How to Translate Your Pension Statement

With the roll out of Auto Enrolment millions of people now have a pension plan. A good number of these will be first time investors in a pension and as such they will be receiving paperwork about their pensions for the first time as well. One of these is a 24 year old relative of mine who chose to run with the idea on the basis that it was going to be a way of squeezing a bit more money out of her employer “so why not”. I don’t think she was alone in that line of thought.

Her first statement arrived a few weeks ago and like many people she scanned the ten pages of information until she found the figure she was interested in then put it back in its envelope. Then, unlike many people, she gave it to me and said “Is there anything in here I should know about?” My answer was “Yes, all of it”. Her look of disappointment was obvious and I think her plea of “Can you just translate it for me, I have no idea what half of it means” was a combination of lack of interest combined with the knowledge that she shouldn’t have a lack of interest.

She is not slow to understand things by any means, for what it is worth she has a MA and holds down a fairly responsible job with a lot of admin, but there is something about a pension statement that seems to repel her, and most people’s, interest. Whether it is the fact that it is full of stuff a regulator says must be in it, no matter how dull or irrelevant,  or whether it is a useful reminder of the ageing process I do not know, but I’ve yet to meet anyone that has read and completely understood (as opposed to thought they understood) the annual statement. With this in mind, I thought I would use her correspondence as a template and attempt to both translate it into normal, point out some of the more relevant bits, and provide a few tips about using the information for the power of good.

So here it is, a brief translation of the annual pension statement. Personal research has shown that making a cup of tea before reading is helpful!

Name and Address

This bit seems easy, but you would be surprised just how many problems follow from getting this bit of information wrong. A pension is a legal contract and as such the information within it has to be correct. This means the spelling of your name has to be correct and the address has to be your current one. When the time comes to take benefits from the plan, you pension provider will want to make sure you are who you say you are. Any discrepancy, no matter how small, has the potential of delaying your claim to your money at retirement. You must keep your pension company up to date with changes of name, title or address.

Letter and Statement

The correspondence you will get from your pension provider will consist  of a statement and a covering letter at the very least. There may well be other stuff, but these two items will always be there. Think of the covering letter as one of those round robin letters you get from a distant relative at Christmas. It will include references to how good the company is, any awards they may have got and proud boasts about particular fund performances.  it is likely to also make reference to some of the more important pieces of information in the statement, partly because they are acutely aware that only a small percentage of people actually read the whole statement. Regardless of the motives in putting information in the covering letter, you should always read it and if there is something you want explaining further, make sure you ask.

The actual statement is part fact, part conjecture and part what the regulator insists should be in it. It is important that you understand which category each piece of information falls into and I will cover this further as we go on.

TIP!

If you are getting a paper statement, scan it straightaway. if it is already digitised, then make a folder for it and subsequent statements you may get. Password protect the folder (encrypt if you feel happier to do that) and back up remotely.

So What is In The Statement

To start with, there will be a lot of different account details. Your pension plan could have all or any of the following:

  • A plan number – This will be your own plan number relating to your own personal pot of money within the scheme.
  • Your details as the Planholder – Check that all your personal details are correct
  • Scheme name and scheme number – These are the details of the overall scheme of which you are a part. Typically the scheme name will include your employer’s name.

You need to make a note of all of these and keep them safe.

A statement may well consist firstly of a summary and then a more detailed explanation. The summary will usually just give you a value of what your pension is worth, how much has been paid in and by who and a indication of what it may be worth at some point in the future. Additional information may include such things as what it might pay to your estate should you die.

Plan Value

The value of your plan will be the given value on the date of the statement. In terms of absolute accuracy, it will be wrong by the time you get it, however any differences will almost always be so small it is not something of great concern. Unless you are of an age where you are able to take benefits from the plan, knowing the value has two main purposes. firstly you can compare it with the amount that has been paid in and if it is more you can allow yourself to be appropriately chuffed depending on the amount of profit you have made. if it is less then you can dig further for an explanation as to why. The second reason is that it is also representative of a transfer value. Your plan is designed to be fully transportable between jobs and even into self employment. If you are changing your work in any way then finding out the transfer value and exploring the options open to you is a must.

Knowing how much has been paid into the plan is important. As is knowing where those payments come from. Typically there are three sources of payment into your plan: Your employer has to contribute, and there are strict rules as to how much they must pay in as a minimum. When you originally joined the scheme you would have been given a guide showing these figures, as well as the minimums and maximums that you can choose to pay in yourself. The third source will be any transfers into this plan from any other plan you may have previously held.

 

TIP!

Add up the total of what has been paid in and deduct it from the plan value in order to find out how well your plan has done over the course of the year.

What You May Get Back at Age 65

This part of the statement is most definitely conjecture. So much so that I can guarantee that the figures you are looking at will be wrong. The younger you are the more wrong they will be. This is because no one can predict all the variables that will actually happen during your working life such as how your income, and therefore the related contributions, will rise, inflation and investment performance.

The best that can be done is to use some regulator approved default predictions so that a figure can be put down. as you get older, this prediction can become a little more relevant year by year due to the fact that as you get nearer retirement, the variables will get narrower. The secret to getting a good return in a pension plan is usually to feed your plan as much as you can throughout your working life so that as the date of your retirement gets closer you will be nearer the amount of return you would like.

Most statements will show a figure at age 65. even though it is a fact that retirement for most will be at a later age than that. If you want to find out your own retirement age have a quick look here to find out. it will only take a minute. I cannot emphasise enough that you should be treating any illustration of what you might get as a pension with caution, especially if you have forty years plus to go before taking it!

TIP!

You can request that your provider send you an illustration of what your pension may be at any age, so long as it is after 55.

Plan Details

By this I mean details about how your plan is invested. When you first joined you would have been told of various funds that were available to you. You may have been offered a “strategy” whereby funds are allocated to you automatically according to to your attitude to risk or age. One theory suggests that you may be more open to higher risk when you are younger, but will gradually get mare cautious as you get older and feel you cannot accept the chance of losing money as you get close to retirement.

Here we have probably the most crucial aspect of your pension. Risk. The choice you make as to what funds or “strategy” to go for will, over time, have a huge impact on how your pension performs. There are endless guides and articles available to you concerning investment risk and all I’m going to do here is implore you to read as much as you can stomach.

As a minimum, you must read all and any information given to you by your own scheme provider.

If you are not sure of where you fall on the risk taking spectrum, then you must keep asking them questions until you are comfortable. It is worth noting that there is no point asking your employer, they are not allowed to advise you, you must ask your questions to the provider, or any advisers appointed by your employer.

TIP!

Keep a separate note of your plan number(s) and your provider’s contact details.

Charges

Imagine you have just ordered a round of drinks. the barman pours your tipple of choice into a glass, but before he gives the drink to you he takes a sip. This is how investment charges work. You give a company your money on the basis that you want a good return on that money, but before it has a chance to grow anywhere, a little chunk is taken by the provider. the size of the charge can vary, but within the auto enrolment environment these are strictly controlled. Again, you need to read and understand how the charges affect your plan. They are provided to you at outset and are easily available on your provider’s website. you can even just call them and ask.

If you do not get to grips with the charges you could find yourself losing out on quite a bit of money over time just by being in the wrong fund for you.

As well as charges that come as part and parcel of the investment element, there may be other charges, such as surrender or admin charges. You need to find out about these before you do anything that may attract them. Just ask.

Contrary to popular urban myth, all providers want you to understand their product. Dealing with complaints and misunderstandings uses up huge resources and they would rather have a client who asks a lot of questions but ends up happy with what is a fairly complicated product, than someone who doesn’t ask or read the information at an early stage and then starts a complaints procedure.

What If I Die Before Retirement?

Not a great thing to dwell on, but we have to acknowledge the possibility. In short, the value of the fund will be paid to your estate. However, I would strongly advise you to check out a part of your plan called “Expression of wish”. This is an instruction you can include in your plan specifically asking your provider to pay the proceeds of the plan to a named person (or persons). The provider is not legally bound to follow the instruction, but it is highly unusual for them not to do so.

And Finally….

The statement is important and you should read it. Somewhere it will say about getting advice, it will probably suggest you speak to a financial adviser. I would wholeheartedly endorse the idea of taking independent advice (there is no point in anything other than independent advice) from an experienced and qualified adviser. However, going back to my young relative’s statement covering her first pension year, it had a fund value of less than £100. Currently, the cost of getting good advice is going to be higher than that. So it is hardly surprising that she won’t be going down that route, and, I suspect, neither will the majority of her contemporaries. Given that, there are still things you can do such as always ask your provider about anything you are unsure of. read everything you are sent and do your own research regarding plans, funds and charges.

Over the last thirty years pension provision has changed beyond recognition. major changes in legislation have occurred with monotonous regularity. So it is a safe bet that the current rules and regulations that come with this latest idea of auto enrolment will not be the rules and regulations that will be in force when you finally come to take  your benefits at age 55, 65, 68 or whatever it will be.

Given that it is certain that changes to pensions will continue to be made, it is crucial that when your annual statement drops on the doormat you take some time to read and understand it. Not doing so could cost you very dearly throughout your retirement.

 

How to Save £70pm and Make Your Bank an Extra 10 Grand!

 

There can be no industry other than banking that is so patronising in the way it treats it customers. Utilities come fairly close, but in order to be thoroughly nannied, try applying for a mortgage. In the thirty odd years since I opened my first mortgage brokerage, now is probably the worst time to try and get a loan to buy a house. It is still possible, but the processes that are now in place make it an entirely unpleasant affair. I was talking to a mortgage broker friend, who is still practicing, and he said that the job was now akin to that of a doctor managing a patient through a difficult course of treatment rather than helping someone achieve the purchase of a house.

A few years ago the whole mortgage industry was subject to the Mortgage Market Review. A whole new set of rules from which lenders now have to comply. Many of the new rules were long overdue and welcome, such as stricter rules on the qualifications needed in order to arrange a mortgage. But, by far the most contentious area though is the way a lender assesses affordability when determining how much they are willing to lend you. And that is where the culture of patting you on the head, saying “there there, it’s for your own good that we have turned you down” is getting more than a few people a tad annoyed.

Nobody is saying that responsible borrowing shouldn’t be based on the ability to repay the loan, a responsible lender should take into account both the financial history and current commitments of the applicant. But this is where I start to see some blurred lines. A lender will ask for at least six months bank statements, I don’t have a problem here, it’s the right thing to do. However, I see a difference when the statements show a commitment to a car personal lease plan that is costing  £150 a month and is a contractual obligation which impacts on affordability because you can’t get out of it for a number of years, and the fact that the statement shows you spend £15 a week on a takeaway.

For as long as I can remember, people’s spending habits have changed when they take on a mortgage, and  things like the weekly takeaway are first in the firing line when a tighter budget is needed. If you factor in the reality of an applicant currently paying more in rent than the proposed monthly mortgage repayment, then you can see why there is frustration when a lender declines an application on the grounds of affordability.

Which brings me to the lenders own interpretation of affordability.

There has been a trend for first time buyers to move away from the traditional 25 year mortgage and take loans of 30 years, or even more. The obvious reason for this is the lower monthly cost, which, at one level would seem to satisfy the more stringent affordability costs. But, while achieving this, it actually costs a lot more in the long run. So just how should affordability be defined?

The new rules put some considerable weight on not only the affordability at the start of the loan, but affordability should interest rates go up, so reducing the monthly cost by extending the loan period will actually have the effect of making the monthly repayments affordable in the event of a rate rise. Interest rates are incredibly low at the moment, and should they go up to 5% they would still be historically low. But what an effect it will have on repayments. A quick look at the table below will show that a £170k mortgage over 25 years will cost £719 a month at 2% interest. If that were to go up to 5% then the monthly repayment would rise by over £250 to £982 per month. So what happens if the loan is 30 years instead of 25? Well, on the face of it the monthly cost at 2% is now £628 and a rise to 5% would make it £912. A noticeable saving indeed.

But wait a minute, look at the total amount you will actually pay back. At 2% interest the total you will repay over 25 years is £215716, but over 30 years it will be £226207. An extra £10491! At 5% interest you will pay an extra £33683!! So, here’s the conclusion. In order to save you money, you will pay a lot more, and it is perfectly within the guidelines set out regarding affordability. In short, the current trend toward longer mortgage terms seems to be saying that the extra £10K which you will pay is more affordable than the extra £70 per month it would cost you to stay at 25 years.

Interest RateMonthly Repayment
25 years
Monthly Repayment
30 years
Total Repayable after 25 yearsTotal Repayable after 30 years
2%719628215716226207
3%802716240775258020
4%890811267187292177
5%982912294850328533
6%10781019323656366922

 

Please treat the above table a guide, it’s a good guide, but in reality the exact figures will vary slightly according to an individual lender’s application of interest rates.

Three Weeks to save a Few Hundred Quid!

Last week a number of newspapers carried the results of a survey which showed that shopping around for your car insurance three weeks before renewal can save nearly £300 compared to leaving it to the very last minute. I have not tried the experiment myself, but am more than happy to believe it. But what does it actually say about the car insurance marketplace? It’s not great in my opinion.

A couple of years ago, one of the online comparison sites wrote a piece suggesting that just over a third of customers didn’t shop around and “auto renewed”. They also suggested that by not shopping around, customers were collectively paying £1.3 billion more than they needed to. That’s rather a lot. It is also a reason why those of you savvy enough to shop around can get a much better deal. Why? Because, insurance companies factor in this amount to their budgeting plans.

Lets be quite cold about this. An insurance company is a business, its first priority is to deliver profit to its shareholders or owners. To do this it must work in an efficient manner, a significant part of that efficiency is predicting cashflow over the coming years. If they know that a third of their customers will renew without much of a haggle, then they can use this money to sweeten deals for new customers and those threatening to move elsewhere. It kind of takes away the image of highly qualified underwriters working out prices using complex formulas that include age, vehicle, usage etc.

Don’t get me wrong, such underwriters still exist, and revel in their complex formulas, it’s just that the marketing folk are considered more important and will nearly always trump realistic underwriting figures in order to get a sale, or keep a customer.

*warning! A “it wasn’t like it back in my day alert”*

When I first started dealing with car insurance, my company gave me a Rate Book. There was no computers, everything was done manually using figures in the book, which was updated three or four times a year. When I gave a quote, that was it. If the customer had got a cheaper one elsewhere, that was my bad luck. I had lost them, and if I was feeling organised, I would make a note in the diary to have a go again next year. Now I really wouldn’t want to go back to those days. However, I do have a little nostalgia for that period when the premium quoted had a bit of a connection with the actual risk being insured.

Today, I have no doubt that the first figure given is the one most likely to reflect the actual cost to the company of the risk, plus a bit for the shareholders annual golf dinner.  The second and subsequent figures reflect how much can be quoted until the customer says OK. I may be a bit cynical here, but in my world a cynic is just an experienced realist. It has been a few years since I did any quotes myself, but not that long ago, and I still remember insurance companies giving me discretion to discount up to say 20%, but to start a 5% and stop when the customer says yes.

Only last year, I was chatting to a person who worked as a customer adviser in one of the last of the high street brokers. They told me that they had authority at that time to knock off £70 immediately they felt they may be losing the customer. if that didn’t work, then the manager could throw in another £70. After that they could still get on the phone and try and chip away further. “What if the premium starts off at £250” I asked. They laughed and said it would end up at £110!  Great for the customer. Absolutely nuts for running a business. While I still think you have to be a bit barmy to use a high street broker who doesn’t give you actual proper and independently qualified advice, I can honestly see the attraction of taking daft premiums if they are being offered.

If we are being honest with ourselves, we are all a bit lazy. It’s part of being human. And it’s what companies rely on to, putting it bluntly, overcharge. When you take out a car insurance now, it is almost certainly one whereby you have agreed to continue with the insurance automatically at renewal. The selling point of this is that you should never find yourself without insurance, which is actually a very good thing. the bit that isn’t shouted from the insurance company rooftop is that the premium you will be paying is going to be part of the £1.3 billion slush fund that will be used to subsidise your friends, neighbours and colleagues who have been a bit more proactive than you have.

 

Getting Advice on Care Home Fees

Care fees can be £30k or more a year, so it is no wonder that there is huge debate about who should foot the bill, the state or the family, and what measures can be taken to mitigate the cost. With regard to the state or family argument this is one of those that polarises opinion with one side arguing that the state is responsible for the health and wellbeing of its citizens and should pay for the care of the elderly. On the other side is the argument that if the individual has sufficient assets to pay for their own care, then they should do so. In between are suggestions that take elements from each.

Quoting from Age Concern; the current situation can briefly summed up as

Most people will be expected to pay something towards the costs.

If your care is being organised by the local authority, then the main steps of the process are:

  1. Your local authority does a care needs assessment to identify what help you need.
  2. They make recommendations about your needs and whether or not you need residential care – this is called a Care Plan.
  3. They work out a budget to ensure you get what care you need – this is called a Personal Budget.
  4. They do a means test, also called a financial assessment, to work out how much you should pay towards your care home fees and how much they will cover.

If your care is arranged by the NHS or social services, you may not have to pay for some or all of the care.

As you would expect, Age Concern have a lot more information on this subject and I would urge you to take a look at what they have to say.

The means test is the one area that seems to be universally disliked. At present, if your assets exceed £23250, you can be expected to pay for your long term care costs. If you do not have that money available in cash, then the costs will eventually be met from the sale of your assets, which is usually your home, upon your death. It is not surprising then that considerable effort has been made in order to think of ways to mitigate these costs and protect the assets of someone who is likely to go into long term care.

When it comes to trying to mitigate the cost, there has been an entire industry that has grown around the subject of Estate Planning, not least because a great number of people are worried about what will happen to their assets should they have to go into care.  Being in the situation where my interest in this subject is morphing from the professional to the personal, I made a point of listening to “The Care Fee Trap” a Money Box programme on BBC Radio 4. Just click the link and listen to it for yourself.

Although the programme largely focused on the behaviour of one Estate Planning company, it is probably better to put that element to one side and concentrate on the actual issues is raised. Most of you who have read any of my previous blogs will know that I am a passionate advocate of asking questions and doing research before going ahead with any product or service. With the subject of planning for possible care home costs I can’t think of a product or service that needs such questioning and research more.

The common thread running through all the schemes that purport to protect assets from the means testing process is the transfer of those assets into a trust. Simply put, the assets cease to be your property and instead become the property of the trust and therefore (so it is sometimes claimed)  cannot be included in the means testing process. Such plans may not be the perfect solution they initially appear to be. There is a part of the means testing process that is called “Deliberate Deprivation” which seeks to address situations whereby the authorities believe that an asset has deliberately been moved from your ownership to that of a trust, with the main purpose of avoiding long term care costs. It is the phrase “main purpose” that drops a degree of ambiguity into the situation and makes the whole situation open to interpretation and can result in the whole plan becoming meaningless.

No estate planner would be daft enough to compile a report for you that said the reason for putting your assets into trust was to avoid long term care fees. However, is is often stated, usually verbally, that the avoidance of such fees can be a side effect of putting your assets into trust for other reasons. It may well be that these other reasons are perfectly legitimate and are borne out of genuine need. The thing to remember is that you can expect the authorities to investigate and ask you, and your family, what those reasons are. If they do not stand up to scrutiny, then the fact that the have been put into trust will be completely disregarded.

You may well be coming to the conclusion that the whole area of estate planning and will writing is a lot more complex than you first thought. It may come as a surprise then, that the process is actually unregulated. It is possible that the company you use may well be regulated through their other activities, solicitors being an ideal example. However, if it is a company that just does estate planning and will writing, then they do not have to be. In 2013, it was recommended to the government that activities such as will writing and estate planning be regulated. The recommendation had the backing of consumer groups and industry professionals who wanted to raise the profile and show their expertise in a formal way. For reasons I just cannot fathom, the government declined to regulate it.

If you are worried about the cost of long term care, do your own research. Do it carefully, don’t rush it. Don’t rely on just one source of information. As well as the age concern link above have a look at the SFE website. The SFE (Solicitors for the Elderly) is an “independent, national organisation of lawyers, such as solicitors, barristers, and chartered legal executives who provide specialist legal advice for older and vulnerable people, their families and carers”. And, of course their members are fully regulated.

 

 

 

All change on the Buy to Let bus!

Some investments become fashionable. I don’t know why, they just seem to reach the certain part of an investor that enjoys talking about them. If an anecdote about a new tenant can be thrown casually into conversation down the golf club or while sipping a free coffee at Waitrose, then all the better.

Buy to let property ticks the right boxes as one of these “vanity” investments and has done for a few years now. Don’t get me wrong, there are all manner of landlords out there, all of which have different reasons for becoming landlords. Even my mother became an accidental landlord well into her eighties when it became apparent that it was a way to help fund her care. What I am saying is that there is a certain type of investor who gets a boost to their perceived social standing through making certain types of investments. It is these people that tend to miss the early warning signs about the investment and only sit up and take note when the investment starts to cost them money rather than make them money.

We now have another warning sign for those people. Although, changes in the way income from buy to let properties are taxed have been flagged for some time, it is April 2017 that one of the most significant takes effect. After many years dealing with people who make “vanity” investments, I full expect this particular red flag to also be ignored and it will be the cold light of the actual annual tax return that will bring them up to speed. It will cost them a few quid by then.

So what has happened? Well, simply put, today marks the start of a process that will finish in 2020 whereby you will no longer be able to set the costs of a mortgage against the income gained from the property. The government website  sets out all the details of the changes, and if you have questions about your particular situation then I suggest you have a chat with your accountant sooner rather than later. Whatever your situation though, now is probably a good time to review whether or not buy to let is the right thing for you to do, or whether or not it is the right thing for you to continue doing.

As with any investment, it will only stand a chance of getting the result you want if you look at it coldly and purely in monetary terms. Buy to let is no different. The purpose of buy to let is to give you a return on your money. A return that at least outpaces inflation. In order to do that, you need to take into account everything the property is going to cost you, plus a guesstimate of what it may cost you. Here’s some pointers:

  • Costs of buying a property
  • Maintenance of the property
  • Risks
  • Tax implecations

A bit more detail…

I think everyone is aware of the costs of buying a property, deposit, survey, legal costs and, if necessary mortgage costs all have to be factored in. It is worth highlighting though that for Buy to Let, stamp duty is more expensive and most lenders have hardened their lending criteria so that the property needs to return a rent that will cover 145% of the mortgage cost, rather than the 125% that was used as a guide not that long ago. If you are getting a mortgage, then 75% of the value of the property seems to be the top end of what lenders will lend you. It goes without saying that the lower the mortgage required, the greater your chance of getting a decent return on your money. If you are looking at the top end of borrowing then you need to think very carefully about the real costs involved. Personally, there is no way that I would touch a Buy to Let investment if I had to borrow 75% of the property value.

Maintenance of the property is your responsibility, any repairs fall to you, as does insuring the property. These costs are unpredictable and can make a significant dent in your return

Other risks can include gaps in tenancy, or not finding a tenant to start with. You will still have to pay the mortgage even when the property is unoccupied. If the property is on a mortgage, then the rate can change. as previously mentioned, lenders have hardened their lending criteria in order to create a larger buffer between rental income and mortgage costs, but if interest rates rise the margins of return will become tighter.

This blog was triggered by the tax changes that come into force today, but paying tax on the income is just one element of your overall tax and financial situation. having a Buy to Let property will have implications on Capital Gains tax, Inheritance tax  and even your entitlement to certain benefits.

I know I have not mentioned the fact that the property is also a capital asset and as such there is a potential return to be had from its underlying value. it is true that the value of property has gone up, some would say by far too much, in recent years. The profit that can be made from eventually selling is something that has to be considered, as should the fact that there has been the odd property crash and the fact that it can take quite a while to find a buyer.

There is no doubt that having a property that you rent out can be a great investment, for the right people in the right circumstances and with the right understanding of the risks involved. If you are not that person, then having one because it makes you feel better is a potentially costly piece of self delusion.