It must be worth more than that?

I know we try to avoid figures here on Moneysucks? but some just out highlight the problems that savers will face as we head towards 2011, and will hopefully highlight the fact that if you only make one resolution for next year you make it this:

To check out the rate of interest you are receiving for your savings and to move your money to an account paying as high a rate of interest as possible!

Why?

Because according to the latest figures inflation is now hitting 3.7%. That means that is you are a basic rate taxpayer your money will need to be in an account paying at least 4.62% just to stand still! And if you pay tax at 40% then your savings need to be earning at least 6.16% for your money to be worth the same at the end of next year – assuming inflation doesn’t get higher still over the next 12 months.

According to money information site Moneyfacts there are around 60 accounts available that will achieve these figures for basic rate taxpayers and only 44 that will produce a high enough rate of return to help 40% tax payers fight the effects of inflation.

Of the accounts that help basic rate taxpayers only 17 are not tied up with ISAs so investors will have their work cut out in the early part of 2011 to make sure that their money is working harder than at present.

We have said it before on Moneysucks?, and we’ll no doubt say it again, that statistics show that more people change their partners than their Bank Accounts and this apathy needs to change! Although it’s true that savings rates have been rising over the last six months or so this is not happening quickly enough to beat the impact of inflation.

So here are two questions you may want to ask yourself if you have money lying in a low interest paying account.

Firstly, where can I move it that will pay me more interest?

And secondly, if I’m not going to use the money in the short term is there anything else I could be doing with it that might be more efficient from an investment perspective, and perhaps also from a tax perspective?

Now these questions open up a whole new can of worms that we’ll come back and look at later but in the meantime get out there and do some work to make sure that the money you have in savings at the moment is not festering away earning no interest!

Top Tips for Budgeting

 

 

1. Keep an accurate note of how much you spend for one full month. That includes newspapers and magazines, lunches, cups of coffee and drinks in the pub. Only by doing this will you be able to calculate how much your day to day living is costing you.

 

1. Try to pay as many bills as you can by direct debit every month. Apart from the fact that you might get a discount for paying this way, if you arrange for bills to be dealt with as soon after your salary is paid as possible then you will know how much money you have left for the rest of the month

 

1. Keep a spreadsheet showing your monthly income and expenditure. Spread as many bills as you can over the year so that you don’t have big bulges in some months when your expenses increase dramatically. Don’t forget to add in the things that you only pay once a year like your TV License or your Car Insurance.

 

1. If you need to overdraw to cope with extra expenditure at a particular time remember to ask your Bank first. Unauthorised overdraft rates are much higher than authorised ones and you also run the risk of having bills unpaid or direct debits returned, increasing the charges you are likely to have to pay to your bank.

 

1. If your borrowing requirements are likely to be longer term then a personal loan might be a better option than an overdraft. Shop around before settling on the loan that offers not only the lowest interest rate but also flexible terms should you find that you are able to repay the debt earlier than you originally intended.

 

1. Don’t rush into buying something just because you want it today. A store might offer you access to a personal loan or its’ own store card but you should go away and check out the price elsewhere, and whether there are better ways of funding your purchase. This is especially true of more expensive items like furniture or cars.

 

1. If things get tight at anytime remember that you have to prioritise your debts. If you don’t pay your mortgage you could lose your house, if your electricity remains unpaid you may have it cut off. If you can’t afford to pay everything at one time then you need to make a list of the most important debts.

 

1. Make sure you speak to your creditors if you are not going to pay bills. There is nothing they like less than debt being built up without being informed. It’s not easy but there should be no stigma to owing money and it is really important that you are up front and honest. Go to them and tell them you have a problem, why you have it, and make a proposal to pay what you can when you can.

 

1. Remember that if your outgoings exceed your incomings you do have a choice. Most people would look at ways to lower outgoings by trying to spend less. But you could, instead, look at ways of increasing your income, whether by looking for a better rate of interest on savings income or asking for a salary increase or more overtime at work.

 

1. Here’s the most important tip. A budget is not all about telling you to stop spending money. It’s not supposed to be negative. Just the opposite in fact. It’s all about helping you to spend more money effectively and in areas that you want to spend it, rather than wasting it on high interest charges on loans and credit cards and bank charges. Use it as a positive toll to help you control your money rather than allowing your money to control you!

Don’t let your pension sink without trace!

Moneysucks? reader Irene asked a really interesting question the other day. She is due to retire in April next year and wonders whether she can access any of her pension as cash. The short answer is yes she can. Usually up to 25% of the fund that Irene has built up can be taken as a tax-free lump sum. And it usually makes sense to do it this way since anything taken vas ‘income’ from a pension is potentially taxable.

Irene’s question raises another couple of interesting points about pensions – and we’re talking here about ‘moneypurchase’ type arrangements where the fund available is dependent on the money invested over the years, not final salary pensions.

Firstly, your pension can be invested in a wide range of funds and if it is a pension arranged by your employer you may not be aware of the nature of these funds. If you are coming close to retirement age you may want to have a close look at where your money is invested and move it if necessary to a low risk, or even cash, fund. This way any growth you have seen over the years will not be wiped out by downward movements in stockmarkets between now and retirement.

Secondly, and this has been covered in a few newspapers over the last week or so, it is not commonly known that when you get to retirement and go to purchase an annuity, you can buy it from any company on the market, not just the one that provides your pension. So it absolutely always makes sense to shop around and make sure that the annuity you are being offered is the best on the market for you.

Don’t let your pension sink without trace

Moneysucks? reader Irene asked a really interesting question the other day. She is due to retire in April next year and wonders whether she can access any of her pension as cash. The short answer is yes she can. Usually up to 25% of the fund that Irene has built up can be taken as a tax-free lump sum. And it usually makes sense to do it this way since anything taken vas ‘income’ from a pension is potentially taxable.

Irene’s question raises another couple of interesting points about pensions – and we’re talking here about ‘moneypurchase’ type arrangements where the fund available is dependent on the money invested over the years, not final salary pensions.

Firstly, your pension can be invested in a wide range of funds and if it is a pension arranged by your employer you may not be aware of the nature of these funds. If you are coming close to retirement age you may want to have a close look at where your money is invested and move it if necessary to a low risk, or even cash, fund. This way any growth you have seen over the years will not be wiped out by downward movements in stockmarkets between now and retirement.

Secondly, and this has been covered in a few newspapers over the last week or so, it is not commonly known that when you get to retirement and go to purchase an annuity, you can buy it from any company on the market, not just the one that provides your pension. So it absolutely always makes sense to shop around and make sure that the annuity you are being offered is the best on the market for you.

Top tips for retirement

1. It’s never too early to start planning for retirement

Don’t think it’s clever to wait until it’s nearly time to retire before you start to think about your pension. The sooner you start to plan for retirement then the more money you will have in the pot when the time comes to retire.

2. Retirement planning doesn’t mean the same as pension planning

While there are obvious tax advantages to pensions it makes sense to have as wide a spread of investments as possible and that means money in the bank as cash, perhaps a share portfolio and for most people property that can be sold as part of a downsizing exercise as you get closer to stopping work.

3. If your employer offers a pension, join it.

Most occupational pension schemes involve your employer making a contribution on your behalf. It may be structured in such a way that they will match your contributions up to a certain level, so if you pay 5% of salary so will they. It’s free money, don’t turn it down.

4. Pensions are tax efficient – use that to your advantage

Under current legislation you can invest 100% of your salary in a pension, up to a limit of £225,000 this tax year, and claim tax relief on these payments. So every £100,000 invested in your pension is effectively only costing you £60,000. On top of that, you can take up to 25% of your pension fund as a tax free lump sum when you retire. The icing on the cake is that pension funds don’t pay much in the way of tax so growth will be faster than in an equivalent fund outwith a pension wrapper.

5. Stopping work and taking a pension are not the same thing – be flexible

Just because you have started to take your pension doesn’t mean you have to stop work, in fact it is possible to be taking income from one pension while still paying into another. Flexibility is the key here and it is important to make sure that your affairs are planned in such a way that you are not shutting down your options at retirement.

6. Use your pension to buy commercial property if you run your own business

It is possible, and extremely tax efficient to use your pension fund to buy a property that you can rent back to your own business. The pension can actually borrow money to help fund the purchase – under current legislation up to 50% of the value of the fund, and the rent that is then paid by your company to the [pension fund can be used to repay the loan.

7. If you are over 40 a pension is not a long term investment

One of the main reasons that people put off investing in a pension is that it is seen as a long term investment. Once you are the wrong side of 40 however then you are only 15 years away from being able to start taking money out of your pension so it is no longer a long term investment.

8. Ask the Pension Department for a forecast of your likely benefits

You can write to the Pension Service at www.pensionservice.gov.uk and ask them to provide you with a statement of projected State Pension at retirement.

9. If you’ve got spare money start a pension for your children

The limit that applies to pension contributions is 100% of income up to £255,000 this year. The most that you can pay into a pension without any income is £3,600 and this can be done from any age so it is possible to start building up pension funds for your children as soon as they are born, and qualify for tax relief on payments even although they don’t pay tax. It’s not what the Government meant to happen but the rules currently allow it!

10. It won’t just happen – you need to make it happen. Have a plan.

People don’t plan to fail, they just fail to plan. There are tens of thousands of people in this country who are currently working past the date by which they would liked to have stopped work simply because they have not make adequate pension provision. Don’t let it happen to you. Make a plan and start it now.

Pensions – pay or perk?

It looks as if public sector, and a lot of other final salary, pensions are firmly in the Government firing line, and the recent changes announced to pensions will have a huge impact on the effectiveness of these schemes, especially for younger employees. On top of that, NUJ staff are taking action today and tomorrow to protect what they see as an unacceptable attact on their pension benefits.

But is that right?

Can the government and other employers, tamper with what is part of an employee’s contract of employment. And even if they can, should they? It’s all very well saying that we need to cut costs but is it not the case that pensions are simply deferred pay and as such entitlement to a pension is the same as entitlement to your salary being paid into your bank account at the end of each month? If pensions are amended to any great extent, regardless of whether we think they are ‘fair’ or otherwise, does it amount to a breach of contract by the government or employer?

Or if you accept the need for cuts do you think that these final salary pensions are over generous and should be first to go? And do you buy the argument that is put forward in the public sector in particular that we simply can’t afford to continue to pay for gold plated index linked final salary pensions for a group of employees when the reason they were given them in the first place – that their salaries lagged behind private sector employees in similar jobs – doesn’t hold water any more?

I’ll just take my overdraft elsewhere then!

A recent survey suggests that there is more chance of most of us changing our partner than our bank Account and I still regularly talk to people who use the same branch of the same bank where they opened their first student account decades ago!

Now if you are happy with the service you have been receiving from your bank I’m not suggesting that you need to be constantly on the lookout for a new account but if, on the other hand, you have felt let down by any of the services that your bank provides then maybe it’s time to ‘take you overdraft elsewhere’ as they say.

Or maybe your existing bankers feel that the new car you want to buy or the expensive holiday you feel you deserve doesn’t fit into your current budget.

Either way, if you feel it’s time to look for a new home for your money, or your debt, then here are some questions that you might want to ask of your potential new bankers:

What rates of interest will you pay me?

How comprehensive is your internet banking service?

How many braches do you have close to where I live and work, and what are their opening hours?

What are your overdraft rates, and can I have an interest free overdraft buffer?

What will you charge me if I go overdrawn without asking you?

If I phone you will I be able to speak to a real person rather than a machine?

What are you charges for running my account?

Do you provide any extras such as travel insurance or accidental death cover?

The changeover process should be straightforward these days – once the new bank has carried out any credit and ID checks that it needs to do it should then also take over all of the administration for you, asking your old Bank for details of all payments into and out of your account. It should be a smooth process.

Remember that it is your money the bank is looking after for you. You are entitled to a decent level of service and you are entitled to have any issues that you have resolved quickly and to your satisfaction. Don’t stick with a bank account that is not doing what you need it to out of any misplaced sense of loyalty. It won’t be reciprocated and there are plenty of other banks out there looking for your money!

Debt or Savings?

It’s a question I’m asked more often than almost any other! Doesn’t matter whether the money you have in the bank is there because you have more income every month than you spend or because someone has died and left you a lump sum – the dilemma is the same.

 Keep it in the bank or pay off the debt?

And you know what? Strange as it may seem not everyone would agree on the best answer!

Let’s start by assuming that your bank is paying you 1.5% on your money. And let’s further assume that this is before tax so it might be less than 1% after tax if you are a higher rate taxpayer. If your mortgage is costing you 5% then anyone with a calculator would tell you that you need to repay your debt simply on the basis that your debt is costing you more than you are earning in interest.

And if the debt is on a credit card rather than a mortgage and the APR* is nearer 20% then it’s a more blindingly obvious answer you would think!

Repay the debt!

So why do so many of us not do that, instead being happier to build up an ‘emergency fund’ to save us should the car break down or the roof start to leak.

Because we feel safe!

Safe in the knowledge that we’ve got a bit spare in the bank ‘just in case’! We probably know it doesn’t make sense but we do it anyway.

We shouldn’t, well not unless the fact that we’ve used all of our available reserves to pay off our expensive debt makes us sick in the morning or causes us sleepless nights.

And that’s why there are two answers, because not having any money in the bank is, for some of us, a bigger problem than paying high rates of interest on debt that we could theoretically clear today.

Having said that, I think that most of us would opt for the ‘pay off the debt’ option if we thought it through logically?

*Look out for my upcoming blog explaining APR in detail and showing you how to calculate how much interest you will pay on loans!

Timing – avoiding a crash?

When the market climate is uncertain, investors often become nervous and lose sight of their long term investment goals. They are often tempted to postpone new investment, and even to sell their current holdings with the aim of reinvesting when the stock market stabilises. However, if you are able to take a long-term view, it is often best to hold onto investments through periods of volatility. This is where having a framework and knowing what you are trying to achieve comes into its own by ensuring that you remain on track towards your longer term objectives and do not get blown off course by shorter term stockmarket gyrations.

The pitfalls of market timing

Of course, all investors would like to be able to predict the movements of the market, buying at the bottom and selling at the top – market timing in simple terms. Unfortunately, it is very difficult to time movements in and out of the market, particularly in periods of extreme volatility.

And getting it wrong can significantly affect the performance of investments. Selling at the first sign of a downturn can prove particularly bad. Sharp falls in markets are often followed by sharp gains. While it may be tempting for investors fearing further losses to sell their investments, they risk locking in losses and missing out on gains.

In for the long haul

The long-term performance of equities demonstrates that there is no need to time the markets; it’s enough just to be in the markets. Research shows that investments made when the market has already begun to recover, and those made when it is still falling, have still paid dividends.

In contrast, waiting for a better time to invest can cost investors dearly as many of the stock market’s best days have come immediately after sharp falls.

And this doesn’t only apply to the UK market. The table below takes the example of other major markets, and shows the pitfalls of trying to time the markets and getting it wrong.

Market Index Fully Invested Missing best 10 days Missing best 40 days
UK FTSE 63.4% 40.0% 3.9%
US S&P 500 56.4% 11.6% -39.2%
Global MSCI World 63.7% 21.6% -26.2%

Source: Bloomberg Datastream. Returns from 1/9/2002 to 28/8/2007

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