Could you live on £140 per week? or £161 million for life?

The Government has recently proposed a single-tier, flat-rate state pension worth around £140 a week, and are currently consulting on how this might be introduced in 2015 at the earliest. Recent research from Standard Life has revealed that almost two out of three people (63%) think they couldn't live on £140 a week in retirement, rising to 72% for the 55 and overs.
And with more than one in six Brits (17%) not doing any financial planning, now is a excellent time to consider your own financial planning and ensure it is up to date (or exists!)

And in this sense, retirement planning is not just pensions, although they play a big part. Much of my work with clients is showing how to provide income in retirement, that won't run out before you do.
Whether that is improving and fine tuning your pensions, considering other sources of future income such as property rental income or investment income or something else entirely.

One thing my work does not include is a recommendation to invest in lottery tickets just in case you are the next lucky winner of £161 million! Although if the recent UK big winner is reading this, I'd be delighted to help with future tax efficient income planning ;-)

Annuities, are they all bad?

Henry Allingham – Probably not a name you have heard of previously. Henry was a World War One veteran who lived to be 113. He owned an annuity.

Henry purchased his annuity (income for life) in 1962 and it paid out, year after year, until Henry passed away in 2010
– 48 years of income.

Annuities generally get a bad press, mostly based around the fact you lose control of a lump sum and if you die you lose the lot with nothing passing to your family.


They are the perceived bad points and whilst true in part do not tell the whole story.

The perception of losing control of a lump sum is not always true, especially if the annuity is purchased from a pension. Perhaps this is the fault of the pension providers who always give us an annual statement with a lump sum figure, yet we should understand from the day we start paying into a private pension it is only ever (under today’s rules) a quarter of the accrued amount that will be payable as a tax free lump sum. The remainder has to be paid as taxable income.

This blog post is not meant to be pro-annuity – As with all my work I remain neutral, preferring not to let personal perspectives get in the way of doing whatever is best and most suitable for any given client at any given time. The aim of this article is just to point out a few positive aspects of annuities I have found in the course of my work, the first being for those that live longer, and we are told life expectancy is increasing all the time, an annuity can represent fantastic value for money.

Living too long or Running out of money

In many ways an annuity could be likened to buying insurance. One is insuring oneself against ‘living too long’, or to put it another way, running out of money.

When financial planning for clients, aiming to generate and provide income for life, one of the greater challenges I face on their behalf is to balance the risk and reward profile, keeping enough money in reserve to fall back on whilst investing in assets that will outpace inflation, thus retaining standard of living and purchasing power as time goes by.

An index linked annuity can address this, providing a definite source of income, for the remainder of life, increasing in line with inflation.

That said, annuity rates today are much lower than in the last 20 or 30 years or so, their rates being closely allied to interest rates and inflation. At the same time life expectancy has increased. In 1970 a man retiring at 65 could expect to receive a pension for 14 years. Today that is expected to be nearer 24 years of payment.

Without going into the maths and actuarial reasons (but for the more technically minded it is known, rather brutally, as ‘mortality drag’) there is a form of cross subsidy at work with annuities whereby, in simple terms, those that die soon after purchasing an annuity subsidise those that live a long time. The approximate cost of this for someone entering Pension Income Drawdown (see other blog posts for more info on this product) is around 0.5% at age 60 – a small price to pay? It rises to around 1% by age 70. However by age 85 the cost is around 5%. So the decade between age 70 and 80 is sometimes referred to as the ‘Annuity Age’ when it may well be sensible to convert pensions to annuities (but always take individual, professional, fee based advice on this)

Another positive for annuities is the simplicity they bring in financial planning, alongside the certainty. A regular, trackable, easy to understand level of income without any concerns over investment performance or otherwise to sustain that income.

But is there an optimum amount, what with the income being taxable? Arguably if you could keep your annuity income under the higher rate tax threshold and create other income that was non taxable elsewhere it may prove tax advantageous for you, especially if you received higher rate tax relief on the way in (in simple term, under current rules, tax relief of 40% on the way in, and only paying tax at 20% on the way out). Again, another area perhaps to take individual, professional, fee based advice on.

Another reason to not have ‘too much’ (crazy idea I know) in your pension when buying an annuity is a recent development by annuity providers based on demographics. Amazingly the size of the purchase price now goes against the policyholder! They now reason the size of the fund buying the annuity reflects social status, arguing a large purchase price means a wealthy client, and wealthy people live longer than poor ones.

The astute client will ensure their financial adviser knows this and will investigate whether to help them to purchase annuities in tranches to maximise income from various providers rather than use the full fund at once with one annuity company.



There are many factors to consider when purchasing an annuity. My other blog post today consists of my helpsheet on this matter with areas and variables to consider before purchase.

Watch out when doing a ‘DIY’ job on annuity purchase. ‘best buy’ tables in newspapers and online are often manipulated to show best rates (ie for a man of exactly 65) and if you do not fit the exact criteria you’ll find yourself worse off. It is also unusual to find your pension provider is also the best annuity income provider so don’t just buy from them, especially if a bank product. Shop around (see other blog post today).
Consider engaging a financial adviser with specialist annuity research software who can pinpoint the annuity provider who will give you the most money (known as exercising your ‘open market option’) for your unique, personal position. Make sure they charge a fee for this service so you can be sure they are not being swayed by a later commission on an annuity purchase. If you wish the adviser to subsequently help with the annuity purchase transaction and implementation, again look for a fee charging adviser so all your money is at work generating you income, not paying a commission.

In summary, conventional annuities are an excellent way of securing a fixed income for life, with or without things such as inflation linking or benefits for dependents. A series of annuities may work well too, especially for those leaving Income Drawdown pensions as time goes on.
Annuities are certainly not the right answer for all of the people, all of the time,
but they definitely are the right answer for some of the people, some of the time.

Ask yourself, when should you buy an annuity?
Just in case, like Henry Allington, you live to be 113 or older.

Shopping around for lifetime annuities

The Open Market Option
Annuity rates vary from one life company to another, so you should make sure you shop around to get the best deal for you. There are a few things to think about first.

• If you're getting a pension from a personal pension arrangement, your pension provider should send you information between four and six months before you are due to retire, setting out what they will offer you based on the value of your fund. They will also tell you that you can shop around for a higher annuity. About six weeks before you retire your pension provider should give you an estimate of the value of your fund. You can use this to compare products from other providers. This is known as your open market option.



• Don’t assume the same company with which you built up your fund will automatically offer you the best rate. You may do better to shop around and check whether another company could offer you more. The annuity rate you get can affect your income by hundreds of pounds a year for the rest of your life.



• If you're getting a pension from an occupational defined contribution pension scheme, the trustees may buy your annuity for you, but you can also shop around on the open market and find the insurance company with the best annuity rate for you, or your scheme trustees can do this for you if you ask.

It can be difficult or impossible to change your lifetime annuity provider after you've bought your lifetime annuity, so take some time to choose the one that’s right for you.

 

Check what your existing provider offers

Before shopping around, make sure you understand what your existing provider is offering you. Check:

• whether your provider offers a guaranteed annuity rate. This is not the same as a guarantee period. A guaranteed annuity rate means that the provider has to offer a minimum annuity rate for your pension fund. Now that annuity rates are a lot lower than in the past, a guaranteed annuity rate can be very valuable and could give a higher retirement income than can currently be bought on the open market;

• whether your provider will charge your fund if you buy your annuity from another company.

Your existing provider will usually give you a quote for a specific type of annuity. Make sure you get a quote for the type of annuity you want, not just the one the provider offers you.

How long have you got?

Annuity quotes are usually valid for between 7 and 28 days.

If you change your mind – you may have the right to withdraw or cancel. If so, the provider will tell you and also tell you how quickly you must act.

Shopping around for your annuity

1. Get an estimate of the value of your pension fund, taking account of any charges, from your provider.

2. Decide whether you want to take a tax-free lump sum, and if so, how much (usually up to a quarter of your fund). If you decide to take a tax-free lump sum, deduct it from the pension fund value your pension provider gives you.

3. Decide whether you want:

o a single or joint-life annuity. If joint life, whether the pension paid to your partner is paid in full or reduced (say by a third) – or

o a level or escalating annuity

4. Think about whether you want your annuity to continue to be paid for a specific number of years (5 or 10), should you die shortly after you buy it.

5. Does your fund need to be a certain size to qualify for the better rates offered by another company? Some firms may not be interested in providing an annuity for small sums.

6. Are you a smoker? If you are, you may get a better rate from some annuity providers.

7. Do you have a medical condition that could reduce your life expectancy? If you do, you may get a better rate from some annuity providers. Some providers of impaired life annuities will also accept pension funds of less than £5,000.

You should now have the facts you need to get quotes from a range of providers.


Or we can do it for you – contact us to discuss our fees for this service

Simpler Tax for Pensioners?

The Office of Tax Simplification (honestly, this IS a real department, it is not run by Sir Humphrey and today is not April Fool’s Day) has announced it will review the pensioner tax system as the Treasury attempts to simplify the pensions tax regime alongside the generally stated aim of the Government of simplifying tax as announced in the recent budget.


The OTS chairman Michael Jack has said: “For the estimated 5.6m people of pensionable age paying tax, this area is widely acknowledged as causing too many problems for a group, some of whom are the least able to cope with them.
The OTS will be looking for ways in which pensioners’ tax affairs can be dealt with in a much more straightforward way - especially for those with multiple sources of income.”

The OTS has now been ordered to carry out a review of pensioner taxation. But for now at least this will not include tax relief on pension contributions.

The Treasury exchequer secretary David Gauke commented: “I would like the OTS to carry out a review which identifies and examines which parts of the tax system cause the most complexity for pensioners, looks at how this varies across the pensioner population, and proposes ways to make their tax affairs simpler.
I look forward to an interim report on these issues ahead of the Budget 2012, and a final report with policy recommendations later in the year.”

So it seems the aim of the review will be to examine and identify which areas of the tax system cause the most complexity and uncertainty for pensioners, consider how these issues vary within the pensioner population and explore what changes could achieve simplification (There’s that word again!) and what the wider implications of these might be.

I’ve said it before and I’ll say it again. Simplification, Tax and Government are 3 words which just don’t seem to work for me in the same sentence. Call me a cynic, but there you are. That said, I’ll look forward to what comes of this and hope it achieves its aims. I just won’t be holding my breath while waiting...

Save into a Barclays cash ISA? Time for a rethink?

Here is a screenshot of some posts on my facebook page (www.facebook.com/greenfinancial - do have a look and hit 'like')
I was at a train station in March, as 'ISA season' got underway and saw an advert for Barclays so-called 'Golden ISA'. I had recently reviewed a previous issue of this for a financial planning client and had noted the way the client had originally been attracted by high rates then seen it drop away. So I light heartedly took the mickey out of the advert imagery with that in mind.

Then not 2 months later, I noticed that http://www.thisismoney.co.uk/ tweeted (@thisismoney - well worth a follow) that Barclays had quietly dropped the rate, from 3.25% to 2.2% immediately taking them out of the best buy tables. So my prediction came true: just like the two previous tax years, Barclays heavily advertised a high headline rate, along with 'promises' then dropped the rate when no one was looking (except @thisismoney and me, @ianjamesgreen !).

And imagine my surprise when today @thisismoney revealed Barclays have now also dropped their 'rate promise' which promised to track Bank of England rates on the way up.

As an independent, fee based, financial planner, I report to the FSA on 'TCF' - Treating Customers Fairly. I wish the FSA would ask Barclays if they think their advertising and marketing methods are 'Treating Customers Fairly'

A big THANK YOU to my clients

Green Financial is a small business, family owned and run, that provides a personal service to a limited number of clients. Recently, I needed to say Thank You and wanted to make the five thank you gifts something more than a branded freebie.


Background
In April 2010, I decided to relocate from working in the City of London to nearer home in Putney. This was so that when my new child was born (now aged 6 months) I would no longer need to spend a number of hours each day commuting, with the attendant stresses of dealing with Transport for London(!) and that time could be spent being a husband and father – whilst still maintaining or even increasing the hours worked on looking after my clients.

Part of this process involved the re-registration of my financial services licence with the Financial Services Authority, a process that normally takes six months but I proudly achieved in just three. Green Financial Advice was born about 6 months before my new daughter. Whilst most clients see our relationship as dealing with me personally, the formation of a new company also meant I legally needed to write to all clients to ensure they were happy to continue to deal with me via that new company name. Additionally, later in the year, as part of my annual International Standards certification process (I was one of the first thirty advisers in the UK to be accredited as ISO22222, Personal Financial Planner, compliant) it was suggested I place on record confirmation from all clients of their intentions to continue to deal with me personally for each of their existing financial plans or products.

This was quite an undertaking with many people to write to, covering almost three hundred different policies. I was delighted that the response rate was 93%.

When writing I acknowledged that most clients would send back the paperwork anyway with no incentive to do so, but I wanted to say thank you for taking the time and trouble to assist me in complying with my administrative requirements.

Charity Thank You

At Green Financial we have been supporting the work of The Royal Hospital for Neuro Disability in Putney. It is a national charity (www.rhn.org.uk Reg No 205907) providing assessment, rehabilitation treatment and care for adults with profound and complex disabilities caused by disease or damage to the brain. I was delighted to make a donation of £250 in the name of Green Financial Clients to the RHN

Client Thank You

here goes...

First ‘out of the hat’ was a client in London. They have a young child so I thought a money box would be appropriate, especially as I had seen this: Not a piggy bank, but a herdy bank! Made in bone china in Staffordshire’s potteries, almost in Green Financial green and with the slogan ‘Why should pigs have all the money?’. I hope it is enjoyed and brings smiles and prosperity for many years to come.





Next up: As the communication had been about letters, what better thank you than a Scrabble themed gift (geddit!?). Two clients in Hampshire and Berkshire have a scrabble mug and a set of scrabble coasters on the way.

As mentioned above, one of my main reasons for moving was to avoid commuting. When I saw a charming book about a pet that hit the news in 2009 after it took to commuting on a bus every day I hoped it would be just right as the fourth gift for an animal loving client in Oxfordshire.

Fifth, finally and by no means last, back to London with a local client in Wandsworth. Echoing my journey, they too used to work in the City so I trust the book below is of interest to them. It is a giant fold out panorama (many, many feet long when extended) that photographs the North bank of the River Thames all the way from Kew to Canary Wharf.

So there we have it, a big THANK YOU again to all my loyal clients, it truly is my pleasure to work with you and I look forward to Green Financial being of service for many more years to come.

What would you do with US$ 3 TRILLION?

The Economist Magazine of 16th April had a fascinating and interesting article on the fact that China's central bank had 2.85 trillion US$ in foreign-exchange reserves.

They suggested a number of 'fantasy shopping' items, many that would leave a sizeable chunk of change!

All the farmland and farm buildings in the USA - $1.87 trn
The sovereign debt of Portugal, Ireland, Greece and Spain - $1.51 trn
All the shares of Apple, Microsoft, IBM and Google - $916 bn
All the property in Manhattan, New York & Washington, DC - $287 + $232 bn
The 50 most valuable sports teams/franchises in the world - $50 bn

Theoretically they could buy the US military, valued at $1.9 trn in 2010 (of the $1.9trn, $413.7 bn is guns, tanks and other gear - the remainder is land , buildings etc)

The Economist often come up with this kind of sideways look / commentary on financial issues - do try a copy every now and then and subscribe if of interest