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 The unpublished reason why rates have been kept so low is to allow the banks to trouser as much of your cash as possible to shore up beleaguered assets.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.