Money at the Speed of Life

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

2012-02-23T10:16:00.000Z

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.

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

2012-02-21T11:06:00.002Z

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.

When did you stop believing in the Pension Fairy?

2012-02-10T12:05:00.000Z

... 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!)

Plan for More Income!

2012-01-31T15:24:00.000Z

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!

Don't Buy an Annuity Yet...

2012-01-26T15:56:00.000Z

...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).

Some Pension Myths

2012-01-18T14:26:00.000Z

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.

Baby boomers are retiring!

2012-01-16T10:14:00.000Z

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.

Pay Less Inheritance Tax!

2011-12-23T10:09:00.000Z

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.

How to Recover from a Poor Investment Experience

2011-12-15T10:42:00.001Z

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.

What can you achieve with trusts?

2011-12-12T10:50:00.000Z

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).

A Generation Retiring into Poverty?

2011-12-04T20:14:00.001Z

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.

More people are giving to charity

2011-12-02T11:28:00.001Z

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.

Do you need life insurance?

2011-12-01T16:54:00.001Z

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

2011-12-01T15:37:00.001Z

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.

How to Choose Your Investments

2011-11-02T14:48:00.001Z

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.

The "Corporate Greed" Protests

2011-10-25T10:03:00.000+01:00

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.

Public Sector Pensions - Some Myths

2011-10-17T09:56:00.000+01:00

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).

Investment Diversity - What Works?

2011-10-14T09:40:00.000+01:00

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!

Paying Commission for Advice

2011-10-10T15:03:00.000+01:00

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?!)

Pensions - Is this you?

2011-10-06T10:33:00.000+01:00

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

Which is worse - dentist or photographer?

2011-10-01T14:51:00.001+01:00

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.

Pension or ISA?

2011-09-11T20:24:00.000+01:00

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.

The Euro Struggles On

2011-09-06T11:41:00.000+01:00

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??!!

Hedging and Ice Cream

2011-09-02T22:56:00.000+01:00

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).

Investment Reviews

2011-08-30T09:52:00.000+01:00

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.

Do you need a new investment strategy?

2011-08-19T09:36:00.000+01:00

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.

BUT...

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!

The Washing Machine Gives Up

2011-08-15T20:05:00.003+01:00

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.

Debt and Scary Americans

2011-07-28T09:45:00.004+01:00

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!

Volatility

2011-07-22T10:45:00.000+01:00

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.

The Euro Future

2011-07-14T21:53:00.001+01:00

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.

Don't Use Your Pension Money...

2011-07-08T10:48:00.000+01:00

...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.

Public Sector Pensions - My Key Points

2011-06-30T18:04:00.000+01:00

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.

If you're lucky you'll have a pension

2011-06-27T17:19:00.000+01:00

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!

Trivial Pursuit of Pension Money

2011-06-23T18:29:00.000+01:00

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.

Don't use your pension!

2011-06-09T14:55:00.042+01:00

... 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!

Inflation-linked National Savings Certificates are back

2011-05-17T11:07:00.000+01:00

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.

Welcome to 1981

2011-04-23T13:43:00.001+01:00

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!

Junior ISAs

2011-04-15T22:07:00.000+01:00

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.

Equity Release Experience

2011-03-31T12:40:00.000+01:00

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.

The Lighter Side of Tax Relief

2011-03-16T15:23:00.000Z

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.

Financial Protection for over 50's

2011-03-03T13:01:00.000Z

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.

Unisex pricing for insurance

2011-03-01T12:37:00.006Z

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.

Time to Consider Equity Release?

2011-02-28T21:17:00.000Z

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.

Life Insurance in Small Businesses

2011-02-16T10:02:00.000Z

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!

Inflation ... and What You Can Do

2011-01-03T12:24:00.000Z

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.

Baby Boomer Investing

2010-12-21T10:31:00.000Z

As someone at the tail end of the baby boomer era I have often wondered when "our" bulge in the population would start to assert itself. Why is it that most advertising is targeted at the 20's and 30's? Why is the TV at the gym always showing MTV (a constant stream of music videos if you haven't heard of that channel!)? There is an assumption that the world is for the young. Now, up to a point that is true, and as someone with an entrepreneurial leaning I can fully understand advertisers' desire to target their marketing spend at those who will buy (some would say - at those who haven't yet learnt only to buy what matters!).

So it was good to hear an investment fund manager having thoughts along the same lines. Stewart Cowley manages the Old Mutual Global Strategic Bond fund. Presumably because of that he thinks all the time about where the economy is going and what might be profitable in the future. So he created a list of goods and services which might increase in price in future due to the increased demand of baby boomers. Here is his list.

Bungalows - nobody will want to live in multistorey ‘trophy house’ accommodation
Healthcare - the desperate need to live longer will overwhelm the accumulation of wealth and they will pay anything for it
Bonds* - a secure income without having to bother with the daily volatility of stock markets interrupting their day on the golf course
Travel - having worked for the past 30 years, it’s time to live a little and see more of the world than the hotel room and airport with which they became familiar whilst away on business trips
Internet connectivity - their children probably live far away, so keeping in touch will be a priority
The secondary or tertiary career - sitting at home all day will become boring and a desire to have a portfolio of activities will be attractive, especially if it involves ‘putting something back’ into the community
Cheap transport - getting around at an affordable price, especially as the oil price rises
Funding their children - the alternative to having them live at home will see them investing in housing and subsidising the beginning of their careers
Tax planning - how can they legally hand as much of their accumulated wealth as possible on to the next generation?
Care homes - in their final years, where can they live comfortably in security and surrounded by like-minded people?

Whether there is any opportunity to benefit from that list in terms of investing, I don't know. Changes of a demographic nature do, by definition, tend to arrive rather slowly giving everyone a chance to jump on the bandwagon.

The other interesting point he made in the same article was that the emphasis will (continue to?) shift towards bonds* and away from equities. As a fixed interest (bond) fund manager he would say that wouldn't he? But the point he makes about the golf course is a good one.

It all goes to show that you can't just invest in isolation. The world is ever-changing and being aware of the wider implications of what you are doing is always going to be helpful - or at least working with someone who can keep you aware.

* "Bonds" is an over-used word in finance. Here he (and I) are referring to "fixed interest" investments such as government gilts and corporate bonds (loans to companies) which pay a regular income and are fairly stable relative to equities.

The End of National Insurance?

2010-12-06T09:14:00.001Z

The Centre for Policy Studies (CPS) has published a new report which proposes the abolition of National Insurance.

That sounds kind of drastic, but given that it has changed significantly since its introduction and that the Government are considering a flat rate, non-means-tested state pension, it becomes little more than some extra tax to pay.

Of course, that doesn't mean that we will end up paying less tax (you didn't really expect that did you?) but it could mean a significant saving in government costs - always worth aiming at.

The CPS describe National Insurance as "complex, cumbersome, misleading and ramshackle". There is no longer any real relationship between what you contribute and what you get, since most benefits paid for out of NI are now flat rate benefits, even though contributions are still related to earnings.

However, I can't see its abolition happening any time soon. It is useful to politicians who are still able to hide behind it as a way of raising taxes without calling it a tax. And with all the reform going on in the pensions world - mostly good stuff - tackling NI in the near future is probably a step too far.

Effective Charity Giving - II - Other Taxes and Higher Rate Taxpayers

2010-11-12T09:47:00.000Z

In the previous article I looked at Gift Aid and Payroll Giving. But there are other ways of giving to charity which enable it to be as effective as possible, both for you and for the charity. “Effective” generally means saving tax and that’s what we will look at here.

I mentioned previously that higher rate taxpayers could reclaim the difference between higher rate tax and basic rate tax on donations made via Gift Aid. In effect, your basic rate allowance is increased by the gross amount of the donation (the net amount of the gift plus basic rate tax reclaimed by the charity). This has a big advantage for those whose taxable income is in the range £100,000 to £112,950 because in this range your personal allowance is progressively withdrawn, so there is an effective tax rate of 60%. Giving to charity and thereby increasing your basic rate allowance means that less of your income (or possibly none) will fall into that band.

There is a similar effect for those with taxable income over £150,000 and subject to the top rate of 50% income tax. Reducing the taxable income to below that level is worthwhile.

Here’s a useful fact: Gifts to charity are free of Capital Gains Tax (CGT). What that means is that any capital gain you have in an asset (such as shares) which would cost you 18% or 28% CGT if you were to sell it can be avoided completely if you donate the asset to a registered charity.

And here’s another useful fact: Gifts to charity are free of Inheritance Tax (IHT). Whether you make the gift in your will, or whether it is before your death the value would not be added back into your estate in order to calculate IHT. (It would be in most circumstances if you made the gift to a non-charity within 7 years of your death.) The gift to charity also leaves the annual IHT gift allowance of £3,000 unaffected and available for other gifts.

And the third in the trio of our most common taxes is of course Income Tax. The good news here is that (quite apart from Gift Aid and Payroll Giving covered in a previous article) certain gifts to charity can get you Income Tax relief. They include shares, land, or buildings. In effect, you can deduct the value of the gift from your taxable income.

Companies which make gifts to charity can also save tax. The gift is made gross (before deduction of Corporation Tax), and the value may be deducted from profits when calculating the Corporation Tax liability.

Contracting Out - Bringing some Clarity

2010-11-08T14:19:00.002Z

"Contracting out" has been - to many people - a confusing aspect of pensions for a good number of years now. What does it mean, and does it matter?!

What you are contracting out of is the State Second Pension, or S2P, and its predecessor the State Earnings Related Pension Scheme, or SERPS. Those are pension schemes set up by the Government aiming to supplement your basic State Pension in retirement, based on your earnings.

However, many people are not part of that scheme because they have another pension plan which will provide at least equivalent benefits. In return for not receiving that additional pension from the State, your National Insurance contributions (and those your employer pays) are reduced.

And just to add to the complication you are either contracted in or contracted out at any one time, but many people will find themselves switching back and forth as they change jobs or pension plans. So for some of your working years you will find that you have an entitlement to the State Second Pension but for others you won’t.

Most "final salary" or other defined benefit schemes are contracted out. So you won't receive anything from the Government beyond the basic State Pension for the years you were in that scheme.

Where your employer provides a "money purchase" or defined contribution scheme, it’s possible that the whole pension scheme has contracted out or that you may have decided to contract out on an individual basis, while a "group personal pension" or "stakeholder" plan would require you to have made the decision to contract out individually.

If you are not sure whether you are currently contracted in our out you can ask your employer or check your annual statement. Any reference to "rebates" or "protected rights" would indicate that you are contracted out. You can also check by ringing HMRC’s Contracted Out Pension Helpline on 0845 915 0150 - see HMRC Helpline information

Even if you have been contracted out, whether you are now better to be in our out is not a straightforward decision. From 2012 only final salary pension schemes will be able to contract out, so are you better off contracting back in before that? You can make the decision to do so before each tax year, although the decision will not affect previous years.

There are several factors to bear in mind in making the decision:

• If you remain contracted out, your employer or pension plan takes the responsibility of providing the additional pension, either from the employer's scheme or from the investment returns in a money purchase plan - and you may have a view on the risk involved with that

• Contracting back in will increase your National Insurance contributions a little

• The Pensions Advisory Service Contracting Out Planner suggest that you are likely to be better to be contracted in if you are aged 40-45 or older

• You will have more flexibility if you are contracted out - in a money purchase plan you can take up to 25% of your pension plan as a tax-free lump sum after age 55, and contracting out means a higher value in your pension plan, and therefore a higher lump sum

• As well as a lump sum you can take other pension benefits from age 55 out of your own pension plan (boosted by contracting out) whereas contracted in benefits (the State Second Pension) can only be taken from state pension age (increasing to 66 by April 2020)

• Legislation may change that reduces the value of contracted in benefits, whereas contracted out benefits are yours

• Conversely you may end up being better off with the state benefits, particularly if you are responsible for choosing the investment funds and those funds under-perform or have high charges

Here are some further information links:

The Department for Work and Pensions has a leaflet called Contracted Out Pensions available on the Directgov website.

The government-funded information website Moneymadeclear also has a leaflet on contracting out which you can download.

And the government’s Directgov website also has a Guide to Contracting out

Effective Charity Giving - I - Gift Aid

2010-11-03T12:15:00.000Z

Many of us like to give to charities, so here are few ways to make sure that your giving is as effective as it can be. This article mainly covers Gift Aid, while a later one will cover other ways of giving, and giving by higher rate taxpayers. Just to be clear... when we talk about charities they have to be registered as such to gain tax benefits.

First of all it is worth identifying for yourself what charitable concerns you have. It is far more effective for a charity if you give a regular amount - and potentially support them in other ways as well - rather than drop a few coins into a collecting tin occasionally. Much as we would like to, none of us has the resources to support every charity there is.

One of the best ways to give to charity is also the simplest - Gift Aid. Your gift is treated as a net amount on which you have already paid basic rate tax. The charity is then able to reclaim that basic rate tax adding to the value of your donation. All you have to do is sign their form to say that you want to give in that way - and the form only has to be done once.

If you are a higher rate taxpayer (40%) or “additional rate” (50%) then you need to declare your gifts on your self-assessment tax return (or the P810 Tax Review form from HMRC if you don’t do a tax return), and the tax you have paid on that donation above the basic rate can be reclaimed by you.

Here’s an example: you give £10, the charity reclaims basic rate tax on that - an additional £2.50. And as a higher rate taxpayer you could reclaim an additional £2.50.

One thing to look out for with Gift Aid - you do need to make sure that you have paid enough tax in the year to cover the donation. That can be either Income Tax and/or Capital Gains Tax. Otherwise HMRC may ask you to make up any shortfall (the tax “rebates” they have paid out to your charities). If you haven’t paid enough in the current year then you can ask HMRC to carry back a donation as if it were paid in the previous tax year.

There is more detail on the HMRC website at: http://www.hmrc.gov.uk/individuals/giving/gift-aid.htm

If your employer operates a payroll giving scheme, you can achieve a similar result as Gift Aid. In this case, the donation is made gross (before any tax is deducted).

See: http://www.hmrc.gov.uk/individuals/giving/payroll.htm for more on that.

Investment charges in the News

2010-10-23T18:53:00.003+01:00

I have come across several news items this month which talk about investment charges. There was a rather ill-informed Panorama programme on pensions and on how much money people were supposedly losing. and there was a MoneyMail supplement "revealing" the extent of the problem.

The fact is that it is important to look at the charges on an investment or pension. Over the long term they can have a significant impact on the growth (or otherwise) of your investment. And it is the annual charges which are the most significant, even though they are likely to be smaller than any initial charge. If you invest £10,000, the difference between growth at 5% and 4% (with an extra charge for example) is approaching £1,500 over 10 years.

Nevertheless, investment companies do have a right to make a profit as well as having costs.

Investors can fall into one of two camps - either they think any charges are a bad thing, and stick to a poorly performing bank account (remind yourself who gets the profit from that!), or they ignore the charges. Neither is the best approach.

A realistic look at the numbers for two different options - invest or don't - will normally indicate what is the best option for you. The key thing is that the charges have to be clear, and while there is room for improvement that has improved a lot in recent years.

Pensions Change (again)

2010-10-15T17:15:00.000+01:00

For something that, by its nature, is long term, pensions have an amazingly large number of legislative changes. The changes announced this week are pretty significant for many people coming up to retirement, but fortunately are pretty sensible, given the financial situation of the country. (The change may just affect some people who are already retired if they have large pension funds not "crystallised", but that is less common.)

The headline was about the Annual Allowance which has reduced to £50,000 per year (from £255,000). In other words that's the limit to the "value which can be added" to all your pensions in a year.

You may think that that doesn't apply to many people, but where someone is a high earner and has a final salary ("defined benefit") pension, there may be a danger of hitting the limit. Also, where someone is in the habit of putting lump sums into their pension when their business has cash available, perhaps, they too could be limited.

There is also a reduction in the Lifetime Allowance - that's the maximum value of all your pension benefits you are allowed to have at retirement before there is an additional tax charge.

As ever, there are details to be considered (like the fact that a year is not necessarily 12 months long!, and that any unused Annual Allowance can now be carried over), but overall it could end up costing some people a five-figure sum in the near future!

Raiding Savings - Good News

2010-08-21T11:33:00.000+01:00

Almost a third of adults have raided savings in the past year to cover income shortfalls, according to investment firm Schroders (quoted by the BBC: http://www.bbc.co.uk/news/business-11039316).

Obviously it's not good to have an income shortfall, but given that "life happens" it's much better to have thought ahead and accumulated some savings than to cover an income shortfall with borrowing! And let's face it, there is little incentive to keep money in savings accounts at the moment.

The key thing is to have the strategy to accumulate savings in the first place. A quarter to a third of your annual income set aside and easily available is a good rule of thumb - perhaps up to a half if your income is less certain (self-employed perhaps?) or outgoings are very "lumpy".

The End of Final Salary Pension Transfers?

2010-08-12T12:27:00.000+01:00

Health Warning: This may all sound like gobbledygook! If it does, don't worry about it! If you have any questions about final salary pension schemes we may be able to help.

At the moment it is possible to transfer from a final salary pension scheme into a defined contribution scheme prior to retirement. Although it is not often worthwhile (since the employer guarantees the ongoing benefits), it can be worthwhile if you have doubts about the ongoing viability of the scheme or if you need extra flexibility of income - by transferring to an "income drawdown" scheme, for example.

But it looks like the Department for Work and Pensions are proposing to abolish transfers from final salary schemes into defined contribution pensions from 2012 onwards. Part of the reason may be that final salary schemes are often contracted out of the State Second Pension and "contracting out" will be abolished for defined contribution schemes.

Financial Services - A Culture Needing a Crisis - Part 2

2010-08-04T21:23:00.001+01:00

part 2... (read Part 1 first by clicking here)

I’d have to say that I would have agreed with the view that financial markets should be left to act according to the free markets a few years ago. Ultimately buyers and sellers sort out what works and what doesn’t and how much things should cost. The trouble with the financial world is that it has become global, and it is now far removed from a single buyer and a single seller (or a borrower and a lender in the banking world). Complicated financial products were invented which enabled various high risk debts (particularly mortgage loans for low income families in America) to be packaged up (into things called Collateralized Debt Obligations – CDOs) and sold on to other banks as low risk debts.

Transparency was lacking, and also, since it was in everyone’s interests that this whole financial product edifice worked, no-one acted as the whistle-blower. To put it another way, it wasn’t in the culture to flag up a potential calamity:

Politicians were happy – low income families were in “their own” homes which was good for votes (and that goes right back to Bill Clinton)
Bankers were happy – their high risk loans had magically become low risk so they could borrow more against them as assets
Shareholders were happy – since bank profits increased
Bank employees were happy – their bonus structures (thanks to the culture – which I haven’t heard has changed) were based on profits they generated, not on the risks they generated, and after all, the taxpayer could pick up the pieces if anything went wrong (not that I think they actually thought about failure)

That’s why I don’t see any alternative other than legislating on things like bankers’ bonuses. If the culture is to reward profit and not worry too much about loss then an enforced cultural change is needed. I find it amazing that the boss of failed RBS – which has cost the taxpayer dearly – still expected a massive pension payout. As an intelligent person (presumably), one can only assume that he sees the world differently to the average man – and that’s a sign of a culture incompatible with reality. He and many others might well say that they have performed the particular task they were given well, and therefore their full rewards are due to them. The rest of us would say that they failed to see the bigger picture which they were uniquely capable of seeing and therefore they have failed.

In the meantime, the culture continues to generate complication because it looks clever, and cleverness is what counts in the banking world. RBS, for example, are currently advertising a retail product which uses “sophisticated dynamic investment techniques” to monitor an index (which itself they have invented using a combination of other indices) and which then uses various parameters to decide whether to buy long or sell short.... all presented as though that’s a good thing!

One could also highlight the culture within financial services regulation as being significant in getting us to where we are. The Treasury, the Bank of England, and the Financial Services Authority could all say that they did what was asked of them. But collectively they failed to prevent a global financial crisis, or even, apparently, to see it coming. I’m quite sure that nobody feels bad about that because they continued to meet their various targets, while continuing to receive their public sector benefits packages.

Here too, there are signs of a culture needing to change. Sadly, I don’t see the proposed reorganisation of the FSA as making any realistic change, and they will continue to regulate the easy bits rather than the bits that matter; but let’s hope I’m wrong.

Financial Services - A Culture Needing a Crisis - Part 1

2010-08-03T14:37:00.000+01:00

A bit of a longer article this time, so I've split it in two...

Ever since doing an Open University management course many years ago I have been interested in the culture of organisations. So much of how an organisation works – including the actions of individuals – is down to the culture. It’s rarely explicit or easy to describe, but it’s vital in the success or otherwise of that organisation.

Basically the culture says what is really important to us – never mind what any published mission statement says, or how the organisational structure is put together.

If the important thing is to cover your rear-end to avoid the big boss getting angry, then that will certainly take precedence over providing a good service to your customers
If it is more important that you can’t be blamed for anything in case you are reprimanded, then you are not going to take any risks in what you do
If there is a strong “can do” attitude, then that is likely to be more important than sticking to the rules

One other example of a culture is that you might call someone a “jobsworth” – it’s more important to them to do exactly what is expected of them and no more, than it is to go the extra mile and actually help someone.

What has this to do with personal finances? Well, quite a lot, actually, because it is quite possible for a culture to apply across organisations, too. In fact, I would contend that the whole financial services world has a culture... and I’m not alone in that – “Whoops!” by John Lanchester is one of quite a few books on the global financial crisis of the last two years, and it says the same thing.

Although there have been changes resulting from that crisis which have cost eye-watering sums of money (to the taxpayer mostly), I can’t help avoiding the feeling that nothing has really changed. The culture is still the same. John Lanchester describes people in the City as having “fundamental assumptions based on the primacy of money, and the non-reality of other schemes of value”. The culture is all about letting the free market do its thing.

I can’t help thinking we have gone way past that. It’s time for some real change.

continued soon...

Good News - Banks Fail Stress Tests!

2010-07-23T17:56:00.000+01:00

Stress Testing the Banks

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

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

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

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

Annuities – The Product you Bought But Never Heard of

2010-07-20T11:22:00.001+01:00

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

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

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

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

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

National Savings Withdraws Savings Certificates from Sale

2010-07-19T11:06:00.003+01:00

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

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

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

Lifetime Cashflow Planning

2010-07-06T13:34:00.001+01:00

I'm getting excited about this - it's the ability to map out your cashflow for the rest of your life (in broad terms, of course). There are big questions which people ask (or perhaps they don't but should do), including:

Is my money going to run out before I die?
Can I afford to spend a bit more?
Am I saving enough for a reasonable income in retirement?
Is there going to be a big Inheritance Tax bill for my estate to pay?
What will happen if I need to pay for long term care?

By looking at expected income and expenditure, growth on investments, and the result on the value of your assets you can start to get some answers.

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

Absolute Returns - for those interested in investment detail!

2010-06-29T21:13:00.000+01:00

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

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

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

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

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

Not More Budget Stuff

2010-06-29T11:33:00.000+01:00

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

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

Reality Revealed - Public Sector Pensions

2010-06-21T09:56:00.001+01:00

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

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

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

These are the key points from that blog (and elsewhere) for me:

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

Savings for Children

2010-06-11T10:00:00.000+01:00

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

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

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

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

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

Useless Financial Products

2010-06-07T15:08:00.005+01:00

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

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

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

Structured products*: Can be confusing, complex and costly - put your money into an Isa

[PTF comment: Care is certainly needed - there is more awareness these days on the "counterparty" who backs the product - but I don't agree that they are useless products - they have a place in a larger portfolio at least]

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

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

Secured loans: Are risky - only take out unsecured loans

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

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

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

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

Risk and Return

2010-05-17T11:56:00.002+01:00

One of the most important parts about recommending where an investor should put their money is to assess their attitude to risk and return.

The unavoidable fact is that risk and return always go together – if you put your money in a current account there is very little risk of losing it, but very little opportunity for it to grow. Conversely, if you invest in a small company which is just starting up there is a high risk of losing all your money, but if it works out, there is a possibility of a high return.

But the risk to your capital value is not the only type of risk. If you regularly follow the FTSE100, for example, you might consider it an unacceptable risk to be under-performing that index. The volatility of an investment is also something to consider (and is often used synonymously with "investment risk"): if an investment goes up and down rapidly (such as small company shares) that is a different level of risk to one which goes up and down more slowly (such as property).

There’s a lot of maths behind assessing risk, including the “normal distribution” curve, and “standard deviation” which you may (or may not!) remember from O-level / GCSE maths. But to make it more palatable for the average investor a risk questionnaire is typically used, resulting in a score of 1 to 10. That result encapsulates the investor’s desired balance between risk and return.

For a simple portfolio it is then sufficient to pick a fund or two which match that level of risk – typically a managed fund which itself invests in a range of different types of asset. For a larger portfolio, it is worth considering the “asset allocation” – in other words, the asset classes like equities, fixed interest, property, and cash (although these can be sub-divided further). That’s because diversification is an important part of reducing the level of risk for the same level of return - particularly over a longer time period.

Having said all that, there is a lot more detail possible, and a lot more questions which could be asked of the investor which will affect the recommendation, including whether you are investing for growth or income, how long you expect to invest for (or at least the minimum time), the level of loss you would be prepared to see in any one year, how far you are willing to stray from a benchmark index (like the FTSE 100), and how much notice you expect to give when considering surrendering an investment.

So if I ask lots of questions about your attitude to risk, the level of return you want, and so on, just humour me! Ultimately it is about understanding and then delivering your objectives without scaring you too much on the way!

Managing Your Investments

2010-04-19T20:29:00.000+01:00

Many investors make use of what are variously called "platforms", "fund supermarkets", or "wraps". These are tools which provide you (or perhaps your adviser) with the means to manage your investments online. By way of example, one of the most popular is "Cofunds".

There are various advantages in using a platform, and they include the means to see all your investments in one place (or at least investments of a particular type, like unit trust funds / OEICs) - even if that is just an annual statement. Costs are generally lower than going direct to individual fund managers, too.

Now the FSA is, to my mind, muddying the water by proposing "unbundling" the charges so that they are clearer to investors and their advisers. It's not yet clear what that will mean in practice, but in principle it seems to be about making it clear how much of the annual / initial charges are down to the platform itself, how much is the charge from the fund managers, and how much is the advice charge (although for Prime Time Financial clients that is already a separate charge since we charge a fee for our advice and don't take commission).

That sounds good at first sight, but when you stop to think about it the last thing investors really need is further complication. It would be like Sainsburys having to show a number of prices on a carton of milk - what part of the cost is down to the farmer, the packaging, the transport, and the retailing. Would that be helpful? Or what about low cost airline flights which already "unbundle" the charges - you still have to pay the unbundled "booking fee", and the charge to get your luggage on board, etc., and most travellers would say it is confusing and unhelpful.

Greater transparency is a good principle, but perhaps there is a lack of realism and business sense among the regulators, since they are not the ones to have to explain it to the average investor, who may only think about their investments a couple of times a year, and who, above all, need simplicity.

The danger is that investors will be too confused to bother, and that will be to everyone's detriment. Let's hope it turns out better than I fear. But whatever happens I'm here to do my best to explain it!!

The Budget and Tax

2010-04-08T11:01:00.000+01:00

Well I guessed wrong! Capital Gains Tax remains at 18% and the Chancellor even increased CGT Entrepreneurs' Relief to £2m (I'm happy to explain that if it might affect you!).

But more in line with the country's current tax situation, the Inheritance Tax Nil Rate Band ("allowance" to you and me) is set to remain at £325,000 until 2015. That means more and more people will fall into the tax - another stealth tax in the usual style of this government.

Pensions for Children

2010-02-19T13:54:00.001Z

That sounds like a contradiction in terms, I’m sure you’d agree. But a client has highlighted to me the value of starting a pension early – and that means as soon after birth as possible – and I thought it was worth passing it on to a wider audience.

The source of the information was a recent Saturday Telegraph article, and it highlights what keen investors will know about – let’s call it the miracle of compounding.

Basically, if you (on behalf of the new-born baby!) contribute the maximum allowed for a non-taxpayer into a pension plan (yes, even children can have one) - that's £2,880 net per year – for the first 18 years of their life, then they could have a pension pot of £1.8m. That’s worth having! (although the real value would be less due to inflation during their lifetime).

There are potential Inheritance Tax advantages for you, too, particularly if you are older (perhaps a grandparent), since that amount fits into your annual allowance for gifts of £3,000. However, if you have more than one grandchild you have to make sure that you live at least seven more years to take full advantage.

Capital Gains Tax to increase?

2010-02-09T22:28:00.001Z

Political parties are fighting over what public spending to cut, and where to raise taxes, but there's general agreement that both of those have to happen. One tax area which seems ripe for attention is Capital Gains Tax (CGT).

The current flat rate of 18% was introduced only in 2008, but the rate feels lower than the general tax environment. So an increase after April 2010 seems a good possibility, and the annual allowance is unlikely to increase - effectively a stealth tax. So what could you do to prepare?

One thing you are unlikely to be able to do anything about is second (and third, ...) homes. If a property which you rent out has increased in value since you bought it, then you will have capital gains tax to pay when you sell. However you are unlikely to start thinking about selling now if you weren't already, and selling in a short space of time in the current market seems unrealistic.

Other than that, investments which are not protected in an ISA (or some other) tax wrapper are potentially vulnerable to CGT. Selling them now would be a good thing if you had considered selling in the near future. Making use of your annual ISA allowance is generally worthwhile since it will avoid CGT in future.

Transferring assets between spouses may be appropriate prior to selling - there is no CGT implication of doing that transfer, and you could make use of two lots of the annual allowance when you finally sell.

Other than that, taking professional advice is good advice - remember that this blog does not provide personal financial advice.

A New Start - Prime Time Financial

2010-02-02T17:03:00.001Z

After something of a delay while the Financial Services Authority sorted out their paperwork(!), I am now providing financial advice as "Prime Time Financial" - part of Keystone Financial Ltd (FSA registration number 501917 should you care to check).

Feel free to get in touch ... click on "View my complete profile" on the right for email address and Prime Time's website. I'm happy to talk to anyone, but my focus will be on the over 50's, pre- and post-retirement.

With Profits Policies - time to reconsider?

2010-01-31T20:56:00.002Z

With profits policies were appropriate for many investors when they came along 10 - 12 years ago. They include a mix of asset types (shares, fixed interest, etc.) and are managed by the insurance company to "smooth" the ups and downs of investing.

The trouble is they have become synonymous for many people with an opaque investment which does the opposite of what you expect. It is up to the insurance company actuaries to decide on the annual bonus rate - the amount by which your investment increases - or the Market Value Reduction (MVR) - the amount by which it decreases (in effect). The way that the smoothing is done can mean that values are now going in the opposite direction to the stockmarket, since they take into account the average performance over a longer period of time.

Combining this with a more cautious approach to asset allocation than when a policy was bought (to protect the bonus pool) means that for many people it is time to get out. Having an MVR doesn't necessarily mean that it is the wrong time to sell, but it is worth checking if there is a time when your policy waives the MVR - this can happen on the 5th or 10th anniversaries, for example.

Having said that, there are still worthwhile With Profits policies out there.

Investing in 2010

2010-01-03T19:40:00.000Z

What are the prospects for investors in 2010? Remembering that this is not personal advice, here's a quick summary of some basic asset types.

Savings look set to be un-rewarding, with low interest rates set to stay for the time being. So apart from a minimal "rainy day fund" it is not worth keeping too much in a deposit account.

Corporate bonds were a big story in 2009 - certainly for the types of investor I deal with (in the cautious half of the scale). There still seems to be some mileage left, but I would hesitate to put new money into corporate bonds now. High yield bonds are following a similar path - just a step behind, and when we begin to see the end of Quantitative Easing their attraction will reduce further. The "strategic bond" category may be a safer bet with fund managers having the ability to switch between different types of fixed interest holding (corporate bond, high yield bonds, global bonds, gilts, etc.). Having said that, government gilts may have rough waters ahead with the end of QE (causing higher inflation, causing reduced value in gilts since their fixed interest rates become less attractive), and with doubts about the UK’s ongoing credit-worthiness.

Equities (shares) look very positive. Although the full effects of the recession have not yet been felt (when ARE the government going to be up-front about how our massive debt is going to be repaid?!) shares tend to recover early in the economic cycle. In particular (again, thinking of more cautious investors), equity income funds are a good story (if chosen well) since the dividend income introduces some stability if re-invested, and in the worst case reduces any loss in capital value.

For the more adventurous, Emerging Market funds continue to look good in terms of increasing valuations. Countries which were "third world" in the not-too-distant past are increasingly going to be the engine-house of the world economy in the not-too-distant future.

Property funds have been bad news in recent years, and some have been closed for withdrawals due to the difficulty there was in selling commercial property to provide the liquidity. However, with a long term view in mind, and particularly for income investors (yields up to 6 or 7%), property is once again on the agenda, and is worth considering (although probably not in the first 90% of a portfolio, since liquidity issues may rear their head again at some point in the future).

Motorways and the Meaning of Life

2009-12-17T16:59:00.000Z

I was driving down the motorway the other day wishing I could go faster, when the question struck me … Why do I want to go faster, anyway?
After you have been driving for a while it’s easy to get fixated on the speed (bear with me if this doesn’t apply to you!!), because you want to go as fast as possible.

But actually the goal of most journeys is not to go as fast as possible, but to get somewhere, safely and, yes, as soon as possible. And there are other ways of arriving sooner, like choosing a better route, knowing where you are going, or – best of all – leaving earlier! Speed is not the goal.

The same applies to your finances – particularly in retirement. You can get fixated on the performance of an investment – is it growing as much as it can? … could it be giving me some more income? Should you try to find a better interest rate? etc., and you end up serving your money.

So here’s a little reminder... Money is not the goal.

So what is the goal? Well, living the life you have chosen for yourself is. Whether or not you set goals or targets for your life isn’t the issue (“Millionaire by the age of 30” – that sort of thing). But the fact is there are things in life which you want to do, which you find enjoyable, fulfilling, and so on. And at best, Money is a tool to achieve the life you want.

So don’t let any financial adviser (including me) tell you that you cannot surrender an investment when you need it, because its value is down; or that you must invest for at least five years even though you would be happier knowing you had access to it.

Remember - Life is the goal – Money is a tool to achieve the life.

Thanks, Grandad!

2009-11-23T23:43:00.002Z

NOTE: Since publishing this post, Child Trust Funds have been replaced by Junior ISAs.

If you are currently retired, then you are in what has been described as the “golden age” to be retired. Whether it feels like that or not, there are certainly some benefits available now which weren’t in the past, and others which won’t be in the future.

Health – therefore length of life – has improved greatly in recent years. To illustrate the point – in 1911 there were only 100 centenarians in the UK; but in 2008 there were 9,600. (I don’t think the Queen still sends out a telegram does she? Otherwise she would be very busy!) That results in a better quality of life in retirement now than in the past.

Secondly, the present generation of retirees have (on average) a better income than future generations are likely to have. And if it doesn’t feel like that to you, imagine what it will feel like to future retirees without much of a pension plan, and a state pension reducing in value!

What this all means is that some people in retirement are in the fortunate position of wanting to pass on their wealth to future generations. Often that means grandchildren heading for university, or looking forlornly at raising a large deposit on a house.

So what are possible ways of passing on money, tax-efficiently? Well, without going into the details, here are some ideas.

1. Child Trust Fund
Children born since 2002 are given a voucher for £250 to invest in a CTF with an extra payment of £250 made at age 7. This can be added to each year by other people (like grandparents) up to £1,200. CTFs are tax-free like ISAs, and the money is available to the child at 18, although admittedly this approach won’t go far towards a house.

2. ISAs
Always worth considering, but a child cannot have a cash ISA until age 16 (18 for a stocks and shares ISA). So the grandparent would have to consider their own ISA as being for the child.

(See my blog on Limited Offer by HM Government for more on tax-efficient saving.)

3. Trust Arrangements
Various types of investment in trust are possible, including “Bare” (where the child is entitled to the value of the investment at 18), or “Discretionary” (where some control may be retained). Tax treatment is dependant on the type of investment and needs careful consideration.

4. Children’s Bonus Bonds
National Savings & Investments provide this tax-free investment. It’s for a 5 year fixed term, and the current issue gives an interest rate of 2.5%. See NS&I Children's Bonus Bonds.

High Finance, Low Finance

2009-11-15T20:48:00.001Z

Most of my time as a financial adviser is spent with investments, pensions, mortgages, and so on. Apart from the fact that I can make a living at doing that, it can be very satisfying helping someone organise their finances to achieve their goals, or have themselves a better life in some way.

That may mean:
• Increasing income from investments
• Helping people to see that they can afford to spend more
• Increasing what will be left to family by reducing the likely Inheritance Tax bill
• Enabling a house move with a new mortgage
• … and so on

But that satisfaction can also be achieved at the other end of the market – those with little in the way of assets. I attended a training course the other day which was about helping people to budget. The process of doing a simple household budget is not always easy for people, and yet it can potentially have an even bigger life impact than advising on investing a sum of money.

The concept of a budget is foreign to many people, perhaps especially to those who need it most – those who have low incomes and many demands on their money.

Wouldn’t it be good if basic finances were taught at school instead of … well, fill in your own subject to drop from the curriculum there. But the point is that it is a key life skill which many never acquire, and so end up in debt, encouraged by those who want to lend to them at high rates.

My two regrets are (a) that those who need help sorting out a budget do not tend to seek advice until things are going wrong, and (b) in spite of the satisfaction available, it is not an area which helps a financial adviser make a living! Nevertheless, I hope to be able to make use of that training course from time to time. There's plenty who need it.

Don’t Pay Tax! … if you don’t have to

2009-11-02T21:22:00.001Z

The National Audit Office has estimated that around 3.2 million older people do not claim available tax allowances. Average income could be boosted by 4% they reckon.

That includes around £200m too much tax paid because people did not have savings income paid gross when they were entitled to.

Here’s a link to use, including one to the R85 form which will get you tax-free savings income (if you are entitled!).

http://www.hmrc.gov.uk/incometax/tax-free-interest.htm

Reminder: This is not personal advice - you should take your own advice from a qualified financial adviser before making any decisions. Information given is my personal opinion and not that of any organisation I am connected with.

Liberate your Wealth – Equity Release

2009-10-31T22:23:00.003Z

What we are talking about here is raising some money by using the value in your house. Why might you want to do that? Well, you may want to do some home improvements, or to help your family out, or simply increase your income. All these are possible.

In the right circumstances it seems to me to be a great solution. There really is no point living in poverty in an expensive house which you own but cannot benefit from.

In the past, Equity Release has had a bad name, let’s admit it. But these days it is fully regulated; advice has to be given by advisers with a specialist qualification, and companies who operate in this market are mostly members of the trade organisation – SHIP – who have their own requirements to be followed by members.

It shouldn’t be the first thing to consider – moving into a smaller house may give a better result, and leave your family with more of a legacy, for example. And you have to bear in mind that raising a sum of money may have an impact on state benefits.

There are two basic approaches – with Home Reversion Plans you sell your house but have the right to live there for as long as you want. While Lifetime Mortgages are just that – a loan secured against your house. You do not have to pay interest each month, because it gets rolled up, thereby increasing the loan. It is paid back after you die or move out when the house must be sold. This reduces the value of what you would otherwise pass on to family.

Depending on your age, with a Lifetime Mortgage, for instance, you may be able to borrow between 20% and 50% of the value of your house. If you want an income, you would take it a bit at a time rather than as a lump sum, so that the outstanding loan doesn’t grow so fast.

Reminder: This is not personal advice - you should take your own advice from a qualified financial adviser before making any decisions. Information given is my personal opinion and not that of any organisation I am connected with.

6 Simple Ways to Reduce Inheritance Tax

2009-10-28T16:09:00.001Z

Of course, you may not expect to have an Inheritance Tax (IHT) bill at all. But if you think you might have, and if you don’t want to rely on the Conservatives (a) being elected, (b) doing what they say they will (increasing the IHT allowance), and (c) doing it before the end of your life(!), then here are some ways to reduce a future liability.

The tax is a hefty 40% so is worth avoiding if possible (yes, tax avoidance is legal – it’s tax evasion which isn’t!). And the big problem on this (arguably immoral) tax is that it applies to gifts made up to 7 years (or even 14 years in some cases) before you die. So if you receive a gift from someone who subsequently died, the tax man may may come to you and ask you to pay 40% tax on that gift – even if you’ve now spent it. Not good! But getting off my soapbox …

Nil Rate Band – this is currently (in 2009/10) £325,000 per person. Up to this level of assets you have no IHT worries. What’s more, if you are widowed, you will probably be able to use your late spouse’s Nil Rate Band as well.
Annual allowance – You can give away up to £3,000 per year (reducing your estate’s value) without paying IHT.
Small gift allowance – In addition, you can give as many small gifts up to £250 as you like, provided they are to different people, and they don’t overlap with the Annual Allowance.
Gifts on marriage – allowances if you are related in certain ways to someone getting married.
Regular gifts out of income – If it can be shown that you have been making a regular gift which is (a) part of your normal expenditure (is “habitual”), (b) is made out of your income (not out of capital), (c) allows you to maintain your normal standard of living, then it would not be liable to IHT.
Gifts to charities, or in “the national interest” – not liable … simple; as is the case if you die on active service (yes, IHT applies to the young as well as the old).

Those are the simple things you can do to reduce an IHT liability. Beyond that it starts to get a little more complicated, with various sorts of trusts, for example, and/or loans which create a debt on your estate, including Equity Release plans. They are certainly worth looking at if you need to, but that’s for another day.

Reminder: This is not personal advice. It is my personal opinion and not that of any organisation I am connected with. So there.

Limited Offer by HM Government? – Buy Now!!

2009-10-12T18:30:00.008+01:00

There’s no doubt that UK finances are under pressure. With all the support given for banks, and with falling tax revenues due to the recession, public finances will be in a right state for years to come.

Politicians will continue to debate cuts without doing what’s needed soon enough (as usual). But undoubtedly the pressure is to increase taxes.

While it is always possible that legislation will apply retrospectively, it is certainly best to take full advantage of any tax breaks which are available here and now. So here’s a few which you should be considering before they (maybe) disappear:

Use your ISA allowance – while you pay into an ISA out of taxed income, income is free of income tax, and growth is free of capital gains tax (but watch out for Inheritance Tax). I haven’t heard any hint that this tax break is going to be removed, but it is wise to use it up to your annual allowance anyway. The only exception might be for older people (life expectancy less than, perhaps, five years); since ISAs have to be sold on your demise (they cannot be transferred to anyone else) and the markets might be down when your executors are forced to sell, alternatives may be better.
No more Tax Free Cash? – when you start taking a pension income, you are typically entitled to a tax free sum (25% of your pension pot in a money purchase scheme, different for final salary). This is now called a “Pension Commencement Lump Sum”, and while it is still tax free at present, does that change of name herald the removal of its tax free status?
Pension contributions – these currently qualify for basic rate tax relief, with HMRC “returning” the basic rate tax you have paid to the pension provider to add to your investment. Even if you are not an earner or are already receiving a pension but are under 75 you can make a contribution and take advantage of this. Higher rate relief is also currently available, making pension contributions particularly tax-effective for higher rate taxpayers. There are, though, limitations on relief from April 2011; is that the start of withdrawing this tax break? It has been suggested that it is: Telegraph. Within the limitations, it is best to make pension contributions sooner rather than later, particularly for higher rate taxpayers.
Gift Aid donations – these work similarly to pension contributions (believe it or not). The charity reclaims the basic rate tax, the giver can reclaim any higher rate tax. Use it while it’s still there!
Capital gains tax increases? – CGT was reduced in 2006 to a flat 18% (in most circumstances). This means that investments (including property) that are subject to CGT can be better than those subject to income tax. That looks to me like an opportunity for a cash-strapped Chancellor to claw back a bit of tax. Realising capital gains sooner rather than later looks like a good plan – and preferably within the annual CGT allowance.

Of course, there are always ways of being tax-efficient in your affairs, but these are some of the ones which may be particularly vulnerable to taxation changes in future.

An iPhone or a Comfortable(-ish) Retirement?

2009-09-28T17:34:00.001+01:00

One of the roles taken by financial advisers is to arbitrate between two people - the client when they are in retirement, and the client today. That's because many people will spend money today without giving a thought to providing for their retirement.

Let's face it, a new phone now is far more important to most people than being above the poverty line in twenty, thirty or forty years time.

There's no doubt that pension income will be squeezed in years to come. The amount of help from the Government in the form of the State Pension is unlikely to increase, while the state retirement age certainly will, meaning longer working lives. That's simply because the country cannot afford the status quo (politicans are reluctant to take this on board, but it is certainly the case) - but that's a whole other topic.

So we are left with making sure that we have made our own plans for a pension income, either from employer schemes or from personal contributions. With ever-changing employment patterns the most reliable way is to have a personal pension plan.

If you pay for an iPhone or its successor on a monthly contract throughout your life (say £40 per month starting at age 30), you will have paid around £20,000 by the time you retire (let’s ignore inflation here). If, instead, that money goes into a pension plan then you will have secured an income of perhaps £3,000 per year. Not much, but at least you will be able to run a car!

Now, I'm not against iPhones (or eating out every night, or having two expensive holidays a year, or anything else that you can afford and which gives you a good standard of living today), but I am against depriving somebody – you in retirement - of the basics of life.

If you have read this far then I guess you are not one of the 15% of the population who have given no thought whatever to retirement planning. But you may be one of the 31% who are relying on an inheritance to fund their retirement (numbers from Friends Provident). The message is: “there is a better way”!!

Structured Products and Artificial Christmas Trees

2009-09-22T21:51:00.005+01:00

Our children used to enjoy the annual trip to buy a Christmas tree. But realistically, artificial ones do have some advantages even though they don’t smell like the real thing.

Structured Products are a class of investment products with the same feel to them as artificial Christmas trees. They are offered by a range of providers, and the key thing about them is that the return you get (whether as income or capital growth) is in some way dependent on the performance of an index, such as the FTSE 100. They will also have a fixed term before maturity.

As such, you are not generally investing directly in the underlying assets (and you may not know what that is - although it’s worth finding out), and you are dependent on the good services of the product provider (and anyone else they partner with) to provide the security of your money. That’s why it doesn’t smell like the real thing.

Having said that, they do provide some insulation from exposure to the stockmarket, and so are a suitable next step up from deposits in some circumstances.

Just to give you a flavour, Structured Products include:

Income products, which continue paying a pre-defined income unless the FTSE 100 falls below a certain level
Growth products, which promise a certain return unless an index falls below a certain level
“Kick out” plans where the product matures and gives you a pre-determined return at the end of year 1, or year 2, or … if an index has grown sufficiently.

There are a different set of risks in investing in these products – arguably less than investing in equity-based unit trusts, for example. So it pays to do your research, particularly to know who gets their hands on your money – the “counterparty”.

If an artificial Christmas tree does the job, and doesn’t drop any needles, it may be worth a look – just like Structured Products.

Here’s one place you could take a look: Structured Products list
Update August 2010: This page no longer includes Structured Products.

My Name's Bond

2009-09-15T23:00:00.001+01:00

It gets pretty confusing when you talk about “bonds”. The trouble is that “bond” doesn’t mean much more than “investment”. Although to be a bit more precise it’s an agreement to pay a sum of money, with or without interest, on a certain date.

So some savings products are called bonds, because they have a fixed duration and fixed interest rate. Also insurance companies offer “insurance bonds” (which do not, actually, fit the definition). But here we shall be talking about “corporate bonds”, and we are considering these because they are, in some cases, an alternative to savings products.

Corporate bonds are investments (the “bond” bit) which can be bought from companies (the “corporate” bit). The agreement is that the company will pay a fixed interest rate for the life of the bond – which will be a number of years – and then repay the original capital on maturity (provided the company is still in existence). So corporate bonds fall into the “fixed interest” category of investments, along with others like Government gilts.

Most retail investors – that’s you and me – will buy corporate bonds via unit trust funds (or OEICs) where the fund manager buys a range of different companies’ bonds. For that reason, the interest paid out of the fund is not fixed as far as the investor is concerned – all very confusing!

So why am I talking about corporate bonds as an alternative to savings? Corporate bonds are generally very reliable in paying their interest, and in returning the capital value at maturity. They are generally pretty stable and unexciting as investments – just what you want when looking at alternatives to savings.

The irony is that, due to the upsets in credit markets, corporate bonds have been rather more exciting recently. Interest rates (or “yields”) have been unusually high (10% or more in some cases), and the capital values have been rather more volatile than usual, too.

That all goes to emphasise that values can rise as well as fall, as can yields. That’s why I describe them as a step up from savings. But provided you are willing to take a touch more risk (now there’s a big subject to cover), then corporate bond funds may be for you. They can be included in the stocks & shares component of an ISA, too.

Losing Interest

2009-09-02T19:03:00.008+01:00

If you have looked at the interest rates available for savers lately, then you will know that they are not much to write home about. If it’s any consolation – and I don’t see why it should be – then you are helping the banks and building societies to “rebuild their balance sheets” following the effects of the Credit Crunch.

Whatever that means, it’s costing us dear, and it’s a particular problem for those in retirement who rely on savings for some of their income. That’s because the bills the income is there to pay never seem to go down in quite the same way.

So what can you do? The first thing to say is that you should always keep some money readily available for emergencies, even if that means accepting very low interest rates. How much to keep will depend on your lifestyle – how reliable your income is, and how regular your spending patterns are – but it seems to me that somewhere between a quarter and a third of your annual income is usually about right. With current low interest rates you might feel like erring on the side of less rather than more, though, and keeping just that basic mimimum in a savings account.

If that amount really is going to be readily available, then there’s not much you can do as an alternative to low savings rates. So be prepared to search around a bit to find the “least worst” – there are some well-known websites which will tell you the best interest rates available. Don’t get tied in for long periods, though – you don’t want to be sat with a blown-up boiler (or even with the opportunity of a great holiday), waiting for your savings to become available!

A bigger question is what to do with anything beyond that basic minimum. It is certainly worth working to find the best home for additional money. I’ll be looking at a couple of options, although they require a step up from savings.

What this blog is about ... and what it isn't

2009-08-31T23:00:00.015+01:00

If I said I find money exciting you might get the wrong impression!...

So let me just say that our finances are an important part of our lives, and I am very keen to see myself and others taking full advantage of our financial circumstances. What comes first at every turn is life in all its fullness, and our finances should be a servant of the life we want to live.

The trouble is that many people end up being confused, bored or annoyed by financial stuff. Then they don't give it the attention it needs, and end up losing out.

That's what this blog is about. I don't promise to make everything exciting, and I don't expect to suddenly make you rich, but I can at least give you some pointers to take full advantage of what you have. Plus, I hope that that information will be interesting to read. My aim is that you will end up with a better chance of turning your life goals into reality. And if you haven't defined your goals, perhaps it will just help you enjoy life more!

So the blog is about practical information for personal finances.

VERY IMPORTANT...

What it is not about is personal advice. I am an independent financial adviser, authorised to give advice in a number of areas, but only based on a full understanding of someone's personal situation. That is clearly not possible in a blog, and nothing in this blog or in any replies I may make to readers' comments should be construed as personal advice.

Happy reading!! .. and do let me have your comments.