The financial lessons we’ve learnt in 2012


The financial lessons we’ve learnt in 20122012 has been an interesting year.

We’ve been in and out of recession, interest rates look as though they are permanently set at 0.50%, billions more has been pumped into the economy and we’ve had more changes to pension legislation, but what have we learned in 2012?

We asked the Investment Sense team, here’s what they had to say:

 Sarah McCarthy, IFA Investment Sense

Sarah McCarthy, IFA: Transferring from a Final Salary pension scheme is still a bad idea

OK, so we haven’t learnt this in 2012, we already knew it, but the last 12 months have certainly reinforced our view, which by the way is shared by the FSA (Financial Services Authority), that transferring from a Final Salary or Defined Benefit pension is rarely, if ever, a good idea.

I’ve seen some shocking examples this year, including people advised to transfer from huge Final Salary pensions, including the NHS, for frankly spurious reasons and simply to earn the ‘adviser’ commission.

If someone advises you to transfer out of a Final Salary pension, think twice, think a third time, and then don’t do it, you’ll be giving up guaranteed and index linked benefits, which are hugely valuable.

 James Lee, Independent Financial Adviser

James Lee, IFA: When an adviser says you don’t qualify for an Enhanced Annuity, it’s best to double check

I’ve spoken to a couple of retirees recently who had previously been told by advisers they did not qualify for an Enhanced Annuity.

After taking more in-depth medical information and submitting this to all the Enhanced Annuity providers, I discovered that they did in fact qualify and that I could get them a higher income than they previously thought was available.

If an ‘adviser’ says you don’t qualify for an Enhanced Annuity, ask them to double check, you might get lucky and find you sneak in, alternatively you could just give me a call!

 Bev Stoves, Independent Financial Adviser

Bev Stoves, IFA: If something looks too good to be true, it almost certainly is

Because we are so active in the SIPP (Self Invested Personal Pension) market we are a natural target for people selling unregulated investments. These types of investment are often marketed with the promise of high, double digit, ‘guaranteed’ returns and the people selling them play on people’s misconceptions about pensions.

We’ve regularly said that unregulated investments carry additional risk of losing your capital, and we stand by that. If you get offered such investments then remember the old saying, “if it looks too good to be true, then it probably is”, just ask ex-England fast bowler Darren Gough!

 Phillip Bray, Independent Financial Adviser

Phillip Bray, Marketing Manager: The Funding for Lending Scheme is bad news for savers

The government launched the Funding for Lending Scheme (FLS) in August. The plan was for cheaper money to be made available to the banks and building societies, which could then be lent out to individuals in the form of mortgages and to companies as business loans with the aim of improving the access to finance for people and businesses who had struggled to borrow money since the credit crunch.

What’s happened?

Mortgage interest rates have fallen, but for those people who could already get accepted by a lender. But there is no evidence that it’s getting easier for borrowers with smaller deposits, particularly first time buyers, or indeed businesses, to get loans. At the same time banks and building societies don’t need savers deposits to lend out, when the government is acting as a cheap source of finance; this has resulted in interest rates falling hugely and 191 savings accounts being withdrawn in November alone.

It’s clear to us that the Funding for Lending Scheme is not working; it simply isn’t targeted enough at the people who need help. Even worse it’s having a hugely negative effect on savings interest rates, without wanting to sound like a politician chasing a sound bite, something needs to be done!

 Anna Timms, Independent Financial Adviser & Director

Anna Timms, IFA & Director: Annuity rates are not going up anytime soon

As much as I’d love to predict that Annuity rates will rise in 2013, I don’t see how this is possible.

Gilt yield are still at all-time lows, life expectancy continues to increase and Solvency II, which will increase the amount of capital Annuity providers need to keep in reserve, is looming on the horizon like a black cloud.

Our view at Investment Sense is that Annuity rates will not start to rise until the Bank of England starts to unravel the Quantitative Easing program and becomes a seller of Gilts rather than a buyer. Yes, rates might start to level off, and you’ll see the odd small, short term rise, as providers jockey for market share, but we can see no reason to expect a meaningful rise in Annuity rates in 2013.

 Jessica McGowan, Independent Financial Adviser

Jessica McGowan, IFA: Cash is a valid asset class for a SIPP

Our best buy table for SIPP deposit accounts is still the most popular page on our website, with ever growing numbers of people using it.

It seems that the national media has also started to switch on to the reasons why some SIPP investors like to hold cash. The publicity our website has gained this year will help to get the message across that cash is a valid SIPP investment, especially for people who want a known return, do not want the volatility associated with stock market investing or are waiting to re-enter the market but want a ‘return’ in the meantime.

A word of warning though, if you plan to hold cash in your SIPP, don’t use the mandated SIPP bank account. Our research shows that the average mandated account pays less than 0.30% per year, with the best only paying 0.75%. This is partly because rates on such accounts, which act in a similar way to current accounts, are low anyway, but also because some SIPP providers take a percentage of the interest you are entitled to, a practice which we think is unfair, often far from transparent and in our opinion should be stamped out.

 Linda Wood, Independent Financial Adviser

Linda Wood, IFA: Waiting to buy your Annuity when rates are falling is not wise

We all know Annuity rates have fallen this year and we believe that the trend will continue, if less sharply, as we head into 2013.

I’ve spoken to a few people nearing retirement this year, who have said they will delay buying an Annuity in the hope that rates will increase. Unfortunately, all that’s happened is that when they have finally made a decision to buy their Annuity, rates have dropped and they have missed out on two or three months of income, giving them a double blow.

When we relay these stories to would-be retirees we’ve clearly got to be careful not to come across as some form of double glazing or second hand car salesman. But it is unfortunately true, when Annuity rates are falling, it doesn’t pay to wait, unless of course you are prepared to consider other ways of turning your pension into an income.

 Shaun Brennan, Independent Financial Adviser

Shaun Brennan, IFA: The government aren’t listening about Income Drawdown, oops, perhaps they are!

Not only have Annuity rates dropped like a stone in 2013, but Income Drawdown plans have become victims of falling Gilt yields (the maximum income available is pegged to Gilt yields, as they fall so does the amount you can take each year from your Income Drawdown plan).

As an Annuity or Income Drawdown plan is the most popular way of turning a pension into an income, both falling victim to falling Gilt yields has left many retirees somewhat snookered and having to put up with lower incomes.
However, it seems that the government has listened, in one of the few positive pension changes in last week’s Autumn Statement it was announced that the maximum amount of income available from an Income Drawdown plan will be increased by 20%.

Good news? Yes, definitely, the only downside though, is that the change will not take place until later in 2013 as the government say legislation is needed. For many pensioners, with an existing Income Drawdown plan, this is a real shame, surely it could have been introduced sooner?

 2013 here we come!

These are just some of the lessons we have learned in 2012, we’ll carry on learning and educating as we move into 2013.

We’d all like to take this opportunity to wish you a very merry Christmas, and a happy and prosperous New Year.

You can contact any of the Investment Sense team on 0115 933 8433, we’d love to hear from you.