Category: Financial planning

Where the joyride of pension reform may lead

Jonathan Eley, personal finance editor at the Financial Times, while welcoming the huge changes being made to the pensions industry (which will give policyholders far more control over their money) has highlighted the following disadvantages:

  • More people will be subject to the annual ordeal of self assessment
  • Some people will pay too much tax when they receive their money and will then have to face reclaiming it from HMRC
  • The funds, instead of being locked away in an annuity, will be taken into account when assessing contributions to long-term care
  • Too many people will end up investing the money in buy-to-let property, in his words “a singularly bad idea in many respects”
  • HMRC is trying to obtain powers to access our bank accounts to settle outstanding tax liabilities. Will they have the power to raid pension savings once they’re in drawdown?
  • Insolvency is on the rise among over 65s, could pension pots be treated as assets for bankruptcy purposes?

As always sound professional advice is essential.

What the Budget means for small business finances

Economia, the magazine of the Institute of Chartered Accountants in England & Wales, very kindly published my summary of the Budget.

Unlike most of the summaries from other firms of chartered accountants it doesn’t focus on the detailed tweaks to the tax system which don’t really make a great deal of difference to businesses, especially small businesses. Instead, I have tried to point out what is important now that the Budget is over and what action you should take to make sure your business is a success.


Just when you thought it was safe to go back in the water

The title, unashamedly stolen from Jaws 2, doesn’t relate to sharks (well possibly a little bit!) and was prompted by me sitting in with two directors of a small limited company when their bank came to talk to them about pensions, both their own and their obligations under the pension reforms which the government is starting to bring in next year, but which will not affect them until 2014.

It’s a few years since I’ve experienced a bank selling pensions offering pension advice and rather naively I though they may have learned from their mistakes – endowment mortgages, high charges, poor performance, etc. Last weeks episode doesn’t leave me feeling very optimistic.

1. Tax relief was the key expression throughout the hour long meeting. At one stage it appeared to be the only reason for taking out a pension.

2. Mind you when I’m told by a pensions adviser from a High Street bank that the tax relief on company pension contributions is 31%, even though the true rate is 20% I started to see that pensions are still being missold. For the benefit of those equally puzzled by the 31% rate I can reveal that it is the 21% Corporation Tax relief (it’s actually only 20% now) and the 10% Tax Credits deducted from dividends. This is utter rubbish.

3. Later in the meeting the advisor salesman told us that some of his clients were receiving tax relief on their pension contributions at 63.5%! ( 21% Corporation Tax relief plus 42.5% – the effective rate of tax on dividends for a 50% taxpayer). This was pure fabrication but my clients didn’t know it and, unless I had been there, I wouldn’t have known what tactics the banks are still using to sell pensions.

4. The salesman then explained that the tax relief, coupled with the low charges on the money invested in the pension fund, plus the wide range of options available to spread the investment risks made pensions a very attractive investment. Strangely at this stage he didn’t discuss the investment performance of the pension provider.

5. He then mentioned the need to make a quick decision because at the moment the bank’s advice was free but from next year ( the introduction of RDR) they may have to charge thousands of £s.

6. Finally, he mentioned investment performance but strangely, didn’t have any figures which related to pension funds. The figures he quoted only covered the two years to June 2011 and surprise, surprise they were gross returns i.e before the bank’s charges had been deducted.

My advice when it comes to pensions has always been “Deal with an Independent Financial Advisor (IFA)“. Last week’s meeting makes me even more convinced that this is the only course of action to take despite what your bank manager may tell you.

Don’t let a bank be your executor

This is Money reports on accusations that banks have been accused of a £40m “rip-off” over acting as executors of their customers’ wills. For a number of years the high street banks have been offering what appears to be good value will writing services for as little as £100, while some have been providing it free as part of VIP accounts.

The rub comes when the banks “appoint themselves” as executors and charge exorbitant fees for administering the estate.
We all know we “can’t take it with us” but you can make sure the banks don’t take your money when you die – sack your bank executor today.

46% of households have little or no money left each month after paying mortgages and bills

The Financial Services Authority (FSA) claims that

46% of households have little or no money left each month after paying mortgages and bills

Even if you’re lucky enough to be in the other 54% this announcement will still affect your financial future because the FSA are using it to justify their clampdown on excessive mortgage lending.

This will mean, regardless of the complaints by builders and lenders, that mortgages will be harder to find which will take us back about 40 years when people had to save for years with a lender (nearly always a building society then) before they could contemplate buying a house. Lending requirements were strict – borrowings were normally limited to three times the salary of the main earner + half the other applicant’s salary.

Whether or not this is good or bad for the housing market is irrelevant because if you’re going to buy a house in the future you’ll have to show you’re suitable. You’ll have to save as large a deposit as possible which although difficult will make applying for a mortgage far easier. Gone are the days when you could just buy a house with easy finance.

The sooner you start saving the better.

Fees take 80% of some pensions

I missed the programme which found that paying £120,000 into one HSBC pension plan over 40 years would result in £99,900 being taken out but do intend to watch it on iPlayer. I only found it because there was a brief mention in the FT.

The figures are horrific and it wasn’t just HSBC at fault.  The FT went on to say that the Co-op Individual Personal Pension came in at second most expensive, with nearly £96,000 in fees and commissions for the same amount and period. In third place was Legal and General’s Co-funds Portfolio Pension, which would take out £61,000.

HSBC told Panorama its World Selections Personal Pension offered “good value for money” and was “certainly not one of the most expensive pension schemes in the market”. The bank said a fifth of the £99,900 taken in fees was profit and the pension was popular.

Not surprisingly the financial services industry isn’t happy with Panorama. Some of the comments were fair though and I think Martin Bamford of Informed Choice summed it up best

“The subject was not as well covered as it could have been but if the end result is to send people off to seek professional advice and take more of an interest then it is probably a good outcome.”

Think twice before you buy shares

The rise in share prices (a bull market) over the last year has meant more and more people are thinking about investing in the Stock Market.

Yesterday’s Financial Times made this comment on the situation:

It has been said that the Stock Market is the only one where customers flee when there is a sale, only to rush back when they can pay full price. Bull markets draw a crowd after all and, after a two-thirds mark up from last March’s low, equities easily meet that definition.

In simple terms, you may be too late!

All mouth and no trousers

is how I would summarise the recent Budget.

The 3CA Budget summary (on a sheet of A4) has slightly more information though!

Bollocks and beware of banks

The global retail banking chief executive of Barclays, Antony Jenkins, has been accused of living in a “parallel universe” after he defended the banking sector against charges of mis-selling and high-pressure sales tactics.

After all we all know that banks don’t try and sell us something we don’t want!

He made an interesting comment later in the interview saying  his staff are “very keen to get the customer the right product”. I would be a great deal happier if they were as keen to offer the customer the right advice!

His attitude is the reason why I refer people to articles like this.

Pension contributions – why bother?

Peter Rogol of Goodman Jones Chartered Accountants has written the best article I have read in years on deciding if a pension policy is the best way to save for retirement.

I have added a comment to the article which is worth repeating here:

this is advice and not as in the case of most articles merely selling dressed up as “help”

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