Foreign Perspectives

Archive for the ‘Business’ Category

This is the first year that it’s become truly possible to take control of your own pension. Up to now, most people with money-purchase (or defined contribution) pensions had to hand over their money to an insurance company and buy an annuity with it. Thankfully, that practice is ended and we get to keep the cash.

What’s stopping a lot of people is simply lack of understanding of what a pension is. In fact, it’s really quite simple: it’s a savings account that you use to build up a sum of money that will eventually provide enough income to support you in your later life. Despite all the changes, it remains a limited access account. Once you put the money in, you can’t take it out again until you’re at least 55. However, when you put the money in, you get a tax rebate so that, for a basic rate tax payer, every £1000 you put in becomes £1250 in the pension. Anything that you withdraw from it is subject to income tax but with an allowance that means that the first 25% you take out is not taxed, whether you take this out as a single large lump sum (as historically people did) or as a series of smaller amounts (in which case 25% of each withdrawal is tax free).

If you’ve had a few jobs over the years, chances are that you’ll have a small pension account for each one. Small pension accounts are generally bad news as the charges, particularly on older accounts, can be rather high. If this sounds like you, it’s best to investigate the possibility of combining the various accounts which will reduce the charges and let you take control of your pension.

Are you up to taking control of it though? The sums involved in pensions can be quite substantial and the sheer size of the sums can put people off managing the money themselves. If you’re comfortable with the amount involved, there are a range of Self-Invested Personal Pensions (SIPPs) around that will let you do that but equally you can choose an investment manager to look after the account for you.

Either way, you need to establish what your objectives are and what your attitude to risk is as that will determine just how the pension account is invested.

As with everything in pensions, the timescale for transfers can be surprisingly long. To move a company pension to a private one (which will normally require you to take professional advice) can take four months or more but even a simple transfer is likely to take a month or two. Mind you, that does have the advantage that it gives you a lot of time to think about how the fund will be invested which is no bad thing.

Up until last year, the clear answer was with an increasing proportion of bonds as you approached retirement. However, that advice assumed that you would be buying an annuity on retirement therefore the rising proportion of bonds was aimed at stabilising your pension fund as you got closer to the point of purchasing the annuity.

All that changed last March when the chancellor announced that you would no longer be required to buy an annuity and could continue to manage your pension fund as you saw fit.

But, what does that mean in practice? Well, you don’t have the cliff-edge of an annuity purchase therefore you can carry on running the fund as you would have done ten or twenty years earlier. This means, that you can carry on largely in equities and, in principle, should let you have a rising income over the years that you are in retirement. On a related note, since the fund will go to your dependents, there isn’t the push to spend it all as there would otherwise have been and, of course, you wouldn’t want to run out of money either.

What you can do depends a lot on your circumstances and temperament. For example, if you’ve got the average pension fund of around £30,000 then you’re quite limited. That’s not really enough to allow you to take many risks and probably only really enough to act as a top-up to your old age pension which, in practical terms, means that you might well be best with an annuity. Move up to £300,000 (which a surprisingly large number of people will have) and it’s a whole different ball-game. For a start, that’s well above the minimum that a range of investment managers will take you on and it’s enough to allow you to move more into equities i.e. to take on a bit of risk.

What’s key though is to know what your attitude to investment risk is. Could you sleep at night if your pension fund dropped 30% for instance? Could you convince yourself that it wouldn’t matter if it did? (and it doesn’t – it’s the income that matters on a pension fund, not the capital value)

The problem with customer service jobs in difficult economic times is that the customers demand a whole lot more when the economy is in a bad way.

Even the bargain basement shops are forced into upgrading how they deal with customers these days although, so far, the local LIDL hasn’t risen to the customer service levels of the LIDL shops in France. That’s pretty odd really as France isn’t exactly known for high customer service levels so it’s puzzling as to why the bargain basement shops have much higher customer service levels than the very same shops have in the UK.

However, there is the small problem that in difficult times, there isn’t the scope to improve customer service through adding to staff numbers nor even through extra training for the staff. What’s needed is a cultural shift in the organisation so that people automatically do the small things that can often make the biggest difference to how service is perceived.

With the credit squeeze in full force many people are finding it difficult to source short term borrowing when they need it to tide them over to the next paycheck. This is where payday loans come in and, of course, there are more and more of them on offer every day.

In principle they’re fairly simple in that they are:

1. intended to be repaid from your next paycheck (although you can usually roll them over to the one after that);
2. don’t require a credit check;
3. are from around £100 to £1500
4. require you to be in regular employment of at least £1000/month (usually for at least the previous three months);
5. require you to have a normal current account (usually for at least the previous three months); and
6. be over 18

Approval is very fast and even quicker now that online checks can be carried out by the credit company ie no more faxing of documents.

Although payday loan advances are fairly simple, the sheer number of them that are around means that a little guidance is handy. The rules do change and you’ll find that the legislation on these apparently simple loans is quite extensive.

Applying online is easy and quick, but do watch the amount that you’re paying as it can easily pull away from you.

Peter Robinson wrote an interesting summary of the situation with politics in Northern Ireland last week.

For those that don’t know, the government in Northern Ireland is a mandatory coalition that requires agreement on major issues. That agreement is proving to be impossible to get in the very central area of welfare reform which poses particular difficulties as Peter pointed out.

Welfare is a major proportion of the overall Stormont budget so any adjustments required to the welfare budget tend to involve large sums of money. Historically Northern Ireland has mirrored any changes in the welfare system on the mainland and the problem now is that they’re moving to universal credit and putting a cap on the benefits that a family can receive but Sein Fein don’t agree with that as they say that it imposes cuts on vulnerable sections of society. To an extent, they are correct if you take the assumption that people living on benefits are by definition vulnerable. However, to pay people what is in some cases considerably more than the same family could gain through working seems fundamentally wrong. Also worth noting is that average salaries in NI are lower than in the rest of the UK so it can pay people not to work.

In that the rest of the UK are cutting benefit payments, they are reducing the amount paid to NI by the amount that they estimate that welfare reform would save. As noted above, these are big numbers and without welfare reform these reductions are having knock-on effects in the public services provided by other areas of government in NI so, for instance, the reduction in payments to the Department of Regional Development means that they can’t afford to maintain all the street lights anymore.

However, a bigger problem is that the computer system which makes the payments is in England and supported by IT staff in England and both are in the process of being wound down as those benefits transfer to universal credit. In principle, the NI government could take over both but the money required to do that is quite staggering: Peter had been quoted £200-£300 million pounds per year to maintain them. They’re also quite old systems and he’s been quoted £1.6 billion to replace them. That’s a lot more than the NI based systems which preceeded them cost but going back to those systems isn’t a runner as the teams which supported them have long since dispersed. To give an idea of how different the scale is, the model of computer which ran all systems in the NI civil service just before they were moved to England was the same model as was used in England just to control the printers. Hence, natually, the IT teams were somewhat larger eg a typical benefit support team in NI was three people compared to 30 in England supporting their version of the system.

Finally, there’s the time issue. A decision to change to universal credit or to take over running the old systems needs to be made quite soon or those benefits affected will simply stop being paid and the deadline for that decision isn’t far off.

So what will they do? They can’t continue to not make a decision for sure but there doesn’t seem to be any clear way out of the impasse. Peter’s suggestion that they hand back welfare to Westminster is going to meet strong opposition from a range of parties. Westminster taking it back either voluntarily or compulsorily may not be easy to do either and also has a deadline as staff need trained and systems updated not to mention the reintegration of NI welfare.

What’s clear is that they need to make a decision and soon.