SBA Financial - Solving the financial puzzle... ...piece by piece

Monthly Update - May 2010

The worst Insurance policy ever sold.

I have raised this issue before but only in brief and we have received so much feedback from people saying that they were unaware of the problem that more detail on this really important issue seemed the right thing to do. Firstly the truth about all insurance policies is this.

If you never make a claim then they are the biggest waste of money, but if you need to make a claim then they become the best investment you ever made (Of course assuming you get paid out?).

Most people will have heard about the odd case where it all went terribly wrong for some poor soul, but the vast majority of claims are paid out (but that does not make for a good headline).

I believe that in general for most people they should have the right insurances to protect themselves, their loved ones and their things. But today we are just going to focus on basic life insurance and why I believe that a JLFD (Joint Life First Death) policy is so wrong, in fact if I made the rules I would outlaw the nasty little things.

If you are around my age you may remember a character on Steve Wright radio one show called “Mr angry of Pearly” well this is me when I met people who have been sold these dam joint life polices it makes me so angry. Let’s look at a simple example: Stereotypical I know but we will keep it simple for the purpose of explaining the truth about joint life policies.

John is 47 years old a smoker with slightly raised blood pressure but otherwise generally fit and he is married to Janet who is 41 years of age a non smoker with mild asthma. They have two children Sarah aged 7 and tom aged 5 they live in a house valued at around £280,000 with a mortgage of £200,000 on it for another 20 years and they have a JLFD policy that will pay out £200,000 if either one of them dies in the next 20 years and the policy costs them £127 per month. So what’s the big problem?

The insurance company takes the worst bits of both clients, then roll them together and come out with a price for the joint policy. Now statistically men die sooner than women they now are both rated as a 41 year old man who smokes, has mild asthma and slightly raised blood pressure, so the total cost will be inflated and if either of them or both of them die then the payout is £200,000

If they had taken out separate life policies the cost would have been £57 per month for John and £29 per month for Janet, so in total £96 per month saving them £31 per month but that is nothing compared to the fact that if they were both to die early leaving Sarah & Tom orphans then with their own separate policies at least their children would have £400,000 left towards their care.

I have yet to meet the client that would not want to have this cover rather than a joint life policy, so why the hell do they take them out? It’s simply they did not know any better or their financial advisor did not bother to explain the options to them either from lack of knowledge, care or both.

Also another all too often extra problem is this let’s assume that 5 years go by and John has had a mild heart attack and Janet has become diabetic and a little later the marriage ends in divorce. Now they understandably don’t want anything on a joint basis and now they apply for single policies and the cost is through the roof assuming they can even get cover at all.

These are just a few reasons why a joint life policy is the worst insurance policy ever sold but there are many more reasons. Do yourself a big favour and have your policies checked out now to make sure you have got what you want and what you need.

One for the business owners:

All business owners know just how hard it is to run a business even in good times, there is always so much that needs to be done and so little time to do it in and that’s when your staff and the team behind you are firing on all cylinders, motivated and don’t have their own worries or pressures on their mind, such as money worries.

In the tough economic times of the last 2 years and what is still likely to be a very tough time to come many business owners are faced with the extra problems that come from many of their staff and key people not being at the top of their game with worries about money, how they will cope with rising bills, where can they save some money to ease the burden etc.

An inspiring 90 minute presentation on how they can achieve financial peace of mind on any income can be a powerful motivator, it releases the feeling of pressure, people are happier and more focused their work for you. For some time we have provided talks to employees on behalf of the FSA in their Money Matters programe of financial education.

We also have our own range of exceptionally powerful programme that is available to employers for their staff to benefit from which start at just £375 per presentation which is not only fantastic value for money but is also covered by our 100% satisfaction guarantee as well. If you would like to discuss your needs please contact us.

Have buy to let’s had their day?

There was a time when you almost could not go wrong with having a buy to let, with good rates on mortgages the rents often more than covered the interest payments and you could reasonably expect to make a healthy gain on the capital over time as well. But times change and comparing them now to say 10 or 15 years ago it is a different matter.

For one thing there is a lot more legislation to contend with as a landlord and that means more cost to you so less profit in your pocket. If you are a very experienced buy to let property investor, then we feel that it still represents a part to play in your overall financial planning but would caution the amateur landlord to think long and hard before going into this area because you could lose more than you make.

The other thing that worries us particularly is when we see some people with almost nothing but buy to lets as their plan for financial security. We all know the adage don’t put all your eggs in one basket. But often this sound advice is forgotten when it comes to property ownership, a good rule of thumb is not to have more than around 30% of your total wealth in any one type of investment, but also to remember we all need to have access to our assets because you don’t know what life will throw at you and having too much in property may mean having to sell one at the wrong time just to deal with a short term cash flow problem.

All of that said some key tips to help you if you are going into this area are…

Research the local area to find out about rental demand and make sure you invest in the right location – a property management agency, will be able to advise you on this and the on potential rental value before purchase.
We recommend 2-3 beds as they are always in demand and are easy to let. We also advise potential investors to look at the long-term investment – the best investment properties are those that are going to go up in value so they can be sold for a profit.”
Troublesome tenants can be a real headache for a landlord, so choose carefully before anyone signs on the dotted line. Late payers, or those who don't pay at all, and tenants who don't look after the property during their tenancy need to be avoided.
A 'good' tenant is someone who pays on time, preferably by standing order, is happy to commit to a six-month (or more) rental contract and is willing to look after the property to a good standard, including the garden.
If you choose to not use a letting agent then at the very least look at Credit checking, contacting their employers plus seeking references from their previous landlords can help you determine if someone would make a 'good' tenant. Meet them in person too, instinct alone can often make alarm bells start ringing and, don't be tempted to take a gamble with a potential undesirable tenant just to occupy the property quickly. If you hear alarm bells ringing – listen to them!

VCT’s can save you a bucket load of tax!

You may be one of those people who have received your 2010-2011 tax coding and may just be beginning to realise the impact of the new tax regime on your Personal Allowance. A VCT investment can net you a 30% tax rebate, up to £200,000 per annum can be invested to deliver £60,000 income tax relief. Additionally, by investing in a VCT now, the income tax relief can be claimed via an adjustment to your tax codes – making it a very simple and effective way to access the 30% income tax relief VCTs provide (if held for five years).

What now that we have a hung Parliament.

A hung parliament doesn't have to mean the end of life as we know it. Greece has a strong majority government but that hasn't been able to prevent a financial meltdown. The main parties broadly agree on the need for a tightening of the fiscal belt on a scale that should keep the ratings agencies happy.

As long as any tough choices are implemented quickly and decisively we should avoid a downgrade of the UKs AAA rating and the market should not suffer too severely. Historically property markets tend to pick up after elections whatever the outcome.

Ten of the 16 countries worldwide that have a triple-A financial rating are run by coalition governments. This proves hung parliaments don't automatically kill off economies. Culturally we have not been a nation built on coalitions in peace time so the markets may wobble in the short-term but as long as the two parties can put their differences aside, focus on what is best for the electorate and maintain financial stability we shouldn't see long term detriment to the markets.

As for mortgages their rates are linked more to the wider financial market. If the wholesale financial market is concerned the hung parliament cannot cut the deficit, and inflation will rise, yields on gilts will rise, pushing up the cost of mortgages. A rise of three quarters of a per cent in gilt yields is a conservative estimate of the impact of the hung parliament.

If gilt rates went up by just three-quarters of a per cent, and mortgage rates rose accordingly, higher mortgage rates would cost families an extra £624 next year on a new £118,000 mortgage – the average according to CML figures – or £52-a-month on a repayment mortgage. This is the equivalent of raising income tax by three points to 23% for someone earning the UK average wage of £25,800.

If we don't deal with the debt crisis we'll have bigger mortgage bills for families. First-time buyers were given a small boost by doubling the stamp duty tax-threshold. But the benefit of this could be wiped out by a jump in mortgage rates that a hung parliament could bring about, continuing the freeze in the mortgage market. Mortgages are already too expensive and restrictive, and thousands more first-timers will be kept out of the market if this happens.

Bank of England admit rising inflation concern

The Bank of England has admitted that rising inflation currently at 3.4%, well above the government's 2% target – is a source of some concern. Figures released earlier this week revealed that inflation increased from 3.0% in February to 3.4% in March. Minutes from the Monetary Policy Committee's (MPC) monthly meeting revealed that inflation is likely to stay comfortably above the long term target of 2% for some time yet.

The MPC said:
"Given that a period of above-target inflation was in prospect at a time when monetary policy was exceptionally accommodative, this was a source of concern for some members." Rising inflation is hitting savers in the pocket, according to recent research conducted by Moneyfacts.co.uk a basic rate taxpayer now needs to find a savings account paying at least 4.25% in interest to prevent their savings pot being eroded, of which there are currently just 44 available on the market.

For a higher rate taxpayer, the challenge is to locate a savings account rate of 5.64%, a return only currently available through four accounts. It comes at a time when interest rates are at an historic low, further penalising savers.

When a giant like Aviva shuts its final salary pension scheme it’s time to look at your pension plan

Aviva have told UK employees that they are to enter into consultation with them regarding proposed changes to staff pension arrangements, a media statement from the giant said.iva media statement:

“Our proposal is that we protect all of the final salary benefits that employees have already built up. We will then offer all UK staff money purchase arrangements with effect from 1 April 2011. There are no changes for retired and deferred members”.

“We've begun discussions with the Trustees of our final salary schemes and representative bodies on our proposed changes to the pension schemes, and a 90-day consultation process is expected to begin in June 2010”.

Regular readers of my email newsletters or my column in the Meon Valley News will already know I am no fan of personal pension’s in-fact I think that they are horrible dam things, but I am a great fan of sensible forward planning. If you have any pension plans whether they are current ones or frozen you can make them work harder for you.

In fact there are three ways that you can boost your pension pot without putting any more money into it so do have them reviewed now.

Is the pension black hole sucking you in?

A popular view might be that a black hole is some kind of monster that lurks in space and drags passers-by to certain doom. The concept of a financial black hole might be considered as something that consumes unlimited amounts of resources without yielding any profit, which sounds about right to me.

Do something now or face the possibility of retirement misery later. People ask me for advice on many things such as Wills and Trusts, Savings and Investments, and Pensions and Retirement Planning, but they all have one major worry and concern - Will they be financially secure?

Most people I meet, like me want the peace of mind that comes from knowing that they can afford to live the lifestyle they want without the fear of running out of money. In a modern developed country is it too much to ask to have this peace of mind? It shouldn’t be, but unless we all take charge of our own finances then for many it will be too late.

I am a great believer in planning for your future. I have never been a great fan of Personal Pensions as they are very inflexible and not as Tax efficient as many would have you believe. Of course Company Pensions are a different matter altogether, in particular Final Salary Pensions and Civil Service Pensions, but nothing compares to the fantastic pensions that our MP’s give to themselves.

We face major shortfall problems. Back in 2003 the Telegraph reported a £470 billion black hole in Public Sector Pensions alone, and in 2006 they reported that the stealth tax raid on UK private Pension funds had cost us all an estimated £100 billion - God only knows what they are now.

Now I don’t want to create panic for our poor old MPs, but in April this year the Independent reported that they have a £51 million shortfall for their gold plated pensions and that the Exchequer (that’s code for us the taxpayers) will increase its contribution from £12.4m to £13.2m a year, (so no change there then). It’s not all on us though; apparently each MP will have to pay an extra £60 a month to help us fill their gap. How will they cope?

I know politician bashing is popular. Now more than ever before, and it’s not that I think they are all liars with their snouts in the trough, it’s just that I have not yet been lucky enough to meet one that will look me in the eye and tell me the TRUTH. The fact is we cannot afford these fantastic Pension Plans anymore, and we have not been able to for over a decade, so they are going to have to come to an end sooner rather than later.

Those with these fantastic Pensions might say that this is what they were promised, well I’m sorry but those who will have to pay for them were not around or were not old enough to have a say when those promises were made.

So what can you do? Well there are some things that you can do for yourself to protect your future security for you and your loved ones. First: Pensions should be just one part of an overall Life Plan. Second: I believe that for most people a Personal Pension that is only paid into by you out of your own hard earned money is not the best way forward (there are many alternatives.) Third: You can boost your existing pensions without putting more money into it.

One final word of warning: If you have already retired on a good Pension, please don’t be fooled into thinking you are safe. You will still be clobbered by yet more Taxation, not to mention that if your grown up children don’t plan now then you may find them knocking on your door for support in your old age.

If you would like to know "The Truth about Pensions and Retirement Planning" Including…

Is a pension really the best for you?
Alternatives to Pensions.
How to increase your pensions without paying more into them.
The most effective ways to invest the money in your pension.
How to reduce your pension charges.
How to pay less tax when you receive your pension.
How to protect your pensions if you die before you retire.
Taking your Pension benefits the right way.

Then come to our seminar on the 22nd of June 2010 at Cams Hall, Fareham. Places are limited and offered on a first come, first serve basis. To find out full details and to reserve your place(s) either visit our website. www.sba-financial.co.uk or call our office on 02392 325720.

If you would like to find out more about the topics covered in this month’s newsletter, please contact us or come along to one of our regular seminars all of the details can be found on our Seminar Calendar.

The information contained within, including references to taxation, legislation, regulation, or any other issues are correct at time of going to print.

Regards

Steve

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