Credit fallout leads to turmoil 

Looking ahead, investor sentiment is likely to remain fragile and bad news will likely meet with a disproportionate level of disappointment. Investors have good reason to be wary in the short term; however, stock markets tend to be driven not by logic, but by emotional factors such as fear: the key is to stay calm, think long term, and be selective. Astute long-term investors should remain objective and remember that, in the words of Franklin D Roosevelt, “the only thing we have to fear is fear itself”.

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UK bank Lloyds TSB has announced it is selling its Abbey Life insurance business for £977m to Deutsche Bank. Abbey Life is a subsidiary of Lloyds’ Scottish Widows unit and has been closed to new business since 2000.

Lloyds TSB concluded that the sale of Abbey Life was in the “best interest of the group, as well as Abbey Life’s policyholders and staff”.

As of 31 December 2006, Abbey Life managed £12bn of assets held in 1.2 million policies, do you own one of the policies? It will be interesting to see what if any benefit there will be for policyholders. If you would like us to review your Abbey Life plan in view of this announcement then please contact us.

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Most people think about retirement as something that there are able to do when they have enough money. The first thing though you really need to think about is what do I want to do in retirement?  

Before you even start thinking about how much money you need in retirement have a real think about what you would like to do. Once you have done this you can then have a realistic view on what income you need. If you know what you want you are more likely to achieve it.

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Every case is different as everybody has different financial circumstances. For some people their pension fund is their sole source of income in retirement, for others it is just part of the picture.

It is important to firstly think about where you can draw from in your retirement and this will help you to decide how secure you need to be with your pension funds. 

The main choice that you have with regard to pensions in retirement is to decide whether you wish to hand the risk over how long you live and how long the income payments need to be made to an insurance company by buying an annuity with all or some of your pension fund; or alternatively, just drawing on your pension funds to provide you with an annual income and perhaps a tax free cash lump sum at the outset. 

Annuities 

Generally if you have a fund at retirement which is less than £100,000 then an annuity may well be the safer option. The main risks you run with annuities are that:- 

• You do not live very long in retirement and you have handed over all your pension funds to the insurance company and therefore they make a large profit.

• You buy an annuity when the calculation to work out how much the insurance company can afford to give you each payment is at an historically low figure, an example of when this would be would be if interest rates were at historical lows.

• You do not buy add-ons such as a pension that increases by inflation and inflation is steep in your retirement years.

• You do not buy an added option of a spouse’s pension when your spouse outlives you for many years, potentially a more difficult situation as they have lost your income stream.

If before you buy an annuity though you think about these factors and are realistic about balancing what you need in retirement, and protecting those around you if they need protecting, then an annuity may well still be a good option. 

Many people are put off by the fact that they have to hand over their pension fund and effectively this is lost. If though you are of normal health and would expect to live a normal retirement then you may well benefit from an annuity. People who live an average or longer than average length of time benefit from effectively their pensions being topped up by those who have unfortunately passed away earlier than expected. The technical term for this is called mortality drag. So annuities are not all bad but are obviously not right for everybody. 

Unsecured Income (also known as Income Drawdown) 

If your pension fund is in excess of £100,000 then an alternative to look at would be unsecured income (previously known as income drawdown). With this type of contract quite simply you have the option to draw a quarter of your fund as a tax free cash lump sum and the remainder of your fund is invested and you draw out an income within a set limit each year.  

The limit will change as you get older as the payment is linked to your age and interest rates. This form of pension income is far more flexible and so you can tailor your income payments to meet your changing financial needs. 

For example if you part retire you may wish to start drawing on your pension but not take the maximum that is allowed until you are fully retired. This would mean that your pension fund would still continue to grow and may mean that you end up with a greater income later in retirement than you may have done if you had purchased an annuity.  

In order to work out the likelihood of this happening a financial adviser would need to provide you with a “critical yield”. This is effectively the rate by which your fund would need to grow to buy an annuity for you at certain ages; usually these are quoted at 65, 70 and 75. 

Unsecured income is a powerful tool which provides those who have had time and the inclination to make pension savings with the flexibility to be able to vary their income to their retirement needs. 

Obviously there are many other ways to invest for retirement, including using your existing investment to provide an income in retirement but obviously these come down to your own circumstances. 

Do you know how much your pensions are worth? Do you know how much you currently pay?Do you know how much your pensions cost you each month? 

All these will have an impact on what options you have when you come to retirement.

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State pensions (particularly womens) have been given a boost with a proposed change to the rules regarding voluntary National Insurance contributions.

Currently there is a six year time limit on paying these contributions. This means that if you did not pay National Insurance in a tax year you are not entitled to any extra state pension income for that tax year, unless you pay voluntary National Insurance within the next six tax years.

Generally speaking though it is not until State Pension Age that people really look at what they are entitled to, by which time it can be long since the tax years that National Insurance was unpaid with no way of making this up. Bearing in mind what good value the State Pension is for most people, this means a lot of people are missing out on a good way to top up their retirement income.

The new Pensions Bill is going to allow people to defer the decision until their own State Pension Age and allow people to buy up to nine years. This will give everyone a great opportunity to top up this pension when they are at a time when they are more likely to have the funds to pay the voluntary contributions. The big winners will be women, currently only 25% of women have a full State Pension compared to 90% of men.

The government may try to overturn the decision but the recent defeat in the House of Lords will make this more difficult.

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Yesterday interest rates were put on hold but will it stay that way? The general consensus is that we will be due one more 1/4% increase to really keep inflation under control.

 The MPC (Monetary Policy Committee) sit down once a month to discuss how to keep inflation stable and the easiest way for them to affect inflation is to change the interest rate. But how will there decision affect you, the answer is in different ways depending on your age. Read the rest of this entry »

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