31 December 2012

Financial Planning Ideas for Business Owners - 3

A final group of ideas - mostly applicable to limited companies...

Get More Benefit from your Pension Scheme
Some pension schemes will support loans to the business or could be used to purchase business premises, for example.

Reducing Tax on Business Sale
Capital Gains Tax (CGT) and Inheritance Tax (IHT) may be applicable when a business is sold. Planning ahead can reduce these liabilities. This might include an EIS scheme to defer CGT, or a Business Property Relief scheme to reduce an IHT liability.

Will and Lasting Power of Attorney
... but that’s not a financial planning idea! Actually it is; defining what happens if you die or are unable to make your own decisions could make a big difference to your financial future and that of your family.

Review your Defined Benefit / Small Self-Administered (SSAS) Pension Scheme
Older pension schemes may be in serious need of a review. This could cover:
- Investments - is there a better approach?
- Scheme liabilities
- Checking whether the trustees are fulfilling their legal obligations

17 December 2012

Financial Planning Ideas for Business Owners - 2

Some more ideas - mostly applicable to limited companies...
Make Pension Contributions using Salary Sacrifice
If you're not doing this already, you probably should be...! Agree with staff a reduced salary in return for increased pension contributions. NI will not be required for the pension contributions making everyone a winner (except HMRC).
Key Person Cover
The potentially disastrous consequences of losing a key person through death or illness can easily be insured against.
Shareholder Protection Insurance
If a shareholder dies who will own their shares? This policy, along with a separate agreement, provides the funds to buy back the shares - normally from their family - ensuring business continuity and providing a monetary benefit for the bereaved family.
Tax-Efficient Inward Investment
Investors in your company may be able to benefit from the Enterprise Investment Scheme (EIS), providing significant Income Tax and/or Capital Gains Tax benefits.

Start a Group Life Insurance SchemeThis could be a valuable employee benefit, even if it only applies to two or three directors. It may be cheaper than individually underwritten policies such as Relevant Life Policies, particularly if there are health issues.


12 December 2012

Financial Planning Ideas for Business Owners - 1

These ideas generally apply to limited companies...

Invest Excess Cash on Deposit
An easy one to start with...If you have cash on deposit and you find that a proportion of it is never needed for running the business, higher returns may be available by investing it.
Profit Extraction from the Business
With the current limits on both pension contributions and pension benefits, an alternative might be to pay a large dividend and pay the proceeds into an EIS scheme and obtain Income Tax relief.
If pension contributions are feasible and the Minimum Income Requirement is met at the point of retirement, Flexible Drawdown may be used to obtain some of the pension value as a lump sum. If income is not immediately required, an EIS investment can provide Income Tax relief.
Cheaper Life Insurance - Relevant Life Policies
The business pays the premiums as a business expense, but the benefits are for the individual (or their family). This provides an alternative to pension-based death-in-service benefits where there might be limits on pension contributions, or there are too few people in the pension scheme to make this possible, for example.
Be Prepared for Auto-Enrolment Pensions
Even if your “Staging Date” is some way off, thinking ahead is vitally important - budgetting for the compulsory contributions, selecting a pension scheme, etc..
more to come...

3 December 2012

Will we get a flat rate State Pension?

A flat rate State Pension of £140 per week has been much-trailed, and was confirmed during the recent party conference season.
This would replace the current, rather complicated, two tier system which has a Basic State Pension which everyone with 30 years of National Insurance contributions gets in full at £107.45 per week, and a State Second Pension (previously called SERPS) which depends on earnings and on whether you have been contracted out (and if so, for which years).
But as usual with pensions, the aim of simplifying things gets hijacked when you look at the detail. For example, how do you introduce it? In particular what do you do about people who already get more than that flat rate because of higher earnings?
And then there is the issue about those who are contracted out. They get the equivalent of the State Second Pension via their main pension provider. Would their pension payments be cut as well?
The alternative is a generation-long transition period to avoid disadvantaging existing pensioners. Difficult decisions for the Government,  but there is a desparate need for simplification. Without it pensions will continue to be seen as obscure and best avoided, when in fact they are generally the best hope for a reasonably prosperous retirement.

28 November 2012

I finally finished winding up my mother's estate. What can you learn from my experience?

Winding up the estate of someone close is never going to be easy, but I decided to do it myself for the experience, and so that I would know what my clients would need in a similar situation.

There was a wide range of things to be done: probate to apply for, Inheritance Tax (IHT) to calculate and pay - including a transferable nil rate band, a trust outside of the estate, a house to sell, and of course Income Tax and pensions to be sorted out, as well as the usual insurance, utilities, savings, investments and bank accounts.
The transferable nil rate band is theoretically a big advantage in reducing the Inheritance Tax payable, but it requires comprehensive record keeping going back 7 years before the first death. Fortunately we had all that, but for many people a Will which creates a "Nil Rate Band trust" is a more practical option.
The IHT reporting and probate application required around 18 different forms and was not a lot of fun, but online guides are available and the IHT calculation was accepted by HMRC without query. We were even able to reclaim some of the tax when the house sold for less than the probate valuation.
Obtaining probate itself was interesting. Swearing an oath is not an everyday experience for me!
So what can you learn from this? Whether you do everything yourself or employ a professional, there are two main tips I can give:

Be prepared - think ahead

Fristly, having a realistic assessment of IHT liability is essential to the planning process.
From that you can work out how you are going to pay any IHT. Having money held in trust outside of the estate was a big advantage (fortunately my mother took my financial planning advice!) since it enabled IHT to be paid and probate to be granted sooner than it might otherwise have done.

... and of course it is absolutely vital to have an up to date Will and preferable a Power of Attorney as well.

Keep records

If you are thinking of claiming a transferable nil rate band from the first spouse to die then you will need records of gifts for the 7 years prior to that.
And of course the details of all savings, investments, etc. will be needed so get organised!
Would I do it again? Probably not. It was a great deal cheaper than employing a solicitor,  but time consuming. A middle way would be to use a probate service offering a fixed price - we can now offer that to our clients, so it must be good!

19 November 2012

What Happens When a Business Partner Dies?

It happened to me!

If you are involved in running a small business then you will know that there are key people involved. They might be key in doing the work, finding the business, delivering what has been sold, etc.. Or they might be key in terms of the finances, perhaps as shareholders.

The statistics say that if you have three people with an average age of 50, then the probability that one will die before 65 is 32%.

So what would the impact be? Only you can know when it comes to your business but here's some possibilities... You might be unable to deliver to your customers. You might be hampered from moving on to the next stage of the business plan. You might lose some key contacts or clients which the business partner had.
If they were a shareholder then there is a realistic possibility that you will lose control of the business. That can happen if their shares end up passing according to their will to family; they may not be involved or interested, and they could simply sell the shares on to someone else - even a competitor - or just sit on them and do nothing, preventing you from moving forward.

Nothing is ever going to completely mitigate the loss of someone. However, there are some straightforward things you can do.

1. The Shareholder Agreement (or Partnership Agreement) could be used to specify what will happen on the death of one shareholder if no-one's that bothered (e.g. an optional "offer" to buy back shares)
A better option in most cases....
2. A life insurance policy could be taken out for each shareholder with the proceeds paid into a trust and used by other shareholders to purchase the deceased's shares. A "Cross Option" agreement enforces this - the shareholders must buy (using life policy proceeds), and the deceased's familiy must sell.

And my experience? My business partner of 6 years died in his 50s. Fortunately for me and others involved we had just sold the business and there were no financial implications. However, a few months earlier and the work of 6 years would have been in jeopardy. There is an alternative!

29 October 2012

Paying for Care Fees

An issue of increasing concern for many families is how to pay care fees in later life.
Anyone with sufficient assets - and that certainly applies if you own a house - has to fund their own care, rather than having the local authority pay. That often means selling the house (although that doesn't apply if a spouse is still living there). The estimate is that 40,000 people per year have to do this.
There is a "12 Week Disregard" provision which theoretically allows time for a house sale. The problem is that it might take a lot longer to sell a house in the current market - and what do you do in the meantime? There is a local authority scheme to take an interest-free loan, but there are limits on this which means that it might not help.
The Government's Social Care White Paper includes the idea of a Universal Deferred Payment Scheme. This would provide a low interest loan while the house sale took place; it could even be deferred until the local property market improves.

Once you've sold the house you could either invest the proceeds, taking enough out to pay the care fees, or buy an Immediate Needs Annuity which will pay a regular amount (tax free if paid direct to the care home). The annuity option transfers the risk that you might live a long time to someone else -otherwise you could find yourself running out of money.

22 October 2012

Should I ... Use my Pension Lump Sum to Pay off my Mortgage?

Generally, pensions will pay you a tax-free lump sum when you first take it. One option for that is to pay off your mortgage or any other outstanding debts.
Note: you have to be over 55, and occupational pension schemes may not let you take your pension early.
That's logical if you have debts outstanding when you retire, but should you consider taking your pension early with the express purpose of paying off debts? ... perhaps while you are still working?
As ever, there are various pros and cons, including the fact that you may lose any further growth in your pension plan, and that the benefits your family will get if you were to die are generally greater before you take a pension than after.
One option is "income drawdown" where you can take the lump sum but don't have to take any income. That is not suitable for everyone but worth considering.
Another thing that may make it a good thing to do for some people is that you can recycle the pension income if you don't yet need it. In other words, use that additional income to pay back into a pension plan! The taxman doesn't mind since your pension income is taxable (so he gets his slice), but then you get tax relief as it goes into a new pension, and you also build up a new tax-free lump sum.
It works particularly well if you are a higher rate taxpayer now but expect to be a basic rate taxpayer in retirement - you get the higher rate relief now but will only pay basic rate tax in retirement.

15 October 2012

Should I ... Plan Where my Assets go on my Death?

It's easy enough to focus on what to spend your money on here and now, but not so easy to invest it for your future spending. And it's even less easy to make plans for what will happen when you die.
That's what Estate Planning is about. And it's an important area since the numbers involved can be pretty big. Saving a five-figure sum in Inheritance Tax (and passing it to family instead!) is not unusual.
So what do you need to do? A starting point could be a quick audit of the likely value of your estate. Your house is normally the largest asset. After that you need to be clear what you want to happen with your assets. Who would you like to benefit? A Will is the first step there. Of course, if you are married, then the considerations will be different.
Beyond that, an assessment of your likely Inheritance Tax liability is essential. There are approaches you can take which will help make sure that you pay as little as possible. But that does require some idea of your plans and expectations for the rest of your life - are you expecting to need residential care, for example? (OK, that may require guesswork rather than planning).
All in all, it's worth not leaving it too late in life. Some Inheritance Tax strategies take 7 years to work. Apart from that, it's good to know that if the worst should happen, you have done everything you need to.

More info and an Inheritance Tax video at Prime Time Financial's website

9 October 2012

The Middle Man Won't Go Away

There was an article in the Financial Times recently about "the middle man who won't go away". That lead me to thinking about middle men (since I am one of them in some respects).

Actually there are various middle men who won't go away. Having recently dealt with estate agents they come to mind first. When the Internet came along there was much talk about changing business models; "dis-intermediation" was the buzz word among business consultants (which was me at the time). That meant getting rid of the middle man, and estate agents seemed to be doomed. After all, why would you use one when you can do a simple search online to find all suitable properties? But estate agents are still with us. Could that possibly mean that we have discovered that they have a useful role to play after all, and that we don't actually want to live without them?

The same applies to recruitment consultants, travel agents, and financial advisers. In our role as intermediaries we provide access to financial products - as well as giving advice.

So in spite of easy access to tons of financial planning, insurance and investment information from helpful websites, I predict that there will still be plenty of people who are unwilling or unable to digest all of that, and who appreciate having someone to guide them through what they need, helping them understand as much as they want to in the process.

27 September 2012

Should I ... Consolidate my Pensions?

It's easy to end up with half a dozen different pension plans over the course of a working life. Is it worth consolidating them? Here are some reasons for and against...
For ...
  • Some pensions have better investment options than others - consolidating could take advantage of those (this is probably the biggest reason to consolidate in my view)
  • Charges levied by pension plans are important - consolidating could mean getting rid of the higher charging plans (typically the older ones)
  • Your admin is easier if you don't have to deal with so many pension plan providers (for example, changes of address and dealing with the annual paperwork)
  • It's also easier to turn your pension into an income at retirement if you have fewer plans to deal with
Against ...
  • If you have any Defined Benefit ("final salary") pensions, then it is rarely worth moving those into a Defined Contribution ("money purchase") plan since you would be taking on the investment risk instead of the pension scheme
  • Some types of Defined Contribution plan have additional benefits which you would lose if you move that pension money elsewhere; that could include a guaranteed annuity rate (which will almost certainly be higher than you would get on the open market), or a higher than normal tax free lump sum entitlement (25% is the normal maximum)
  • If your pension is invested in a With Profits fund, then there may be a Market Value Reduction applied
  • You have to do some work here and now to achieve it!

17 September 2012

Should I ... Defer taking my pension (or State Pension)

There is an updated version of this blog published in September 2017 and taking into account State Pension changes implemented in April 2016. See "Should I Defer Taking my State Pension".

As I've noted in other blogs, if you take an income from a pension plan at the moment - typically via an annuity - it won't be on favourable terms. So the natural thing to do is to wait a bit in the hope that things will improve. But is that the sensible option?
If you have a following wind, then your pension investments will grow well in the meantime, and annuity rates will go back up again and give you a higher income than if you took an income now. Also you would be older, which gives you a higher annuity rate, and you may not be so healthy (sorry to point that out) and may be entitled to an enhanced annuity as a result.
But... You would have missed out on X years of income.
Also, annuity rates for older people are not as high as you might expect, since life expectancy actually increases the older you get - life expectancy for a 65-year old male is 86, but for a 70-year old is 87.
The first point is the key one, though. If you add up the total income received year by year, then my calculations indicate that if you defer taking an income, it might take something between 15 and 25 years before you catch up with the income you would have received (depending on your age, and on assumptions about investments over that time period). How many years will you be around after that point to benefit from the higher income? Your guess is better than mine.
In summary, the only situation that makes it clearly better to defer is if investment performance of your pension is going to be good (perhaps better than 7% or 8% per year), and annuity rates return to historic levels within 5-10 years (which might just happen - who knows). If you think any of that unlikely, then don't defer but go for it sooner! ... but do think about income tax in the meantime - you don't want the extra income to push you into higher rate tax, for example - and you also need to be aware that the death benefits available to your family are likely to be better if you do defer and then die before taking a pension.
What about your State Pension? You can defer taking this beyond your State Pension Age and get a small increase in return. But should you? The same point applies - you are losing income in the meantime, and are pretty unlikely to catch up within a reasonable time. For most people, deferring State Pension doesn't make sense.

12 September 2012

Should I ... Have Life Insurance?

Any sort of insurance is there to protect something. So the question is, What have you got which needs protecting? Or to put it another way, what could happen which will disadvantage you or someone else?
Here's some examples:
- You're the main breadwinner with a young family, and you have a mortgage. If you were to die or to be ill for a while then your family could end up on the street since you couldn't pay the mortgage.
- You are self-employed running your own business. If you are unable to work (even for a short time) then how will you pay the bills?
- You are concerned about contracting a major illness since it runs in the family. How will you cope with the extra expenses?
- You have an Inheritance Tax liability but don't want to give away your assets since you may need them to pay for residential care. How will your family pay the tax bill?
- You are a small business owner and you want to be sure that if you or your business partner were to die then the shares will not go outside the company. How will your partner afford to buy your shares from your estate?
... and of course there are many other scenarios where insurance would help. There are situations where it wouldn't help, though - if you are a single person owning your own house, and without any family, then it could be said that there is nothing to protect. Why waste money on life insurance?!
Life insurance can be pretty cheap in terms of a monthly budget, though, particularly for younger people. So it's worth considering a few scenarios to understand the impact ... or ask an adviser for a financial review.

6 September 2012

Should I ... Buy an Annuity?

Now there's a difficult question. Let's assume here that you are over 55 (so you can take the benefits from your pension plans - in most cases, anyway), that you need income (because you are retiring or long-term unemployed), and that you have one or more "money purchase" pensions with which you can buy an annuity.
The main advantage of buying an annuity is a secure income for life. But the main disadvantages are that you can't change it once started - a standard annuity anyway, and at the moment we are stuck with all-time low annuity rates. That means the income you can buy with your money purchase pension is not much!
So what alternatives are there? Well, it's possible to keep your pension money invested (risking the ups and downs) and take an income from it - that's called pension "drawdown". It's also possible to defer the final decision by buying a short term annuity - perhaps 5 years. That will give you a pre-defined lump sum at that time with which to buy a lifetime annuity.
No easy answers, unfortunately. It's probably the financial decision which it's most important to take advice on.
Even if you do decide to buy an annuity, make sure you get more than one quote. That's what the "Open Market Option" is about.

30 August 2012

Should I ... Invest some of my cash savings?

This is the first in a mini-series of "Should I ...?" blogs - hopefully addressing some of the common questions which we have about our money.
I'm often asked how much you should keep in savings and how much to invest. Well, you should never leave yourself without some easy-access cash, but on the other hand you can have too much of a good thing! For many people, having something like a quarter to a third of their annual expenditure held in cash is about the right level. More if your income is uncertain, less if your circumstances are stable.
So if you have more cash than you need, should you be investing it? In most cases I would have to say "yes". There are caveats, of course, like being able to leave it alone for several years, and being willing to see ups and downs in value. But on balance, and over the longer term, history tells us it is better to be invested than to hold cash.
Where you should put it is a whole different question, of course. That depends on your attitude to investment risk, whether you are looking to take an income from it, and various other things. But a starting point for most people will be to use their stocks and shares ISA allowance to invest in funds. That will give you access not only to shares but also to other "asset classes" like property funds and fixed interest funds which will be less volatile than shares.

29 August 2012

The most important personal finance tip...

There's one bit of advice I would give to anyone and everyone. It's a simple thing to do but will potentially avoid all sorts of problems later in life.
Again and again I see people suffering financially because they haven't followed this simple advice. That could be anything from having to work when they would prefer to retire, up to landing in serious debt when it was avoidable.
It really is simple but I'm going to say it in several different ways:
  • Give yourself a financial buffer
  • Set up an emergency fund or rainy day fund
  • Save!
This tip applies equally to high income and low income situations. Although perhaps it's more significant for high earners, because they are used to spending a lot, and if they lose a job it's a big impact.
I know I have covered this topic before - http://moneyatthespeedoflife.blogspot.co.uk/2012/01/plan-for-more-income.html - but it's amazing how much a cushion of savings can help when something changes in life, or something goes wrong. Give yourself a break.

15 August 2012

Are bonds and gilts too risky?

If you talk about investing to someone, they generally assume shares - otherwise known as equities. That's when you buy the shares of commercial companies and become a part owner of the business, entitled (usually) to any dividends the company pays out, as well as to the change in the share price - hopefully an increase not a decrease!).

But in terms of the sums involved, the other main area of investment is much much larger: Bonds. Those are "fixed interest" investments where the issuer - either a company or a government - promises to make regular fixed interest payments for the life of the bond, and then to give you your original money back at the end of the term. You can also buy and sell at market rates during the life of the bond.

Bond investing used to be the norm, with equity investing seen as too risky. But the big enemy of successful bond investing came along: inflation... the value of the fixed interest payments you receive reduces if inflation increases. Hence the rise in popularity of equities.

But even ignoring the inevitable return of inflation at some point, bond investing is no longer the "invest and forget" option is used to be. The economic situation is causing anomalies such as the "flight to quality" which means that Government gilts have been in demand, increasing their price. So moving your pension plan into gilts a few years before retirement to give you some stability is not necessarily the right move, since they could head downwards again without much notice.

The bottom line is that a diversified approach is really the only way. Along with regular reviews of what your investment portfolio includes you should have some hope - but no guarantees - of staying ahead.

30 July 2012

More About Risk

I spend a lot of time considering and explaining risk in connection with my investment advice. Most of the time we are using "risk" as a shorthand to mean "volatility" - for example, higher "risk" investments are expected to go up and down in value more, but over the long term they are also expected to rise further than lower risk investments.

However, there is more to risk than that. Here's my summary - each of these may need to be considered before investing:
  • Volatility (capital) - how much will the investor see their invested value go up and down? Or, to put it another way, what is the likelihood that it will be down when they want to surrender their money?
  • Volatility (income) - if a regular income is being taken, how well can the investor cope with a variable income?
  • Capital loss - how likely is it that some or all of the value will be permanently lost? You could invest in a small company (low volatility = low "risk" in theory) but your investment could be lost entirely if the company fails
  • Inflation risk - how much of a problem could this be for the investor?
  • Liquidity risk - is it possible that you will not be able to surrender when you want to?

16 July 2012

The Value of Advice

I'm always keen to make sure that my clients get good value when paying for financial advice.

That ideally means that they can see how much better off they are having paid for advice than if they hadn't. Often that is easy to see looking back but is not so easy to be sure about beforehand! Offering "guarantees" is a bit of a "no-no" in the financial world and you can't always be sure what the outcome will be in any case. But on the other hand it can be quite easy to demonstrate in retrospect.

As well as being financially better off, financial advice clients often receive other benefits, including being better protected by insurance, being more confident that they are doing the best for themselves, or reducing the likelihood of a large Inheritance Tax bill on their death, ... to give a few examples.

Here's a list of some achievements (2011) which I included in a recent newsletter. Clients are real but I've changed their names:

Tim and Sarah got 30% more pension income by taking advice, rather than just taking the annuity offered by their pension provider.
Payment from a Critical Illness policy was beneficial to John. After a heart attack he was able to pay off his mortgage.

Paul retired earlier than he had expected. We were able to show him that taking his final salary pension early was worthwhile in the long term, even though the monthly income was lower.

The value of Mike’s investment immediately increased by 25% when he made a lump sum pension contribution, thanks to tax relief.

Clive and Hannah ensured that they would pay less tax in future by moving some existing investment funds across into their ISAs.

Tom and Penny are retired - they increased their income by moving a matured National Savings investment into funds paying an income.

Damian and Carol are still working, and don’t expect to call on their investments just yet. They put aside a lump sum for up to six years in a “kick-out” structured product. They expect a good return in due course (11% per annum).

Philip and Edith are uncomfortable with their investments going up and down too much. A product with a guarantee ensures that their investment will never be worth less than 90% of the amount invested.

Gareth and Sally are not far off retirement but had accumulated various savings and investments which were under-performing. They consolidated onto a platform in ISAs and a new pension plan.

11 July 2012

Auto-enrolment Pensions - Snippet #6

What Pension Scheme Should We Use?
In the early days of auto-enrolment some people thought that all employers had to provide a government-backed pension scheme called (at the time) "Personal Accounts". That isn't the case, and that scheme - now called NEST - is just one of the options to satisfy the auto-enrolment requirements.
In fact, it is perfectly possible to provide a number of different schemes for different types of employee, and that's the route that many are likely to take. So here's a quick summary of the main possibilities:
  • An existing company pension scheme - provided it meets the qualifying criteria
  • A new company pension scheme - some providers are likely to offer additional admin support to employers in meeting their obligations around enrolling staff
  • NEST - a basic scheme for the masses with low costs (although some would argue that point)
  • The Peoples' Pension - another  basic scheme

9 July 2012

Too Little Carr Tax

Following the theme of my previous blog about culture and morality in the financial world, comedian Jimmy Carr's tax affairs have raised some important questions in that area.

For many, it has simply been too easy to condemn his approach of reducing his tax bill. The problem is that he has done nothing illegal. To condemn his approach means that we end up with three levels of legality - illegal, legal but bad, legal and good. The trouble is that the law only has two levels - legal or illegal.

Any further refinement is always going to be subject to the variable whim of public opinion. What about using your ISA allowance to reduce the tax you pay - is that OK? What about making additional pension contributions to obtain tax relief - is that OK? What about shifting the ownership of assets between spouses to reduce tax - is that OK? ... and so on.

Ultimately it should only be the law which judges what is acceptable. Otherwise we all end up open to prosecution at some point in the future - financial advisers particularly! - when the wind of opinion changes direction.

Public opinion should result in a change to the law, not in judgements handed down by the tabloid court!

7 July 2012

Financial Culture and Morality

Two recent news stories have brought the subject of corporate culture and financial morality to our attention.

Firstly there is the Barclays LIBOR-fixing scandal and the corporate culture that seems to have prevailed there. If individuals are prosecuted (and that is probably the right thing to happen) then it would be interesting to know whether those individuals were aware of the consequences of their actions - sufficient to make their own judgements about whether they were engaged in wrongdoing or not. I suspect that they were, although it's possible, I suppose, that they did not understand the full ramifications of their job.

But the larger responsibility must remain with their employer - Barclays, and perhaps other banks yet to be revealed - who gave them a globally significant job to do without sufficient monitoring and, more to the point of this blog, within a corporate culture which apparently did not include the appropriate level of ethics.

I suspect that there are many similar situations in the financial world, and only when something goes publically wrong or is somehow brought to light will we all be outraged yet again.

What is needed is a responsible and ethical culture. But that needs more than a quick training course, for example. It's a question of changing attitudes and culture. And that takes time. The sooner that individual financial institutions have less of an impact on all of our lives the better. They are currently hardly worthy of our trust.

And the second news story? That'll be my next blog.

5 July 2012

Auto-enrolment Pensions - Snippet #5

Who does it apply to?
The legislation talks about "jobholders". What does that mean? The main category includes employees between the ages of 22 and State Pension Age, who ordinarily work in the UK, and earn over £8,105. These are "eligible jobholders" and employers' obligations fully apply to them, although individuals can choose to opt out.

Secondly we have "non-eligible jobholders". These are people not covered above who are between 16 and 22, or State Pension Age and 75, and who earn at least £5,564. These people are not auto-enrolled but can choose to opt in - which means that the employer must make their pension contributions.

Thirdly we have "entitled workers". These earn less than £5,564 and are aged 16-75. They do not belong to the auto-enrolment regime but there are still some employer obligations re pensions.

Of course, people move between those categories. When someone reaches 22 for example, they have to be auto-enrolled, and there are rigid processes to follow within defined timescales.

2 July 2012

Auto-enrolment Pensions - Snippet #4

How much do we have to contribute?
There are 3 basic contribution models of which the first one is the baseline. Here we are talking about the minimum contribution levels. Many employers already make higher contributions, and bearing in mind that this is benefitting your employees, don't just think how little you can get away with! (even though that may be the initial plan).

Option 1:Total contribution at least 8% of "qualifying earnings"
The employer must contribute at least 3% of this (but could choose more), with the employee having 4% deducted from their pay, with the remaining 1% coming from tax relief.
Qualifying earnings includes earnings in a band between £5,500 and £42,500 (roughly), and must include overtime, bonuses, statutory sick / maternity pay, etc..

Option 2: Total contribution at least 9% of "pensionable salary"
The employer must contribute at least 4% (but could choose more), with the employee having 4% deducted from pay, with 1% from tax relief.
Pensionable salary must be at least basic pay, but doesn't have to include variable pay like overtime and bonuses.

Option 3: Total contribution at 7% of all earnings
The employer must contribute at least 3% (but could choose more), with the employee having 3% deducted from pay, with 1% from tax relief.

And finally, although the minimum contribution levels are as above, they can be phased in. For example, if the 3% employer contribution model applies, until September 2017 an employer must contribute at least 1%, then until September 2018 it's 2%, up to the final 3% after that.

28 June 2012

Auto-enrolment Pensions - Snippet #3

What if we have an existing pension scheme?
Employers with an existing pension scheme don't necessarily have to make any changes. BUT... the existing scheme does have to meet the auto-enrolment criteria (or be adapted to do that). This could apply to any occupational pension scheme, or personal pension plan, or stakeholder pension plan.

That means for example:
  • It must fit into the required processes and timescales for enrolling employees into the scheme
  • The employer must have an agreement with the pension provider to make contributions on behalf of the employee
  • Contributions must be at least 3% of qualifying earnings
  • There must also be an agreement between pension provider and employee to contribute the balance of the minimum 8% contributions
  • Contributions must be deducted by the employer from pay

27 June 2012

Paying the Bills

How does your household expenditure compare with this list which I came across today...?

TV - £10
Water - £70
Council Tax - £200
Cable/Sky - £30
Phone - £30
Gas - £70
Electricity - £60
Mortgage - £500
Food £440
TOTAL - £1,400

And the next question... how would you pay for those things if you lost your job / company?

It's true that Payment Protection Insurance (PPI) was mis-sold, but the danger is that we all leave ourselves with no income protection. Short term income protection (like PPI) is still useful - especially for debts like a mortgage. Long term Income Protection may be better value though.

26 June 2012

Auto-enrolment Pensions - Snippet #2

Employer Zone - Auto-enrolment pensions
When is it happening?
Your pension duties as an employer mostly* start at your "staging date". This varies according to several things, mainly the number of employees you have. For BIG employers it's October 2012, but if less than 30 then it's in 2015 or 2016, based on your PAYE reference (that's just a way of spreading the dates).

Here's a full list (with some details still to be finalised): Staging Dates

You can bring forward your staging date if you want to align it with, for example, your year-end date.
The Pensions Regulator will tell you 12 months before, and 3 months before your staging date, but if that's the first time you start thinking about Auto-enrolment then you may not get the best outcome!

* but the legislation (Pensions Act 2008) gives you the obligation not to engage in "prohibited recruitment conduct" from July 2012. That means, for example, there are severe penalties if you encourage a new employee to opt-out of your pension scheme (which would save you having to contribute).

25 June 2012

I'm Feeling Sorry for this Person

This person
  • is early to mid 60's
  • is thinking about retiring - or at least moving to a part time role
  • has 3 or 4 pension plans - which they haven't really kept tabs on
  • has various pension quotes - which they don't fully understand
  • has heard that annuity rates are poor - but doesn't know if that will improve or not
  • had some plans for their retirement - but are now wondering if it's going to happen like that
That covers many people, unfortunately. And the reason I genuinely feel sorry for them is that they shouldn't have to understand the ins and outs of pension planning, but if they don't, there is a big chance they will lose out financially. Decisions made at the point of retirement can be final, but can apply for the next 30 years or more.

The alternative, of course, is to ask a financial adviser. Fortunately, that's what people are increasingly realising. Money well spent!

22 June 2012

Auto-enrolment Pensions - Snippet #1

Employers' New Responsibilities - A Summary
The biggest change to work-based pensions in a generation is rapidly coming down the line, and many employers (especially smaller ones) remain unprepared. Employers have been known to comment:

"Why didn't we know about this earlier?
We must get the rules changed!"

But it's too far along to change things now, so live with it!

I plan to blog a few key points in the near future to help towards understanding. For now, here's a few basic facts:
  • Employers will have to have a pension scheme in place
  • Processes will have to exist to make sure that employees are "auto-enrolled" into it
  • Employees can opt out, but they have to do so repeatedly - the Government's intention is to get people into pensions!
  • There are big penalties on employers for non-compliance - this is not another Stakeholder Pensions regime which you can just ignore!
  • Enrolment is being phased in from 2012 to 2018, based (mostly) on employer size, but recruitment is affected from July 2012
  • Employers must contribute a minimum of 3% of salary to each employee's plan
  • The Government are setting up a default pension scheme which will suit a few employers called "NEST"
  • Employers can have more than one scheme covering different classes of worker

21 June 2012

Best Savings Rates

We continue to be in a low-interest rate world for our savings, as we all know. Finding the best account for your savings is not very easy, either. The banks make it even more of a challenge by reducing interest rates on some accounts after a year, perhaps, hoping that we will forget - to their benefit, of course!

Whenever I try an online comparison tool I seem to find limitations - like the Money Advice Service told me no accounts were available for my search criteria without explanation, and on the next search told me there were 410 accounts available, but I couldn't filter out those where you had to go to the other end of the country into a branch to open an account!

Anyway, my point is that intelligence is needed - but if you've got some of that, here are some comparison tools which are worth exploring.

  • MoneyFacts - as linked from Prime Time Financial's web site!
  • MoneySupermarket - search allows you to put your own bank's available accounts at the top of the results, since you may prefer to stay with them

11 June 2012

New Flat Rate State Pension - Winners and Losers

The Government's plan is to replace the two existing State Pensions (Basic and State Second Pension - previously SERPS) with a flat rate one. £140 per week has been suggested. It's not law yet, but if it happens like that there will be significant winners and losers:

  • Those only entitled to the Basic State Pension (currently £107 per week)
  • The self-employed - who pay lower National Insurance, and cannot accrue State Second Pension benefits - they would get the higher rate for no additional contribution
  • Those who were "contracted out" in the past (although it's not possible any longer) - their National Insurance contributions have been funding a private pension which they would still get, as well as the flat rate State Pension
  • Higher earners who have been "contracted in" so their higher earnings have been accruing them a bigger State Second Pension - which they wouldn't necessarily receive if it becomes a flat rate
There's plenty of water to flow under the bridge yet, but the key message must be (as always) take as much control of your own pension arrangements as possible by contributing to a private scheme.

31 May 2012

The Magic of Pound-Cost Averaging

Well that's a mouthful - and it sounds too technical to be bothered with, but sticking with me could be to your advantage. Pound-cost averaging is all about investing smaller amounts of money on a regular basis.

A volatile market (such as we have at the moment) can work to your advantage if you do that. The key point is that when markets are down, your regular sum of money will buy more shares or units, and that reduces the average cost of units in your holding.

Here's an example in a falling market, investing £100 a month:
  • Month 1 - If unit price is £25 you purchase 4 units
  • Month 2 - If unit price is £20 you purchase 5 units
  • Month 3 - If unit price is £10 you purchase 10 units
You now hold 19 units and have spent £300, so the average price you paid is £15.79.

Of course, you have to have an expectation that your investment will eventually rise in value again, but since you have a well-balanced, expertly selected portfolio (you have, haven't you?!) that's a perfectly reasonable expectation. And when the price does rise - say it goes back towards £25 - you have made a good return... much better than stopping investing until it has gone back up again!

A similar effect applies in a rising market, too.

It has been shown repeatedly that it's not possible to reliably judge the bottom of the market. So in the absence of that possibility, in a volatile market regular investing is the best approach.

30 May 2012

Now is the Time To ...

When people hear that share prices are falling, markets are uncertain, global economies are at risk, etc., the normal reaction is to want to leave it all behind and sell your investments.

But of course that's exactly the wrong thing to do. That's using short term information to make long term decisions. If your investments are in appropriate places then the ups and downs are expected and there's nothing you need to do.

In any case, by the time you've heard about a fall on the news, it has already affected any shares you hold - and its effect may not even be that significant if you have a sensibly diversified portfolio.

While timing the market has little place in financial planning, if you were going to do anything then now is the time to invest. When would you rather shop? When prices are high or during a sale?

One very effective way to invest is regularly - perhaps on a monthly basis. There are several areas where "magic" comes into financial planning - and "pound-cost averaging", which results from regular investing, is one of them. It especially works in volatile markets. I'll write another blog on that. (The amazing power of compound interest is another bit of magic.)

So now is not the time to sell up - now is the time to make sure you have a sensible financial plan, and then to invest if you can.

30 April 2012

Your State Pension Age

The age when you are entitled to receive any State Pension is increasing. There have been various legislative changes in recent years, and some announcements which are not yet law. Here's a quick summary.

For women, State Pension Age is rising from 60 to 65 between 2016 and 2018. It then rises for everyone to 66 between 2018 and 2020. That was in the Pensions Act 2011.

Current legislation is for an increase to 67 between 2034 and 2036, and to 68 by 2046. But in November 2011 it was announced that the increase to 67 is being brought forward to be between 2026 and 2028.

More information - and a pension age calculator - at

... and it's always worth remembering that you can defer taking your State Pension in order to increase it a little, and also that State Pension Age has nothing to do with when you take other pensions (which could be before or after that age), nor with when you actually stop work.

27 April 2012

Can't we make it simple?

I reviewed our gas and electricity supplier at home recently and experienced something of the complication and confusion which I guess that financial advice clients experience!

My objective is always to make things as simple as possible so that clients can make an informed decision about something. But I'm all too aware that I am not always successful - partly because some things just are complicated (try explaining higher rate pension tax relief, or charges levied on unit trust funds, for example!), and partly because the Financial Services Authority expect all sorts of information to be provided so that people have the opportunity to fully know what they are getting into (good in theory but for many people it just confuses them).
So it was interesting to see the amount of information and understanding I needed to acquire even to be able to compare gas suppliers. Not only do you have a standing charge and a cost per unit, but these can vary depending on how many you use, what month of the year it is, etc.. Then you get different levels of fixed prices, early exit charges, billing options, payment options, and so on. And if you add in dual-fuel options then it really starts to get complicated.

Surely there's a case for keeping things simple - I might even be willing to pay a little more for something I understand - or to have access to someone who can explain it to me!

23 April 2012

Should you do a Tax Return?

Useful list from HMRC - when you need to do a tax return. If:
  • Self-employed
  • Company director
  • Income over £100,000
  • Savings / investment income over £10,000
  • More than £2,500 in untaxed income
  • Income from letting out property
  • Foreign income liable to UK tax
  • Employee claiming expenses of more than £2,500
Also worth doing (or at least telling HMRC) if:
  • You're a higher rate taxpayer and have made pension contributions or Gift Aid donations

12 April 2012

What You Need for a Good Pension

Continuing my recent theme on bad news for retirees (I promise to be more positive in future!)... I see some recent research* has looked at the required pension contributions to achieve a reasonable pension income.

In 2000, the average 30-year old could have expected to make contributions of 12% of salary in order to provide two thirds of their final salary from retirement at 65. In fact, it has turned out that they would have needed to contribute 39% of salary to achieve that. And of course to make up the shortfall later means you now have to increase contributions even higher to make up the difference!

It's difficult to see how anyone can make much of an impact on this shortfall - it's unfortunately a question of lowering expectations: working longer, cutting back retirement plans, raising money against your house, not passing on an inheritance, and so on.

If only you'd been a teacher, a nurse, or a civil servant...

*Alexander Forbes National Pension Index

9 April 2012

Bad News for Retirees

Although most people cannot now be forced to retire at a certain age, we don't exactly have complete flexibility on when we do. So it certainly doesn't seem fair that those who want to retire at the moment are liable to get a particularly poor deal.

That doesn't apply if the bulk of your pension income will come from a reliable defined benefit (final salary) pension scheme - such as public sector workers (although many don't seem to realise the value of what they have got).

But if you have a money purchase pension plan and are intending to buy an annuity, things have never been worse. And if you are a man, things will go downhill even further from December 2012. EU rules will stipulate that men - who until then get a better annuity rate due to shorter life expectancy - have to be offered the same rate as women. Women's rates may rise (or they may not!).

The only positive angle on the situation is that there are now a range of other ways of taking an income from your pension which may improve the situation. Advice is needed to navigate your way through the options, but it's essential to look given that these are decisions which will affect the rest of your life.

Good News for Investors?

The first quarter of 2012 has been good for investors, with share prices generally rallying. There is a bit more optimism around that there will be a global economic recovery, and that the eurozone will avoid a collapse. In particular, the US has been leading the world away from the threat of a general recession.

But (.. there's always a but!), the last few weeks have seen a hesitation in that forward progress and the financial world still feels pretty susceptible to any bad news. "There's little room for manoeuvre and no room for policy mistakes" says the IMF.

So it's worth keeping a good spread of investments, including fixed interest, and not going too strong on any one type of investment. Short term winners - not that we invest for the short term - include smaller company funds, and strategic bond (fixed interest) funds.

26 March 2012

What's your "Retirement Personality"?

MGM Advantage recently produced a report with six "personality types" for retirees:
  • Thriving
  • Aspiring
  • Comfortable
  • Careful
  • Squeezed
  • Restricted
Since these are largely based on someone's financial situation I don't really think they are "personality types" as such, but  they do serve to illustrate the range of possible situations which people face in retirement.

54% of those interviewed said they were "not at all prepared for retirement" (presumably those who were not yet retired!).

Regular readers of this blog will know that you really can be prepared!

13 March 2012

Should you worry about charges?

Periodically the Sunday papers pick up on "the scandal of charges" that are applied to investment and pension products as though it's hot news. The fact is that charges are important and it's worth being vigilant about what is being deducted from your money, but in general things are slowly going in the right direction, with general awareness and transparency increasing.

Cutting the value of your money
Although there may be some up-front charges - an initial charge for the product, a bid-offer spread, commission or an Advice Fee, perhaps - the most significant charges are the ones you pay every year.

I've always looked to keep the costs down for my clients (of course), but it's only recently that I've tried to visualise the effect of those charges. The fact is that a 1% annual charge will reduce the value of your investment or pension by nearly 20% over 20 years. Obvious when you think about it, but that's a big chunk of your investment to "lose".
The hope is that investment growth will dwarf the charges of course!. But in times when growth is harder to come by, as in the past few years, those charges loom larger in significance.

The answer is certainly not to keep your money under the mattress (or even to leave it in the bank). But a healthy consideration of the costs can only be a good thing.

23 February 2012

Bed and ISA - what's that and can you benefit?

In the old days you could "Bed and Breakfast" shares, unit trusts, etc., to save you Capital Gains Tax. You sold the shares at the end of one day making use of your CGT allowance for the tax year, then bought them back first then next morning. As a new purchase there was no capital gain so no CGT liability.

That is not possible now - you have to leave 30 days between sale and purchase, which leaves too much possibility for the pricing to move against you for most people.

BUT - you can "Bed and ISA", which means selling shares, funds, ... you own which are not in a Stocks and Shares ISA and then buying them back in your ISA. That way there is no future CGT liability since an ISA protects you from that.

You could also "Bed and Spouse" which means that you sell and your spouse buys back.

21 February 2012

Why your Pension has Not Done Well... and what to do about it

I regularly get people saying to me “My pension is rubbish - it hasn’t grown in years. I wouldn’t use Company X again” - etc., etc..

So why is that, and what can you do about it? There are two main factors which affect the value of your money purchase pension plan:
  • Investment performance, and
  • Charges
A lot could be said about charges, but the longer you have held a pension plan the higher and less clear they are likely to be! The pension provider may even still be paying an annual sum to the original adviser who set it up for you all those years ago, even though you never heard from him again - most likely at your expense. While some level of charges is necessary to pay for someone to manage your investment, communicate valuations to you each year, and so on, the level may or may not be “reasonable” by today’s standards.
Although the charges act as an ongoing drag on the performance of your pension, where it is invested is likely to have a bigger impact. Most people are not investment experts and if given a choice of funds will (apparently) choose the ones they like the sound of near the top of the list - those beginning with “A” get picked the most! Alternatively, a pension provider might offer a smaller range of “managed” funds. The provider’s expertise is on the line here, but that doesn’t mean much if the investors don’t recognise good or bad performance.
On top of that there is the underlying performance of investment markets. Over the last 12 years, the average equity return (UK shares) will have lost you money, although bonds (fixed interest investments) have fared better.
So what can you do? Well first of all you need information. What are the charges? Where are you invested? And what alternatives are available? In most cases you can switch investment funds fairly easily within the plan. If you can’t get those answers - either by looking at your documentation or by phoning the company  - then you should consider transferring your pension plan elsewhere. That is not a difficult process, and might even give you a chance to consolidate with other pension plans.
Then you can see what the charges are going to be, and you can choose investments which match your outlook and the time you have before retirement. There really is no substitute for knowledge here. Generic funds like “managed” funds or trackers or “lifestyle” funds have some value, but may end up performing only as well as the market average (reduced by charges, of course). So you are very likely to be better off eventually if you apply some more expertise and use an adviser to select investments for you based on your situation and outlook.
Pension performance can be great! So don’t be hampered by old-fashioned charges and limited investment options.

10 February 2012

When did you stop believing in the Pension Fairy?

... or perhaps you still do! I was inspired by Red Blog to ask the question, since so many people act as if she exists, and don't look after themselves.

There's some great research on that blog, too, which demonstrates how we all have to work so much harder than twenty or more years ago to get a reasonable pension income. In 1980 you needed a pension pot equivalent to 1.8 times your salary to get two thirds of your salary in a pension. If you retired in 2010 you needed a pot 9.3 times your salary!

(We are talking defined contribution / money purchase pensions here, rather than defined benefit / final salary. If you have one of the latter, the pension fairy still exists for you!)

31 January 2012

Plan for More Income!

I am often surprised by the number of people I come across who have a good income but simply spend it all, leaving little in the way of savings or investments.

If I prepare a financial plan for a client I would generally recommend a strategy which will include easy-access savings, plus investments which can build up to provide a worthwhile and flexible nest-egg to be used later in life. This could include investing the tax-free lump sum which is generally available when you first take your pension.

Apart from spending sums on capital items (like the house or car), or holidays, etc., it gives you the option of increasing your income in retirement. Investing for income requires a different approach (although it's easy enough to make changes when required).

Various types of investment are available which pay out regularly, including unit trust or investment trust funds which focus on "fixed interest" investments like corporate bonds, or on shares which pay dividends - known as "equity income" funds. Then there are structured products which pay a regular sum (possibly subject to the stock market keeping above a certain level). Investment bonds issued by insurance companies (either onshore or offshore) have a different tax treatment and are the best approach for some people.

All in all, it's worth increasing your options for the future by having a plan to put some aside in the present!

26 January 2012

Don't Buy an Annuity Yet...

...without considering all the options. There is a very topical choice to be made as we head towards April 2012, as well as the usual choices that are available for taking an income from your pension (and we are talking "money purchase" or "defined contribution" here).
Pension plans containing "protected rights" (which relate to any time you were "contracted out" of the State Second Pension (or SERPS)) currently have some restrictions on how you take an income from that part of your pension. For instance, if you are married you must buy a 50% spouse's pension.

BUT - from April this year those restrictions are being removed. As a result, you may do better to wait and buy an annuity after April. Then you could choose a different level of income for spouse (or none at all if they have their own pension provision).

18 January 2012

Some Pension Myths

What can I do to help people get a better income in retirement? Debunk some myths, perhaps...

I don't need a pension - the Government will provide for me
Oh yes?! The Basic State Pension is now £5,312 per year. Do you think it is more likely to increase or decrease?!

My house is my pension
It's true that a pension is not the only way of generating an income in retirement. But if  you plan to use your house you would have to sell it or rent it out, and where will you live?

I'm too young to start saving for a pension
If you are going to wait until your 30's, 40's, or even 50's before starting to save for a pension there is much less time for investments to grow (yes I know that growth hasn't been on the agenda for a while but I fully expect it to return in due course). So you would have to save a very large proportion of your income. Much better to spread it over a working life.

Pensions are too risky
The best growth generally comes from investments which go up and down in value, which is often described as "risky". But over the longer term the ups and downs turn into growth. Anyway, where can you put your money that isn't "risky"?

Pensions are too expensive
It's certainly worth looking at charges in a pension plan - some older plans are definitely "unfriendly" from that point of view. But it doesn't have to be expensive.

I can't afford to save in a pension
If you don't, then you are effectively stealing from your future self! Yes, you have to live, which includes servicing any debts you have, but most people have some discretion over what they spend on.

Annuities are bad value
Annuity rates are the lowest they have ever been, it's true. It won't (hopefully) always be like that, and in any case, buying an annuity is not the only way to take a pension income.

16 January 2012

Baby boomers are retiring!

In 2012, 150,000 more people reach the age of 65 than in 2011. 

This is in addition to the long term trend towards an aging population, and is specific to the post-war generation. This ‘boom’ lasts for approximately 3 years, with around 2.25 million people hitting the 65 year milestone.

Blog Archive