What can you do with small annuities?

If you have less than £5,000 in your pension pot then I believe you should be able to take it as cash. The fact is that annuities cannot really be bought with less than around £3,000 and those under £5,000 are not common. Anybody trying to shop around for an annuity after exercising the Open Market Option will already know that choices are limited. 

In 2007, the Association of British Insurers (ABI) reports that there were around 102,000 annuities sold with a value of less than £5,000.  That’s a lot of people being forced into very small annuities. Just to demonstrate the futility of this, a pension pot of £2,000 could earn you around £10 per month. What on earth are you going to do with that? Far better to take the £2,000 cash and do something useful with it.

I have mixed feelings about compulsory annuities anyway. Why should we be forced to take an annuity just because we reach the age of 75? What if your life expectancy is 5 years? Or even 1 year? I know you can get much more from an enhanced annuity that takes your health into account but surely you’d be better off with just the cash. And what about those of us who are reasonable financially sophisticated and would prefer to be in charge of our own finances – can we not choose for ourselves?

On the other hand, just like putting fluoride in the water supply, you manage to ensure the general welfare of the greatest number of people. You also remove the possibility of certain foolish actions – if I get my pension pot and bet it on a horse that loses I could end up relying on a state pension. The fact that the majority of your pension has to be paid to you monthly over a long period of time also pretty much precludes you going out and blowing it all on a gin palace pleasure boat (substitute your own favourite toy). You could argue that this prevents moral hazard e.g. I spend all my cash on fast cars, boats etc then rely upon the state to pay for my long term care.

I freely admit that I don’t know the answer. I hate being told what to do by a nanny state but I don’t want vulnerable members of our society blowing their hard earned pensions. I am certain though that people with smaller pensions pots (under £5,000) should simply be allowed to cash it in. There is no moral hazard here and no real impact on monthly income.

Making a will is easy

Well, it’s easy if you get somebody to do it for you anyway! I just had my will done by a very lovely woman called Kathy who I would recommend to anybody (anybody who lives in the South East of the UK anyway).

I learned some interesting things during the process. For example, the documentation itself can be very simple depending on the complexity of your estate so there isn’t much money in it for solicitors. Therefore many solicitors aren’t that keen on doing a will but if they do so they may try to persuade you to name them as executors in your will – that’s where they can make a profit. The woman who did my will specialises in wills and she didn’t seem to get involved in that side of things – at least she didn’t offer and I didn’t ask.

If you have more than a certain level of assets (if I remember rightly it’s only £16,000) your survivor has to apply for probate. There can be quite a lot of work involved in being an executor so you may like there to be more than one executor. The fact that there are two of them may alleviate the emotional strain for both.

One of the key reasons that persuaded me to get a will was that I have a partner but we are not married – which means she has no claim on anything if I die intestate. Interestingly, if you make your will without a view to getting married later then it becomes invalid if you do get married. So, even if you don’t intend to get married it makes sense to make your will with a view to marriage anyway. That way your will is not invalidated if you change your mind.

Before I consulted Kathy about my will I had considered doing it myself. As long as your will is done properly there’s no reason why you can’t do it yourself. There are lots of opportunities to make a mess – for example, nobody who you use as a witness can also be a beneficiary. If you do plan on doing it yourself make sure you get everything right or your wishes may not be carried out exactly as you wish. Another reason to seek professional advice is that you may end up leaving a substantial amount of your estate to the tax man if you don’t have proper Inheritance Tax Planning advice.

Death knell for final salary pensions

The current economic climate is proving tougher and tougher for defined benefit pension schemes, revealing that perhaps their time is up. According to Aon almost two thirds of the largest private pension schemes are now in deficit. It predicts losses of £226bn for the UK’s remaining final salary schemes.

This is not a good time for companies to make additional contributions – they may be fighting for survival themselves. The Pension Protection Fund (PPF) said it expects pension compensation claims to rise over the next 18 months due to adverse economic conditions.

The PPF is funded in the main through the pension protection levy that occupational pension schemes pay. Loosely speaking, the amount to be paid depends upon the “level of a scheme’s liabilities relating to members” and “the funding level of a scheme and the risk of its sponsoring employer becoming insolvent”. There’s plenty of detail for those who want it on the PPF website.

Interestingly, if you qualify for your pension you get 100% compensation (although inflation indexation may be lower than your original scheme) but if you are not yet old enough to receive your pension the compensation is 90% subject to an overall cap that depends on your age – as at April 2008 that cap for a 65 year old equates to just over £27,770. What about people who are about to retire as opposed to those who have just done so – perhaps only separated by a matter of months – do they really deserve lower compensation? To be honest, the details are far more complex than my brief comments here but there is certainly a discrepancy between members and deferred members and I just don’t see the logic in that.

Is your defined benefit scheme covered by the PPF? You can view the eligibility criteria here.

Save As You Earn schemes protected by FSCS

The Financial Services Compensation Scheme (FSCS) has confirmed that save as you earn share plans are covered by the scheme. You should bear in mind that if your savings in such a scheme are held in a bank or building society they will count towards your total £50,000 compensation limit with that institution.

These days it is important to remember that the FSCS also protects investments. After all, cash is likely to offer less attractive returns now that interest rates are coming down. Now it might be said that cash is a risk – could be time to look at fixed income products.

What Happens when Countries Go Bankrupt?

Very interesting article on bankrupt countries The Ghost of Argentina: What Happens when Countries Go Bankrupt? – SPIEGEL ONLINE – News – International

The article contains well researched analysis of the situation in Argentina, Pakistan, Hungary, Ukraine and others. Of course a big worry is that the smaller countries might drag some larger countries down with them.

It’s fairly depressing reading so I recommend listening to Glenn Gould play Bach as an antidote!

Will defined benefit pensions go bust?

There was some research done earlier this year by the Association of British Insurers (ABI) which examined the likelihood of defined benefit pension schemes going bust. Based on a hypothetical defined benefit scheme that matches the typical real life scheme they concluded that an increase in longevity of five years could make it almost twice as likely to fold – although that’s only a movement from 3% to about 6%. Defined benefit schemes are going out of fashion pretty quickly anyway – in 2000 there were 18,350 private sector defined benefit schemes but in 2006 there were just 3,470. Over the same period the number of people in these schemes went from 4.1m to 1.6m.

There’s a PDF available to download on the ABI site if you want the full report titled Coping with uncertainty and the importance of the sponsor’s covenant.

Are comparison sites independent?

Does anybody still believe that comparison sites are independent? Years ago I had dealings with a very popular comparison site and was also involved in establishing a new one. I’m thinking back to the year 2000 here and I’ve had dealings with many of them since then so can see how the dynamics have changed.

Initially, there were far fewer internet users and far fewer comparison sites. There was a feeling that we were still on the cusp of something, the dot com bubble had burst and the more serious commentators were talking about ‘clicks n bricks’ rather than pure internet companies. The comparison sites began to grow rapidly.

Now, if you were selling personal loans at this time there were several factors to consider:

1. If I sell through an intermediary (comparison site) then I have to pay commission and I lose control over the customer acquisition process. Do I really want to help them to become more powerful?

2. If we allow the comparison sites to sell our products then we only make them stronger. After all, if they have nothing to sell nobody will use them. Except of course my competitors might advertise on their site and so I’d lose out.

3. The internet is growing all the time and it seems likely that it is going to become very important but none of us have the experience, knowledge or skills to make it work. The comparison sites seem to know how the internet works and perhaps if we use them then we will learn something and of course not be left behind.

And of course there were others who just didn’t think it was that important. But they were wrong because the internet’s powerful ability to provide access to information was set to revolutionise the way we shop online.

So the comparison sites would list your products on their sites and in return you would pay them a commission each time somebody took out a loan. It didn’t cost you anything to be listed and the site benefited from having a broad range of providers.

These days there are many comparison sites and and visitors are less trusting. This competition has reduced the income of comparison sites and forced them to look again at their business models. It takes a pretty substantial team of people to maintain up to date websites and continually refresh the content – they are basically publishers. Just like other publishers they have fixed costs that must be recouped and they have a limited amount of inventory with which to do so. They have to focus on those ad revenue opportunities that will provide them with the maximum income – and now they want paid upfront too.  This introduces a bias in which products reach your screens at all.

They will in fact, just like newspapers, have editorial departments separate from advertising departments but all publications have an editorial bias – the Torygraph probably doesn’t appeal to the loyal Guardianistas! And the editorial standards of the Sunday Sport probably vary from those of the Sunday Times. Not all comparison sites are the same quality.

The evolution of comparison sites into online publications like any other does not in itself give us reason to doubt the quality of the comparisons they provide but not all product providers will be listed. Direct Line make a point of telling you that they ‘cut out the middle man’. Comparison sites list fairly basic details and, for simple products like personal loans, this is a useful service that makes it convenient for us to get a snapshot of the market. In themselves they are not sufficient to guarantee that you are getting the best rates on the market but they offer a reasonable estimate.

What about more complex products though? What about rating funds? We’re moving beyond your usual comparison sites here because rating a fund is far more involved than simply comparing rates. What’s interesting here is that most fund rating companies will charge a fee to the company that runs the fund in order to provide a rating. This fee is in the order of £8-10,000 per fund rated per annum. In return the fund manager can advertise the fact that they have a 3 star rating (or whatever rating system applies). There is an exception to this practice – Old Broad Street Research (OBSR) rate the funds they feel ought to be rated and then, if the company that runs the funds wishes to purchase the rights to use that rating they may do so. Last time I looked OBSR rated around 280 funds from 67 providers – about 49 of these bought the rights to use the rating. OBSR makes money in other ways and its business model allows it to remain independent.

In summary, comparison sites are useful time savers for simple products. When it comes to more complex products you are still best advised to do more independent research.

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.