So making plans to pay the expected IHT without waiting for probate is often the best approach.

New Endowment policies are unlikely these days, but many people still have these which were often taken out to cover mortgages. As well as the life cover they have an investment element (which is what gave them a bad name).

Private Medical insurance of various types increases in significance as we get older. Generally these policies give access to private treatment, whether in NHS hospitals or elsewhere.

Long Term Care insurance will provide some financial support in the event of needing to move into long term care in later life. There are not many providers of this, and costs are high, but it can provide peace of mind.

1 March 2011

Unisex pricing for insurance

The European Court of Justice have today ruled that insurance premiums cannot be set based on gender.

This is an extremely significant decision (although not entirely unexpected). It's small comfort that its implementation has been delayed until December 2012 which at least gives the insurance industry some time to get things organised.

In practice it means that:
  • car insurance will be more expensive for women and cheaper for men
  • life insurance will be more expensive for women and cheaper for men
  • critical illness insurance will be more expensive for men and cheaper for women
But most significantly from my perspective...
  • Pension annuities will be more expensive for men, so pension income will be reduced (that's because men die younger so their annuity purchase didn't have to last so long, so they got more income for their money) - a figure of 8%-10% more expensive has been suggested which means that much drop in pension income. How an un-elected body is allowed to reduce the value of the majority of men's pensions at a stroke with no recourse is quite amazing! (final salary schemes are not affected)
Whether all of that is "sensible" is a difficult question. I suspect it was an unexpected side-effect of anti-discrimination legislation. Removing bias might be regarded as a good thing, but some of the current differences are more to do with biology than bias and it's madness to ignore that!

So whether anyone will be better off after the changes (other than those who like to blindly tick the anti-discrimination box regardless of the real impact) remains to be seen.

28 February 2011

Time to Consider Equity Release?

The current cuts to welfare spending and the numerous pension reforms may both have an effect on the take-up of Equity Release.

Welfare and benefits spending cuts of £7bn announced in the Government's Spending Review will, among other things, mean a significant reduction in local authority budgets. And that's where much of the spending on adult social care comes from.

So where can the shortfall in funding come from when someone needs to pay for their care in later life? Equity Release plans have got to be one of the options considered, even though it will be difficult to assess the impact of taking out such a plan on someone's benefits entitlement.

There will always be difficult cases where an individual is clearly let down by the system after such significant cuts, and nobody wants to see any individual disadvantaged by the changes. But it could be argued that the present retired population have a bigger slice of the pie than the next couple of generations will have.

Big rises in house prices have contributed to make those in the second half of life "asset rich". While a slow response to a deteriorating investment environment for pensions has meant that many people in final salary pension schemes went on accumulating pension rights above what their pension schemes could really afford (or are going on doing that in the case of the public sector!).

All of that is to the detriment of the youngest generations. No-one would dispute that it is difficult for first time buyers, while the likelihood of someone who is starting work today ending up with a pension at the level of many of today's retirees is pretty low.

So making use of your own accumulated assets to fund your own care (or at least improved care) seems like a good option. We just have to make sure that the safety nets remain in place for those who have neither a good pension nor their own assets.

Dispassionately, at least, it seems like it is time for Equity Release.

16 February 2011

Life Insurance in Small Businesses

One of my bugbears when running a small business previously was dealing with the bank! The bank manager never did anything helpful (like lending money on reasonable terms to help you grow the business)! Instead, at any opportunity he tried to sell us insurance of some sort - he even tried to sell car insurance at one point.

One type of insurance which was worth having, though, was life cover for the key people. In a small business if you lose a key person you are in trouble, so having a payout in the event that the worst happened is some compensation.

Since 2006 it has been possible to obtain this cover on better terms than previously. Before April 2006 such life insurance was covered by pensions legislation and potentially limited the "real" pension contributions. As a result, the life cover was often best handled by individuals who paid premiums out of taxed income.

But since that date, "Relevant Life Policies" have become available. With these, the company pays the premiums and, in most cases, these will be a business expense deductible against Corporation Tax.

So the message is - if you run a small business - or are a director - don't pay for life cover yourself - get the company to pay it and save tax!

3 January 2011

Inflation ... and What You Can Do

Inflation occupied headlines one way or another in 2010.

One issue was whether inflation or deflation was the more significant danger.. We know that inflation means the value of your money reduces, but it's worth summarising what deflation can mean... So consider what you would you do if you wanted to buy a new car / kitchen / house / TV / ... and you knew that prices were falling because of deflation? Well, you'd wait a bit longer, wouldn't you? The trouble is, so does everyone else, so prices come down some more, and then you are into the "deflationary spiral" which economists talk about, which many companies would not recover from.

With Government spending cuts reducing the nation's buying power (since unemployed people have less money to spend), we are not out of the deflation woods yet.

But in spite of fears of deflation, the actual inflation indices (the Consumer Price Index and the Retail Prices Index) remain stubbornly high, mostly due, it is said, to "temporary factors" like tax-related price hikes, rising oil prices, and soaring food prices. However, these temporary factors do not seem to be going away, and they certainly don't help when interest rates on savings remain stubbornly low. Basically the buying power of your savings gradually melts away.

Central banks in the UK, US and Europe have already shown that they will act to avoid the risk of sliding down the deflationary path. But the danger is that they will not get the balance right and inflation will get a foot in the door.

So what can an individual do within their own finances? Equities and property are seen as "real assets" and therefore a good way to hedge against inflation. While the other asset which has been a key beneficiary from this war between deflationary and inflationary forces is gold.

But real assets are not everyone's cup of tea, with, in some cases, extended timescales required to see a sensible return on an investment, and with liquidity issues making it difficult to sell an asset such as property when you want to. And gold tends to be rather difficult to store securely! (There are, of course, other ways to invest in gold.)

Nevertheless, subject to your circumstances, "real assets" look like being the place to be for long term inflation-protected growth.

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