Thursday, 7 March 2013

We want our cake and we want to eat it…..

I have sympathy when policies we take out don’t provide the benefit we expect, I recently read the story of Chris Hargreaves who took our a protection policy and when he came to make a claim the insurance company refused to pay the claim. He fought this all the way and eventually won but in the process he had lost almost everything including his business.

In no way equal to this I have previously mentioned about the car warranty I took out and despite reading the policy document and following the claim procedure I found that I was not covered, this is now with the ombudsman.

The point is that there are times when it is right to fight and complain for what we think is wrong.

I have sympathy for those who were sold payment protection but I struggle a little on this. The insurance was in place to protect the individual if they were unable to meet the payments on their loans. During the last ten years (or more) the western world has lapped up this concept of free money, buy now pay later. In fact often credit was so easy that it felt that there was no check on whether you could afford to pay it. I remember in one week I was offered £20,000 of “free money” and I knew that with a young family we could never afford to pay it back but there were others who took it.

There is a balance because of the availability of credit drives growth so it is about getting the balance right. Looking back we know that banks overstepped the mark but equally most people benefited from easy credit, high dividend pay outs (I think RBS was paying around 8%) or investments in banks themselves.

Of course when it all went wrong we were quick to blame everyone but ourselves and PPI is one of those things. Many people didn’t understand that they had purchased this but equally they had a responsibility not only to ensure they could pay the loan but also to understand the terms of that loan.

It seems very easy to get money back and I know of a someone who has recently received £15,000 in compensation. Now like all compensation this goes back to the individual to spend as they wish. Just a thought, I believe that if it was proved that the person “buying” the insurance was misled then that compensation should firstly be used to pay down their debts and if after paying down those debts there is any money left then they can use that to spend as they wish.

We now seem to be moving to the next “scandal” and with these thoughts in mind about taking responsibility for our actions we turn to the nasty bank salesman who sold structured products. Before I cover this I want to paint a picture, I know of a number of direct platforms who advertise structured products without advice. I also understand the type of person who buys these; they are pulled in by words like protected and a high return or income. From my experience a lot of these people do not necessarily understand what they are buying however they have signed a piece of paper saying that they do.

When we look at the Daily Mail’s latest campaign I have some sympathy with the investors however ultimately they have to take responsibility. It is likely they will have seen the collapse of the likes of Icesave, Northern Rock and others and decided that they wanted to protect their capital. It is possible they were seduced by the high rates offered by some of the companies (I was) and then expected the government to bail them out when it went sour. So they went to their nasty bank who offered a plan which protected their capital and provided the potential for growth.

Sounds good, if the plan had paid out in July 2011 would the picture have been different, stock markets falling and the capital protected perhaps you would have seen happy investors. However, they have paid out at a time when the stock market is rising and investors are saying if I had invested in the market I would have got more, even a fixed rate bond would have paid more or perhaps a basket of bond funds. Of course hindsight is an amazing thing we can say "what if" but ultimately you need to understand what you are buying, there will be some who were mis-sold their plan but others are just disappointed with the return because they could have got more if they had invested it differently.

Ultimately they wanted to protect their capital, during the last five years if they had invested in say the stock market there would have been times when their nerves were tested and perhaps without the appropriate advice they would have sold at a loss, if they had placed it in a savings account they could be receiving little or no interest and so it goes on.

My point in all of this is that we have to take responsibility, there are contract terms which we read and we believe will deliver especially insurance and perhaps we should all question the terms we are not sure about. However when it comes to basic financial management whether through a loan or investing we need to take an element of responsibility even if we have advice – if I want a new car, do I take a loan, can I afford that loan, what happens if I am unemployed etc – if I want to protect my capital but have the chance of growth how do I achieve that, what about inflation, etc etc

As a society we want the cake and we want to eat it. If it goes wrong then the last person whose fault it is is us, in some cases the fault is clearly not with us but I suspect a lot of cases we are seeing around PPI and structured products are spurious where the individual knew exactly what they were agreeing to but now sees a chance to get some easy money.

I want to leave you with this thought on where I predict the next “scandal” will be, anything that disappoints will be a “scandal”. I have mentioned the recent marketing of an income fund, twenty five years on it invests in mega caps, it is a mega fund and will it continue to deliver the same returns, almost certainly not will investors be disappointed yes, will they complain possible. We are seeing a massive influx of money into bond funds because they have delivered over the last ten years, with yields being squeezed will they deliver the same over of the next ten years, possible not, will investors be disappointed yes, will they complain possible. I am sure there are more that you can add to the list the point is the world is changing and we have to responsibility for our actions.

Wednesday, 6 March 2013

Its life Jim but not as we know it……

I am sometimes overly critical of journalists; this is because I am often incensed by sensational headlines and half-truths. I also feel that they do more damage than good, but then it is the headlines that people read and it is often those headlines that spark debate.

Ian Cowie at the Telegraph is one such journalist, his latest piece “frozen base rates rob older savers of £3,000 a year to rescue young borrowers” is a piece written surely to spark debate rather than provide constructive help.

His argument or article is about how people in retirement are suffering whilst people with mortgages are benefiting. What he writes is not incorrect; interest rates are at an all-time low which means those with cash savings are effectively losing money and those who can get good mortgage rates are benefiting.

Of course this will only get worse, it is unlikely that interest rates will go up anytime soon and the new Bank of England Governor has indicated that he will do anything to stimulate growth even if this means inflation going up.

There are signs of life in the UK economy, many of the UK banks are close to repairing their balance sheets and in fact despite the massive write-offs this year are profitable. As the banks move to clean balance sheets they will be in a position to lend again and it is clear that lending stimulates growth as we can start to see in the US.

So where does this lead us to………

My point is that for all of us things have changed, let’s consider the older generation (which also applies to the younger generation).

The retirement age of 65 was introduced at a time where most of us didn’t expect to live much past 65, even at 67 it is too low when life expectancy is now 20 plus years in retirement. This is fundamental to a lot of arguments about how “poor” pensioners are.

Take 15 to 20 years ago, life expectancy was shorter and if you didn’t have a final salary scheme you could get an annuity rate which would give you a decent income in retirement if you had saved enough and normally a cash lump sum. The cash lump sum was seen as a nest egg and could be put in cash where even up to 1999 could expect to pay 6% or so a year. So carefully managed it could deliver a small amount of income and growth on top of the pension.

The problem is that now we want the same but for it to last longer. I am no mathematician but the figures just do not work. People preparing for retirement need to plan for retirement it’s as simple as that. It could be that retirement income is made up of state pension, private pension and tax-fee ISA income but a plan needs to be in place.

We also need to rotate away from this fixation on placing all our assets in “safe” assets when we retire. Of course if we only have say less than £10,000 then a savings account may be the only option but these people would never have been significantly supplementing their income whatever the rates.

And here-in lies the problem, if I have saved all my life and have a pot of money of £50,000, £100,000 or more and I knew that I would have the potential to live for 20 plus years would I realistically move that money into cash? Turn it around I am 45 and have 20 years to retirement am I going to invest in cash for 20 years. Of course the answer is no and this is what journalists should be discussing the case for risk aversion. We become risk averse at 65 and go for “risk free” assets which are being destroyed by inflation.

Of course some of these investors are shrewd and have moved into bonds because the yield provides income and there is the potential for growth. The problem is that yields are being squeezed and so is growth so the bubble in bonds we have seen is unlikely to continue, it may even burst but there are arguments on both sides of this.

An alternative option is to go for an income fund; there was some recent marketing material that said £10,000 invested 25 years ago in a famous income fund would be worth £180,000 now.  The problem with these funds is that not only are they massive but they limit their investments to mega caps and clearly these will struggle to not only pay these dividends going forward but also some are overpriced.  I do not believe these investments will deliver the same returns going forward.

So this argument about old people being frozen out is not incorrect but there just needs to be some education and planning, yes they have suffered from lower interest rates and yes gilt rates have come down but they are living a lot longer and therefore they have to plan for that and invest in the appropriate way.

Turning to whether the young have benefited from interest rates is a very na├»ve comment, like the older generation the younger generation face a very different market. In the past we could expect a job for life; this is no longer the case. In fact I met someone the other day that said in some cases a job which is here today may not be here in ten years’ time.  This means the younger generation have more insecurity in their jobs and face potentially retraining several times during their life time.

So not only do they suffer from job insecurity but also they have costs that perhaps their parents didn’t have. So property is a lot more expensive, only 20 years ago you could purchase a house for £40,000 that house would now be £200,000. Although all sections of society have suffered young families have seen a significant increase in the cost of household bills like gas and electricity as well as costs of commuting.  If both members of the household work then you have child care costs as well to consider. It was only a few years ago that the now retiring generation would have benefited from child benefit and married persons allowance, the married persons allowance has gone as has child benefit for some.

My argument is yes interest rates are low and yes some people are benefiting from these but actually other family costs have gone up and any significant uplift in interest rates will see families struggle to pay even the basic bills. However, there are families who cannot re-mortgage and are on variable rates and they are already going up, seeing these families struggle.

So in summary this highlights one basic need in our society and that is a need for financial planning, I have argued that as an individual we can do our own financial plans and manage this but if we do this we have to be honest, or we can get help the choice is ours. Ian Cowie needs to consider “its life Jim but not as we know it”, as a journalist he could help.

The question is does he want to and will it make it good headlines – over to you Ian….