Finance blog: Studlea Takes a Safe Option
|Published: 5th February 2010 16:51|
5th February 2010.
"...a pilot suffering panic attacks, a chauffeur with multiple fractures, and an aircraft designer suffering depression..."
As promised, we put the rage against the economic machinery behind us, and get back to basics with a look at the first rule of financial planning, a news snippet about Employer Pensions for all employees, and of course, our sweepstake.
Interest Rate Sweepstake
If you are ‘interested', you will know the Bank of England again decided to photocopy the meeting from last February and not change interest rates yesterday, so when will rates rise? Some say... but who cares what some say?
It is what you think that matters. Our sweepstake is still running, with prizes to all who pick the right month. JH, AS, AD, EW, MD and DW are the latest losers following this weeks decision. Care to have another go ladies & gentleman? If you haven't already, please e-mail me your selection for which of the next 4 months (March to June) will see the first Bank of England Base rate rise.
For the speculators amongst you, we have introduced a George W, Bush inspired option, which is ‘none of the above'. If you think rates will remain as they are all the way through to June, you can opt for this. A rubbish prize to all who get it right.
First Rule of Financial Planning
The first objective or rule of financial planning is protect what you have got. Now, this does not mean having a loyal crocodile go with you to the bank, wearing strategically placed armour or gluing your share certificates to a guard-dog.
This short expression encompasses several issues, but for most of us the application will be one or more of the following: The ability to earn, being a provider, or securing your savings and assets to provide for you and yours in the long term. Securing assets, and the broader role of provider I will look at another time, but for now...
Your Ability to Earn
Most of us who are not wealthy enough to retire, rely on our ability to earn to fulfil our plans in life. (M.P.s obviously excluded.) This is to pay the bills, provide for family, enjoy life, save for holidays, retirement, whatever. Many not only rely on this ability to earn, but have others dependent on them as well, be they a spouse, children or other relatives.
In case nobody has told you, research confirms it is certain you will get older*, and without being too dark, I can guarantee that you will die*. (*I am reliably informed there is currently no known cure for either of these
What we do not know however, is what health issues or conditions you might face between now and that point in the future, usually retirement, when you no longer NEED the ability to earn. If you fell ill and could not work, how long would your finances support you? Your employer might offer some sick pay, and if you are lucky enough to be funded by taxpayers, perhaps as a council employee or teacher, this might last as long as 6 months on full pay, and 6 months on half pay, but then what? (Early retirement ill health pension benefits are not what you think they might be.)
For the majority however, such generous benefits do not exist, with many entitled to far less than this, and for most it is just Statutory Sick Pay, currently £79.15 a week for a limited period. N.B. The self employed get nothing of course. You might have some savings, but think about your expenses, how long will your savings last?
Perhaps your spouse could support you and yours, but what if they fell ill? Stick with this, it gets funnier later.
In short, if you rely on employed or self employed income, you are in fact relying on having the health and ability to earn, and if this is you, then unequivocally, you should have in place Income Protection insurance. Let me stress however, I am not talking about those insurances linked to your mortgage repayments or a bank loan, for which so many of our lovely banks have been fined so heavily for mis-selling of late. Similarly, this must not be confused with ‘critical illness cover'.
(Critical illness cover is the payment of a lump sum only, on your diagnosis AND survival, of a list of very carefully drafted specific illness definitions. There is a whole raft of issues that will stop you working that are not on the ‘critical' illness list, and sadly it is often over sold (mis-sold) as income protection.)
Income Protection on the other hand pays you a proportion of your income (maximum is usually around 65%), tax-free after an initial period, and pays this for as long as you are ill, WHATEVER THE CAUSE, or all the way up to retirement. If you go back to work the benefit stops, but if you fall ill again, with the same or different problem, it starts again. If you are only fit enough to return to work part-time, then a portion of benefit is paid.
How likely is it? Well, there are a variety of statistics out there but perhaps those that prove the point are that during a working life, 1 in 7 (14%) of the population will suffer an incapacitating illness lasting longer than 6 months. This means it is likely you know someone who has suffered such a lengthy illness. Where we live for example, is a road of 8 houses, and one occupant has suffered such a lengthy illness during their young adulthood.
Don't, whatever you do, get fixated on my use of the term 6 months or more either. Friends Provident tell me they have been paying more than half of their income protection claimants for over 5 years. As to critical illness, one of the insurance companies reports that over 75% of the Income Protection claims they are paying would NOT be covered by a critical illness plan. To illustrate, and without getting too graphic, ‘Unum', a company specialising in this type of insurance report, recent paid claims include a pilot suffering panic attacks, a chauffeur with multiple fractures, and an aircraft designer suffering depression. I think we would all agree, best they take some time off.
There are detailed differences between the plans offered by the insurers, and so you or your adviser needs to have sufficient knowledge (you will not find the answers on comparison websites) to find the right policy for you, but by and large they all work in this way. Equally, if you are young and fit, now is the time to get some, because the older you are the more expensive it gets, and you don't know if a health issue might arise which might make it more expensive, or difficult to obtain.
I have one, Alison has one, and I think all but three of my clients, (and you know who you are), who depend on the ability to earn have one as well. Have you?
Finally, How to Waste Your Money
Some will be aware that as a vehicle to encourage large numbers to save for retirement, Stakeholder pensions have been a tremendous flop, and most popular usage has been for those with larger sums wishing to distribute wealth in a tax efficient way around family members.
Greatest beneficiaries have been Ron Sandler, who thought of them (latterly chief executive of Northern Rock), the taxpayer funded mandarins who ‘rolled out' his idea, and the marketing companies who introduced the concept.
Anyway, your hard working and well expensed (and very well pensioned) politicians have been having another go. The plan is to re-hash the stakeholder pension, but this time automatically enrol everyone into it and have the employers run the schemes. (All employees aged 22 or over who don't have a better pension already.) So will you be forced to save? No, because you will be able to opt out. Anyway, take up might be higher, but we will see if it actually helps.
However, when the idea was launched in 2007, they were called ‘Personal Accounts', and great swathes of your cash have been spent on discussion, sandwiches, press officers, sandwiches, websites, latte, sandwiches, salaries, marketing and brand agencies and so on.
After three years of hard work, they have now actually achieved something. Yes, after incurring costs of several million pounds thinking about it, they have thrown another £300,000 at coming up with a new name and a funky logo. They are now nauseatingly called Nest Accounts, this being an acronym of National Employment Savings Trust. I wonder which came first, the name or the fluffy friendly warm acronym. I wonder...
John C. Cartlidge
Independent Financial Planner
Tel: 0151 336 6610