Just had a meeting with a client that I first met last year when he was looking for an annuity as his 65^th birthday was early January. He just wanted to talk about the capital he had received as part of his pension commencement lump sum, (tax free cash), as he wanted to invest that for the medium term, hopefully to beat inflation.

The nicest thing he said was that he had been comfortable with the process and that I had answered all of his questions, often before he had asked them!

He had picked Bankfield off the Internet but was initially apprehensive about both the advice process and the potential costs. After the initial meeting at the client’s home and my early responses, he was both reassured and encouraged to make a series of better informed decisions than his initial knee-jerk reactions.

As IFAs, it is vital that we offer advice AND education to both our clients and potential clients as there is no personal help and advice out there than does not have an agenda likely to be at odds with the actual client needs.

Education needs are met, at least in part, by the Money Advice Service, www.moneyadviceservice.org.uk, but this cannot give regulated advice, nor does it actually execute anything, so it is only a source of information.

The client mentioned above and others in my experience, really value the ability to have a 2 way conversation with a human being who can tailor the conversation to fit the needs, desires and vocabulary of the person who is actually paying.

The proof of this pudding is like many other IFAs, I get quite a number of referrals from existing clients, happy with my recommendations and performance and are keen for their friends and relatives to benefit from that same quality of advice and support.

Contact me with queries
If anyone is looking for general advice, then please write in to the blog and I would be happy to help with anonymous advice posted here. Alternatively, please call us on 0116 253 5600 and ask to speak to an IFA, (Independent Financial Adviser), for a no-obligation discussion.

If you know you need formal advice, have a look at http://www.bankfield.net/ or ask around for a recommendation, it might even be me.

An article on a non-financial website caught my eye a little while ago as the subject is dear to my heart and I feel it deserves a wider audience.

http://www.theregister.co.uk/2011/09/05/half_of_workers_unaware_of_pension_auto_enrolment_reforms/

The Register is an IT orientated website and usually you can expect the discussion to be robust, well informed and sometimes rather humorous, but sadly I feel disappointed by the responses in the comments section. One of the more sensible comments was:-

Pensions just don’t make sense as a concept any more #

Posted Monday 5th September 2011 09:52 GMT

They were fine when you worked for one company your entire life and retired at 65 and died at 67. They don’t work any more. Yes, save, but don’t tie it into an annuity, keep it handy, you’ll never know when you may need it.

Old idea is old. New idea please – one that keeps track with the notion that I may live for 20-30 years AFTER retirement?

I think I understand what the writer is getting at, but I don’t agree that pensions make no sense. Once money is in a scheme you cannot spend it until 55 at least, but these days you don’t have to buy an annuity. There are very few ways you can save without paying tax on the earned income used to pay for it but pensions allow you to put in money without any deductions for tax or gives a refund if your premiums are already tax paid!

Agree #

Posted Monday 5th September 2011 10:11 GMT

I wish I could use the cash in my pension to pay off the mortgage on the family home. But apparently I’m not allowed to access my pension savings, the reason being ‘just because…’.

The rest of the explanation is presumably ‘… because we’ve gambled all your savings on the stock market, and spent it on bonuses for us, so there’s none left for you sucker’.

At 55, you could use the tax-free cash, (25% Pension Commencement Lump Sum), to pay down your mortgage. If I was your adviser I’d possibly suggest it if it made sense for you and your circumstances. That you cannot now suggests you are too young and the government is worried you’ll spend it on junk you don’t need, (like the rest of the feckless population!).

I really like the next contribution as it explains quite clearly the choices to be made:-

I’m glad I bit the bullet.. #

Posted Tuesday 6th September 2011 09:16 GMT

…sure I got the feeling I was being ripped off for all the years I paid into a pension but I am now retired on about about 60% of my final salary. I remember thinking when I was paying in around 20%-ish of my salary “Is this really worth it?”, especially when friends were going for fancy holidays three times a year and buying a new flash car every 3 years – while I went away once a year and made my cars last 10 years. But I stuck with it and now I feel relatively comfortable (definitely not “well off”) and secure. I also stretched to pay off my mortgage early.

Friends who did nothing are now in a bind, they have the minimum company pension (around 15-20% of their final salary and are wondering how they are going to survive. I retired early (I had just about enough of the company I worked for) – some of my friends will have to slave on to the bitter end of their 65th birthdays and then even beyond if they want a reasonable lifestyle.

Would I have done anything different? – probably. I should have diversified – some into the company pension scheme and invested some in property – and tried to invest even a bit more than I eventually did (say 25-30% of my income).

Sorry if all this seems a bit of a preach or smugness but I was just lucky. I didn’t understand this pensions stuff – I just stuffed some money into it and got on with my IT’ing around the world. But suddenly one day you discover – without warning it seems – you are retired and you have no more salary coming in – shock horror. What must have is a plan, any plan, maybe a pension, property, a croft in the Shetlands -whatever – but it must be a plan! When you are in your 30′s or 40′s it seems that you will go on working for ever – you are everlasting, you are invincible, but it does end, and end suddenly.

So there you are; you have a choice, enjoy life beyond your ultimate means or save a bit!

Now for a bit of life planning;

1. Save yourself an emergency fund,

2. Then get out of debt as fast as possible, (don’t worry excessively about a small mortgage, think of it as a rent substitute),

3. THEN save for a pension.

Use a bit of intelligence, so if your employer is offering to match contributions or pay in more, take them up on the offer as it is as near as you will get to free money, even if it is not exactly at the right time.

For a very small minority a pension is a waste of time and money, but this minority will typically be dependent on state benefits until they die. If you are happy with that thought, then I am no use to you; if you have loftier ambitions, I can save you both money and effort.

Risk Warning: A pension is a long-term investment and the fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation. The basis of pension tax relief is dependent on personal circumstances. 

Contact me with queries
If anyone is looking for general advice, then please write in to the blog and I would be happy to help with anonymous advice posted here. Alternatively, please call us on 0116 253 5600 and ask to speak to an IFA, (Independent Financial Adviser), for a no-obligation discussion.

If you know you need formal advice, have a look at http://www.bankfield.net/ or ask around for a recommendation, it might even be me.

There has been a bit of a fuss in the press recently about the falling annuity rate, with the best article in my opinion in the Telegraph on Saturday 28^th January 2012. The original article is at:-

http://www.telegraph.co.uk/finance/personalfinance/pensions/9044601/How-to-beat-the-annuity-rate-crisis.html

My favourite quote from this article is the quote from an annuity provider:

“Those delaying annuity purchase in the hope that rates will improve might just as well sprinkle fairy dust on their pension and hope this boosts their retirement income.”

Coming back to more earthly matters, how do you make the best of a bad job? An annuity being a bet between you and the provider on how long you will be around to want your monthly income.

Firstly, do you really want a conventional annuity, as the alternatives may be a better bet? If you are strongly risk-averse, then annuities are the default choice, but returns of less than 6% can be matched with alternative investments using an element of equity exposure. This would suggest to me that you ought to take your full tax-free cash from your pension pot, (Pension Commencement Lump Sum, PCLS), and put it in an alternative investment or use it to pay down any debt.

If you still want the guarantees from a conventional lifetime annuity, make absolutely sure that you explore the Open Market Option and Enhanced Annuities, as these should bring your retirement income up as high as possible. An IFA that specialises in annuities should follow this road as a matter of course, I certainly do and often I’ll suggest that a potential annuity purchaser goes for health screening beforehand. High blood pressure, high cholesterol or diabetes will make a dramatic difference to the annuity rate, even if you are otherwise healthy. If you are going to give up smoking or drinking, do it AFTER you have purchased your annuity!

If the income rates are not palatable, then look at With Profit annuities, or Asset Backed annuities as a way of increasing income and sharing some of the investment risk. All of the asset-backed annuities I can see offer a “back-stop” guaranteed income, so your level of investment risk is capped.

If you think your health will deteriorate over time, then a fixed term annuity might be of interest, say 5 years or to 75 years old, but you may find yourself chasing falling annuity rates with an ever-decreasing fund if things go badly.

Highest on the risk scale, but also highest on the flexibility scale is income drawdown, but to work this well, you need to be able to accept significant investment risk AND have a pension fund large enough to offset the considerable costs that can be incurred.

As an IFA that spends most of their working day looking at people’s retirement income plans, I would suggest that you look hard and critically at your retirement options and get advice early. An annuity purchase is a one-off transaction, with you then committed for life. As most people will only buy one or two annuities in their lifetime, you cannot learn on the job and there are no second chances. I advise on annuities every day of the working week.

Contact me with queries
If anyone is looking for general advice, then please write in to the blog and I would be happy to help with anonymous advice posted here. Alternatively, please call us on 0116 253 5600 and ask to speak to an IFA, (Independent Financial Adviser), for a no-obligation discussion.

If you know you need formal advice, have a look at http://www.bankfield.net/ or ask around for a recommendation, it might even be me.

Right, we have gone through the various types of protection assurance available and covered most of the standard pitfalls above, so how does this relate to your circumstances?

Everyone’s circumstances are different and all I can illustrate here are general principals, not hard and fast rules, nor offer individual advice, so don’t read into this more than there is. Ultimately, getting proper independent professional advice based on your own individual circumstances is by far the best option:-

Scenario 1: Single man, late 20s, no personal debt, in good health, parents divorced and estranged, with a budget of £150 per month.

Solution: As this client has no debt and no dependents, all protection needs to be geared around his needs, especially as the Bank of Mum and Dad is probably not available. Income protection is paramount, with life cover and critical illness as a secondary issue to cover a potential future mortgage at today’s rates or to provide a lump sum if he gets seriously ill, but it does not kill him.

Reasoning: The client has no family to fall back on in adversity and will need to make provision for his own care if his health fails. Buying life cover when healthy is a good idea if there is a need in the near future; a mortgage for a new house and critical illness cover would be sufficient justification, (life and critical illness is often cheaper than critical illness on its own and remember, most life and critical illness quotes are on an “accelerated basis”, only one payout, whichever is the sooner).

Scenario 2: For a couple in their early 20s, in good health with one young child, a large mortgage, credit card debts for furniture, both parents working and a budget of about £100 per month.

Solution: First priority is the clearance of all capital debt, then the replacement of lost income, then income protection for sickness. The available budget is the key issue here, so there will need to be some juggling between products, but in outline, a small level term assurance in joint names to clear any capital debt, then a Family Income Plan in joint names for the lost income, probably written to retirement age and two income protection plans to cover to retirement age.

Reasoning: If the worst comes to the worst, benefits will provide a basic living if you are unable to work, but do not provide a lifeline for mortgage or other debts, so clearing that is paramount. Replacement of income is the next priority after a death, as benefits are not generous if the partner/spouse has died. A family income benefit is the cheapest form of life cover and will meet that need. If there is any budget remaining, then income protection for sickness is the next need. Critical illness will be too expensive for this scenario and income protection is likely to cover most of the risk in any case.

Scenario 3: A married couple in their 30s, both working, he is a civil servant, she is a part time administrator, 2 young children, a new 25 year interest only mortgage and already have a mortgage protection plan, (MPPI), for 25 years. Budget is very tight, as they have just bought a new, larger house, so no more than £100 per month.

Solution: First priority is the clearance of the mortgage, which the MPPI may do, so the details must be checked to ensure that cover is not duplicated. If the MPPI only covers sickness income, then a life plan in joint names will need to be added to clear the full mortgage; in any event the value of the MPPI plan should be assessed, as some are poor value and should be cancelled and replaced if necessary. Next priority is income replacement on death, so a Family Income plan in joint names to their retirement age(s). As a civil servant, he will have significant death in service benefits, so the income cover may be reduced. After about 5 years service, he will also be entitled to 6 months full pay and six months half pay in the event of sickness, so an income protection plan could be deferred significantly, reducing premium. If the budget allows, she should be provided with an income protection plan on a suitable deferred period, but the couple may choose not to cover her sickness. Medical insurance through Benenden Trust is available to public sector employees at very reduced rates, so they should look to that as a part of their financial planning.

Reasoning: Although they have already some cover in place, the adviser must check that it is appropriate and economic. The existing MPPI may cover all of the necessary bases, but it is generally only available to cover the mortgage payment, not general living expenses and may or may not cover life claims. Benefits available as part of employment should be assessed as part of the financial planning process and gaps filled rather than cover duplicated. Other than the above, the issues are similar to Scenario 2 above.

Scenario 4: A couple in their 50s, with two children over 16, but not yet fully independent, he runs a business that generates a good income and contributes to a pension, she is a housewife, they have a repayment mortgage with 10 years to go. The total household assets are in excess of £1.5Million and the husband has recently been diagnosed with heart and cholesterol issues. There is some life cover in place, a level term assurance in his name with 10 years to go, worth £100,000, slightly more than the mortgage.

Solution:  The first priority is to make the best use of the existing plan. If the plan is not already written in trust for the remaining family, it needs to be, which should be an administration procedure. The next priority is income replacement for the wife and children, so the terms of his pension need to be examined and cover tailored to match any remaining gaps. The wife can be provided with income protection on a “homemakers” basis to cover her potential illness. The potential Inheritance Tax, (IHT), issue in the event of a early death for both parents needs to be addressed, especially as the second death will be the trigger event.

Reasoning: Protection after any diagnosis of serious illness will be very expensive, if you can find anyone to offer cover at all. The family assets suggest that there may be a potential Inheritance Tax issue, so adding a further £100,000 to his estate on death would be a major error, an additional £40,000, (40%) in tax would be payable. If the policy was written in trust, the proceeds would fall outside of his estate and would be available to his dependents immediately, without having to wait for probate. For many insurance providers, trusts are available “off the shelf”, so assigning the plan will be a simple administration procedure. In the event of his death, his pension assets would normally be available to his spouse, so that may offset any income requirements, but she can be insured in her own right at ordinary rates. The IHT issue can be addressed with a second death life plan in the short run and IHT planning over the next 7 years. (The Financial Services Authority do not regulate Inheritance Tax Planning).

Reasons to be cautious

If the person trying to sell you protection insurance cannot give you a clear explanation of why you need it and how much, then DON’T BUY IT! I won’t argue with the normal bank proposition that life cover is a good idea, but I will dispute how much and where from. Doing a protection review in a systematic manner, putting the needs of the client paramount will usually come to a different answer than just enough to clear the loan! If you have made the decisions, remember that a comparison website cannot give you the various factors that should influence your product, option and sum assured choices, it’s just a robot to give you rates. You cannot sue it if you get your cover wrong and you cannot discuss your ideas and ambitions with it either.

Discussing your individual circumstance with a qualified IFA will ensure, (by statute), that you receive the best possible advice that recognises your personal circumstances, needs and minimises the potential for inappropriate cover.

Contact me with queries
If anyone is looking for general advice, then please write in to the blog and I would be happy to help with anonymous advice posted here. Alternatively, please call us on 0116 253 5600 and ask to speak to an IFA, (Independent Financial Adviser), for a no-obligation discussion.

If you know you need formal advice, have a look at http://www.bankfield.net/ or ask around for a recommendation, it might even be me.

Accident, Sickness and Unemployment, (ASU), income protection or permanent health insurance, (PHI), are regularly misunderstood, firstly because they can be quite complex and also because, once you are past the basic principles, there are lots of potential pratfalls for the adviser and the client.

Firstly some shared basics; you can typically get assured a maximum of 65% of your normal income from employment; as you will not be taxed on this, it will be close to your normal take home pay. Some policies will take State benefits into account, others will ignore them; and all policies will have a deferred period, (a waiting period), where benefits will not be paid out. The deferred period is usually at the policyholder’s discretion at the start of the plan. A final common thread is the need to be able to prove your normal level of employment income; for a number of policies this will be at point of claim, so if your income fluctuates significantly by months or years, you could be lucky or very unlucky. Get advice to ensure that these quirks work for you or at least are addressed.

Accident, Sickness and Unemployment

Taking ASU first, this is often sold by lenders wanting to ensure that their debts are paid. In this context, ASU is often known as Payment Protection Insurance, (PPI), Mortgage Payment Protection Insurance, (MPPI), or a “fully protected loan”, which would commonly also include life cover. There is much scope for ASU to be oversold and under-advised, so even I, as an experienced IFA, am wary of most of these policies.

ASU is normally renewed monthly and will pay out claims for 12 or 24 months only. You can guarantee that once you have made a claim you will not be allowed to renew! For some people this will be ample, but be aware, there is an alternative. The cost of these plans is driven by the amount you want to insure, (usually to a maximum of 60% of normal income or the full monthly mortgage or loan repayment). A smaller sum guaranteed and longer deferred period will give a lower premium.

You will not be able to get an ASU plan if you are already sick, under notice of redundancy, in generally poor health or self-employed. In many cases, early claims will be declined, as they will be considered as a pre-existing condition, usually known as the “waiting period”. Unfortunately, there is no substitute for reading the fine print, so ignore the pretty sales brochure and look for the fine type in the Key Features document.

As you might guess from this write-up I am not a fan of ASU plans; in a previous life I worked for a wholesale packager of insurance plans for ASU, selling policies via loan companies and estate agents. Unfortunately, the low premiums to the underwriters and the high relative commission to the retailers meant that the product was often “pressure sold”, but to keep claims costs down, every claim was investigated by the underwriter, leading to delay and sometimes refusal.

It may be trite, but the most expensive policy in the world is the one that doesn’t pay out when you really need it.

Income Protection

This will pay out on being unable to work due to ill health, not redundancy; it will normally continue to pay out the sum assured until you get better and return to work or you retire or in the worst case, die. Most companies will limit the sum assured to between 45-65% of your normal income and will have deferral periods of 0 to 24 months. For the self-employed, two weeks deferred back-dated to day one of sickness is often available, although the cost will be high compared to a normal deferred period.

As the biggest asset most people have is their ability to earn a living, I strongly believe that these policies are undersold by most advisers and under-bought by the population as a whole. Remember, 45 years at £25,000 per year is £1,125,000; even at average industrial wage most employees will have over a £Million pass through their hands. A broken neck from a car accident or MS at 25 will make a mess of your annual earnings and your eventual retirement.

The key to buying this product well is to match the sum assured with the sickness benefits provided by the employer. If you are self-employed, this is easy; how long can you hold out on your savings? Remember accepting a longer deferred period will bring your premium down significantly, so don’t ask for day one cover blindly. For the employed, you need to find out what sick pay is available from your employer. The most generous employers will give 1-6 months at full pay and then 1-6 months at half pay; if you can survive for 6 months to a year on your employer’s sick pay, then your deferred period can be that much longer and your premium much lower.

I cannot emphasise enough the value of professional advice when buying products like this; any product from a reputable provider will be much better than nothing, but a complete understanding of weasel words like ‘Own Occupation’ or ‘Suited Occupation’ and ‘Activities of Daily Living’ will flag the difference between an OK plan and an excellent plan.

In this marketplace, I am a particular fan of the Mutual or Industrial Friendly Societies, some of whom have only one product, an Income Protection Plan. This is where assurance for the workingman started in the mid-Victorian era and the business model holds good today. These policies are often poorly advertised and so are not fashionable, but if you are a self-employed building industry tradesman or a factory worker with Statutory Sick Pay, (SSP), only sickness benefits, they can be a life and sanity saver.

See the next exciting episode for tying together the loose ends.

Contact me with queries
If anyone is looking for general advice, then please write in to the blog and I would be happy to help with anonymous advice posted here. Alternatively, please call us on 0116 253 5600 and ask to speak to an IFA, (Independent Financial Adviser), for a no-obligation discussion.

If you know you need formal advice, have a look at http://www.bankfield.net/ or ask around for a recommendation, it might even be me.

So, I’ve written about basic level term assurance, (usually known as LTA, where the sum assured is the same from the start of the term to the end), so now I’ll look at some of the variations available:-

Other Policy Types

Decreasing Term Assurance, (DTA), or ‘Mortgage Term’ or Mortgage Protection Life Insurance; here the sum assured goes down over time, either in a straight line or in accordance with mortgage repayments. The idea being, if you are covering a debt like a mortgage, the sum assured tracks the debt remaining to be paid, these are typically suitable for repayment mortgages. Premiums are calculated against an assumed mortgage rate, often these days 10%. As long as the mortgage interest rate does not go over 10%, the sum assured will be sufficient to clear the outstanding mortgage. As mortgage rates can exceed 10%, you should never be complacent. Premiums for a DTA, will be less than a LTA, as the insurer’s risk is lower and reduces over time.

Family Income Benefit: These plans pay a fixed sum every month from the date of claim to the end of the term selected. They are an effective and economic solution for a family who wish to protect themselves from loosing the breadwinner(s).

Policy Options

Indexation: This is where the sum assured can go up over time, often based on a fixed percentage or the Retail Price Index, (RPI). For almost every plan in the marketplace, the premium will go up as well, so your cost is not fixed. For long periods of cover, this is a good idea, as the sum assured will go up, without having to buy a new plan and having to pass any new medical screening.

Remember, all insurance premiums are based on age, sex and health, so therefore it is advantageous to buy a protection plan when you are young and healthy and keeping the plan current for the full duration of the term. Reductions in the long-term cost of life cover mean that there is some mileage from shopping around every five years, so long as your health has not deteriorated.

Guaranteed or reviewable premiums: Either the premium remains the same for the full duration of the plan, (guaranteed), or the provider has the ability to increase the premium according to their rate table at the point of review, often every 5 years, (reviewable). Guaranteed premiums often start at a higher cost to reviewable premiums, but for reviewable premiums, the rate of increase will rise as the policy goes on for longer. Reviewable premiums can be a trap for the unwary as health issues may be reportable and the increases with age can be significant. If you are using a comparison website, make sure you are comparing like for like. Bankfield policy here is to opt for guaranteed premiums, as there will be no surprises later on.

Waiver of premium: If you are unable to work, normally for 13 or 26 weeks, the provider will then deem to pay the premiums, until you return to work or a claim is made. Bankfield policy here is to opt for waiver, as normally the cost is low compared to the potential value. Again, if you are using a comparison website, make sure that you are comparing like for like.

Critical Illness Cover: usually sold with life cover as an addition, but can be found as a standalone cover. Critical Illness Cover, (CIC), will pay out on diagnosis of a number of specific diseases and a specified level of severity. There are three approaches in the marketplace, Association of British Insurers, ABI Core, ABI Core+ and the Serious Illness Cover offered by just one provider; so comparing like for like is almost impossible. Each company will have its own application form, underwriting and claims and premium policy, so a raw monthly premium is a poor way to assess the value of one plan versus another.

The basis for understanding the difference between a good plan and a poorer one will be an assessment of the likelihood of a payout, its value and the premium cost. As a general rule, more illnesses covered is better, less severity is better and higher payouts are better, but these are normally mutually exclusive. Every policy will represent some form of compromise, so get professional advice or pay your money and take your chance.

If you already have an older critical illness plan, say 2005 or before, DO NOT be in a hurry to cancel it as the criteria for a settlement on a claim were generally much more favourable. To put this in perspective, I have an older CIC plan for £250,000, which I have topped up not replaced. If you hear siren voices to cancel and replace an older plan, be afraid and check the commission!

Bear in mind that you will have to survive for 14 days following diagnosis to obtain a settlement and that once the critical illness cover is paid out the life cover will normally lapse, known as quoting on the accelerated basis. It is possible to get quotes on an ‘additional basis’, (two payouts, one on critical illness diagnosis and one on death), but there will be significant additional cost as higher monthly premiums.

See the next death-defying installment for the delights of Accident, Sickness and Unemployment cover and income protection insurance.

Contact me with queries
If anyone is looking for general advice, then please write in to the blog and I would be happy to help with anonymous advice posted here. Alternatively, please call us on 0116 253 5600 and ask to speak to an IFA, (Independent Financial Adviser), for a no-obligation discussion.

If you know you need formal advice, have a look at http://www.bankfield.net/ or ask around for a recommendation, it might even be me.

Every time you go into a bank or building society, the contact person behind the counter will ask “if there is anything else today” or they will ‘invite’ you to have a ‘financial review’. The cynic in me says that they are just hoping to sell you another of their products, which is why I coach my clients to say “No thanks, I have an IFA”, and then to walk away.

Sadly, statistics show that most people are underinsured, possibly due to a lack of unbiased, independent advice.

Much as it galls me, most protection policies are sold by the banks and building societies, normally as an adjunct to a mortgage or a loan, with both of these making considerable profits from this up-selling. Going to a comparison website for protection policies will save you money, however, without personal advice, these are generic, off the shelf, one size fits all products. At no point are you guaranteed the most suitable policy for your circumstances, here at Bankfield, we are legally obliged to provide you with the best possible advice.

Banks and building societies ultimately act for themselves, wanting to make a profit from you and cover their risks if you die or fall ill. The policy they sell you is more likely for their benefit than yours. Their priorities will be to protect their loan rather than your lifestyle.

As an IFA, my priority is to find the best product for you, bearing in mind your situation, budget and aspirations and if I do not do the best I can for you, you can complain and ultimately the Financial Ombudsman Service will direct me to provide compensation for miss-selling. Although I still need to make a profit, I can only make a profit from serving your best interest.

If you would rather assess your needs yourself, then seek specific advice, start by going to www.moneyadviceservice.org.uk and completing the “Health check”, https://healthcheck.moneyadviceservice.org.uk/?. Answer the questions and print off the final report and bring it to me. This is an excellent basis to start from and I am always delighted if someone comes in to see me with this as it gives me the key background information.

So, what is protection? This covers the provision of life insurance, critical illness plans, income protection, ‘keyman’, mortgage protection, family income benefit and the good, old-fashioned endowment plan. All protection plans need to be taken out in advance: once you are dead, you cannot have life cover! As a general rule, the younger and healthier you are the cheaper it is, so buy it as soon as you can.

At its simplest there is level term life assurance. Assuming the premiums are paid on time, this will pay out a fixed sum, (the sum assured), if the insured dies during the term of the plan. So let us have a look at each of the basic variables; the term, the sum assured and the insured.

The term; how long should the plan run? In simple terms, for as long as you need it! For a mortgage, for at least until the mortgage is repaid, the same applies for any other loan. If it is more of a lifestyle thing, (keeping the spouse and offspring in the manner they have become accustomed), then to normal retirement age, as after that you will not be earning new money but drawing down on your pension. Extending terms past 65 tend to be more expensive so be aware of policy pricing.

The sum assured; how much? In an ideal world, enough to cover any debt you have and enough to cover any loss of earnings because you were ill or had died. In practice, the premiums to cover the full loss of income would potentially be prohibitive. Often we would suggest a capital sum large enough to produce an income sufficient to cover the majority of the income lost, assuming a return of 5% per annum. Say you were earning £25,000 per year, you need to arrange for a £500,000 sum assured to give an equivalent income. At this point, your budget is likely to be the most important influence, but the general message will be “more is better”, with the loans covered as a minimum. (The state benefits system is unhelpful with capital debt, although it will assist with basic living expenses).

The Insured; whose life is covered anyway? For a couple with children, both partners should be covered, as the death or serious illness of either of them will be devastating for the family unit. Insurance requires there to be an “insurable interest” between the insured and the policy owner, but for a couple this is self-evident. Insurable interest is where there is a relationship between two parties, a couple, a creditor and a debtor, an employer and employee and similar arrangements, where a financial loss may occur if the subject of the insurance is damaged/destroyed. More importantly, the insured does not need to be the policy owner and in some circumstances, they would be better separate. For most families I would strongly suggest a trust, as probate can take months or years and after a death, the survivors need the money quickly.

See the next exciting instalment for the standard variations on term assurance.

Contact me with queries
If anyone is looking for general advice, then please write in to the blog and I would be happy to help with anonymous advice posted here. Alternatively, please call us on 0116 253 5600 and ask to speak to an IFA, (Independent Financial Adviser), for a no-obligation discussion.

If you know you need formal advice, have a look at http://www.bankfield.net/ or ask around for a recommendation, it might even be me.

I’ve been to a seminar recently where one of the delegates was complaining that all too many business people and come to that, much of the general public, say either:-

My business is my pension

Or

My house is my pension.

As soon as almost anyone mentions pensions, probably half the population glaze over and do the “I’m not listening, I’m not listening” recital in their heads, a quarter think they are fully set up with their current arrangements, leaving the remainder either being too much in debt to worry about anything else or having some other matter dominating their thoughts.

So, imagine you are a self-employed electrician or plasterer, (almost any other sole trader will do), who is doing all right in the current market conditions as you are good at what you do and have a good reputation. As a sole trader, there is no difference between your personal and business assets, so if your business fails, say a big debtor goes bust and does not pay, you go bankrupt, perhaps at the instigation of HMRC or some other creditor of yours.

Imagine instead of the bankruptcy scenario above, you put money away every week/month/year in a Trust that kept your money safe, even after bankruptcy, so you could get money when you are over 55 or give it to your family if you died.

Now that sounds like a great idea doesn’t it?

Well, that is a PENSION, just dressed up a different way!

If you ARE the business, like an electrician, plasterer or web designer, then selling the business will be very difficult in any case. You need to extract value from your business some other way than just selling it as what do you have to sell?

Back to the “My house is my pension” folks. How are you going to get cash to live off from your house?

Equity release? Trading down? Moving to a rental property? All of these are possible but will cause extra cost or effort. Houses are awkward to sell, hard to sell off just a little bit of and usually most people get a personal, emotional attachment, making the decision to sell just that bit too hard.

Putting cash away in a pension is not the most fascinating thing to do with your money, but may easily be the best, most tax efficient and flexible way to provide for a long retirement.

One little thought to file away; for 10 notional retirees at 65 today, on average, the first will die at 69 and the last at 99, so retirement could be a long time! •(Source: Allianz of America, April 2010, quoted by the Money Advice Service MTMOYM 20/09/2011)

As for investment returns/losses losing all of your money, please understand that your ultimate pension will be the product of the amount you have saved, the tax relief, the investment growth, less the charges, less the tax free cash and after you have bought an annuity, (or the income stream from a drawdown). Any one of the elements could be worst than expected or less than the best, so all need to be checked at regular intervals, say every 2-5 years. So, either brush up on your pensions or get an IFA and use them!

Most business people are aware of keyman insurance and understand that in some circumstances the premiums can be fully allowable against tax and won’t appear on their P11D. This insurance is for the BUSINESS, not the life assured, so isn’t terribly helpful as financial planning for the people themselves. To qualify as “wholly, necessarily and exclusively”, so the premiums are allowable for tax, is very restrictive, so most business owners stand the premium cost themselves and pay tax and National Insurance on the income used to pay the premiums.

There is now a situation where you can have life cover, with the premiums probably allowable as a business expense! Several providers have launched a new product for business protection, which can only provide life cover for an individual, but it is treated as an alternative to pension based Death In Service cover. For small business owners that cannot have a Death in Service plan in place or for higher earners who are trying to maximise pension contributions outside their annual allowances, this plan is a real step in the right direction. To be really useful, it has to be written in trust, but this is no hardship, as this will keep the proceeds outside the individuals’ estate for IHT purposes and payment does not need probate, so it will be quick.

It won’t be suitable for everyone, but business owners should find out if it will work for them, as a matter of urgency.

Contact me with queries
If anyone is looking for general advice, then please write in to the blog and I would be happy to help with anonymous advice posted here. Alternatively, please call us on 0116 253 5600 and ask to speak to an IFA, (Independent Financial Adviser), for a no-obligation discussion.

If you know you need formal advice, have a look at http://www.bankfield.net/ or ask around for a recommendation, it might even be me.

Three things to think about:

I drop dead, most of my assets are wrapped up in the company, how do my dependents carry on?

My Sales Director drops dead, how do I survive until I replace him?

My fellow shareholder drops dead and his wife wants me to buy her out at the last company valuation, how do I find 50% of £5Million?

Coping with “I drop dead”

If you work for a big company or in the public sector you will have Death in Service benefit, which pays out to your dependents if you die in harness. It is more unusual in small businesses and impossible to get Group terms with fewer than 5 eligible employees. Relevant Life cover gives you death in service benefits, with the premium payable as business expense, so you pay no personal tax for a “personal” benefit. It is not a universal panacea, as there are some restrictions over cover types and total benefit.

Coping with “My Sales Director drops dead”

If a key employee dies, the business may not survive if you cannot replace them in a timely fashion. Keyman insurance provides cash to the company to meet the cost of recruiting and training a suitable replacement or cash to wind up the company in an orderly manner. The premium is a legitimate business expense, so is allowable for tax purposes.

Coping with “My fellow shareholder drops dead”

If your fellow shareholder dies, then either their spouse will want to be involved in the business or they will want you to buy them out at the market rate. If you do not buy them out, then you will be stuck with someone you did not choose, or their placeman. Who needs an incompetent business associate? Shareholder protection and a good shareholders agreement will allow the survivors to give a good price for the deceased shareholders stock and retain full control of the business. The premium is a legitimate business expense, so is allowable for tax purposes.

Contact me with queries
If anyone is looking for general advice, then please write in to the blog and I would be happy to help with anonymous advice posted here. Alternatively, please call us on 0116 253 5600 and ask to speak to an IFA, (Independent Financial Adviser), for a no-obligation discussion.

If you know you need formal advice, have a look at http://www.bankfield.net/ or ask around for a recommendation, it might even be me.