Are you paying too much for your pension?

A hot topic in the world of retail financial services right now is the suitability of Self Invested Personal Pensions (SIPPs) when compared to the alternatives of a personal or stakeholder pension. Earlier this week the Financial Services Authority (FSA), who are responsible for investor protection in the UK, issued a warning to advisers that they should carefully examine SIPP charging structures to determine whether or not a personal pension or stakeholder pension might be a cheaper alternative.

A SIPP is basically a very flexible form of personal pension. It allows 'self investment' in a very wide range of assets including commercial property and company shares. Other than this additional investment flexibility, the rules governing a SIPP are broadly similar to a personal pension or stakeholder pension. However, a SIPP can be more expensive than a personal pension or stakeholder pension, particularly for smaller pension funds. This is because many of the charges are often expressed as a monetary amount rather than a percentage. This favours the larger size pension fund.

The danger of focusing solely on cost is that you miss out the importance of value. Selecting the cheapest financial product available does not necessarily give you access to the best value product. In the case of pensions this can mean paying less but ending up with a less functional product without access to a wide range of investment funds. Any investor with money languishing in an old-style pension contract that only offers a limited number of life assurance company managed pension funds will be able to tell you about the importance of having access to a wide range of funds.

One of the most attractive features of a SIPP is not the range of investment options but transparency. All costs and charges within a SIPP should be completely transparent. This gives the investor a real understanding of what they are paying for which enables them to measure value. Within many old-style personal pensions this simply isn't possible, making it difficult to determine what you are paying for fund management, pension plan administration, the sale of the product and ongoing advice.

I was quoted on this subject in The Observer today, in an article looking at the SIPP product from Standard Life and whether this offers good value for money for investors.

Martin Bamford, pensions expert with independent financial adviser Informed Choice, says Sipp charges have fallen steadily and many now cost less than stakeholder and personal pensions. 'Compare the 1 per cent cost of the Standard Life Sipp with the 1.5 per cent charged by some stakeholder pensions for the first 10 years,' he says. 'You just need to be careful about which pension plan you choose for your purposes.'

He splits Sipps into two camps: those that he recommends because they offer a much wider range of packaged funds than stakeholder or personal pensions, such as Winterthur Life's and Scottish Widows' plans, and more sophisticated ones that allow direct investment in shares and property, including schemes sold by Hornbuckle Mitchell, Pointon York and Suffolk Life.

'Standard Life falls into both camps,' he says.

Should we include property when we talk about personal wealth?

The BBC reports today that the personal wealth of UK households has more than doubled between 1996 and 2006, to £6.336 trillion. That's a very big number, but included within that figure is the value of property (after mortgage debt has been taken off) of £2.7 trillion. In fact, over half of the rise in personal wealth during that ten year period was down to house price inflation.

I think that most of us accept that when we talk about property wealth we have to ignore mortgage debt. That is why so many of these 'we will make you a property millionaire' type services annoy me slightly because what they really mean is 'we will show you how to become laden with so much mortgage debt that you own one million pounds worth of property, but actually very little if you ever had to repay the mortgages'.

It is positive to see that whilst property prices have risen, on average, by around 216% during that time, mortgage debt has 'only' risen by 163%. This means that the gap between property prices and mortgage debt has been growing - good news when we are being regularly bombarded with dire warnings about our collective levels of personal debt.

But is there any reason to get particularly excited about this increase in national personal wealth when a large part of it is locked away within property wealth? Owning an expensive property might give you something to talk about at a dinner party but it isn't a particularly liquid asset. Even if you did decide to sell it then you would need to buy somewhere else to live, or use the sale proceeds to pay the rent on another property.

There was a warning last year from The Institute for Public Policy Research (IPPR) who said that one in five retired people living in poverty in the UK own a property worth in excess of £100,000. This is what we refer to as being 'asset rich but cash poor'. Whilst at face value the simple solution would be to sell the property and buy a cheaper property, freeing up some of the value to subsidise income in retirement, this can lead to a serious reduction in means tested benefits.

Real personal wealth is about much more than the value of your house. It is about having a diversified set of assets ranging from the liquid (including cash) to the not-so-liquid (including property and pension funds).

Is it a problem that personal debt exceeds Britain's GDP?

I was quoted in the Atlanta Journal today, in an article looking at how our levels of personal debt now exceed GDP. It is well reported that the Americans have their own problems with personal debt in the wake of the sub-prime mortgage debacle. However, over the past week our friends across the pond have started taking more of an interest in the health of our own economy.

Earlier this week Alan Greenspan, the former head of the US Federal Reserve, was forecasting doom and gloom in the UK housing market and the potential for our interest rates to hit double figures. This followed the Tories recently claiming that "Under Labour our economic growth has been built on a mountain of debt".

Interest rates in the UK have been on the rise for the past couple of years. The recent worldwide 'credit crunch' is set to make mortgages much harder to obtain for people with anything less than a perfect credit history.

How much of a problem is it that the total level of personal debt in the UK now exceeds our GDP?

The majority of people I speak to give the impression that they are quite comfortable with our 'debt culture' and their own levels of personal debt, even though this probably holds them back from reaching other financial goals and objectives.

Greenspan on the UK housing market - was I a little hard on an old man?

I feel that I may have been a little bit hard on an old man earlier today. A journalist called me this morning to ask for my thoughts on comments from 81 year old Alan Greenspan, the former head of the US Federal Reserve. You can read what he had to say here.

I responded that it is a bit rich of him to start prophesizing doom in the UK housing market when the main problems rest in the US. Unlike the US, we were not lending to people who had no means to meet their mortgage repayments. The 'credit crunch' started with irresponsible lending practices in the US. He should spend more time commenting on the economic problems faced by the US and stop trying to divert attention away from their own fragile housing market.

He was bound to make some fairly controversial comments in order to publicise his memoirs, which are being published shortly. The prediction that UK interest rates will hit double figures to control inflation is ridiculous and inflammatory at a time when the UK economy is becoming increasingly nervous.

This is the first, and most probably last, time I have ever heard Gordon Brown described as having made an 'intellectual journey' in respect of the UK economy. The Tories were right when they claimed that recent economic success in the UK was based on a 'mountain of debt' encouraged by Brown.

What do you think about what Greenspan had to say? Is the UK housing market heading for a crash?

When £125 million goes to waste

According to some research published today, about £125 million will be wasted by parents not taking advantage of the full tax breaks of their children’s Child Trust Funds in 2007.

Hearing about wasted tax breaks is never a surprise. I am constantly shown figures that suggest we are all paying the tax man far too much in unnecessary income, capital gains and inheritance tax.

What makes this particular wasted tax break worse is the fact that only 71% of new parents have opened a Child Trust Fund account for their children since their introduction back in April 2005. If the Treasury offers you 'free money' to invest for when your child reaches their 18th birthday then not taking it is really inexcusable. Find out more about the Child Trust Fund at the official Government website here.

There is a useful online tax wastage calculator available here. If you think that you might be paying more tax than you should be, then use the calculator to check it out.