Welcome to our Winter Newsletter. Let us hope that the spring offers us some warmer weather than the winter. As we leave the Noughties to join the next decade, we thought it might be a good time to review the last ten years from an investment perspective.
Historically, looking over past decades there are certain truisms about investing. Inflation in the longer term will erode and outperform cash deposit rates. Gilts will outperform inflation over the long term and are a good hedge against rising prices without too much exposure to risk (as long as they are held to maturity). Corporate bonds are a relatively low risk asset class; the aim usually being to outperform gilts without excessive risk. Property should do better than these options and prices may typically rise in line with average earnings to reflect greater affordability. Stock and Shares (equities), especially those offering a strong yield, offer the potential to outperform all of these mentioned asset classes over the medium to long term. Stock and Shares (equities), especially those offering a strong yield, offer the potential to outperform all of these mentioned asset classes over the medium to long term.
Anything that promises huge returns ("double your money in 2-3 years") should be viewed with extreme caution or ideally avoided. Advertisements like these are either too risky or the sales company is too well paid and therefore prepared to tell lies. Finally, tax mitigation is vital with all forms of investing.
So how well did the Noughties perform against these long term truisms? Well two of them stand out like a sore thumb, residential property and equities. The Noughties, even allowing for the correction in it's last two years, were a phenomenal decade for residential property with huge house price increases. As for equities, it was a terrible decade. Since the Second World War it has been virtually impossible to invest for a whole ten year period in a basket of UK shares and not make money. The only exception was 1964-1974 but your timing would have to of been dreadful to achieve this, as the market rallied strongly in 1975. In 2010, the FTSE 100 stands well below where it started the decade, even after the latest rally.
Does this mean that we should turn our back on equities? Quite the opposite. My prediction is that the Noughties will be a good decade for equities and a bad one for residential property. Why? To bring these assets back in line with their long term value trend. I do have some other evidence to back up this view. Commercial property prices look to have dropped 33% in the recession, perhaps 10-15% more than residential prices. On an affordability basis, residential property looks very expensive, the only thing holding it in place is the low level of interest rates. Once they rise, expect another drop in prices. I could be wrong. This is only my view (Julian Gilbert). Other advisers may hold a different perspective. But remember the last two times some people said that the old rules were broken? Just before the Dot Com Bubble and pre-2007 on the property front. Rules never change, but nor does human desire to make a bit of money. Of course, the truth is that no-one knows exactly how investments shall perform. That is why Wealth Matters recommend spreading your investment risk and re-balancing your portfolio every year, in line with the level of risk you are comfortable with. Nonetheless, I shall report back at the start of the Twenties to reflect on this article. Happy investing...
 |
The reason for this difference is that pensioners spend differently from families – in fact families at different times of their life-cycle spend differently from each other. This means that the RPI, which is based on a ‘typical’ basket of purchases of goods and services is not really an indicator of what is happening to individuals, more a broad brush guide to trends.
So while the actual inflation rate for everyone is likely to be slightly different from the published rate, the direction of movement is likely to be similar. While we are on the topic, the Consumer Prices Index (CPI) is different in that it excludes mortgages and other housing costs. This is why it is currently running well above the RPI.
Does this matter?
Because pensions are currently linked to the RPI, this difference is really important to pensioners. When state pensions are next reviewed, if the RPI is negative, the best pensioners can hope for is no increase (in theory there could be a reduction – but this would be political suicide); yet their costs are rising. In fact most private pensions are also linked to no more than RPI at best (in some cases, nothing at all or for others the RPI up to a maximum of 5%). So, again, the next review could be most uncomfortable.
Plans are in place to link the basic state pension to average earnings – which tend to rise faster than (RPI) inflation – but only if it can be afforded, which seems unlikely by the target date of 2012.
What can pensioners do?
For those who are already retired and have purchased an annuity, there are few options other than, perhaps, seeking to release some of the equity from their home in order to generate more income. (This is a highly complex area and one that should not be considered without individual professional financial advice.) Those using an unsecured pension (formerly called drawdown or pension fund withdrawal) could consider increasing the rate at which they take money from their fund, but this has implications for the value of the residual fund. It is also important to be aware that age-related limits apply to the rate of withdrawal.
Those still at work need to consider whether their contributions remain at an adequate level to provide the income they are likely to require in retirement – bearing in mind that inflation is unlikely to go away over the longer term. There are no simple formulae to help, other than knowing that the best private sector pension schemes generally aim to provide two-thirds of pre-retirement salary as a pension. If you want to do better, you will have to become an MP.
It is important always to seek independent financial advice before making
any decision regarding your finances. For further information, please contact your usual independent financial adviser. The value of investments is not guaranteed; you may get back less than you put in.
NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.
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In essence, a self certification mortgage means that the lender accepts the borrower’s word on how much they earn – and thus their ability to repay the mortgage – rather than demanding evidence from an employer (or accountant for the self employed).
There were very good reasons for the growth of this type of mortgage – not least that it placed more reliance on the individual, rather than adopting a ‘nanny knows best’ approach to house purchase. It also helped those without a regular source of income to buy a home more easily, without having to jump through hoops to do so.
What is wrong with them?
The problem is that this form of borrowing has been open to abuse with people exaggerating their ability to pay their mortgage and then getting into trouble if expected earnings failed to materialise. Such problems are not necessarily widespread but in the wake of the Credit Crunch, which was largely caused by the excesses of the US sub-prime mortgage market, regulators have apparently decided to tar self-certification mortgages with the same brush as lending to NINJAs (no income, no job or assets) in America.
Is this fair?
In the view of many, outlawing this form of lending will be of little value in helping to reduce the number of home repossessions, because the number of repossessions – in any event lower that some had expected during the recent recession – is not necessarily linked to self certification. According to www.docstoc.com, self certification accounts for just 5% of the total market and a small proportion of total repossessions.
The banks, however, have an obligation to lend responsibly – and they are not exactly flush with money at the moment – so there is every chance that the self-certification mortgage will suffer a decline as a result even if the regulator decides to take no formal action after all.
Who will be affected?
It will not only be the self employed who are affected by this proposal. Anyone who wants to borrow close to the maximum in terms of multiples of earnings could find that the new responsibilities on lenders to assess affordability based on the borrower’s free disposable income and borrowing capacity, (in view of the plausibility of the information and the basis of capital repayment, in the case of interest only mortgages) could find that their ability to obtain a loan is reduced.
This could adversely hit first-time-borrowers as well as those seeking to move up the housing ladder.
Is there a solution?
It depends whether there is really a problem associated with this form of borrowing, whether this is actually an issue that needs to be addressed. What is clear, however, is that the role of professional mortgage brokers and independent financial advisers is set to become even more important in future.
It is important that you should take individual professional advice before making any decision relating to your personal finances. Your home may be repossessed if you do not keep up repayments on your mortgage. Think carefully before securing other debts against your home. Fees for mortgage advice may be charged and for details of these please contact your usual adviser
NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.
FINANCIAL NEWS ON THE WEB HAS BEEN PRODUCED BY THE INSURANCE MARKETING DEPARTMENT LTD. YOUR INDEPENDENT FINANCIAL ADVISER DOES NOT EXERCISE ANY EDITORIAL CONTROL OVER THE CONTENT AND MERELY PROVIDES THIS INFORMATION AS A SERVICE TO ITS CLIENTS, WHO SHOULD SEEK PROFESSIONAL ADVICE BEFORE TAKING ANY ACTION IN CONNECTION WITH ANY INFORMATION PROVIDED THEREIN.
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These could well be perfectly legitimate – in some cases, the bank will need to verify that a transaction is legitimate, in order to protect your interests. However, it appears that not all calls come from the bank; in some cases a call centre is being used.
This raises an important point about how much information you should give them – and they should give you. For example, if the caller says they are from your bank and “just need you to confirm your PIN number” you can guarantee that the call is fraudulent, because a bank or credit card provider will never ask for that information.
On the other hand, if your bank does call you, they will need to confirm your identity in order to ensure that they are talking to the right person and not giving your son or daughter (for example) information that is personal to you! The problem is that, with inwards calls, you never really know who the caller is – especially as banks are so faceless, these days. So the information they ask for when calling you could be part of a process that will eventually result in identity theft, once sufficient pieces of data have been parcelled together.
What can you do?
There is no simple answer to this issue. After all, banks do need to protect your interests if they think something may be wrong. But how far should you go in responding to confirmation requests? There is no simple answer except to refuse to give any information at all, ask for a name and department and then say that you will call back. There is little point in asking for a telephone number as this could be that of a criminal gang; on the other hand, giving this to you would mean that they are traceable, which many inward calls are not, because of the ‘number withheld’ facility.
Some call centres will say that they are unable to accept inwards calls, which is not unusual. In this case, you may prefer to terminate the conversation because if they are your bank, they must allow you to call them.
Should they be doing this at all
This does, however, raise a broader issue and that is the question of inwards calls after a large amount has been deposited in your account – this can also happen when you go into the bank to undertake a routine transaction. What the bank is seeking to do – whatever it may say about giving impartial information – is to sit you in front of one of their sales people (they may call them advisers, but they can usually only sell the bank’s products and are targeted on product sales, not quality of advice).
There must be questions over the confidentiality of your data, if one part of the bank is able to approach you about something done within another part of it.
“Silent calls”
Another aspect of telephone calls from banks is that these are often so-called “silent”; in other words, you answer the telephone, but nobody is there. There can be several reasons for this – one of which is crooks telephoning to see if anyone is in the house before burgling it. But the most common is that it is a call centre using an automated dialling system. The machine dials a number and then, when it is answered, the call is transferred to the next available agent. If none is free at the time, there is a long pause before the call is terminated.
Perhaps the facility to withhold the caller’s number is one that should be withdrawn completely. Unfortunately, overseas calls come into this category (as do calls from internet telephone systems such as Skype).
You should take individual professional advice before making any decision relating to your personal finances.
NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.
FINANCIAL NEWS ON THE WEB HAS BEEN PRODUCED BY THE INSURANCE MARKETING DEPARTMENT LTD. YOUR INDEPENDENT FINANCIAL ADVISER DOES NOT EXERCISE ANY EDITORIAL CONTROL OVER THE CONTENT AND MERELY PROVIDES THIS INFORMATION AS A SERVICE TO ITS CLIENTS, WHO SHOULD SEEK PROFESSIONAL ADVICE BEFORE TAKING ANY ACTION IN CONNECTION WITH ANY INFORMATION PROVIDED THEREIN.
Back to Top
It was only with the changes brought about by so-called pension simplification, that the term ‘unsecured pension’ was forced upon us.
Actually, there is nothing wrong with this new term other than it fails to explain precisely what the facility means –on the other hand, it does cover one important aspect, which is that unlike an annuity, it does not provide a guaranteed basis of income. We will come back to this later.
So what is an ‘unsecured pension’?
Basically, this is a facility that allows you (after taking any tax free cash that you may require, up to 25% of the value of the fund) to take money directly from the fund as a taxable income. The advantage of this is that you are not purchasing an annuity so you can decide exactly how much to take, within limits set by the government. These are basically anything from nothing at all, to 120% of the amount you could get from a single-life level annuity. To make this easier to calculate, the Government Actuary’s Department issues tables, which IFAs and pension providers can look up, depending on the most recent gilt yields.
Highly flexible
Perhaps the most important aspect of this is that you can actually vary the amount you take each year. This means that if you are retiring gradually, perhaps reducing the number of days you work each week, you can build up the level of income from your pension gradually, to compensate for reduced salary.
Most importantly, the balance of your fund remains invested within the highly tax-efficient regime applying to pensions. If you purchase an annuity, you no longer participate in investment markets.
Should you die
Unlike under an annuity, where on death the entire fund is lost or used to provide an income for a named dependant provided this was set up at the outset, on death while using an ‘unsecured pension’ the balance of the fund can be returned to the estate (less a tax charge of 35%) or used to provide a dependant’s income either directly from the fund or through an annuity.
What are the risks?
Using an ‘unsecured pension’ is not for everyone. Firstly there are generally higher costs than when an annuity is purchased, particularly on smaller funds. Secondly, you remain exposed to investment risk. Thirdly, you are not receiving a guaranteed income as you would, had you purchased an annuity. Fourthly, any future reduction in annuity rates could give a lower income in future than would have been available at outset.
This means that, in a worst case, your pension fund could run out. Conversely, you are keeping your options open and, if you believe that interest rates will recover – and therefore improve annuity rates – using an ‘unsecured pension’ for a year or two before purchasing an annuity could make sense.
At 75
‘Unsecured pensions’ are available only from age 50 (55 from 6th April 2010) until you are 75. Thereafter new – much more restrictive – rules apply under the equally inelegantly titled ‘alternatively secured pensions’ (which industry people refer to as an ASP, largely because they can take a massive bite out of your fund when you die).
It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact your usual independent financial adviser. The value of investments is not guaranteed; you may get back less than you put in.
NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.
Back to Top
Welcome to our Winter Newsletter. Let us hope that the spring offers us some warmer weather than the winter. As we leave the Noughties to join the next decade, we thought it might be a good time to review the last ten years from an investment perspective.
Historically, looking over past decades there are certain truisms about investing. Inflation in the longer term will erode and outperform cash deposit rates. Gilts will outperform inflation over the long term and are a good hedge against rising prices without too much exposure to risk (as long as they are held to maturity). Corporate bonds are a relatively low risk asset class; the aim usually being to outperform gilts without excessive risk. Property should do better than these options and prices may typically rise in line with average earnings to reflect greater affordability. Stock and Shares (equities), especially those offering a strong yield, offer the potential to outperform all of these mentioned asset classes over the medium to long term. Stock and Shares (equities), especially those offering a strong yield, offer the potential to outperform all of these mentioned asset classes over the medium to long term.
Anything that promises huge returns ("double your money in 2-3 years") should be viewed with extreme caution or ideally avoided. Advertisements like these are either too risky or the sales company is too well paid and therefore prepared to tell lies. Finally, tax mitigation is vital with all forms of investing.
So how well did the Noughties perform against these long term truisms? Well two of them stand out like a sore thumb, residential property and equities. The Noughties, even allowing for the correction in it's last two years, were a phenomenal decade for residential property with huge house price increases. As for equities, it was a terrible decade. Since the Second World War it has been virtually impossible to invest for a whole ten year period in a basket of UK shares and not make money. The only exception was 1964-1974 but your timing would have to of been dreadful to achieve this, as the market rallied strongly in 1975. In 2010, the FTSE 100 stands well below where it started the decade, even after the latest rally.
Does this mean that we should turn our back on equities? Quite the opposite. My prediction is that the Noughties will be a good decade for equities and a bad one for residential property. Why? To bring these assets back in line with their long term value trend. I do have some other evidence to back up this view. Commercial property prices look to have dropped 33% in the recession, perhaps 10-15% more than residential prices. On an affordability basis, residential property looks very expensive, the only thing holding it in place is the low level of interest rates. Once they rise, expect another drop in prices. I could be wrong. This is only my view (Julian Gilbert). Other advisers may hold a different perspective. But remember the last two times some people said that the old rules were broken? Just before the Dot Com Bubble and pre-2007 on the property front. Rules never change, but nor does human desire to make a bit of money. Of course, the truth is that no-one knows exactly how investments shall perform. That is why Wealth Matters recommend spreading your investment risk and re-balancing your portfolio every year, in line with the level of risk you are comfortable with. Nonetheless, I shall report back at the start of the Twenties to reflect on this article. Happy investing...
| |
The reason for this difference is that pensioners spend differently from families – in fact families at different times of their life-cycle spend differently from each other. This means that the RPI, which is based on a ‘typical’ basket of purchases of goods and services is not really an indicator of what is happening to individuals, more a broad brush guide to trends.
So while the actual inflation rate for everyone is likely to be slightly different from the published rate, the direction of movement is likely to be similar. While we are on the topic, the Consumer Prices Index (CPI) is different in that it excludes mortgages and other housing costs. This is why it is currently running well above the RPI.
Does this matter?
Because pensions are currently linked to the RPI, this difference is really important to pensioners. When state pensions are next reviewed, if the RPI is negative, the best pensioners can hope for is no increase (in theory there could be a reduction – but this would be political suicide); yet their costs are rising. In fact most private pensions are also linked to no more than RPI at best (in some cases, nothing at all or for others the RPI up to a maximum of 5%). So, again, the next review could be most uncomfortable.
Plans are in place to link the basic state pension to average earnings – which tend to rise faster than (RPI) inflation – but only if it can be afforded, which seems unlikely by the target date of 2012.
What can pensioners do?
For those who are already retired and have purchased an annuity, there are few options other than, perhaps, seeking to release some of the equity from their home in order to generate more income. (This is a highly complex area and one that should not be considered without individual professional financial advice.) Those using an unsecured pension (formerly called drawdown or pension fund withdrawal) could consider increasing the rate at which they take money from their fund, but this has implications for the value of the residual fund. It is also important to be aware that age-related limits apply to the rate of withdrawal.
Those still at work need to consider whether their contributions remain at an adequate level to provide the income they are likely to require in retirement – bearing in mind that inflation is unlikely to go away over the longer term. There are no simple formulae to help, other than knowing that the best private sector pension schemes generally aim to provide two-thirds of pre-retirement salary as a pension. If you want to do better, you will have to become an MP.
It is important always to seek independent financial advice before making
any decision regarding your finances. For further information, please contact your usual independent financial adviser. The value of investments is not guaranteed; you may get back less than you put in.
NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.
Back to Top
In essence, a self certification mortgage means that the lender accepts the borrower’s word on how much they earn – and thus their ability to repay the mortgage – rather than demanding evidence from an employer (or accountant for the self employed).
There were very good reasons for the growth of this type of mortgage – not least that it placed more reliance on the individual, rather than adopting a ‘nanny knows best’ approach to house purchase. It also helped those without a regular source of income to buy a home more easily, without having to jump through hoops to do so.
What is wrong with them?
The problem is that this form of borrowing has been open to abuse with people exaggerating their ability to pay their mortgage and then getting into trouble if expected earnings failed to materialise. Such problems are not necessarily widespread but in the wake of the Credit Crunch, which was largely caused by the excesses of the US sub-prime mortgage market, regulators have apparently decided to tar self-certification mortgages with the same brush as lending to NINJAs (no income, no job or assets) in America.
Is this fair?
In the view of many, outlawing this form of lending will be of little value in helping to reduce the number of home repossessions, because the number of repossessions – in any event lower that some had expected during the recent recession – is not necessarily linked to self certification. According to www.docstoc.com, self certification accounts for just 5% of the total market and a small proportion of total repossessions.
The banks, however, have an obligation to lend responsibly – and they are not exactly flush with money at the moment – so there is every chance that the self-certification mortgage will suffer a decline as a result even if the regulator decides to take no formal action after all.
Who will be affected?
It will not only be the self employed who are affected by this proposal. Anyone who wants to borrow close to the maximum in terms of multiples of earnings could find that the new responsibilities on lenders to assess affordability based on the borrower’s free disposable income and borrowing capacity, (in view of the plausibility of the information and the basis of capital repayment, in the case of interest only mortgages) could find that their ability to obtain a loan is reduced.
This could adversely hit first-time-borrowers as well as those seeking to move up the housing ladder.
Is there a solution?
It depends whether there is really a problem associated with this form of borrowing, whether this is actually an issue that needs to be addressed. What is clear, however, is that the role of professional mortgage brokers and independent financial advisers is set to become even more important in future.
It is important that you should take individual professional advice before making any decision relating to your personal finances. Your home may be repossessed if you do not keep up repayments on your mortgage. Think carefully before securing other debts against your home. Fees for mortgage advice may be charged and for details of these please contact your usual adviser
NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.
FINANCIAL NEWS ON THE WEB HAS BEEN PRODUCED BY THE INSURANCE MARKETING DEPARTMENT LTD. YOUR INDEPENDENT FINANCIAL ADVISER DOES NOT EXERCISE ANY EDITORIAL CONTROL OVER THE CONTENT AND MERELY PROVIDES THIS INFORMATION AS A SERVICE TO ITS CLIENTS, WHO SHOULD SEEK PROFESSIONAL ADVICE BEFORE TAKING ANY ACTION IN CONNECTION WITH ANY INFORMATION PROVIDED THEREIN.
Back to Top
These could well be perfectly legitimate – in some cases, the bank will need to verify that a transaction is legitimate, in order to protect your interests. However, it appears that not all calls come from the bank; in some cases a call centre is being used.
This raises an important point about how much information you should give them – and they should give you. For example, if the caller says they are from your bank and “just need you to confirm your PIN number” you can guarantee that the call is fraudulent, because a bank or credit card provider will never ask for that information.
On the other hand, if your bank does call you, they will need to confirm your identity in order to ensure that they are talking to the right person and not giving your son or daughter (for example) information that is personal to you! The problem is that, with inwards calls, you never really know who the caller is – especially as banks are so faceless, these days. So the information they ask for when calling you could be part of a process that will eventually result in identity theft, once sufficient pieces of data have been parcelled together.
What can you do?
There is no simple answer to this issue. After all, banks do need to protect your interests if they think something may be wrong. But how far should you go in responding to confirmation requests? There is no simple answer except to refuse to give any information at all, ask for a name and department and then say that you will call back. There is little point in asking for a telephone number as this could be that of a criminal gang; on the other hand, giving this to you would mean that they are traceable, which many inward calls are not, because of the ‘number withheld’ facility.
Some call centres will say that they are unable to accept inwards calls, which is not unusual. In this case, you may prefer to terminate the conversation because if they are your bank, they must allow you to call them.
Should they be doing this at all
This does, however, raise a broader issue and that is the question of inwards calls after a large amount has been deposited in your account – this can also happen when you go into the bank to undertake a routine transaction. What the bank is seeking to do – whatever it may say about giving impartial information – is to sit you in front of one of their sales people (they may call them advisers, but they can usually only sell the bank’s products and are targeted on product sales, not quality of advice).
There must be questions over the confidentiality of your data, if one part of the bank is able to approach you about something done within another part of it.
“Silent calls”
Another aspect of telephone calls from banks is that these are often so-called “silent”; in other words, you answer the telephone, but nobody is there. There can be several reasons for this – one of which is crooks telephoning to see if anyone is in the house before burgling it. But the most common is that it is a call centre using an automated dialling system. The machine dials a number and then, when it is answered, the call is transferred to the next available agent. If none is free at the time, there is a long pause before the call is terminated.
Perhaps the facility to withhold the caller’s number is one that should be withdrawn completely. Unfortunately, overseas calls come into this category (as do calls from internet telephone systems such as Skype).
You should take individual professional advice before making any decision relating to your personal finances.
NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.
FINANCIAL NEWS ON THE WEB HAS BEEN PRODUCED BY THE INSURANCE MARKETING DEPARTMENT LTD. YOUR INDEPENDENT FINANCIAL ADVISER DOES NOT EXERCISE ANY EDITORIAL CONTROL OVER THE CONTENT AND MERELY PROVIDES THIS INFORMATION AS A SERVICE TO ITS CLIENTS, WHO SHOULD SEEK PROFESSIONAL ADVICE BEFORE TAKING ANY ACTION IN CONNECTION WITH ANY INFORMATION PROVIDED THEREIN.
Back to Top
It was only with the changes brought about by so-called pension simplification, that the term ‘unsecured pension’ was forced upon us.
Actually, there is nothing wrong with this new term other than it fails to explain precisely what the facility means –on the other hand, it does cover one important aspect, which is that unlike an annuity, it does not provide a guaranteed basis of income. We will come back to this later.
So what is an ‘unsecured pension’?
Basically, this is a facility that allows you (after taking any tax free cash that you may require, up to 25% of the value of the fund) to take money directly from the fund as a taxable income. The advantage of this is that you are not purchasing an annuity so you can decide exactly how much to take, within limits set by the government. These are basically anything from nothing at all, to 120% of the amount you could get from a single-life level annuity. To make this easier to calculate, the Government Actuary’s Department issues tables, which IFAs and pension providers can look up, depending on the most recent gilt yields.
Highly flexible
Perhaps the most important aspect of this is that you can actually vary the amount you take each year. This means that if you are retiring gradually, perhaps reducing the number of days you work each week, you can build up the level of income from your pension gradually, to compensate for reduced salary.
Most importantly, the balance of your fund remains invested within the highly tax-efficient regime applying to pensions. If you purchase an annuity, you no longer participate in investment markets.
Should you die
Unlike under an annuity, where on death the entire fund is lost or used to provide an income for a named dependant provided this was set up at the outset, on death while using an ‘unsecured pension’ the balance of the fund can be returned to the estate (less a tax charge of 35%) or used to provide a dependant’s income either directly from the fund or through an annuity.
What are the risks?
Using an ‘unsecured pension’ is not for everyone. Firstly there are generally higher costs than when an annuity is purchased, particularly on smaller funds. Secondly, you remain exposed to investment risk. Thirdly, you are not receiving a guaranteed income as you would, had you purchased an annuity. Fourthly, any future reduction in annuity rates could give a lower income in future than would have been available at outset.
This means that, in a worst case, your pension fund could run out. Conversely, you are keeping your options open and, if you believe that interest rates will recover – and therefore improve annuity rates – using an ‘unsecured pension’ for a year or two before purchasing an annuity could make sense.
At 75
‘Unsecured pensions’ are available only from age 50 (55 from 6th April 2010) until you are 75. Thereafter new – much more restrictive – rules apply under the equally inelegantly titled ‘alternatively secured pensions’ (which industry people refer to as an ASP, largely because they can take a massive bite out of your fund when you die).
It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact your usual independent financial adviser. The value of investments is not guaranteed; you may get back less than you put in.
NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.
Back to Top