Don’t You Keep Ledgers Man?

This question was put to a colleague of Alison’s in the 1990’s during her time in the banking branches. A gentleman customer querying a transaction was told the computers were ‘down’ and so his question could not be answered, triggering this aghast outburst. It should be noted the word ‘ledgers’ was projected in the style of Lady Bracknell’s “A handbag?”, as portrayed by Edith Evans in the 1952 film version of ‘The Importance of Being Earnest’.

I’m sure bank customers had harsher words during last Sundays breakdown of computers at Lloyds & TSB. Some mileage was made of this by Dave Fishwick, founder of Burnley Savings & Loans, a man who is proud of his ledgers. They do use a computer, but he was pleased to remind us they also use a hand-written record book of all transactions, which is kept in the safe overnight. To be fair, as successful and lovely as Burnley Savings & Loans is, or “Bank on Dave” as it is styled, I suspect he would have to employ a fair few scribes to record all the customer transactions of a retail clearing bank.

Life Matters

I have had a couple of enquiries about life insurance* this week. (*Being picky, this would be assurance if we’re talking about whole life cover.) Anyway, both enquiries were not whether to have it or not, but how much is needed. Unlike homes or cars which can be repaired or replaced and values are easily assessed, how much is your life worth? Well to be abrupt, it is not what it is worth to you, but what it is worth to those you may leave behind, and the really annoying thing is we know with 100% certainty it will happen, just not when.

I will not attempt to produce an essay on the different types of life insurance / assurance policies but I would hope I can encourage you to do some sums and consider the results.

The primary objective is to ensure those you leave behind are not financially disadvantaged. So, if you’re young, debt free and single, you probably do not necessarily need life insurance, but be advised that when you think you do need it you will be older (cover more expensive) and it might not available or only at higher cost if you have suffered ill health in the meantime. For some couples with similar earnings, it might simply be to settle debts, most commonplace being a mortgage.

Method 1. The Multiple

Multiply your annual income by 10 and add an amount to cover the funeral, the after party and any debts. This is a pretty blunt tool and does not take adequate account of childrens needs either now or after they enter adulthood. It might be too much if you are older, and it might not be enough if you are younger, and no thought is given to spouses income or perhaps pension benefits.

Method 2. The Shortfall

Work out the income your household will need to replace in your absence from today until your retirement age. Add on for funeral and debts etc., then deduct that which is in place in the form of savings or other assets, as well as ongoing income such as death in service pension or spouse’s income. Whilst this is better than the multiple approach it falls down by ignoring inflation or investment returns. It also creates a ‘static’ figure which might be enough now, but too much in say 15 years time if you have survived and reduced the mortgage and increased savings or pensions benefits.

Method 3: Income Generation

This a little more complex but perhaps the most reliable in terms of taking into account more factors. Add up debts, funeral etc plus an amount for immediate bereavement costs, less existing savings. Calculate the annual income needed whilst there are children and how much this will reduce by once the children are financially independent (about their age 35). Of course in some families a child may never become independent because of their health or a disability. These figures are then plotted for each year from now until the spouse’s age 100 alongside other sources of income. Inflation is applied, investment returns considered, and then after doing lots of sums we can work out what the need is now, and illustrate how the need will change over time. Financial events such as a child’s wedding can also be factored in. This process is repeated for the spouse. I use a computer spreadsheet to do this but it can be done with a pencil & paper, fingers & toes or abacus but it will take some time. At this point you can then consider which policy or combination of policies gives you the right cover and peace of mind.

So that is your homework; do the sums above and have a bash at the questions below. What better way to spend the weekend.

John.

Cheesy Advice

First of all your question from last week. Correct answers were received from JO (courtesy of DO) & DW, and a half correct answer from PH. (We also had a delightfully cynical answer from DP.) I asked what did Sir Mervyn (King) have to do 37 times since 2008 until he left, but Mark Carney has not had to do once? The answer is to write to the Chancellor of the Exchequer to explain why the inflation target was missed by more than 1%. A fairly rubbish beach ball is on it’s way to DW who was first with correct answer. This should come in handy given he and his family lives a couple of hundred yards from the Scottish North Sea coast. (Apologies the prize wasn’t thermals and a wetsuit.)

A couple of bits then a question, but this week, those who are classed as financial professionals (?) will only win if their answer is funnier than a correct answer received from a human being. The prize is a pen I have invented for those given to signing in haste.

Unemployment Rate, Bank of England & Interest Rates.

What seems to have been good news has immediately been swamped by made up news. The good news is that more people are in work then there have been recently, albeit for many this is temporary, part time or low paid, and the unemployment rate was announced as 7.1%. That’s the news. Here is the nonsense. In August last year, Governor of the Bank of England, in agreement with the Treasury, issued forward notice of factors that might, and I stress might contribute to a decision to increase interest rates. The threshold as far as unemployment was concerned was 7%. So what do the press do, they all jump around speculating interest rates will rise imminently. The unpublished reason why rates have been kept so low is to allow the banks to trouser as much of your cash as possible to shore up beleaguered assets. They are doing this by paying near enough 0% (and in many cases actually 0%) to savers, yet still charging high rates for lending.

Don’t be swayed by seeing mortgage deals at below 2%; look at the follow on rates and the fees. For example, West Brom presently offer a 1.48% fixed rate for just under 2 years. Wow I hear you say. But as ever look more closely. Add on the fees and then at the end of the fixed rate your mortgage rate becomes bank base rate plus 3.49%. So say, you go for this, and borrow £100,000, likely the fee will be added to the mortgage so your debt immediately increases to £102,400. At the end of the 2 years, if base rate has got to 3%, you will be paying 6.49%. So total cost over three years is £9,676, or 9.5% so in simple terms 3.2% per annum. (APR 3.9%) Moreover, over ten years, that £2,400 fee will have cost you just shy of £3,800. Still think it’s a good deal? In the words of T. S. Eliot (1888 –1965): “Never commit yourself to a cheese without having first examined it.”

Anyway, back to the story. I hereby predict (foolish I know):

1. There will be no increase in bank base rate until either Lloyds or RBS are in a position to pay a dividend; only then will the banks be deemed to have stuffed their pants with sufficient of your cash.

OR

2. Only if there is inflation significantly below 2% for a sustained period. This is unlikely given that real inflation is running at 2.7%.

I have spoken.

Annuities.

There has been much in the press recently about the annuity market. It has come under the spotlight for two reasons:

1. The regulators don’t. (Regulate that is.)

2. We have an election next year, and the main parties know that the sector of society most likely to vote are over 55 years of age and therefore pensions will be a hot topic

Such is the brouhaha being whipped up by certain newspapers of a certain persuasion that there is great promotion being given to ‘DIY’ or ‘guided’ annuity purchase because this will save you money and protect you from the ravages and expense of the likes of me. Let’s have a look at that shall we. For those not in the know, I will not, but could write thousands of words on the ins and outs of annuities. For the sake of brevity an annuity in this context is when you have built up a pension pot, and want to convert it to income to provide for you for the rest of your life.

In recent weeks, I have dealt with three annuity decisions. In two of these cases an enhanced annuity was applicable, and in the third case annuity wasn’t the answer. These three clients received authorised and fully independent advice, after assessment of their circumstances, with the pros and cons explained, and consideration given to their other assets, pensions, health and family. They are confident they have made an informed opinion with the peace of mind that if I have mucked up, they can complain, at any time in the future and have the full weight of a fully covered complaint and compensation procedure. By anytime, I mean anytime, even if 15 or 20 years from now. The advice costs were £690, £790 and £1,400 respectively.

Had these 3 clients taken the much promoted non-advised or ‘guidance’* route, perhaps encouraged by the press or ensnared by one of the increasing number of unregulated ‘lead generators’ trawling for clients to sell to none advice brokers, then they will have paid £2,100, £2,275 & £10,500 respectively. (*Guided/guidance actually means sold without advice.)

So which is best. No advice, no comeback, total fees (commissions) in these cases of £14,875 and the rest of your life to regret the decision if you’ve got it wrong or, a lifetime of comeback, all options explored including other than annuity, pros and cons explained and total costs for these 3 cases of £2,880.

John.

Cheesy Financial Guidance

Unemployment Rate, Bank of England & Interest Rates

What seems to have been good news has immediately been swamped by made up news. The good news is that more people are in work then there have been recently, albeit for many this is temporary, part time or low paid, and the unemployment rate was announced as 7.1%. That’s the news. Here is the nonsense. In August last year, Governor of the Bank of England, in agreement with the Treasury, issued forward notice of factors that might, and I stress might contribute to a decision to increase interest rates. The threshold as far as unemployment was concerned was 7%. So what do the press do, they all jump around speculating interest rates will rise imminently. The unpublished reason why rates have been kept so low is to allow the banks to trouser as much of your cash as possible to shore up beleaguered assets. They are doing this by paying near enough 0% (and in many cases actually 0%) to savers, yet still charging high rates for lending.

Don’t be swayed by seeing mortgage deals at below 2%; look at the follow on rates and the fees. For example, West Brom presently offer a 1.48% fixed rate for just under 2 years. Wow I hear you say. But as ever look more closely. Add on the fees and then at the end of the fixed rate your mortgage rate becomes bank base rate plus 3.49%. So say, you go for this, and borrow £100,000, likely the fee will be added to the mortgage so your debt immediately increases to £102,400. At the end of the 2 years, if base rate has got to 3%, you will be paying 6.49%. So total cost over three years is £9,676, or 9.5% so in simple terms 3.2% per annum. (APR 3.9%) Moreover, over ten years, that £2,400 fee will have cost you just shy of £3,800. Still think it’s a good deal? In the words of T. S. Eliot (1888 –1965): “Never commit yourself to a cheese without having first examined it.”

Anyway, back to the story. I hereby predict (foolish I know):

1. There will be no increase in bank base rate until either Lloyds or RBS are in a position to pay a dividend; only then will the banks be deemed to have stuffed their pants with sufficient of your cash.

OR

2. Only if there is inflation significantly below 2% for a sustained period. This is unlikely given that real inflation is running at 2.7%.

I have spoken.

Annuities

There has been much in the press recently about the annuity market. It has come under the spotlight for two reasons:

1. The regulators don’t. (Regulate that is.)

2. We have an election next year, and the main parties know that the sector of society most likely to vote are over 55 years of age and therefore pensions will be a hot topic.

Such is the brouhaha being whipped up by certain newspapers of a certain persuasion that there is great promotion being given to ‘DIY’ or ‘guided’ annuity purchase because this will save you money and protect you from the ravages and expense of the likes of me. Let’s have a look at that shall we. For those not in the know, I will not, but could write thousands of words on the ins and outs of annuities. For the sake of brevity an annuity in this context is when you have built up a pension pot, and want to convert it to income to provide for you for the rest of your life.

In recent weeks, I have dealt with three annuity decisions. In two of these cases an enhanced annuity was applicable, and in the third case annuity wasn’t the answer. These three clients received authorised and fully independent advice, after assessment of their circumstances, with the pros and cons explained, and consideration given to their other assets, pensions, health and family. They are confident they have made an informed opinion with the peace of mind that if I have mucked up, they can complain, at any time in the future and have the full weight of a fully covered complaint and compensation procedure. By anytime, I mean anytime, even if 15 or 20 years from now. The advice costs were £690, £790 and £1,400 respectively.

Had these 3 clients taken the much promoted non-advised or ‘guidance’* route, perhaps encouraged by the press or ensnared by one of the increasing number of unregulated ‘lead generators’ trawling for clients to sell to none advice brokers, then they will have paid £2,100, £2,275 & £10,500 respectively. (*Guided/guidance actually means sold without advice.)

So which is best. No advice, no comeback, total fees (commissions) in these cases of £14,875 and the rest of your life to regret the decision if you’ve got it wrong or, a lifetime of comeback, all options explored including other than annuity, pros and cons explained and total costs for these 3 cases of £2,880.

John.

The Price of Passion

A few bits this time, and a return to the question with prize for best / quickest / funniest answer.

Many Happy Returns.

First of all a belated* happy 30th birthday to the FTSE 100 index. Yes, on a cold 2nd January 1984, a Monday, the Financial Times and the London Stock Exchanged launched the index of 100 leading shares on the UK stock market. Leading in this context means by market value of the companies, not because they are leaders of anything; I did not want to be misleading.

The index started at 100, and as I write it stands at a little over 6,800. The highest it has been was a whisker below 7,000 on the last day of trading of 1999. I didn’t need to look this up; I lost a £5 bet that it would get over 7,000 by that year end. In simple terms, this suggests £1,000 invested on that Monday in 1984 into a pure tracker fund (not that any existed then, nor do any exist today for that matter,) would be worth £6,800 today. However this does not take into account the value of dividends received; it is simply a snapshot measure of value, and it updates every 15 seconds of the trading day. Dividends: If you are a shareholder of Lloyds Banking Group you will probably have forgotten what these are.

(*I have used this word a lot lately, so my belated New Year’s resolution is not to use it again.)

The Coutts Index: Objects of Desire.

“A rich man is nothing but a poor man with money.” W. C. FIELDS (1880-1946).

Coutts, the Private Banking arm of RBS (yes that RBS, the state owned one), has issued a press release we will all find useful I’m sure. Basically it tells us the wealthy are getting wealthier and doing this more quickly than the rest of us. Like the FTSE, the Coutts ‘Objects of Desire’ index tracks the value of assets, but those regarded as desirable objects rather than shares. Since 2005, this index has recorded that classic cars have risen in value 257%, classic watches are up 176% and overall, an increase of 77% when you include fine art, collectables and precious items as well as high value homes. The FTSE by comparison has grown by around 40% over the same period. (Edit by Alison: So if you know anyone with, say, an old Jag in the garage that has been waiting 3 years for a certain person to fix it, tell him to get on with it and stop using it as some kind of 4 wheeled storage facility.)

Inflation Falls to 2%.

The Consumer Prices Index fell to 2% in December, down from 2.1% the month before, so it is the first time it has been on the government set target since November 2009. This received much news coverage and fanfare. Less light fell on the other index of course, the Retail Prices Index, which actually rose from 2.6% in November to 2.7%.

Neston & Even Further Beyond: Hello Again

Belated felicitations of the season and all that. It has been just a touch over a year since I last put finger to keyboard to share my musings, discoveries and thoughts on matters financial and I feel you have been spared long enough.

So then; 2013, how was it for you? For us it was very busy, with a significant portion of time being spent on tracing various next of kin and beneficiaries as well as administering estates. All this in addition to the ‘usual’ life insurance, pensions and investments. (If you haven’t done so already, please make a will.) What else has been going on?

King Richard III was found under a Leicester car park, but I bet if his ghost shouted “A horse, a horse, my kingdom for a horse”, he wouldn’t have expected to be served a frozen lasagne.

A politician told a truth, when Chris Huhne pleaded guilty to conspiracy to pervert the course of justice.

In February, Moody’s, the credit rating agency, cut the UK’s AAA rating to AA1, with a warning economic growth would be “sluggish” but seeing as they missed the debt crisis spiralling in western markets between 2001 and 2008 I wouldn’t pay them too much mind.

Cyprus came up with a novel way to deal with the nations debt problems, by simply taking the money out of the bank accounts of those people who actually had some. Genius.

We now have a Canadian, Mark Carney, as the new Governor of the Bank of England and he was selected largely because he was perhaps the only banker to be found that hadn’t royally mucked up (yet).

Scot Andy Murray suddenly became British when he won the mens singles at Wimbledon

A portion of The Royal Mail was given away, whilst the US teeters on default and is forced to send federal employees home.

The efficacy of bank regulation is further established with the discovery the regulators carefully and meticulously vetted and approved the appointment of Paul Flowers, Methodist minister, drug user and banking newbie to be Chairman of Co-operative Bank.

Prince George arrived and whilst waiting we heard BBC reporter Simon McCoy tell us “Plenty more to come from here of course, none of it news.”

On an almost serious note, if you need to complete a tax return, remember the deadline is 31st January. HMRC in a rare moment of humanity have published what they consider to be the ten best / worst excuses for submitting late:

1. My pet goldfish died (self-employed builder).

2. I had a run-in with a cow (Midlands farmer).

3. After seeing a volcanic eruption on the news, I couldn’t concentrate on anything else (London woman).

4. My wife won’t give me my mail (self-employed trader).

5. My husband told me the deadline was 31 March, and I believed him (Leicester hairdresser).

6. I’ve been far too busy touring the country with my one-man play (Coventry writer).

7. My bad back means I can’t go upstairs. That’s where my tax return is (a working taxi driver).

8. I’ve been cruising round the world in my yacht, and only picking up post when I’m on dry land (South East man).

9. Our business doesn’t really do anything (Kent financial services firm).

10. I’ve been too busy submitting my clients’ tax returns (London accountant).

In a return to form for HMRC, all the above were find £100.

In a press release, HMRC’s Director General of Personal Tax, Ruth Owen, said: “There will always be unforeseen events that mean a taxpayer could not file their tax return on time. However, your pet goldfish passing away isn’t one of them.”

Bye for now and remember, “There is no problem so bad that you can’t make it worse.” (Chris Hadfield, International Space Station Commander.)

John.