As most people would agree, the current home buying process has its problems. Few homebuyers (outside Scotland, where the rules are different) have not on some occasion or other been ‘gazumped’ (where the vendor accepts a higher price from someone else after the deal has been agreed) or had other last minute difficulties with the process.

This is highly frustrating since the purchaser has already committed substantial time and money in the purchase; if it falls through, the money is lost.

To counter this, the Deputy Prime Minister decided that vendors should be responsible for the cost of surveying the property, through the new Home Information Pack (HIP). In this way, if they accept a higher offer elsewhere the unsuccessful buyer will not have laid out so much money. On the other hand, if the purchaser suddenly decides to withdraw, the vendor is left with a large bill unless he or she can find another purchaser before the HIP becomes out of date; as it inevitably will, sooner or later. However, this does not appear to have occurred to Mr Prescott, who created HIPs within the Housing Act 2004.

The precise content of the HIP has yet to be decided but it is likely to include a Home Condition Report (HC), which will be similar in content to a current structural survey (which not everyone bothers with at the moment), plus proof of ownership, local authority searches, sale particulars and copies of any guarantees and warranties applying to the property.

There is some dispute about the cost of creating a HIP – which is unlikely to be resolved before the full content is known – but the government disputes estimates that this could be as much as £1,000 on average, citing £650 as a more likely level.

This will not just apply to those selling freehold properties; leasehold property will also be affected with additional information likely to be required. This may include a copy of the lease, details of service charges and the most recent ground rent notice, details of building insurance, the memorandum of articles of the residents’ management company and other items.

We can expect a national ‘dry run’ during this year, with an expected roll-out in June 2007. Hopefully there will be sufficient Home Inspectors to satisfy demand, or the whole housing market could grind to a halt, with HIPs attracting a premium for those wishing to move quickly. Unfortunately, while the government says 7,500 Inspectors are required, the Royal Institute of Chartered Surveyors has indicated that only about 1,800 are currently in training or have qualified.

It may seem that this concept has been ill thought through and may have been developed to meet a perceived, rather than a real need. It is to be hoped that the dry run will demonstrate whether this is in the interests of homeowners and, If not, that the government will have the good sense to abandon it before too much damage is done to the currently rather fragile housing market.

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Options at retirement

With retirement options expanding this April, it can too easily be forgotten that most people already enjoy considerable flexibility in how they take their pension. In this article we outline some of the things that are not changing, as well as what’s new.

Many years ago, we used to say that the company which helps your pension fund grow best may not be the most appropriate one to pay your retirement income to you. There were various reasons for this which are rather technical and relate to how life insurance offices are capitalised and attract new business.

Whether or not this remains true, one thing is certain; it is always worth looking at the market when you come to retire, because you almost certainly have the right to go to another company for your pension benefits, rather than staying with the same one. This is called an open market option and it allows you to look at the market – or ask your Independent Financial Adviser to do so on your behalf – in order to find you the best deal.

Such an exercise can be really worthwhile. We looked at the ‘top ten’ annuity offices on one day in January 2006; the best offered an income that was 17% higher than that available from the tenth company. Based on a fund of £100,000 a 60-year-old single man could expect a level income of £6,272 from one office but only £5,359 from another. Over a life expectancy of 25 years, that is a difference of more than £22,500 – almost a fifth of the starting value of the fund. And this list is the top ten – there are many other providers. So shopping around makes very good sense.

It is important to see whether your existing arrangement carries a Guaranteed Annuity Rate (GAR). When these were included in pension plans (largely in the 1980s) they may have appeared relatively unappealing because the guaranteed rate at age 65 was usually below what was then available on the ‘open’ market. But in those days, annuity rates were much higher than today, because people lived for a shorter time after retirement and investment returns were generally better. Today a GAR could offer rather more than the best rates available in the open market. Giving up such a benefit may not be a good idea, unless there are other considerations, such as the possible need to provide for a surviving spouse, or the requirement for an indexed income, which the GAR may not have accommodated.

Of course, this is not the only decision you will have to make, when you come to retire. But thinking about it earlier might influence how other investments are to be arranged, so now is a good time to do so.

Annuities – basically a promise to pay an income for life – come in several forms but for practical purposes, the main ones are:

For the joint lives of husband and wife (or civil partners) and then for the survivor, either at the same or a reduced level;
On a level basis, or increasing by a set amount or in line with the Retail Prices Index;
With a guaranteed payment period or not.

(For Protected Rights – that is benefits built up as the result of ‘contracting out’ of the State Earnings Related Pension or more latterly the State Second Pension – there are some restrictions on the choices you can make.)

It is also worth noting that those with impaired health can often secure better rates, on the basis that they can expect to live for a shorter time.

Even before the changes being introduced in April, investors can opt to take their tax free cash and draw an income directly from the fund, subject to a maximum and minimum level. They must, however, buy an annuity before their 75th birthday.

All this changes on 6th April 2006 and for once, it is an improvement. From that date, it will be possible to access your tax free cash and then either draw an income of up to 120% of the annuity rate for your age or leave the fund alone. You do not even have to buy an annuity by age 75, but the maximum you can take after then is reduced to 70% of the appropriate annuity rate.

This means that any unused pension fund on death can be used to provide benefits for a dependant or even given to charity, subject to certain rules. It may even be possible to transfer any remaining money to the pension fund of a family member, although there is likely to be a tax charge in this case. But at least the insurance company does not get to keep the money, as is the case now.

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Protecting your family

It can often be all too easy to focus on basic family needs such as housing, food and clothes. But this may mean that we miss out on planning for what might happen to us and our families if we are unable to earn a living – or even worse, no longer there at all.

There are times when there is simply no alternative to facing unpleasant facts; we simply cannot expect to live our entire lives without facing the prospect that one or other of us will suffer a severe illness or accident. And, of course, we all have to die sometime and for a significant number of people, this is while they are still of working age. According to the office for National Statistics, 367 men in every 100,000 and 239 women in every 100,000 will die each year, between the ages of 45 and 54. Between 55 and 65, the numbers rise to 900 men and 570 women.

In many (but not all) families, it is the man who is the principal earner and it is common for them to carry enough life assurance to cover repayment of a mortgage plus, in some cases, life assurance under a pension arrangement. However, the loss of a breadwinner means not just that debts have to be paid off, but also living expenses met; in some cases for a very long time.
At one time, it was thought that life assurance of ten times income would be adequate to provide for a family, but with personal debt (excluding mortgages) being so high in the UK, this ‘rule of thumb’ may no longer be adequate.

Of course, an Independent Financial Adviser can help you establish the right level of cover for your family, but the following might give you an indication of how to assess your ball-park requirements.

Add:

Mortgage and other outstanding debts;
Known future costs (such as school and university expenses for children);
Future expected income between now and retirement age (don’t forget to allow for inflation and other increases); and
The amount an employer will no longer be able to put aside towards your pension.

Deduct:

State benefits, such as the basic state pension and State Second Pension;
Existing life cover including death-in-service under pension arrangements;
Widow’s pension that is available under any pension scheme; and
Other sources of income that will continue after your death.

The result will give you an indication of how much overall cover you require. This can be made up life insurance that provides a lump sum &/or an income.

Similar considerations will relate to the need to provide a lump sum or income for yourself in the event of long term illness, which can be provided by critical illness insurance and permanent health insurance. This latter provides an income starting shortly after the onset of illness or injury until a fixed age, recovery, or death. Critical illness cover generates a lump sum on diagnosis of one of a series of major conditions and can be arranged on a stand-alone basis or in conjunction with life assurance.

What can often be forgotten is that the loss of a carer – whether or not they also earn an income – can also leave a family in financial straits. After all, the ‘services’ provided may not of themselves be income generating, but they would certainly cost a considerable amount to replace, should that become necessary. One need only consider the basics, including cleaning, cooking, child care (and transport) and shopping to identify perhaps 30 hours a week that you would have to pay someone to perform. At just £5.05 an hour (the national minimum wage) this would cost almost £8,000 a year; and that is if you can get someone to work those hours for so little! It also takes no account of lost income either of the carer, or any time the remaining parent might have to give up, in order to cope.

So effecting life and health insurance on a carer is also highly worthwhile considering.

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Past performance

Any ‘advert’ promoting investment products must make it clear that past performance is no guide to the future. It is important that we should always remember this because, like lottery balls, investment markets have no memory. But what does this actually mean when it comes to selecting an investment strategy?

According to the National Lottery, the frequency with which individual numbers are drawn varies very little. Indeed, if you ignore 13 (lowest) and 38 (highest) all numbers are drawn between 12 and 16% of the time. The only conclusion that can be drawn from this is that every ball has roughly the same chance of being picked on each occasion and that the balls have no memory. Rather like a Roulette Wheel.

Of course, investment markets are nothing like the lottery, because they move in response to external stimuli; or to be slightly more accurate, market prices move according to how investors and investment managers react to news and events. However, there is a similarity, in that the way markets or individual stocks have moved in the past gives no indication of how they will move in future.

So how can investors give themselves the best chance of achieving a positive investment return, if they cannot rely on past performance? After all, few people have the time – or specialist knowledge – to follow an individual investment strategy.

Investment success depends largely on accepting that there will always be times when values fall as well as rise; this is more than just a formula of words, it is a fundamental truth of investments. What the alert investor can do is recognise how markets work and then seek to minimise the impact of reverses by following a structured approach.

Firstly, thinking about the range of assets held is important. For example, most investors will already own their own home, or be purchasing it on a mortgage. For them, investing in buy-to-let property could be seen as concentrating too much on one asset class and investing in equities and other asset classes should be considered. Looking at life insurance companies; they will hold within their with-profits funds a range of assets including UK equities, overseas equities, cash / deposits / gilts and property. For most, property is unlikely to be the largest proportion since it lacks liquidity.

Secondly, be aware of how the market is moving within each asset class. If, for example, share prices generally are falling, then the value of an individual investor’s holding will also be falling. This does not mean that immediate disinvestment is automatically a good idea, since this will limit the potential for benefiting from a bounce back. On the other hand, a long term decline could be an indicator that it is time to step back from the individual market for a while.

Thirdly, it is important to consider whether individual sectors of a particular market are moving against the general trend. For example, owning commercial property while residential property is falling in value, or fairly static, could make sense as part of a large portfolio; or looking at telecommunications infrastructure shares at a time when “dot.com” businesses are not faring well, could make sense.
Lastly, there is always the possibility that an individual investment manager can out-perform the market and offer potentially better returns. However, it is here that the caveat about past performance is most important. Just because a manager has beaten the others in the past does not mean he or she will do so in future. For this reason, many people are now opting to use tracker funds which can carry lower charges, although they do not offer the potential to out-perform the market they follow. If you believe the markets are broadly efficient and will offer the best long term results, this can be an option.

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Contents:

Home Information Packs

Options at retirement

Protecting your family

Past performance