interest rate cut again

Last month I commented on the Bank of England’s decision to cut interest rates to 1.5%, the lowest for more than 300 years.

Less than 30 days later, and the base rate has been slashed by a further 0.5 percentage points. Where’s the good news? Easy – if you still have a tracker mortgage you’ll save £41.66 per calendar month for every £100,000 of mortgage. If you’re one of the lucky few who feels the benefit of the rate cut on your SVR (standard variable rate) mortgage then good for you!

But there’s plenty bad news:

Primarily, it doesn’t address the problem of interbank lending (or lack of it) which is the fundaental reason that so few loans are being offered.

It does not encourage lenders to improve rates for borrowers more than 75% LTV (loan to value) as it will continue to harm their balance sheets as their debt repayments are at a much higher rate! In other words, most borrowers won’t notice any difference to their monthly payments.

Savers are penalised further still – those who rely on their savings and investments as a source of income are seeing a serious decline in personal wealth.

In turn, it’s harder for banks to attract funds (from savers) to fund further lending, creating a negative feedback loop.

Sucessive interest rate cuts are doing little or nothing to free up credit for the small businesses who really need it to avoid cutting their payroll and/or going under.

By continuing the period of artificially low rates the Treasury / Bank of England is risking long term inflation hikes while failing to provide the intended stimulus. In other words, continuing Government interference (including BoE reducing interest rates) is likely to exacerbate and prolong the recession rather than shorten it.

Sorry for such a negative post!

IFA - choose carefully

First, understand that Tied Advisers (e.g. work for your bank) and Multi-Tied Advisers (similar) are different from Independent Financial Advisers. By definition, Tied Advisers do not have access to the whole market, so they’re unlikely to be in a position to give you the best advice. We’re only considering Independent Financial Advisers (IFAs) here.

Second, realise that choosing the right IFA matters. You’re entrusting this person to align your financial goals with the financial products you need to achieve them. They need to get it right, and you need to be able to trust them.

There are 2 ways that an IFA can earn their living, and it’s important to understand the difference:

• They charge a fee, typically £100 to £300 for an hour long consultation and associated follow up (which can be extensive and time consuming).
• They’re paid by commission, so will earn a fee from the providers of the products that you buy

Which you choose is up to you. It may be important to you to avoid an upfront fee, but you should be aware that doubts have been raised about the true independence of advisers who are paid by commission.

Next there’s qualifications to consider. The bare minimum is the Financial Planning Certificate (FPC) which is required by law, but the best IFAs probably also have the Advanced Financial Planning Certificate (AFPC), and additional qualifications according to their area(s) of specialisation. Most advisers are general, but some specialise in mortgages, investments, pensions or inheritance tax. Think about this if you’re seeking specific advice now, because when your needs change, you may not want to change adviser.

Is your adviser part of a larger team? In other words, do they have back-up in the form of administrative support, and other advisers?

You should feel completely comfortable discussing all these questions with potential advisers. You need to be sure that their fees, qualifications, specialisms, processes, and deliverables meet your needs.

Tell-tale signs that you haven’t found the right IFA (yet):

• You feel like you’re being sold to
• Financial summaries produced by hand or simple spreadsheets, and not from a professional system
• You feel rushed, or your questions aren’t answered to your satisfaction
• You’re not given a thorough financial review

At the end of the day, there’s no substitute for a personal recommendation, but without one, you need to use your common sense, and most importantly, find someone you can trust.

Advice Forum gives you the opportunity to ask any question you like to a fully qualified IFA, specialising in your area of interest, without any commitment at all – you don’t even need to leave a phone number. Just ask.

negative equity

According to the Nationwide Building Society yesterday, 1.2 million Brits suddenly find themselves in negative equity. In a downturn like this one, when the house market is sluggish and property prices are falling, whether or not you find yourself in negative equity is usually a function of when you bought your house rather than a consequence of bad planning or poor decision-making. If you bought last summer with a high LTV mortgage (Loan To Value) you’re more likely to have negative equity than if you bought 3 or 4 years ago.

So in that sense, if the property is your home, and you’re not in a position where you need to sell up, you shouldn’t worry about negative equity – the financial health of the nation is cyclical, so if you sit tight and don’t fall into arrears then the loss is on paper only. As the market picks up, as it inevitably will, the value of the home will, at some point, exceed your mortgage balance – the only question is when.

That said the slightly flippant title of this post does not apply if:
a) you need to sell
b) you’re coming to the end of a favourable fixed rate deal

If you really need to sell now, and the alternatives (e.g. renting in the short term) are not possible, you’re going to lose money. If you’re coming to the end of a good fixed rate deal, it’s quite possible that defaulting to your lender’s Standard Variable Rate (SVR ) is the best option. One caveat – some of the recently nationalised banks have stopped lending. If you’re in negative equity and your current mortgage is with one of these institutions (e.g. Bradford and Bingley) you ay find it difficult to re-finance. We recommend speaking to a suitably qualified Independent Financial Advisor as soon as possible.

Just ask.

Time to get real

The IMF released its World Economic Outlook update today, forecasting World Output to grow by 0.5% in 2009. Before you start thinking “Oh, that’s not so bad”, take a closer look:

First, it compares very badly against 3.4% growth in 2008, and 5.2% in 2007.

Second, and scarier still, the UK economy is expected to shrink by 2.8% in the same period (although Downing St dispute the projections).

This leaves a £20bn hole in the Chancellor’s coffers. And what do you do when you’re £20bn short? The options boil down to:

1. Cut spending
2. Increase taxes
3. Print more money

So it’s going to be a long hard slog. But you know that already, or you wouldn’t be reading a well-informed blog like this one . So what should you do? Here’s my suggestion:

• Stop blaming the banks. OK so they took unnecessary risks and lent recklessly, but it takes two to tango. Borrowers unable to repay are at least as culpable as lenders who conveniently forgot to manage risk because they were making money hand-over-fist.
• Manage your money better than you think you need to. Pay down your debts. Save. Budget and maintain a sustainable lifestyle.
• Get your head down – work harder than you’ve ever worked before. When times are hard and companies downsize, the most valuable staff are the most productive. When companies go bad, the best people find new employment faster.

We’re not talking rocket science here, and we’re not even talking about financial advice, this is just common sense. Once you’ve got that straight, meet your Independent Financial Adviser (IFA) and make sure that your financial arrangements are inline with your goals. Simple, affordable steps like taking  out an income protection policy could help you through the tough times.

Read the IMF release (PDF).
More about financial reviews on www.advice-forum.co.uk.
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Final salary pensions stampede?

So everybody knows that more and more Final Salary pension schemes are closing their doors to new employees. In fact only a quarter of the UK’s 8,500 final salary pensions are open to new employees.

The NAPF (National Association of Pension Funds) predicts that 1,000 of these face closure to new entrants over the nexy five years.

The NAPF survey, out today, points to 25% of firms considering closing their final salary schemes to existing members, which means that no new contributions would be accepted.

This is big news, and it’s a massive increase from the same survey just 6-months earlier.

Conventional wisdom has always dictated that if you have a final salary pension you shouldn’t consider moving it. Final Salary Pension schemes now have a collective defecit of £200bn – that’s 43% higher than it was in November, and has been brought about by the credit crunch, economic slowdown and subsequent stock market decline.

If you’re “lucky” enough  to be in a final salary pension scheme, you need to think about your options if you were barred from making further contributions. You wouldn’t expect a reputable adviser to advocate anything as drastic as moving money out of a final salary pension without some serious thought, but the transfer value of your pension could be dramatically reduced if your scheme closed or your employer went into liquidation with a hole in the pension fund.

we switched

We’ve switched blog providers from Google’s Blogger to WordPress. Unfortunately, we weren’t able to import the blog from one to another, so I have copied and pasted January’s posts below.

Older posts are gone for ever, sorry! As always, we’re happy to answer general or specific queries here.

pension boost

[originally posted Thursday 22nd January, 2009]

Gold-plated final salary schemes are practically a thing of the past, with most employers closing this type of plan (expensive) in favour of money purchase schemes or stakeholder pensions (cheaper).

If don’t have a Salary Sacrifice scheme in place you may well be missing out on important additional benefits.

Salary Sacrifice has been around since the end of 2004, and it means that basic rate tax payers can boost their pension contributions by 31% without impacting their take home pay. And that’s in addition to the tax advantages that your pension contributions already attract. A very large number of UK employees can benefit from Salary Sacrifice, regardless of their income level.

How does it work? Essentially you arrange for your employer to make pension contributions on your behalf, in exchange for a reduction in salary. Both you and your employer save on National Insurance. It’s this saving in employee National Insurance and income tax on the amount diverted to your pension which means your take home pay remains unchanged. Get it?

Salary Sacrifice can be a really good way to boost your pension contributions. Is it right for you? If you don’t have any pension in place, or you’re in a money purchase scheme (including personal pension plans (PPP) and stakeholder pensions) or have a final salary arrangement you may well benefit from Salary Sacrifice. We suggest you seek professional advice from a suitably qualified IFA.

World stock markets are suffering from a lack of investor confidence and lacking direction.

invest with confidence

What should you do? Keep your powder dry & wait for things to bottom out before you invest? As an investment strategy it’s sensible enough in theory, but the retail investor will always come out second best when compared with the pros.

My advice? Make good medium to long-term decisions and invest with confidence. Here’s an analogy:

That car of your dreams has been retailing at £20k for a couple of years. You may not have bought one, but plenty other people did. Now it’s discounted to £12k and no-one’s buying. What’s stopping you? Fear that you’ll miss out on a bargain next month when desperate dealers knock another £500 off the asking price?

It’s not just the fictional car that’s 40% cheaper today than a year ago. It’s very likely that there are significant gains to be made by anyone with an investment perspective of 5-10 years, so don’t risk missing the boat by waiting for the market to bottom out. Fund selection, risk management and clarity about your own objectives are more important than ever, so get informed, then get professional advice.

If you’re not sure, just ask.

should you overpay?

According to the Council of Mortgage Lenders (CML) today, people moving house in November (latest figures available) typically 14.4% of their income on mortgage interest.

With the base rate moving downwards again since November, it’s likely that this percentage has reduced still further. Many investors are seeing dismal returns right now, so should you be overpaying your mortgage every month?

Not all lenders allow you to make additional payments, and if you have other, more expensive debt, it’s almost certainly advisable to clear that first.

I’m afraid the usual advice applies: talk to your Independent Financial Adviser and get some professional, financial advice first. If you’re not sure, just ask.

A couple of people have asked me what Advice Forum is all about. Why not just go direct to your bank, or to an IFA?

what's it all about?

It’s a good question – here’s where Advice Forum is different: if you have a question about mortgages, investments, pensions, life assurance, insurance or school fees you have 2 clear choices:

1. Figure it out for yourself, cross your fingers and hope you made a good decision
2. Carefully choose a competent professional adviser and follow their recommendations

Advice Forum gives you access to the expertise of a real, live Independent Financial Adviser (IFA), but leaves you completely in control. You can ask anything you like, but you’re not even under any obligation to reply.

You should be aware that without lots of juicy detail about your personal circumstances, our advisers can only give you general answers and information, but it’s offered free of charge and without obligation. We hope that you’ll find our input invaluable, and when you’re ready you’ll come back for a formal consultation. But the choice is yours.

Just Ask.