Bank bonus disgrace

When banks are under pressure not to pay bonuses or just to reduce the bonus levels what do you think will happen? I expect those at the bottom of the tree – administration and ancillary services staff – will be the ones to suffer. How long before we hear ‘We’ve cut bonuses this year by 50%’ sotto voce ‘by only paying the top people’? After all, they are the ‘skilled’ people they can’t afford to lose. What a disgrace.

And what of the latest idiocy to come from Government – blaming everything on bankers when it was they who put in place the state of affairs that led/allowed the banking behaviour to develop. Despite their greed I do have a little sympathy with the bankers when they say what they did wrong was fail to anticipate the scale of the collapse. They worked within the framework that existed in order to maximise profits. That’s what shareholders expect.

The fact is that government policy (low interest rates for far too long), regulatory conditions (lax rules and not enough policing) and the (entirely natural) greed of bankers led virtually everybody in the banking industry to participate in practices that ultimately led to our current situation. The fact that they didn’t understand many of the financial instruments they were using is the part for which they cannot be excused. They didn’t understand the risks but proceeded with the gamble anyway.  Or worse, they understood the risks and thought they could escape with the cash before being rumbled.  Who could have predicted they would be rumbled yet still escape with the cash?!

Those at the top walk away with their millions from years of gambling excess while the rest suffer job losses and eroded savings. As usual the blame and the money goes right to the top.

UPDATE: an interesting take on the american solution

Another useless rate cut

The Bank of England has cut the base rate again. It is now just 1%. This is not good news. Banks are not passing on these rates cuts in full except where they are legally obliged to do so – for example if you are on a base rate tracker mortgage.

However, those kind bankers have seen fit to pass those rate cuts onto savers. Yes, those who have been prudent enough to save some money are now being penalised heavily. Pensioners who put their life savings into savings accounts in order to live off the interest are now truly struggling. Savings interest rates are falling rapidly towards zero.

Rate cuts are not the answer to our problems. I’m afraid a rather long and painful period of contraction is going to happen regardless and all we are doing now is making it worse.

Recession and the rise of fascism

There are usually more extreme views, more selfish views, expressed when money and resources are scarce. What is slightly frightening is that it is happening to us so soon. Social unrest is spreading with riots in Greece, the French as always, are protesting about something (this is not a criticism – I love the fact that they take politics seriously and don’t just swallow the government propaganda), riots in Lithuania, Latvia and other parts of Europe.

Now Britain has wildcat strikes over the issue of foreign workers. The BNP were quick to take advantage of this new attitude. There is a real danger that they will see many more recruits to the BNP’s fascist agenda. Did anybody else see the ‘striker’ (BNP activist?) on the news last night refer to the Italians as “eye-ties”?

We should all try to keep things in perspective and think of the bigger picture. If there is no foreign demand for the UK’s exports then we all suffer. We can no longer operate without the rest of the world. Just look at the total collapse in exports currently being suffered by Japan. It’s worse than the collapse in the US in the 1930s. Look at factories closing in China as a result of falling demand.

It’s just so obvious that individual nations cannot take the beggar thy neighbour attitude without serious consequences. The trouble is that if all nations co-operated we would have a smoother ride but as soon as somebody doesn’t play the game and behaves selfishly they get an advantage. A nation’s leaders cannot be seen by the electorate to cede this advantage therefore we must all go for the less effective action – selfish protectionism from the outset.
At the very least Britain should remain a fully active member of the European Union. Let’s not let the fascist idiots drag us down the least productive and frankly rather disturbing path they promote.

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.


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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.