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.

You need to earn more than £21,888 per annum to be able to save

There was some interesting research from Birmingham Midshires published today, suggesting that 55% of people in the UK do not think they earn enough to save.

The average amount British savers think they need to earn in order to be able to afford to put money away in a savings account each month is £1,824. However, a third (33 per cent) of Brits cited £2,000 or more as the minimum monthly salary they needed to earn to be able to afford to save.

Almost one in ten (8 per cent) people would not put away savings unless they were pocketing an annual salary of £36,000.

It is interesting that the ability to save is often linked to earnings rather than the gap between income and expenditure. Making this gap as wide as possible is the best way to put yourself in a financial position where you can save money each money.

Earning a higher salary is one way to increase this gap but what often happens is a simultaneous increase in expenditure. When people earn more, they spend more!

With savings rates now looking at their highest level for six years, exceeding 7% for some one year fixed rate accounts, now is a great time for savers who can make that gap between income and expenditure just a little bit bigger.

Three bedroom house or two bedrooms and a study?

Changes to the rules surrounding Home Information Packs (HIPs) introduced today look set to cause more confusion and rule bending. This comment from price comparison site moneysupermarket.com just about sums things up:

“Amid all the chaos surrounding HIPs, the Government has introduced yet another amendment that will only confuse matters further. Anyone searching for a three bedroom home might have to look much harder, with a sudden glut of adverts for two bedroom houses with a large study! The Government should bite the bullet and admit, in their current format, HIPs are a disaster."

You can find the official Government website for HIPs at http://www.homeinformationpacks.gov.uk/. This explains that, from today, all homes in England and Wales with three or more bedrooms will require a HIP, including a home energy rating certificate.

There was a suggestion from a property expert on the news this morning that HIPs can cost up to £1000. This example was for a leasehold property in central London and it is typically much cheaper than this, but the wider introduction of HIPs will certainly add an additional layer of cost and complexity to the already difficult home selling process.

Book Review: The 4 Hour Workweek

I was quite sceptical when I first heard about Tim Ferriss and his book, The Four Hour Workweek. You only have to take a look at this biography to wonder how such a young person could achieve so much in such a short space of time.

At only 28 years old he speaks six languages, is a national Chinese kickboxing champion, and a guest lecturer at Princeton University. His book is based on this popular lecture series.

Reading this book will encourage you to evaluate choices you make about work and life. It also causes you to readdress the value of money and why we always seem to desire to earn more.

Time management is a recurring theme in the book and it forces you to ask if you are being productive or simply 'busy'. Both practical and motivational, this book will make you take a long, hard look at what you are doing with your life.

The Four Hour Workweek has not been published yet in the UK but it is due out in April 2008. You can, of course, do what I did and order a copy from the US where it has already made it into the New York Times Bestseller list.

Will it blend? - Credit Cards

They should be called 'debt' cards really.

This couple take an innovative approach to cutting down their debt:

In search of 'good customer service'

Banks. Don't you just love them?

Recent research by Defaqto, the financial research company, has found that bank account holders rate “good customer service” as the most important feature in a current account. This feature came ahead of 'free when in enough credit' and 'a good interest rate'.

My own experience with high street banks over recent years has been mixed, at best. I changed banks for the first time when I was in my teens, simply because they refused my request for a debit card. I have been with my new bank ever since and sometimes they offer a reasonable level of service. On other occasions they have done things so terrible that I have come very close to upping sticks and moving to another bank.

The only reason I haven't moved to another bank (yet) is that I am not convinced that my banking experience would be any better elsewhere. It's a sorry state of affairs when all high street banks offer a poor standard of perceived customer service. If consumers are crying out for this as the most important factor when selecting a bank account then surely banks should be paying more attention to the design and delivery of excellent customer service?

What is your experience of customer service when it comes to your bank?

Teaching kids about money

Children will be taught how to open a bank account, understand basic financial concepts like interest rates and learn important skills to plan for their financial future as part of an £11.5 million boost to personal finance education. This initiative was announced today by Children, Schools and Families Secretary Ed Balls and Treasury Minister Kitty Ussher.

This is a really positive move, in my opinion. When I left school I had no formal personal finance education. The only experience of financial education during my school years was a single lesson when a business studies teacher showed us his credit cards and explained how much money he could borrow on each one - hardly the best thing to teach a class full of impressionable young kids!

If the UK is to get out of the 'buy today, pay later' culture then we need to start with education for children. Debt and poor financial management can have such a negative effect on people as they start their careers and establish a family. Leaving school with a sensible attitude towards money should help people to avoid taking on unnecessary unsecured debt and make much more sensible financial decisions.

£11.5m is probably not a lot on a 'per child' basis, but it's a good start. At least the Government is starting to realise that long-term economic growth can only be achieved when young adults are better at managing their money.

Have UK interest rates peaked at 5.75%?

The Monetary Policy Committee (those seven men and two women in suits who decide how much your mortgage is going to cost you each month) decided today to keep UK interest rates on hold at 5.75%.

This decision was widely expected following weeks of uncertainty in the money markets following the sub-prime mortgage 'crisis' in America. Recent inflation figures also appeared to be showing a slow down so another rate rise probably would have been a step too far.

Richard Dingwall-Smith, the Chief Economist at Scottish Widows Investment Partnership, thinks that the risk of UK interest rates going up again this year to 6% has now receded. He commented earlier:

"We believe that the official Bank Rate has now reached its peak given the developing UK economic background. Growth currently running at a buoyant 3% is set to slow back to a muted pace of little more than 2% in both 2008 and 2009 as the economy responds to the marked tightening of monetary policy seen over the last year."

All of this should mean good news for people with mortgages but less positive news for savers and investors. It will be very interesting to read the minutes of today's MPC meeting, when they are published in two weeks time, to find out how the voting went and if any pressure remains to increase rates one more time this year.

Adapting To The Early Retirement Trend

Pensions have historically been geared up to provide retirement benefits at the traditional retirement ages of 60 or 65. Those wishing to retire any earlier than this will need to bridge the gap with non-pension financial resources. In this article Independent Financial Adviser and personal finance author Martin Bamford considers the main issues associated with early retirement planning.

The Government is currently considering a series of changes to pension rules. These proposals will have serious consequences for anyone considering an early retirement. They include a rise in the State pension age from 65 to 67.

These proposals follow recent pension legislation changes that mean an increase in the minimum age at which you can access pension fund benefits. You can currently take benefits from a pension plan at age 50. From 6th April 2010 this is raised to age 55. There is also a phased increase of the State Pension age for women taking place – from 60 to 65 years old.

These factors, combined with a more general mistrust of conventional pension plans as retirement planning vehicles, have caused many people to seek and consider non-pension alternatives.

Pension plans as a retirement planning tool come with some advantages as well as some drawbacks. Despite all of the modern features that have developed, a conventional personal pension plan still misses the mark for many people. The benefits you can take from a personal pension do not suit everybody and access to these benefits can still be restrictive. The new legislation introduced in April 2006 to simplify pensions did improve things, but there is still an inherent inflexibility when using personal pension plans for retirement planning.

The trend we are currently witnessing towards an earlier retirement comes as we are being told to work for longer and retire later. Early retirement is about personal choice and control. If we accept that a financially comfortable retirement at age 65 is becoming much more challenging to achieve than early retirement at, say, age 55 will require some quite sophisticated planning as well as potentially great cost. It will also require a good deal of determination to make this a reality.

The earlier this planning is done, the better. If the benefits of compounded investment returns (where investment returns are based on previous investment returns) are fully leveraged then plenty of time is required.

The specifics of early retirement planning will depend on your personal circumstances; namely your income, expenditure, assets and liabilities. The financial resources you plan to have available for an early retirement might come from a wide variety of sources; including non-pension investments, savings, a business sale or stake in a property – or possibly even inheritance.

Conventional retirement plans in the form of a personal pension are likely to be geared towards providing benefits at a much later stage than an acceptable early retirement age. In some cases this problem can be very easy to solve. Some of the more modern pension products allow you to bring your retirement age forward, in line with the minimum retirement ages explained earlier, without excessive penalties or charges.

Less modern pension arrangements and occupational pension schemes in general are generally harder to deal with. The result of taking early retirement benefits from these arrangements is, typically, a big financial penalty. If those plans contain a with profits investment fund then those penalties can be substantial.

There are lots of disadvantages to bringing forward your selected retirement age with a pension plan. One big drawback is the lower annuity rate available at a younger age. Annuity rates are partially based on life expectancy so they are better as you get older. You will receive a much lower annuity at 50 years old than you would at 65 years old.

It is also important to think about your investment risk profile. If your pension fund was originally invested with a twenty year time horizon in mind then you were probably tolerant of a higher level of investment risk. Shortening this time horizon by ten years or more will have an impact on how suitable those investment funds are.

If you do conclude that it is not appropriate to bring your pension fund retirement age forward then you could consider bridging the gap. This would involve building sufficient assets to provide an income between the early retirement age and previously selected retirement age.

This approach to early retirement planning actually requires less money than traditional retirement planning because you are trying to build up a capital sum that will be gradually eroded over a predetermined length of time. There are no concerns about building a capital sum and converting it to income.

Martin is joint managing director of award-winning IFA firm Informed Choice Ltd (www.informedchoice.ltd.uk) and author of several personal finance books, including How to Retire Ten Years Early (Prentice Hall, £9.99, December 2007).

This article first appeared on Fresh Business Thinking.com.

Do you have a 'rate shock' mortgage?

Nationwide has coined the term 'rate shock' mortgage to describe the 250,000 people who have a fixed rate deal coming to an end between October and December 2007.

Back in Autumn 2005, when these fixed rate mortgages were taken out, interest rates were at a historically low level. The average rate for a two year fixed rate mortgage back then was only 4.56%. Since then the average has risen by around 1.8% to over 6.4%. If you have a £100,000 mortgage then this rate rise will cost you an extra £110 per month.

However, there is potentially a more serious issue to consider. When a fixed rate mortgage comes to an end you move onto the Standard Variable Rate or SVR. The current average SVR is a shocking 7.75%.

So, based on an average mortgage size of £120,869, mortgage payments could rise from £676 per month (based on a fixed rate of 4.56%) to £913 per month (based on typical SVR of 7.75%) - a rate shock leading to an additional cost of £237 per month.

To avoid this potentially damaging increase to your monthly expenditure you should act early. Don't wait until your fixed rate period comes to an end before considering all of your options. Speak to an independent mortgage adviser who can talk your through all of your choices and options.

Keep in mind that a lot of customers will be scrabbling around for the best mortgage deals towards the end of this year. With the recent 'credit crisis' starting in America and now spreading to the UK, the availability of cheap mortgage rates looks set to be rather limited in the months ahead.

The millionaires who don't feel rich

I found an interesting article in The New York Times whilst pottering about on the web earlier today. The author describes several people from Silicon Valley who, by a traditional definition of the term, are very wealthy but don't feel particularly rich because of the expensive lifestyles they maintain and their relative wealth in comparison to neighbours.

This has created a new phrase - the 'working-class millionaires' who have to keep working (and working very hard) in order to fund big houses, private education for their children and tropical holidays.

This article got me thinking about a trait I frequently see when people receive a salary increase or a bonus. These are people who live within their means at their current level of income but magically increase their expenditure the second more money is coming into the bank each month. Every pay rise results in a bigger mortgage, more exotic holidays or a newer car on the driveway.

I have spent a few hours this week reading The 4 Hour Workweek by Tim Ferris and he explains the importance of relative wealth. Stop thinking about the headline figure of how much you earn and start thinking about the difference between your income and expenditure. Start thinking about what it takes to maintain your lifestyle and how can achieve this in less time rather than work just as hard to earn more and then spend more.

Being a millionaire these days is still quite an achievement (assuming you are measuring wealth in Pounds Sterling and not Zimbabwean Dollars). Understanding exactly how much you need to earn to maintain your lifestyle both today and in the future is even more impressive.

Tracking the stock market

Q I've heard a lot about 'tracker' funds. What are the advantages of using these rather than more traditional managed investment funds?

A Tracker funds are part of an investment group referred to as 'passive' funds. These funds are designed to 'track' the performance of an investment market or index. For example, an index tracker fund might aim to track the performance of the FTSE 100 index - an index which represents the top 100 companies (by size) in the UK.

Investors are becoming more interested in tracker funds as they start to understand that actively managed funds are failing to consistently outperform their targets. By using a tracker fund instead, it is possible to gain access to the same investment returns as the underlying index (less charges) but at a much lower cost.

Tracker funds in the UK are still more expensive than those available in the US, where the market for this sort of investment is more established. Over time we hope to see the introduction of a wider range of tracker funds at much lower charges, offering investors far greater choice.

Protecting my family in the event of a natural disaster

Q The recent flooding has made me worry a lot about how my family would cope, financially, if I was killed in a natural disaster. What can we do to alleviate these worries?

A Natural disasters often focus our minds on the financial impact of death. To give yourself real peace of mind, you can put insurance in place that would pay a benefit (known as a sum assured) to your family if you were killed. There are a few different types of life assurance policies to consider.

The most basic, and cheapest, form of cover is called term assurance. This provides life assurance cover at a set level for a set time. There is no investment element to consider, which reduces the complexity and keeps the costs down.

Before you put some life assurance in place, it is worth carrying out a thorough review of your finances to determine the right level of cover for you and your family. This is often done in conjunction with some 'estate' planning to consider your wills and enduring powers of attorney.

Speak to a specialist advice and you will certainly sleep easier at night.

Child Trust Fund or Motorbike Fund?

Tomorrow, 1st September 2007, will mark five years since children born in the UK have been eligible for a Child Trust Fund.

The actual scheme didn't materialise under 6th April 2005, but all children born on or after 1st September 2002 will have received a voucher of at least £250 to invest in a Child Trust Fund. Or at least their parents will have received the voucher and then faced the decision about where to invest this generous gift from the State.

The money invested in a CTF remains the property of the child but they can't touch it until they reach their 18th birthday. Households receiving the Child Tax Credit get a voucher worth £500 rather than the standard £250. A further payment is made by the Government on your child's 7th birthday.

Because the CTF is a long-term investment, it makes sense to consider higher risk investments. With more risk comes the opportunity to earn higher rewards. Short term stock market volatility may seem like a bad thing if you need your money tomorrow, but not with 18 years to go.

Apart from where to invest the voucher, the biggest decision faced by most parents is whether or not to top-up the CTF account. Parents, extended family and friends can contribute a maximum of £1,200 a year into a CTF. The money invested within a CTF is largely free of income and capital gains tax. This can make it seem like an attractive investment option; particularly if you have already used up your annual Individual Savings Account (ISA) allowance.

Just remember that when your child gets to 16 years old they can decide where to invest their CTF. That previously cautious managed fund might suddenly be diverted to a series of Japanese smaller company shares by your rebellious teenager. More importantly, they can get their hands on the money from their 18th birthday onwards. Many parents shy away from topping up their children's CTF accounts in fear that it might just become a sizeable motorbike fund at precisely the wrong time!

There is a great article on This is Money today about the best and worst performing Child Trust Funds. Take a look and let me know what you think of my comments on a sensible investment approach for a CTF account.