What is the best way to save for retirement? Part 2

This is the second in the series “What is the best way to save for retirement?”

The Alternatives to the Big Annuity Gamble

Thanks to some new(ish) rules, you don’t have to buy an annuity. In fact to be clear, just because your pension is set to mature at 60 or 65, does not mean that you have to take it then anyway. You can decide to take money out of your pension from the age of 55. Doing so beforehand will break the pension rules and get you into serious problems with HMRC. So don’t be tempted by firms promising “pension release” or “pension liberation” this is a load of rubbish and you are being lied to, it’s a scam to get money out of your pocket (or rather pension pot).

Delayed gratification

Ok, so you could defer taking the annuity. Why would you? Well because you reckon you don’t need the money now and annuity rates should rise the older you get (because you have left time to live). This is a truism. True in theory, but in practice over the last 20 years annuity rates have fallen from around 15% to around 5% for a variety of reasons which I won’t bore you with (you and I cannot do anything about it anyhow).

Have your cake and eat it..

You could phase your retirement, taking a slice of the pot (much like cutting a cake). As before, 25% of the slice will be tax free, the remainder is used to buy an annuity. The balance (rest of the cake) remains invested and hopefully growing. You can take slices gradually, or just take the balance when you want, same principles applying. Why do this? Well you might be gradually stopping work and want to plan how you take your income and in particular how your income is taxed – so it can be a helpful tax planning tool.

Drawing what you want

Another option is to go into “DrawDown”. This is where you can take the tax free cash bit, and then income. The balance is left invested. Not much different from phased retirement, but meaning that you could take all of the tax free cash now. The amount of income you can take is restricted based upon, wait for it, quango speak coming “GAD rates” this is a rate set by the Government Actuarial Department, who figure out a rate for everyone. It changes, but its not far off the same as an annuity. Alternatively, if you are lucky enough to have guaranteed income of £20,000 from pension sources, then you can do whatever you like with the balance of the pot, take it all out at once, or over the rest of your life. You have to prove you have £20,000 a year mind you. Once its gone..well its gone. This is a really useful feature, but doesn’t apply to most people (who do not meet the £20,000 a year requirement).

Temporary annuities

A newer and evolving option is temporary annuities. These are really DrawDown pensions, but paying an income for a fixed period, typically 5 years. The remaining fund is invested and usually has a guaranteed level of growth (which means using derivatives) so that you can elect to buy a full annuity or do the same again at the end of the term. I have lots of reservations about anyone in the investment world guaranteeing anything, but it is an option.

Life is like a box of chocolates…

All of these options give you more choices. Invariably you have more control over how and when the income is paid to you. As a result you can do some tax planning to hopefully keep your taxable income within your control. You are also keeping your options open that should your health worsen you could then buy an enhanced annuity, or worse if you die, the balance of the fund is passed along to your spouse or possibly your estate, depending of tax charges being met and some other rather dull criteria that we don’t have time for here.

So these are all options. You aren’t being forced to buy an annuity, you can control the income. Tomorrow I will look at other options to pensions – other ways of investing to achieve the same result, income in retirement.

Dominic Thomas: Solomons IFA

What is the best way to save for retirement? Part 2Dominic2023-12-01T12:38:51+00:00

What is the best way to save for retirement?

As pretty much everyone is now being told to open a pension under the new auto enrolment rules, perhaps it is appropriate to cover the basics of what pensions are what some of the alternatives (or additions) that are also available. I’m going to provide a basic course on pensions, annuities and the alternatives. Bite size chunks that we can all manage.

Pension Plan Basics

Let’s start with some basics. A pension is not a pension. A pension is little more than a savings plan or pot with tax relief (a Government sweetener). The income that you ultimately take is really your pension, however to confuse matters this is invariably called an annuity. Yes, if it wasn’t true, you’d think that the financial services industry simply made it up to keep you in the dark.

Cut to the chase

In the hope of not boring you to death, I’m going to start at the end. Let’s say you have now decided to retire. If you have a pension (and there are lots of types based on history) they tend to fall into one of two camps, firstly a final salary (sometimes call defined benefit) pension and secondly a “Money Purchase” pension (or in plain English an investment based pension). In this post I’m only going to refer to the latter (an investment based pension).

A pension fund is a pot of money

So you are now at retirement and have a pot of money. You have loads of choices. You can take 25% of the fund as tax free cash and put it straight into your bank account and go spending. The balance (or all of it) is normally used to buy an annuity. This is simply an income for life. The income will stop when you die unless you have a spouse and you have included an option to have the income continue to him/her after your death for the remainder of their life. Simple enough right? Well yes and no. Simple idea, tough decisions. Why? Because you have to take a gamble on what you think the rate of inflation will be for the remainder of your life – do you buy an annuity that rises each year at RPI or an agreed amount (say 3% each year) or do you have a higher initial income but that stays constant. As a guide it will take about 12 years for a rising annuity to catch up with a level one and another 12 years to have paid out more in total. So as well as having to predict inflation (which by the way economists, Bank of England, Chancellor, professional investors) all fail to get right) you also have to guesstimate how long you will live.

Are we there yet?

Oh and if you think, “not long” remember that the average age of death for a man is now about 80 and about 84 for a woman… but then consider your own family’s longevity and perhaps add a bit for improved diet, lifestyle and medical care… unless of course you are wolfing down the processed food whilst spending no time outside getting any exercise. Alternatively like about 40% of people at retirement age, you may be taking regular medication for high blood pressure etc, in which case you probably qualify for an enhanced annuity. This is a polite way of saying “you have a reduced life expectancy”.

Back to the future..

So – a pension is not a pension, an annuity is a pension. You have to take a gamble on what inflation will do and how long you will live. You may want to build in a spouses pension, if not the annuity will die with you. To make the decision a little more pressured, once you have gone down this route, there is no U-Turn, no change of mind. You have to live with it. Sadly there is no time machine to see the future. Steve Webb, the pensions minister doesn’t like this either… but there are no easy solutions, unless you have a DeLorean with a Flux Capacitor.

Next up…what are your other options to buying an annuity? I will cover that tomorrow.

Dominic Thomas: Solomons IFA

What is the best way to save for retirement?Dominic2023-12-01T12:38:50+00:00

Moneybox and the Diamond Scam

This week BBC Radio 4 Moneybox featured a story about a diamond scam. This is sadly a rather familiar tale and one that prays on financial naivety. It’s the classic boiler room scam, a cold call from what sounds like a busy dealing floor (though why the sound of lots of people on the phone should suggest something good is rather beyond me). Anyway, the latest revision of this scam is in the form of diamonds… which of course is nothing to do with the stoc kmarket, which to some “investors” has appeal as a possible form of “alternative investment”.

Don’t miss out before its too late! (er… no)

The promise is… yes you had better sit down for the obvious statement “this will provide a guaranteed return of XX%”… which is never true for the investor, no matter who says it. The only guarantee is that there is no such thing as a guarantee. Everything carries risk. However it’s back to that same old phrase – if it’s too good to be true, then it isn’t true. Yet so many people forget this, when placed under pressure… pressure from another person at the end of the phone…which you can hang up… yet our nature is to be nice, friendly, amenable and rarely do people like to say “no”…. well a lot of people (it is alleged).

The carat carrot… what’s up doc?

Back to the scam – the diamonds may not even exist, you haven’t seen them, and so there is only a verbal suggestion of their value (even if this were a written valuation, it should be treated with caution). The price of the diamonds is naturally inflated, by an estimated 1500% and the broker/trader… oh lets call a spade a spade… criminal, takes a 25% commission cut… which is the only guarantee. Now of course, it’s wrong that anyone gets taken in by these criminals, but it is particularly concerning that they target the elderly, who are more vulnerable.

New tales, old tricks

How is this different from the penny shares sold by the Wolf of Wall Street? Well, it’s not much different, the process and tactics are very similar – selling much overpriced things to over optimistic “investors” who will never recoup their investment. This isn’t investment, its basically stealing… not to mention that there are serious issues about conflict diamonds, as highlighted in the 2006 movie “Blood Diamond”.

The question behind the action

Of course building a diversified portfolio is sensible, so that your wealth is not exposed entirely to the stock market. Hence why when we create a portfolio it has a variety of different “asset classes” within it, including cash, alternatives and potentially a wide range of different sorts of investments. So I have every sympathy with someone trying to diversify their portfolio – a good adviser will do this. Oh and by the way, it was a financial adviser that raised the alarm about the scam to the victim (not the media, not “the internet” , not the bank, not the best friend and not the regulator)… I’m feeling a little sanguine as the obligatory levies that advisers pay to regulators in their various forms (FCA, FOS, FSCS) have increased a staggering 300%… and frankly that feels like a very big scam.

Dominic Thomas: Solomons IFA

Moneybox and the Diamond ScamDominic2023-12-01T12:38:49+00:00

Moneybox and Platforms

This week BBC Radio 4 Moneybox featured the running spat that seems to be developing in the investment platform market. Platforms are online administrative services that both advisers and clients can use to buy, sell and value investments. To say that they vary considerably in price and functionality would be an understatement. There’s an entire market for helping advisers assess what platform is best for their clients (which I pay for and use for no small sum of money). In essence there is a price war or what I might call a race to the bottom. Cheap is not always good, but then neither is expensive. Moneybox kicked the tyres on the new Hargreaves Lansdown (HL) platform, which is really aimed at DIY investors. As far as I’m aware (which means from the latest research data) they have a decent platform with a reasonable range of funds. Their new charges aren’t that competitive and whilst they provide extensive fund information (most now do) as the HL spokesman said on air, there is the belief that they provide “the best funds at the best prices”. Whilst I can understand this statement, it rather betrays the belief that selecting “the best” fund is easy to do. It isn’t. This is a convenient belief, I might suggest delusion and one that DIY investors also suffer (hence a marketing match made in cyberspace).

Here’s the big one

Ok, here’s the big issue that the financial services industry generally doesn’t want to acknowledge, but when you read the next statement, and reflect on it, you know it is true. Here it is. It is not possible to consistently outperform the market without taking additional risk to the market. You might want to re-read that. Now there are some that that do outperform, but do so over the very short-term. Given that most fund managers do not manage their fund for very long, (a cynic might suggest that they quit whilst ahead) looking at the longer term performance of winners is equally unhelpful. Suffice to say a very small percentage outperform the market over 20 years… and the proportion that do is about the same as random chance. Its also depends on when you buy into a fund and don’t forget that hundreds of awful funds are closed and if had been included, would demonstrate that an even smaller proportion outperform over the long-term. Here is a chart a friend of mine shared recently.

Experience isn’t priceless, but it is highly valuable

As for the platform, well on one hand it is an administrative system. They are not all equally as good as each other, they all have different charging structures and functionality. A key issue for me is “does it work?” and you’d be surprised at how many fail the test. Theory is one thing, reality is another. A good financial adviser will review the platform you use, sometimes it is better to move, sometimes it isn’t. Whilst it is important (always) to challenge the way things are to improve, the assertion that there is “one way” of doing things, that “cheapest is best” or that similar products are in fact “all the same”, is simply not accurate. Experience isn’t priceless, but it is highly valuable.

Profit or profiteering?

However, let us not ignore some obvious facts, there are vested interests. Financial advisers (myself included) are not charities, we are businesses. Platforms are businesses, Fund Managers are businesses. All need to make a profit to continue to exist, the real question is what level is reasonable and fair – which is almost impossible to answer to everyone’s satisfaction. Moneybox challenged the 71.5% profit margin that HL make.

Dominic Thomas: Solomons IFA

Moneybox and PlatformsDominic2023-12-01T12:38:48+00:00

The soothsayers and forecasters are at it again

Well, the year is drawing to a close and most people seem to be preparing for the Christmas festivities. A clear sign of age is feelings that Christmas seems to be coming around more quickly these days. As if unprompted, my email in-box is now being filled with lots of reports and tips for 2014. If I were wishing to pour scorn on these I would keep them and then send them back at the end of 12 months. Invariably these are nothing more than guesses, which will miss the surprises and restate the obvious. Glossy and earnest yes, but invariably a pointless exercise. The point of investing and perhaps life, is that the future is not known, we are merely managing expectations and planning as best we can in a sensible fashion for what may or may not happen.

Lessons from history

For those of you that receive a birthday card from us, you will be familiar with the decade by decade summary of specific years. This has several purposes. Firstly it reminds us all that time is short, 10 or 20 years ago actually doesn’t seem that long ago when you recall information about what you were doing or what was happening in the world. Secondly it is a reminder that history has a tendency to repeat itself, not precisely, but closely. I can with a degree of confidence make a couple of predictions. That my predictive powers are no better and no worse than anyone else’s, that things will change but this won’t always occur as expected. Financial planning makes lots of assumptions which will be wrong, but are based on sensible, reasonable logic. That’s why it is important to review your planning, not because we are guessing, but because we need to adjust for what happens in reality.

Dominic Thomas: Solomons IFA

The soothsayers and forecasters are at it againDominic2023-12-01T12:38:45+00:00

Money Box asks has your pension been burgled?

Money Box asks: has your pension been burgled?

Once again pensions were in the news, the Radio 4 show Money Box took on the rather complex issue of annuities. Charges, fees, value for money Financial Services Consumer Pension and even the very funny Jeremy Hardy’s comments on The News Quiz also received some mild stick, following his joke about not wanting to understand anything about annuities, or listen to Money Box and his intention to be a burden to the State..of course he was being ironic.

Yawn… annuities are just so dull

Anyhow, Jeremy is pretty much right, annuities are very boring and not something to spend too much time worrying about… until you actually need to. So what is an annuity? Ok simple stuff… an annuity is an income for life. You can have a rising income or a level income. Importantly an annuity dies with you.. eh? When you die your annuity stops… but if you want you can build in some guarantees… such as the income continues to pay a spouse or your estate, in full or part.. you can build this in at the design stage, not later on.

So why are Money Box and the FSCP talking about annuities?

Well, most people have no idea what to do and most is a lot – something like 400,000 people retire and buy a annuity each year. It’s a large market. Most people assume that there is not much between annuities (sadly and expensively wrong) there is an enormous difference and it costs you no more to get the most suitable one (on the whole). I’ve not met anyone that likes a pay cut, particularly one of 20% or even 40%… yet that is precisely what the wrong annuity is effectively like….for life!

So can I shop around for a better annuity?

Yes, you should (no you MUST). Start by checking out the MAS site, the site that supposedly advisers dislike, yet pay for via our fees… and plug in some details. If you like to be frightened, do this now. This is only part of the story and did you notice all the disclaimers? You could then approach the annuity providers yourself and set up your annuity. You won’t get any more money than if you did this via an adviser, but the provider makes a bit more money out of you, and you carry the risk for picking your own.

So should I use an annuity broker?

Well you could, but be warned that they may simply focus on getting you the biggest annuity (which seems ok doesn’t it?). If the company provide guidance rather than advice, they are not liable for any mistake, you are. They will charge a fee for their selection. However, this might be akin to going to a garage with a car that has a flat tyre and won’t move… demanding a tyre at a decent price… but failing to observe that the car has no engine (ok it’s a metaphor). My point being that there is no context for good planning, it’s just selling or arranging products, as Paul Lewis reminded the listeners.

So should I pay for financial advice about annuities or retiring?

Well, I would say this wouldn’t I, but of course! There are lots of issues and lots of solutions. My main gripe with annuities is simply that once you set one up, that’s it, decision made for life. A bit of a straight-jacket if you ask me. More importantly perhaps the adviser is qualified and responsible for the advice.

So what will a good financial planner do?

Start by forgetting about products. Discuss your plans for your retirement and determine what that really means for you. In short, what lifestyle are you aiming for? How much will it cost? So this is about income, not products. The sort of things that need thinking about and understanding are your requirement for income, your tax position, your other assets, your marital status, your expectations about inflation, your health and how long you will live. Advisers need to help work through the tricky discussion about the risks of not knowing. There are alternatives (lots) and of course there is the option of not even buying an annuity at all. Good financial planning is not about products it’s about figuring out what you really need and then building a plan to get you there.

Do financial planners have to arrange products?

No, but we often do. I really wish that Money Box would grasp this point. A good financial planner may not ever arrange products at all (I have a dream)…frankly because arranging products is a pain and very, very dull. Solving problems and helping people to get the life they want… well that’s an entirely different matter…however if you want a job done properly…

Anyway, keep up the good work Money Box… time often seems against any proper full discussion on the main media channels, so I am currently toying with my own show…well a podcast anyhow.

Dominic Thomas: Solomons IFA

Money Box asks has your pension been burgled?Dominic2023-12-01T12:38:45+00:00

University Fees – what Parents need to know

As you know, University is not free. Most courses cost £9,500 a year and accommodation is likely to set a student back £5,000 when all is said and done. Add in money to eat, drink, buy the odd book and probably £100 a week is not unreasonable to live off…. In 2013.

The impact of inflation

So let’s suppose that you have not yet even had your child. Let’s assume that you are expecting shortly in 2014. So your yet to be born student will be entering University in say 2033, aged 19. £20,000 of fees with inflation running at a consistent 3% becomes £35,070… and you have a three year course, so total costs are likely to be £108,400 (roughly). So you have 19 years before any money is needed – but needed it will be in 2033, 34 and 35.

Get an early start

If we assume an investment return of 5.50% (not exactly blowing the lights out) but this is still a real return of 2.50% above inflation investing £250 a month will do the job. However, you’ve got a lot of commitments with your new baby, never mind a possible drop in income. So you decide to delay saving… until you are clearer about educational prospects. So let’s suppose you wait until your baby is a teenager at 13 with 6 years to go before University life. The maths is the same, you simply have less time to squirrel money away and of course less time for it to grow. Well, now you need to find £1,950 a month to achieve exactly the same result.

What is financial planning?

The thing about financial planning, is that its not really about any financial products. Its about helping you to figure out what you want to do. We review our assumptions together – here we made assumptions about inflation, investment returns, University fees, going to University and when. The same logic applies to any goal, we need to figure out what something costs today, allow for inflation and the time until you aim to achieve it. So, whether you have a University challenge… here is your starter for 10… when will you begin your financial planning?

Dominic Thomas: Solomons IFA

University Fees – what Parents need to knowDominic2023-12-01T12:38:43+00:00

So what’s the fuss about annuities?

You may have come across yet more media coverage in relation to rip-off financial services. The story, like most has some truth to it, but some… well let’s just call a spade a spade…inflammatory errors. Here I shall attempt to briefly convey what the fuss is about in relation to annuities.

What is an annuity?

First off, what is an annuity? In short, its an income paid for life, most of the time paid like income (and taxable) every month. You can choose for it to stay the same (level) or rise each year (to keep pace with inflation). You effectively buy an annuity with your pension fund.

Are you getting a bad annuity deal?

Easy enough so far… so what’s the fuss about? In short, most people don’t shop around for the best deal in the belief that they wouldn’t get much more, or simply didn’t know they could. As a result many or most buy their annuity from the company their pension is with. In most instances they aren’t getting the best deal or anything like it.

A bit like Russian Roulette…

The main problem with buying an annuity is that you make your decision and have to stick with it for the rest of your life. It’s a one time deal. So any decent adviser will help you to think about the income you want well in advance of the day you decide. A financial planner will do this from the start (not just before you retire). So good planning is planning ahead and figuring out how best to tale your income and when, pensions and annuities are simply part of the picture, not the entire story.

There’s not much between them right?… wrong!

Is there really much difference? Yes. There is a massive difference. This will depend on how old you are, where you live, your life expectancy and your state of health. Bizarrely, the worse your health the better the annuity (as the annuity company won’t expect to pay it out for as long as someone with good health). Getting this part right alone could increase the income by 20%-50%. The message here is to shop around… however the reality is that this isn’t the whole truth, you really ought to use an IFA to do the shopping and set something up having discussed all of the options properly… in-line with your requirements and expectations about the future.

Planning ahead, understanding the bells and whistles

The bells and whistles… when you die the annuity stops. However you can have it pay in full or part to your spouse or your estate, you can put in guarantees. You can mix and match. You can delay. There are lots of things to think about and an IFA will do this, for a fee. This is money well spent and ultimately, if things go wrong the IFA is responsible for the advice (unlike a journalist or doing it yourself). The really important thing is to be engaged in the process and thinking about what you want your lifestyle to be in the future, when you do eventually get to the point when you can decide if you want to work or not.

One trick pony?

Annuities have their problems for sure and there are other options, but I wont drone on any longer. You give yourself more options by seeking independent advice from a financial planner, who will work to keep as many options open for you as possible (and sensible).

Please send me your questions!

That wasn’t so bad was it… any questions?

Dominic Thomas: Solomons IFA

So what’s the fuss about annuities?Dominic2023-12-01T12:38:42+00:00

How we talk about life and love

Stories make life richer, they also inspire and remind. We have all probably been reflecting on the coverage of Nelson Mandela, who succeeded in finding a path of communication and reconciliation between two opposing world views. However, often we don’t need to go as far as South Africa or Syria, often we don’t even need to go through our own front door. Relationships are complicated and we all know that communication is the bedrock of any good one. So you may find it amusing that I went to see a new award winning play “In the Next Room or The Vibrator Play”….now what has this to do with financial planning you ask? Well, I believe its how we talk about life and love.

Hysteria

There has been a reasonable amount of coverage about the differences between men and women. I have to admit to being somewhat nervous about making such claims. In essence we are all different and negotiating and navigating our differences is a significant life skill. A play currently showing at St James theatre exposes such differences rather well. The backdrop of the story may, even in 2013, cause some to gasp and takes off from where the 2011 film “Hysteria” left off. In my lifetime there has been a significant shift in attitudes towards sex and gender. I’m assuming that this is not news to you. On the face of things, the play “In The Next Room or The Vibrator Play” is about a doctor who uses pioneering electrical devices to relieve hysteria in women…. and the occasional male. This is of course a subject shrouded in mirth, embarrassment, shame, guilt and a diverse range of opinion, indeed one could simply consider the social hysteria about the topic over the years.

The F-Word…..Finance

Despite the title, the play really examines the relationship between men and women and their failure to comprehend one another, the patriarchy of the Victorian male and the object of his affection. This is 2013 and much could still be said on the subject of women’s rights and access to equality. Others explore this far better than I. My point is really to wonder if despite the sexual revolution, the emancipation of women and the general liberalisation of society, why is it that so many women are so regularly excluded from economic empowerment. Most of my industry seems to be run by and for men. Many women (perhaps most) are put off talking about money and stereo-typed as spenders. I believe, passionately, that financial planning can be liberating. It sounds dull I know – because of the word “financial” and most people aren’t enthused by “planning” either. However, financial planning is a discussion not about money, but about your life and what you want from it. Most couples struggle to have the money conversation, this is largely due to the baggage that each carries and nobody has shown them how to discuss it well. Much like the play, the rising pressure of misunderstanding can become overwhelming and requires addressing through honest and frank discussion about what is really desired from a life together. However difficult, once experienced it is clear that there is the real prospect of a better future, there is hope.

Christmas stocking filler tickets?

I enjoyed the play and had a very enjoyable afternoon with friends. There is a great cast with some very good performances, led by Natalie Casey and Jason Hughes with strong support from Flora Montgomery and Edward Bennett. It runs until 4th January and is a stones throw away from Buckingham Palace. It is not for the easily shocked, you have been warned….then again, good financial planning isn’t for the easily shocked either.

Dominic Thomas: Solomons IFA

For a professional review: The Telegraph and The Guardian

How we talk about life and loveDominic2023-12-01T12:38:41+00:00

Short-listed as “Firm of the Year” for London

I have to admit to being somewhat chuffed and a bit taken aback. I learned this morning that the firm made it to the last 8 short-list for the Professional Adviser awards 2014 for “Firm of the Year” for London. These were actually announced yesterday. I doubt I will make it to top of the list – the competition is rather good, with firms that are frequent award winners and quite a lot bigger. I do not even know how many firms entered –but as they say, “you’ve got to be in it to win it”. I had to submit a case study and then information about the firm and how we do what we do. It really is a long-shot and minnow versus the rest. Whatever the outcome, I’m really chuffed for me and the team here. We don’t find out who wins until a glitzy event in February. Whatever the result, it’s nice recognition… as a first-time entrant, perhaps I should enter a few more.

Building Reputation

Anyway, I hope that for our clients it’s a bit of good news (that they are being served by a decent firm). Of course you can also add your own testimonials to a system firms cannot control (Vouched For). This is a completely impartial way for clients to put a few comments down about us. The blue icon is in a couple of places on this page if you wish to do so. Obviously if you aren’t a client… well do these things make any difference to you when considering who to meet? As a small business clearly I want to attract the right clients, most are recommended by existing clients, but some manage to find us on the web, so if you have any bright ideas of how we can make our difference clearer and why our clients give us good feedback, do let me know.

Dominic Thomas: Solomons IFA

Short-listed as “Firm of the Year” for LondonDominic2023-12-01T12:38:40+00:00

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