DEATH AND INCAPACITY

Death and incapacity are unpleasant subjects but they are a reality of life. You can either ignore these matters until they affect you or your family or you can do some sensible forward planning. Unfortunately we will all die at some time. At that point our possessions will be shared out. If we have made a will, they will go to those people we have chosen. If we have not made a will, they will go to people other than those we wanted them to go to, including even the Tax Man! The simple solution is to make a will. You can do this yourself or take professional advice. We can provide recommendations if needed. With death comes a funeral. You can make it clear in your will how you want your funeral to be. Viking funerals with a burning boat could prove rather costly. However, even a simple funeral can involve considerable expense. If you are not otherwise setting aside money in some way for this, there are pre-paid funeral plans available which, once paid for, guarantee to cover the costs of a traditional cremation without any further costs – regardless of how much prices rise in the future. (Note: Viking burials on burning ships come at a somewhat higher costs!). We can help advise on the pre-paid funeral plans. Going into care is not the sure bet that death is, but it is pretty likely that if you or one of your family beat the grim reaper past the three score and 10 on the score card, that you will have to deal with the problems of care and even mental difficulties. If you or your parents or other relatives are not able to look after their affairs for one reason or another, they will need someone to do it for them. As soon as this begins to become a possibility, we recommend that you find out about and arrange a Lasting Power of Attorney. “Attorney” simply refers to someone with the power to act on the behalf of another. Such an arrangement can either be just for financial matters or for health care decisions, or both. And as the final point of this rather unpleasant section, there is the option of a Living Will. This is simply an advance decision which you document about what medical treatments you do not wish to have in the future, if you are not in a condition to make an informed decision at the time.

TAKING THE RIGHT RISKS

Pension policies and investments do need regular reviews to ensure that the money in the fund is being invested in the way that the person wants. All too often people leave their pension or investment funds unmonitored and that is a bit like the captain of a ship leaving no one at the helm while he goes to play shuffleboard with the passengers. It makes it uncertain as to whether the ship is going to reach its destination undamaged. We would be pleased to assist with a review of how your pensions or other investments are invested without charge.

PENSIONS – RINGING THE CHANGES

While we are still awaiting final approval of the Finance Bill, the writing on the wall looks in pretty permanent ink. 75 will cease to be the age for compulsory annuities. Those reaching 75 years of age will be able to maintain their pension options, including Drawdown. Maximum pension payments will be limited to £50,000 from 6 April next year. However, it will be possible for a person to pay up to a further £50,000 for each of the past three years – if he has not already contributed that much over those three years. Taking into account some of the other fine print, in fact, a person who had made no pension contributions in the previous 3 years could conceivably contribute up to £250,000 early in the next Tax Year.

OFFSET – MAKING YOUR MORTGAGE WORK HARDER

If you have both a mortgage and significant cash savings (£25,000 plus), you may with to consider an offset mortgage. This allows you to have a savings account that is linked to the mortgage account. You only pay interest on the difference between the two. For example, if your mortgage is £100,000 and your savings amount to £25,000, you only pay interest on £75,000. With savings rates being very low, this is a way of getting more out of your savings. With a mortgage rate of, say, 4.0%, it means that you are effectively getting a net 4.0% on your savings without risk.

INTEREST RATE QUESTIONS

While the economy is being sorted out, it is likely that the Bank of England will continue to keep interest rates low. However, at some point rates will inevitably begin to go up. If you do not already have a good mortgage deal and are looking for options, it may well be a good idea to go for a fixed rate for 3 years or longer. This will ensure you are not stung by increasing costs for that period. Those who will not be hurt by an interest rate of 0.5% to 1.0% might wish to continue to bet on the Tracker rates.

MORE FLEXIBILITY

The swing of the pendulum in the last two years was far away from the easy solutions available at that time, including self-certification of income, 95% and 100% borrowing, and great flexibility in dealing with credit problems. But there does seem to be some flexibility coming back into the mortgage market. Self-certification of income is still not available but there are lenders who will consider borrowers who have had historical credit problems. For example, one lender will provide borrowing for up to 80% of value and ignore any County
Court Judgements that are over two years old or that have been settled over a year ago. There has also been some improvement in the calculations for how much can be borrowed.

THE BEST MORTGAGE POSSIBLE

With the Bank of England keeping its interest rate at 0.5%, new mortgage rate offers have improved. There is a warning to sound as well, however. Those who took out mortgages several years ago, often had their ongoing rate (the interest rate that comes into effect after the end of any special fixed rate or discount) linked to the Bank of England Base Rate. Before looking for a new deal, find out what ongoing interest rate you are entitled to. You may find that it is very low and, in that case, you may wish to leave things as they are. If you are not sure, give us a ring on 01342 313302.

Other Financial News

Equitable Life compensation is due to start being paid out next year. Those who will benefit the most, and fastest, will be those who had “with profit” annuities with the company. Their income will be enhanced.

The Government is planning to launch a Children’s ISA. This sounds helpful but as the Government will not be putting anything into it, it sounds like it will be of very little real use.

The limit on pension contributions is to be set at £50,000 per year from next April. The Government also proposed to lower the Lifetime Limit on total pension contributions.

You Do Get Older – Long Term Savings and Pensions are Important

Yes, you might go under the Number 9 bus next week, but the odds are that you will not and that you will live longer than your parents did. And at some future point you will either not want to, or not be able to, work in the same way you do now. At that point you will need additional income. You should put some money aside now for that eventuality. Ideally you are one of the lucky ones who can still look forward to a substantial pension from their employers. The problem is that this will not be the case for most people. So you will need to set up your own pension, or some workable alternative investment.

A pension is a useful means of long term savings because it benefits from tax relief from the Government (a taxpayer’s £1.00 put into a pension gets 25p added immediately by the Government – and a higher rate taxpayer benefits even more). Since you cannot access the benefit until you are at least 55 years of age, it also means that you cannot go out and spend it before then.

Regularly review your financial arrangements

It is estimated that the UK public are losing £12 billion simply by failing to keep an eye on their cash savings and failing to switch them over to an account paying a better rate of interest. This does not have to be difficult as it may mean just changing the account over with your existing Building Society or Bank who may have “forgotten” to tell you there was a better interest rate available. You can go on line to various comparison websites to see what your savings should be earning you. We recommend www.moneyfacts.com .

Be willing to take a risk with some of your savings

Cash savings are very useful as a ready reserve. However, the interest earned, particularly in today’s financial environment, will not generally protect your money from the effects of inflation. Historically investment in the Stock Market has provided a good return on savings. Most people would be well advised to put at least a percentage of their savings into stocks and shares.

Save for a “rainy day”

This is probably an unworkable motto for England given the number of rainy days we have, but the underlying principle is sound. It is wise to have accessible cash set-aside for an emergency. A rule of thumb target would be at least 3 times your monthly net earnings. An instant access ISA is a good way to achieve this level of savings. The good news is that from April 2011 the amount you can put into an ISA is expected to go up to £10,700, of which you can put 50% into a Cash ISA.

Virtually everyone should make a will

Some 30 million UK adults have not made a will. In worse case scenarios this can mean children or a partner receiving nothing, the State getting everything, or just a very unpleasant argument amongst those who feel all or some should be coming to them. If you are well organised, you can do the will yourself. A safer option would be to get it done professionally – something that is likely to cost about £120 for a single person and £200 for a couple. We can recommend professionals who can assist.

Those with children, a business or other responsibilities should arrange an appropriate amount of life assurance

Insurance is a fairly modern development but it allows one to avoid a disaster for a relatively small regular payment – whether the disaster is a car wreck, the house burning down, or the death of the sole income-earner in a family with young children. Usually it is easy to work out how much insurance is required. In the case of life assurance it is usually approached as to what amount would be needed to replace the income of the deceased person, or, in the event of a house-person, what it would cost to cover all of the work that person does. This can be surprisingly large, with some research putting the equivalent cost for a house-person with children at as much as £25,000 to £30,000 a year, not including love and affection!

Life assurance is now available to many people who might have been turned down in the past because of some medical situation. It may cost more but it is worth checking it out. For example, we were surprised to learn recently that life and travel cover is available for those who have had breast cancer – on a case by case basis.

If you have a business, you do need to have a plan “just in case”. The loss of the business owner or a key person could be disastrous. Life cover could keep the business afloat while it is sorted out. A common calculation for this type of cover is five times the owner’s or the keyman’s earnings.

You need to arrange your income and expenditure to ensure you have more coming in than going out.

This is what the Government has been trying to do for decades and failing. You simply need to list out all your expenditures on a monthly basis and then compare it to the monthly take-home income you have received in the recent past – not what you are hoping you will make in the future. This will tell you whether you need to have your own “Spending Review”. Dickens had his character, Mister Micawber define the money “happiness” zone as having a few pennies more coming in than are going out. This is quite true.

This same exercise can be done if you have your own business. This will also help you review the charges you make for your service or product to ensure you are making sufficient profit.

SO HOW DO YOU CHOOSE WHERE TO INVEST YOUR MONEY?

There are many schools of thought on this but it is generally agreed that an investment portfolio (by which is meant any group of investments) should be diversified. In other words they should be spread out amongst the asset classes.

Why? Different asset classes react differently to changing market conditions. If you have your investments spread out amongst different asset classes, it is likely that at any given time, some may be rising while others may be falling. This helps to reduce the investment risk, but it can also act to hold back the overall return. As to how much to diversify and what asset classes to use, this is comes back working out what level of risk the client wishes to take. Different portfolios can be worked out to cater for different tolerances of risk.

All of us are invested in one asset class or many. We may have money on deposit in our savings. That is one asset class. If interest rates go up, it benefits. If they go down, it suffers. We may own residential property. The value of properties can go up or down. Many of us have some sort of pension investments. Often these are with some type of Managed Fund which has an investment manager in charge of working out which asset classes to put your money into, and who is actively trying to increase the value of your investment.

THE TEMPORARY ANNUITY

Rather than taking out a guaranteed for life annuity now while annuity rates are low, you can choose to take a guaranteed income for a fixed period of time, e.g. 5 years. You then have a guaranteed amount returned to you so you can either repeat the process or buy a lifetime annuity at that point. For some unwilling to take an investment risk, this can be a useful way to guarantee a level of return on your pension fund without investment risk.

MAKING INVESTMENT DECISIONS

You can invest your money in many ways. The different general groupings of investment choices are called asset classes. An asset class is a type of investment, which shares its characteristics with others in the class – both as regards risk and the way they behave in the investment market.

The three main classes of assets are as follows:

 Equities – by which we mean investment in companies either directly, e.g. buying shares in British Telecom, or through an investment fund, which invests in a number of companies, e.g. a pension managed fund.
 Fixed Income – referring to bonds (essentially loans to a company or the Government – when they are called “gilts”). The company or Government pay an agreed rate of interest on the loan and promise to return the capital at the end of the agreed term.
 Cash – usually money in a high interest savings account or ISA, but could also be actual cash you have in a safe or under your mattress.

In terms of risk, Cash is considered the lowest risk, followed by Fixed Income and then Equities.

Equities can be broken down by:

 Size – large companies or small companies
 Industry – health care, energy, technology, building, etc
 Country – any specific country or geographical area, including global funds

Bonds can be broken down by:

 Safety – a bond issued by the Government is considered safer than one issued by British Telecom, which in turn is considered safer than one issued by a relative small or new company, since they are more likely to run into trouble and have difficulty repaying their debt.
 Term – a short-term bond (i.e. one that will come due in less than 1 year) is not as risky as a longer-term bond (i.e. one due in 20 years time).

Other asset classes would include Property, Foreign Currencies, natural resources, precious metals like gold, collectibles such as art, coins, stamps – or even fine wine.

ANNUITIES – A LOWER RISK CHOICE

An annuity is basically the swapping of a sum of money in exchange for a guaranteed income for life or for a specified term of years. The Government backs these guarantees in most cases. So if you have £50,000, for example, and do not need the capital but do need to increase your income, you can go out to the market and trade the capital for an income. Once the deal is done you are guaranteed to get your income, so there is no investment risk – in most cases. Annuities are normally only worth considering by those aged 55 and older

Cash ISA transfer process - A fairer deal

Individual Savings Accounts (ISAs) are big business: over 17 million Britons hold a total of £143 billion in cash ISAs. However, recent investigations by the Office of Fair Trading (OFT) are set to ensure a fairer deal for ISA savers. Typically, around 11% of ISA holders will switch their cash to a new provider each year. However, in response to a "supercomplaint" from consumer watchdog Consumer Focus, the OFT found that cash ISA transfers take an average of just over 26 calendar days, with a quarter of transfers taking longer than 30 calendar days. Current industry guidelines indicate that the transfer process should take no longer than 23 working days. As part of its findings, the OFT has reached an agreement with the financial services sector to ensure that transfers and interest rates on cash ISAs are more efficient and transparent than at present. The OFT has recommended that, from 31 December 2010, transfers should take no longer than 15 working days. Consumer group Which? wants the transfer process to take no longer than 10 days, and also wants a fully electronic transfer system to be set up. The OFT has recommended the Financial Services Authority should undertake research to see whether an electronic transfer system is feasible. At present, the old provider sends details and a cheque to the new provider through second-class mail. The OFT found that, during the transfer process, there is a period of up to five days when the consumer receives interest from neither the old provider nor the new provider. The OFT has deemed this unacceptable, stating that transferring savers should always receive interest on their money. Moreover, the OFT announced that the new rate of interest should be paid after the recommended 15-day transfer period – even if the transfer remains incomplete – and wants interest rates to be published on statements from 2012. At present, only around 15% of ISA savers receive statements that include their interest rate. The OFT also wants consumers who have applied for fixed-rate products to be guaranteed the rate of interest advertised at the time of application. The OFT commented: “There is often strong competition between providers in this market to win new savings, the transfer of cash ISAs is taking too long and there is not enough transparency over interest rates. The voluntary changes announced today will give consumers a fairer deal and drive stronger competition.”

A new incentive to save

In the UK, we are now living longer and having fewer children. As a result, workplace pension schemes have come under increasing pressure, as they have to cover retirees for longer on less income. At the same time, people just don't seem to be saving enough for their own retirement so the Government is getting worried about its own ability to provide state payouts.

Consequently, the Government has decided it is time to try and persuade you to start saving towards a private pension. The latest measure, the ‘National Employment Savings Trust' (NEST), is set for implementation from 2012 and designed to encourage both a greater level of saving generally and also open up pension saving to individuals who do not currently have a workplace scheme.

Therefore, from 2012, all eligible workers who are not already in a workplace scheme will be automatically enrolled either into their employer’s scheme or into NEST. You could opt out from this if you want to but it is your responsibility to do so and you would then miss out on some of the incentives, which the Government has attached to them.

NEST is aimed primarily at low-to-moderate income earners aged from 22 right up to state-pension age. As an employee, you must contribute a minimum of 4% of your earnings (subject to limits), meaning your take-home pay will reduce. However, as an incentive, you will receive a corresponding 3% contribution from your employer and a further 1% in tax relief from the Government, thereby doubling your contribution.

There are still some unanswered questions about how NEST will ultimately look. It is intended to be simple, inexpensive and run in the best interests of members; however, the structure so far appears quite complicated and information is relatively scarce.

However, a choice of branded pension savings accounts will be available alongside a default account for those who do not wish to make an investment choice. Indeed, the Pensions Act 2008 obliges all employers to enrol eligible employees into a good-quality workplace pension scheme, so NEST could provide a practical solution for both you and your employer. Whether they will be the most suitable pension arrangement for you as an individual depends on your own personal circumstances, but it is worth investigating the options and getting ready for the opportunities which lie ahead.