Equity release up 10%

Safe Home Income Plans (SHIP) has reported a 10% rise in equity release in Q3 2008 over Q2 2008. There could be many reasons for this but with house prices falling fast and expected to continue on their journey south it may be that people are bringing forward their existing plans to release equity.  Those who have their pension invested in volatile assets that are suffering a downturn at the moment may also be turning to equity release to shore up the gap.  It certainly beats crystallising losses on the stock market.

ABI targets 30 day annuity transfers

The Association of British Insurers (ABI) has announced an initiative designed to reduce the time taken to make Open Market Option (OMO) payments to pensioners.  The scheme includes creating an electronic information exchange which will, apparently anyway, reduce the time taken to switch annuity providers.  

Are they implying that delays of months are currently caused by a lack of efficient technology?  I suspect they’re actually caused by a lack of motivation to solve the problem.  In fact, 30 days still seems like quite a long time doesn’t it?  Just shows you how low the bar was set initially.

I suppose we’ll have to wait and see what effect this initiative has once we’ve given it time to work.

Women get full rights to state pension

At the moment only 35% of women in retirement get the full basic pension compared to around 95% of men. Many women have broken employment records due to taking time out of work to raise children, resulting in reduced national insurance contributions.  In other words, they haven’t paid their stamps.  Of course this is grossly unfair.

Now, or rather in a short while when the amendment to the pensions bill becomes law, women will be able to buy back national insurance contributions from previous years when they were out of work.  This means they can top up their contributions to qualify for a full state pension.

Gordon Lishman, Director General of Age Concern, said: “We are absolutely delighted by this decision which will give thousands of older women the opportunity to build up a better state pension.” 

In 2010 the number of years of NI contributions needed to qualify for a full basic state pension will come down to 30 for both men and women.  At the moment men need 44 years and women need 39. Those who want to benefit from this new expansion of the ability to top up will need to have 20 years’ contributions  already to qualify.  

This is good news but in reality it’s very little and it doesn’t apply to everybody. You still need to have made your own arrangements if you want a comfortable retirement.

Poll: equity release to fund a holiday – right or wrong?

I’ve just read a report from an equity release provider that surprised me.  It has a breakdown of what people use equity release for – the results show that the second most popular use is to fund a holiday.  Of course people have multiple uses for the money they release from their homes so it’s not quite as outrageous as it seems but still, 34% of people is a lot. We are talking about mortgaging your home after all.

I’ve written previously that I think it’s an irresponsible tactic to use holidays in marketing but I’m now having to challenge this. Given that so many people do use equity release to fund a holiday, isn’t it justifiable for equity release providers to use it in their marketing?  On the other hand… I heard a while back that people use haemorrhoid cream to reduce the appearance of wrinkles around their eyes but, oddly enough, I don’t recall Preparation H advertising this use!   

Icesave ISA tax status resolved

Just a quick note to those Icesave customers who wondered if the money they eventually get back from the FSCS will be income tax free – yes it is.  You can open a new ISA and put the money in there when you get it. There’s a good article on the Guardian website here.

Are your savings safer in building societies than banks?

With all the turmoil in the banking world, the disgrace of Iceland and a host of British savers getting a narrow escape*, I thought I would write a post about our often ignored building societies. After all, none of them have gone bust whilst all of the ones that the carpet baggers got their grubby hands have sunk like a stone. Just look at the casualty list of demutualised societies:

Halifax, Northern Rock, Bradford & Bingley, Alliance & Leicester, Birmingham Midshires… perhaps they should have remained mutual societies.

So why might building societies be safer than banks?

You have to look at why they demutualised in the first place. Northern Rock’s rapid expansion was only possible because it got a large portion of its funding from the money markets. This reliance on wholesale funding was ultimately the cause of it’s demise. Had it remained a building society it would not have been able to access this external capital, would not have been able to grow so aggressively and, I suggest, would not have gone belly up.

There are limits on how building societies can raise funds other than from individuals and on lending other than fully secured on residential property. At least 50% of the funds of a building society (or of the society’s group) must be raised in the form of shares held by individual members of the society. These rules leave no room for highly leveraged high risk growth strategies.

As at August 2008 there were 59 building societies in the UK with assets of £360bn, including mortgage assets of £250bn. Savings balances were £235bn. That seems pretty prudent to me.

The hunger for growth and expansion led Northern Rock to famously offer it’s 125% loan-to-value mortgages. This kind of irresponsible lending is not something you find in building societies. Building societies are primarily for the provision of (sensible) mortgage lending to members. They are not investment banks like Lehmans, JP Morgan, Goldman Sachs or any of the other irresponsible institutions that built their vast empires on massive leverage.

Now I hate to suggest that greedy executives drove societies to demutualise but… a study conducted in 2005 by Kent Business School showed that between 1993 and 2000 executive remuneration at demutualised societies increased by 293% compared to 65% at building societies.

Building societies also serve the wider interests of society in a way that banks just don’t. Not everything a building society does is driven by turning a profit – unlike banks. For example, if you struggle to get on the housing ladder and need a shared ownership mortgage where are you going to get one? Leeds building society, Kent & Reliance, Nationwide, (and Halifax but of course that’s a hangover from their mutual days). These are not the sort of institutions to take excessive risks for a bit of extra profit. They are cautious and, dare I say it, more caring than banks with a genuine concern for customers.

Having said all that, most of my personal money is not in building societies. I think that given the actions taken over the Northern Rock, Icesave, Bradford & Bingley episodes that if you are a UK resident with your money deposited in a UK bank then your savings are probably safe. I took my savings out of Icesave because I didn’t trust the Icelandic compensation scheme (phew!) but I have every confidence that my savings are safe where they are in Egg, Abbey, Northern Rock and Nationwide (the only building society on my list). Not only are they all covered by the UK Financial Services Compensation Scheme but the UK government has made it clear that they will not allow savers to lose their money.

* Readers from the Isle of Man have commented that there were no guarantees for them and another reader who had savings in the Guernsey branch but was not resident there says that he’s not sure if he is covered. Bank guarantees are not international.

Bank guarantees are not international

After the disgraceful behaviour of Iceland, will there now be a credit crunch of national banks? The only reason to loan money to Iceland is for geopolitical gain – they are not a good credit risk. In the terms of the industry they are deep sub-prime borrowers trying to mortgage their home. Are there other countries in the same position?

The fact is that only very large or very wealthy countries can afford to guarantee their banks. And of course all countries will look after their own in times of trouble.  There is no international rescue plan in place, neither does one seem possible to me. As a UK saver, I do not trust any other country’s bank guarantee.

The last Kaupthing in the coffin for Iceland

Iceland’s biggest bank, Kaupthing, was today the last of the big three to go under.  Well, the UK arm you and I know and love as Kaupthing Edge anyway.  

Kaupthing earlier agreed to sell its own Kaupthing Edge deposit business to ING, the Dutch bank, and had been approached with offers for Kaupthing Singer & Friedlander Capital Markets, which is 30 per cent owned by staff. The Treasury emphasised that “savers’ money is safe and secure”.

The bank had earlier told the Financial Times that its London operations were “a superb business, with an excellent franchise and is core to our long-term future”.

The Financial Times, 8 OCtober 2008

The details hardly matter – it’s been on the cards for months.  UK customers are protected by the Financial Services Compensation Scheme but of course we know the UK government would have stepped in as they did with Icesave anyway.  

The event is significant though as it is the last nail in the coffin for Iceland which looks set for bankruptcy with debts 12 times GDP. I have a lot of sympathy for the everyday people of Iceland but their government has conducted itself with a distinct lack of honour. 

Iceland tried to nationalise it’s banking system without the resources to back it up.  They knew that their compensation scheme was useless and that their reserves couldn’t cover it either but did they come clean?  No, they let their banks carry on soliciting for business.  Kaupthing Edge were still advertising online (the sort of campaign that can be turned on or off instantly with no penalty) the day before they were shut down.  If our money was safe then I wouldn’t mind but clearly they put customers at risk.

The Chairman claimed that they were doing well until Glitnir hit the news and people panicked.  The Icelandic compensation scheme was still a joke though and Kaupthing were still frantically trying to reduce their leverage.  They were hardly healthy so I’m not sure how he was measuring success.  It is unfair to call it panic when people withdraw their hard-earned money from irresponsible banks.

And what about Glitnir?  Nationalised and then put into receivership when they realised that they couldn’t afford it.  Surely they knew their reserves were low when they nationalised it – looks like a hollow show of strength to me.  They fooled nobody and from that moment on their behaviour just went downhill. 

A pathetic attempt to peg their currency, now in freefall and about as valuable as the paper its printed on. It was like trying to turn back the tide.

Iceland may be able to save itself with a loan from Russia.  Even then they announced a deal which was actually only in the pipeline and not agreed!  A junior PR executive could have told them not to do that! Russia can now, for a very modest sum, acquire a fantastic base in the north atlantic.  Hey, is there oil in the Arctic?

Kaupthing Edge update

With events moving so quickly it’s difficult to keep track of critical events.  There’s some interesting stuff on Reuters this morning regarding Icelandic events:

The Swedish central bank said it would grant liquidity assistance to the Swedish arm of Icelandic bank Kaupthing with a loan of up to 5 billion crowns ($702 million). The central bank said it had judged the unit, Kaupthing Bank Sverige, was solvent, but conditions in the Icelandic banking industry made it difficult for it to meet its payment obligations.

“In the situation that has arisen there is an imminent risk that the bank may suffer liquidity problems,” the central bank said in a statement.

So they are suggesting that Kaupthing’s issue is purely liquidity.  Remember that this is in reference to the Swedish arm of Kaupthing.  Bloomberg on the same topic adds:

Kaupthing has put the Swedish subsidiary up for sale, joining other Icelandic banks in scaling back international operations as the credit crisis hits the Atlantic island.

Meanwhile, it is not clear whether or not Glitnir will survive despite last week’s announcement that the government would nationalise it:

Oddsson late on Tuesday raised the prospect that the goverment might not pump money into Glitnir after all.

“The state will not inject new capital into the bank unless there is actually a bank,” Oddsson said, referring to a shareholders’ meeting which is slated for Saturday.

The rest of the Reuters article can be found here.

UK to compensate all Icesave customers

The Chancellor has today agreed to guarantee 100% of savings for UK Icesave customers.  Yes, that’s not just £50,000 that’s the whole amount.  He said that the Icelandic compensation scheme had no money to meet its obligations and that he would step in and protect depositors.

This is fantastic news for all those with their retirement savings stuck in Icesave right now.

Darling said that he “wouldn’t normally do this” for the subsidiary of an overseas bank.  It really is every nation for itself at the moment.

“The Icelandic government, believe it or not, have told me yesterday they have no intention of honouring their obligations here,” said Mr Darling.

“Because this is a branch of a foreign bank the first call would be on the Icelandic compensation scheme which, as far as I can see, hasn’t got any money in it.

BBC, 8 October 2008

It seems to me that offering a guarantee without sufficient backing is tantamount to fraud and we should now be asking all guarantee schemes to tell us precisely what reserves they have.  Primer Minister Gordon Brown said the UK would take legal action against Iceland over its failure to guarantee compensation.