Woodruff Financial Planning blog

Why set yourself financial goals?

Dan Woodruff — Wed, 01 Sep 2010 12:03:52 +0000

Setting goals is probably the most important part of your financial plan. Naturally, this is also probably the most difficult area as well!

Why set goals?

Simply put, if you don’t set goals then you can’t measure success.

Many people try to live their lives without setting goals, and then fall short of their expectations because they were not trying to strive for something specific.

The reason that most people put off setting goals is probably why you should actually do so. Most would say they are too busy, but by spending the time to think clearly about what you want from life you can start to focus on what is important.

This does not need to be financial. Think of your financial plan as a route to enable you to achieve all that you could want from life. This will help you to get things into perspective, and focus on what you really want from life.

You might want to think about other areas of your life such as work, family, personal achievements, your health, education or community. Your financial plan is relevant to all these areas because a strong financial base will give you more room to achieve your other goals.

How to start

Most people start with the ‘stuff’. They list possessions that they want like houses, cars etc. When you delve a bit deeper you can then uncover the real motivations behind your spending decisions to date.

Try to answer these questions:

If you had all the money you needed for the rest of your life, what would you do differently?
If your doctor told you that you had only 5 years to live, what goals would you have for the rest of your life?
If you found out you only had 24 hours to live, what would you wish you had done?
If you can answer these questions you can then start to focus on what you really want. This will help you to develop financial goals which enable you to achieve your vision.

My business is my pension…

Dan Woodruff — Fri, 27 Aug 2010 09:56:05 +0000

When we first talk to business owners about financial planning they usually reply: ‘My business is my pension.’ Equally this applies to many employees – ‘My house is my pension…’ This is a poor place to start with your financial planning, and may leave you far short of your ultimate goals.

Why your business is not your pension!

OK, your business might prove to be your pension, but it might not. By saying that it will provide you with a future income you are leaving your retirement plans in the lap of the Gods.

By saying that your business will provide you with an income, what you are really saying is that you will sell up in the future, and someone will come in and give you enough money to retire on.

Will you be able to sell your business?

Any asset is only worth as much as what someone else is prepared to pay for it. You might not actually have a business that someone wants to pay for.

We meet many business owners who are actually just self-employed consultants. They have swapped the employee life for self-employment, but the business would not run without them. With this in mind, without them there is probably no business, so who would pay for that?

The best kind of business runs without the owner. Financial planning is about getting to financial independence – i.e. being able to survive without the income from the business. If you run your finances well, you can eventually become an investor. This means you rely on your money to do the work, not you. If you do this well enough, you can choose not to work, and live off your independent income.

If you haven’t already, get hold of a copy of Rich Dad, Poor Dad by Robert Kiyosaki. His analysis of this area is very useful (his cashflow quadrant).

How much do you actually need?

You should first work out what you need to be able to fund your future lifestyle, and work backwards from there. If you know how much you need you can build a plan to achieve that worth for your business, and more importantly build the business in such a way that someone else will be prepared to buy it.

You could work closely with other business advisers such as an accountant or business coach to plan for your exit strategy.

Think of your business as a cash generation tool

You should be able to earn income from your business, either as salary or dividends. Hopefully you can also sell it at a later date for a lump sum. These streams of cash should be used towards your ultimate aim of independence.

Don’t forget tax!

When you sell your business you will need to pay capital gains tax at 10% or greater.

Why your house is not your pension!

You may be able to use your house to supplement your future income. However, in my experience this is rarely desirable for most people.

Downsizing?

You could choose to downsize, but who wants to work hard all their life to get the house of their dreams, to then sell up to someone else so you can live more easily?

Equity release?

You could choose to release equity from your home through a complex mortgage product. However, for most people this is expensive, complicated and risky.

Surely it would be better to have some financial discipline now and prepare for the future with your eyes wide open?

Want some help?

We work closely with our clients to develop and maintain their financial plans. If you would like some help in preparing your plan, please contact us.

Insuring your business against the loss of key staff

Dan Woodruff — Mon, 23 Aug 2010 12:49:23 +0000

Almost every business has staff or business owners who are integral to the success andprofitability of that organisation. Many such businesses would suffer adversely if one ofthese employees was to die. This could be loss of profits through loss of confidence in thecompany, withdrawal of credit, or the loss of contracts. Key person insurance seeks toprovide a cost effective and tax efficient way to protect against these losses.

What is key person insurance?

Key person insurance seeks to ensure that the business can continue, even with the loss of that key employee, either through death or disability. It is simply another form of protection, such as life assurance, critical illness cover, or income protection insurance.

Who is a key person?

This can be anyone who is vital to the profitability of the business, and whose loss would cause the organisation to suffer financially. This does not necessarily mean the owner or shareholders.

Typical key people:

Business owners
Technicians/experts
Senior directors
Senior sales people

Main reasons to consider cover

Loss of profits

This is the main area of concern for most businesses. The loss of a key person could lead to the reduction of profits in

any of the following ways:

Loss of sales/lack of new sales
Loss of confidence with suppliers
Loss of expertise
Projects delayed
Other managers need to cover
Lowering of morale
Recruitment costs for replacement

Profits could be affected if a key person dies or is too sick to work.

Loan Protection

The loss of a key person can lead to a company being unable to service existing debts. As this is often a key part of

growth plans, it is important to consider protecting existing company debts.

These could be:

Commercial loans from banks
Directors’ loans
Personal guarantees

If your company is liable for any debts you should consider protecting these debts.

Management buy-outs

After company restructuring it is common for the organisation to be vulnerable if key people are lost to the business. Cover can be arranged to cover the losses the company may suffer.

Sole owners

Where there is a sole owner of the business, the loss of this person can be catastrophic both for the business and the owner’s family.

For example, without a manager, the business could go under as the owner probably took on many roles within the

business. The family of the deceased may have no wish to become involved in the business. Without the owner, the business could fold, leading to statutory redundancy payments for the staff.

Solutions to these problems

These depend on the specifics of the situation, but the most common solutions are as follows:

Term assurance

Life cover to provide a lump sum, for example to repay a loan, or cover loss of profits.

Critical illness

A lump sum payable on the diagnosis of a serious illness, to cover for the loss of the staff member.

Income Protection

A regular income to cover loan repayments, or to provide a replacement member of staff on a temporary basis.

Taxation

Each case is treated according to its merits by the local tax office, and you should always seek guidance from them.

Generally the premiums are deductible against corporation tax, and capital sums received under policies are taxable. This is dependant on 3 criteria being met:

The sole relationship is that of employer and employee
The insurance is intended to meet a loss of profit resulting from the loss of the employee’s services
The contract is short term (probably less than 5 years)

Generally, where tax relief has not been allowed on premiums, the benefits will be tax-free (income protection proceeds will be taxable). Guidance and advice on this area is vital as the level of cover will be affected by whether tax

will be levied on the proceeds or not.

Why should you make a financial plan?

Dan Woodruff — Thu, 19 Aug 2010 15:28:01 +0000

If you have read our previous post on comprehensive financial planning, you will have seen the basic principles on what makes a comprehensive financial plan. Well, this post aims to give you some reasons why you might want to consider making a financial plan.

Getting control over your life

Financial planning is about breaking your financial life into manageable chunks so you can make progress in all of these. Your plan will allow you to prioritise your needs, so that the most important are dealt with first.

Achieving your goals

Ultimately your financial plan should be about making the most of your life. We all know we are going to die one day, so why not aim to ensure that you have lived your life to its potential, and have done all the things you set out to do?

A strong financial base will give you the freedom to make choices for you and your family.

What happens to people without a plan?

We all have good intentions, so here are some genuine statistics which might prompt you to some action. We probably all know people who fit into these categories…

We are all living longer

In 1901 the average life expectancy at birth for a man was 45, in 2002 this was 76. For those who make it to 65, men can expect to live until 81, women to age 84. Source www.statistics.gov.uk

What this means is that the traditional retirement no longer applies. We are more active, and live for longer; therefore we need more money and probably want more flexibility.

The state can’t afford to provide for you

People tend to believe, wrongly, that the state will provide for them. As the population ages, the ratio of working people to retired will only get worse, meaning there will be fewer people available to pay for retirement benefits.

The basic state pension is currently £95.25 per week for a single person. This increases at a slower rate than average earnings, meaning it loses buying power over time.

The question is whether you would like to live on this amount when you get to retirement. What would you have to give up?

With an aging population, it is no surprise that the Government is forced to cut benefits and extend retirement ages. Current proposals aim to increase the state retirement age to 68.

Savings, what savings?

According to a study by the Yorkshire Building Society, the average person’s savings would last only 52 days. Think about your own outgoings. How long would your lifestyle last if you lost your income? Would you have enough put by to cope with an emergency?

I won’t get sick

Hopefully you won’t, but you might. According to the Department for Work and Pensions in 2007, you had a 1 in 13 chance of claiming on life assurance; a 1 in 8 chance of claiming for critical illness, and a 1 in 5 chance of claiming on an income protection plan. Yet, according to Mori in 2008, the same amount of people insured their teeth as their incomes! That’s 6% if you’re interested!

If you get sick the Government will give you £89.80 per week (ESA, long term benefit). If you do not pass the rigorous tests to get this benefit you are deemed to be able to look for work and therefore go on lower Jobseekers benefits.

How many days just to pay your tax bill?

The Adam Smith Institute calculates that you need to work until June 25th to pay your tax. That means, your money is not yours until you pass this point. Yet people talk about their income before tax. If you think of the expense of your tax bills, this puts your disposable income into perspective.

A debt mountain

The average household debt in the UK (excluding mortgages) is £9,180; if you take out those who have no personal loans this rises to £21,355. If you include mortgages this is £58,290. See www.creditaction.org.uk

Many people use debt to fund their existing lifestyle, which only serves to feather the nests of those lending money.

As well as this, there is a worrying trend to use interest only mortgages. This help people to save money and provides flexibility, but many people do nothing to work towards paying off the capital of their loans. This could lead to severe consequences later in life.

How much money do I need to retire?

Obviously this depends on your expectations in retirement. As a rule of thumb, you should be able to achieve an income of around 5% a year from your cash assets (pensions, ISAs etc). Thus, if you have £100,000 this would equate to roughly £5,000 per year. Of course, this all depends on the age you are, how much risk you want to take and so on.

Want some help?

We work closely with our clients to develop and maintain their financial plans. If you would like some help in preparing your plan, please contact us.

Individual savings accounts (ISAs)

Dan Woodruff — Tue, 17 Aug 2010 13:39:52 +0000

This post attempts to explain the somewhat complicated rules which surround Individual Savings Accounts (or ISAs). ISAs were created in 1999 to replace PEPs. Their main benefit is that any savings you make will be largely free from income or capital gains tax.

What are individual savings accounts (ISAs)?

An ISA is simply a tax-free wrapper, into which you can put either a bank account, or stocks and shares (either as individual company shares, or using pooled investments such as unit trusts or OEICs).

What are the main benefits of ISAs?

ISAs allow the following benefits:

- No tax is paid on income from your savings, apart from the initial tax credit on share funds.

- No tax is paid on capital gains from your savings

- You can take your money out at any time (although some accounts have notice periods)

- You do not have to notify HM Revenue & Customs about income and capital gains from these investments.

Types of ISAs

You can invest up to £10,200 per tax year into an ISA. Within this, you need to choose whether you want a to invest into cash (through a bank account), or stocks & shares (usually through a pooled investment).

Cash ISAs

The current limit for cash ISAs is £5,100 per tax year.

Stocks & Shares ISAs

Alternatively, you can choose to invest your whole allowance with one provider as a stocks & shares ISA – thus you can invest £10,200 per tax year using this method. Stocks and shares ISAs can also accept other forms of investment such as corporate bonds, or property.

Mixing and matching

You can be flexible as to how you choose to split your ISA allowance. For example, you could choose to save less than the cash maximum, say £2,000; you would then be left with a larger element to be used in stocks and shares – £8,200.

Alternatively, you could choose not to save into a cash ISA, leaving the maximum of £10,200 for a stocks & shares ISA.

Transferring ISAs

Cash to stocks and shares

You can choose to transfer your cash ISA savings into stocks & shares ISAs without losing their ISA status.

For example, if you have previously been saving into cash ISAs, you could have a pot of money which could be switched into shares in addition to your allowance for this tax year. So, if you had accrued say £10,000 in cash ISAs, this could be switched into shares, and you could then also invest this year’s allowance of £10,200.

Stocks and shares to cash
You cannot transfer from stocks and shares back into cash.

Cash to cash

You can transfer from one cash ISA to another while retaining your tax-free status.

Stocks and shares to stocks and shares

You can transfer from one stocks and shares ISA to another while retaining your tax-free status.

Things to be careful about!

You can only hold 1 cash ISA and 1 stocks & shares ISA in each tax year. Thus, you should be careful if you save monthly into either type of ISA as if you make a new contribution in the new tax year, you will be committed to that provider.

If you accidentally start a new ISA, which is not permitted, the newer account will not be tax free.

You can get around this by transferring your existing ISA from one provider to another. By doing this, your new ISA will be treated as if the original one had always been with the new provider. This means that you can still make use of the current tax year’s contribution allowance.

When should you invest in an ISA?

Almost everybody should save into an ISA, because most of the income and all of the capital gains are tax-free. Thus, if you pay tax on your earnings, you will avoid paying further tax on your savings and investments. Since the £10,200 annual limit is quite generous, you might therefore be able to save up to £850 per month without paying tax on your savings.

This tax-free element will mean that you can make your money grow much faster. For example, if you have £5,100 saved in a cash ISA, and this grows at 5%, you will have £255 in interest before tax. If you are a higher rate tax payer, this will be taxed at 40%, meaning you will pay £102 in tax. This therefore reduces your interest to 3%, which is not as attractive!

When shouldn’t you invest in an ISA?

If you have an inheritance tax liability you should avoid ISAs. This is because they are personal assets which must be cashed in on death. Thus, although you may avoid paying income tax during your lifetime, they will not be an effective investment for inheritance tax purposes. You will be putting your investment at risk of paying 40% inheritance tax on the whole balance.

What we can do to help

We advise on stocks & shares ISAs, and can help you to set up new ISAs, or review older ones. We usually set up ISAs with fund supermarkets so we can give you access to all funds on the market rather than with just one company. We use state of the art research tools to analyse your investments to ensure you get the best chance of returns, although this is not guaranteed.

We also offer a Portfolio Management service to ensure that you stay on track with your investments by managing risk and hopefully maximise returns.

What is comprehensive financial planning?

Dan Woodruff — Fri, 06 Aug 2010 12:13:36 +0000

Financial planning is about building an objective plan for your financial future. You should follow these principles to ensure that every aspect of your financial life is covered, and therefore build a solid foundation to meet your goals.

Your goals will depend on your own personal situation and what you want for the future. For example, you might want to plan for retirement, buy a second home or send your kids to private school. The list is only limited by your imagination.

This is all based on a common sense approach. Anyone can do it, you just need to be methodical and objective.

What about financial advice?
Unfortunately, most financial advisers do not offer comprehensive financial planning. Most of them are glorified sales people. This is proved by the fact that they usually sell products rather than financial plans.

If your financial adviser starts by talking products he is thinking about himself rather than your future!

Of course, there is a place for products, but only at the end of a comprehensive analysis of the reasons why you need that solution. What’s more your financial plan might reveal that you do not need further products!

What should be in your plan?
Here are the main areas which need to be covered. There may be other areas, depending on your own circumstances.

Gathering data
You need to think of your plan as a whole because your financial decisions are inter-linked. For example, if you have an expensive mortgage this may impact on your ability to save for the future.

You will need to get together data on every aspect of your financial situation.

Setting goals
Without an end in mind, it will be difficult to evaluate your progress. Therefore you should think carefully about what you want your future to look like. These goals should be measurable.

Income and outgoings
This is fundamental to building your plan. If you spend less than you earn, you have a chance to affect your financial future. If you spend more than you earn you will have limited options and could spiral into debt. Understanding tax is a big part of this.

Assets and liabilities
You need to build up assets to underpin your financial future. And more importantly you need to build up the right kinds of assets. The sooner you can be debt free (unless it is the ‘right debt’), the sooner you can be in control. For planning purposes we ignore certain types of assets.

Emergency funding
Making sure you can cope with short-term crises is vital. We recommend that you set aside 3-6 months worth of outgoings.

Protecting what you’ve got
You should think about what happens if things go wrong. This includes all types of insurance to ensure your lifestyle is defended from catastrophes. You should also consider making wills and powers of attorney etc.

Paying off debt
Generally, any debt is a barrier to your future prosperity. The sooner you become debt free, the sooner you have control over your future. Remember that your bank manager includes your mortgage as one of his assets!

Saving for the future and investing wisely
You need to work out how much will be needed to fund your future goals, how much risk this requires, and the effect of external forces such as inflation, charges and future legislation.

Tax
While this should not drive your plan, it is certainly an important part of the equation. Understanding how tax affects your life should run throughout your plan.

Monitoring your progress
Financial planning should be much like servicing your car. You wouldn’t spend £20,000 on a new car and then never take it to the garage for a service. Likewise, you should regularly review your plan to ensure your remain on target to meet your goals.

Of course, your circumstances will also change over time, so your ultimate goals may also need a tweak from time to time.

Conclusion
As you can see, a proper financial plan should be extremely detailed, and will take some work. However, the rewards will really benefit you as you will be back in control of your life.

Divorce – what happens to your pensions?

Dan Woodruff — Wed, 04 Aug 2010 12:56:18 +0000

If you decide to get divorced from your spouse, one of the key functions of the process will be decide how to split the assets fairly.

Usually, the Courts will look at your family assets as a whole, such as the family home, and will include anything else of value such as pension plans. This is an issue because it is common for one spouse to hold larger pensions than the other, either because their earnings were greater, or because the other spouse stopped work to raise children.

What happens to your pension assets on divorce?

Both sides in the divorce proceedings will need to value their pension assets, just like with the other assets of the marriage. You will attempt to come to an agreement for a fair division of these assets. This can be via agreement

between you, by negotiation (collaborative law), or if not by Court order.

This is an important consideration, because in many cases one side will hold vastly more in assets than the other. Also, there are many other considerations such as children of the marriage, which may mean that a division of assets is not a simple 50:50 split.

It can be difficult to come up with a valuation of a pension scheme, bearing in mind that there may not be a definite pot of money assigned to a person’s entitlement.

This has led to 3 main ways of dealing with pension assets on divorce:

Pension offsetting

This is where pension assets will be balanced against other assets, such as the family home.

Thus, in this case, one party might get the house, and the other will get to keep their pensions. There can be problems with this approach because the assets may not be equal in value, or the pension may be worth far more than the family home.

Example

Alan and Mary have 2 major assets: the family home and Alan’s pension scheme. The house is worth £100,000 after the mortgage, and Alan’s pension is worth £100,000. They could decide that Alan keeps the pension, and Mary

the house. The pension asset offsets that of the house.

Earmarking

The Courts can make an order that when one party’s pension comes into payment, a part of this income will be paid to the other.

In theory this is a neat solution, but can lead to problems. For example, the person with the pension plan will still retain control over the assets even though the other party will be receiving some of the benefits. There may be conflicts as one spouse has full control over the investment decisions.

Also, the former spouse with the pension asset has control over when to decide to take their benefits (i.e. to retire). This could be at a date convenient for them, but not their former spouse! Another drawback is that the pension payments will stop when the owner of the scheme dies, which could be many years before the former spouse dies. Finally, earmarked benefits cease on remarriage.

These problems have meant that this is now a little-used option.

Example

Tim and Julie decide that Julie should be entitled to 25% of Tim’s pension scheme. Julie will be entitled to this amount, but only when Tim decides to retire, and this will stop when he dies, or Julie remarries. Julie has no control over Tim’s choices with the pension scheme, and Tim could decide to take much more risk with the pension scheme than Julie would like.

Pension sharing

This approach allows the parties to split the pension benefits to give the former spouse their own share of the pension pot. This allows a clean break, and gives the former spouse complete control over their new pension asset.

The former spouse gets a pension credit, which can remain invested in the same scheme; alternatively, they can transfer the pension credit to a scheme of their choice. This is a much more straightforward choice than earmarking; if offsetting cannot be agreed, then pension sharing is usually taken.

Example

Bob and Sarah decide that Sarah can keep the family home, but Sarah should also have 25% ownership of Bob’s large pension scheme. The Court can issue an order for Sarah to have this amount, which can be transferred to a scheme of her choice, giving her full control over the scheme. Sarah now has a new scheme with her pension fund, in which she will have control over investment choice and when to take the pension benefits.

Advice in this area

This is a complicated area, since it combines a relationship breakdown with a difficult legal maze and convoluted pensions legislation.

There are many types of pension, and each type will need to be treated differently. This means that both sides in a

divorce situation should take advice from a financial adviser before committing to any option. Your solicitor will be qualified to advise you on the legal aspects of the solutions, but not the financial implications.

We have worked with many local solicitors to help smooth the transition of assets at a difficult time, and will help you to understand your options as well as how to manage a valuable asset for your retirement.

Protecting your biggest asset – your income

Dan Woodruff — Tue, 03 Aug 2010 11:06:50 +0000

If you owned the proverbial golden goose, you would probably insure it in case it broke down at some point, and stopped providing you with golden eggs. Income protection insurance works on this principle. It exists to provide you with an income when you are too ill to work. This can be vital to ensure that you keep your standard of living, even should the worst happen. You are the golden goose, your wages the golden eggs…

Why should I consider income protection?

We all know of people who have become sick and are no longer able to work. You should consider what you would do if your main income through your work dries up due to illness. You may get some sort of sickpay if you are employed,

but often this is for a shorter period than you would imagine. For example, it is rare for a company to provide sickpay beyond a month of illness.

Of course, if you are self-employed you will not have such a safety net. The alternative is to rely on savings, but how long would this last for you?

We recommend that you think about your outgoings: your mortgage, food, utilities etc. The question is what would you have to give up if your income was drastically inhibited?

The state will provide for me

According to the Department of Work and Pensions, the state currently pays ESA or Incapacity Benefit to 2.62 million people . This represents around 7% of the working population.

Source: www.dwp.gov.uk

How much benefit will I get?

The amount depends on your individual situation, and will be assessed according to your severity of illness, and the length of time you have been unable to work. The starting point is £81.60 per week. See the Direct.gov website for more information.

How does income protection work?

You can take out a policy to cover your outgoings should you be unable to work due to illness. The cost depends on your age, sex, occupation, health and other relevant factors.

Usually, the policy would have a ‘deferred period’. If you are sick and want to claim, you would have to wait until the end of this period before you can claim. The longer the deferred period, the cheaper the plan will be, because you will be less likely to claim. You can select deferred periods from 4 weeks to 52 weeks with most plans.

How much can I cover?

Most plans work on a percentage of your income before tax. Typically, this will be around 50% of your income before tax. As the benefits will be tax-free, this usually represents around 85% of you income after tax. The idea behind this is that the extra 15% will be your encouragement to go back to work when you are able.

How long will the plan pay out?

It will continue to pay out until you are fit enough to return to work, or you reach the end of the plan. Thus, some people have managed to claim for many years if they have a particularly serious illness.

Isn’t this similar to critical illness?

Critical illness pays out a lump sum if you are diagnosed with a serious, named illness on the policy. Income protection pays an income, if you are unable to work due to sickness. Thus, income protection seeks to put money in your hands to pay your bills.

Also, income protection pays around half of claims to back pain and stress related illnesses; these illnesses would not be covered by critical illness.

Who is income protection appropriate for?

Anyone of working age, who has a family or lifestyle to support, which would suffer if they were unable to work for an extended period.

Income protection for businesses

Businesses often take out income protection plans to cover key employees, should they be too ill to work. The business can insure the individual so that they can either continue to pay that employee during sickness, or to be able to fund a temporary replacement. This is especially useful for directors, or business owners who would need to hire in someone to run things in their absence. Premiums would attract tax relief, although the benefits would be taxable.

What we can do for you

We don’t just analyse the cost of plans. We also look into the specific features of the plans to ensure that you get the most comprehensive cover, and value for money. There can be vast differences between the levels of cover on offer, and the illnesses covered. It is more important to look at the quality of the contract than the cost. After all, you want to be able to claim on the policy when the time comes…

Compulsory retirement to be consigned to history

Dan Woodruff — Thu, 29 Jul 2010 15:05:04 +0000

The Government today proposed to scrap the compulsory retirement age for most employees. At the moment, it is perfectly legal for an employer to set a compulsory retirement age for its workforce, which can mean that employees can be forced to retire at age 65, whether they want to or not.

This seems unfair and discriminatory. As we live longer, the traditional retirement will no longer apply. This may mean that some people choose to retire later (working longer), or may semi-retire. This proposal seems a sensible step in making retirement decisions more flexible, and also allowing employees freedom of choice.

Of course, the reality for many people as they get to retirement age is that they have not done enough to save during their working life, meaning that real hardship could be forced upon them if they are required to retire in the normal way. This proposal does not remove the problem of a lack of retirement income, but can mean that the over 65s are not forced into poverty.

The consultation period for this proposal ends in October, after which legislation could be brought in to turn this into law from April 2011.

Why regulated investments are almost always better than unregulated investments

Dan Woodruff — Wed, 28 Jul 2010 11:55:09 +0000

You may have seen that the Financial Services Authority, the UK financial regulator, has today launched the results of its findings into advice given by advisers who recommended unregulated investment schemes. See here for the report (the results are pretty damning).

This got us to thinking about why regulated investments are generally better than unregulated investments.

So here is a list of some of the main reasons we can think of (feel free to add to the list).

Risk
We feel that most unregulated investments are extremely risky, and often invest outside of normal markets. This is fine if you are a sophisticated and experienced investor, and the unregulated investment forms a small part of your overall portfolio; however, our experience is that most of these schemes are marketed to ‘normal’ investors, who over-expose themselves to this high risk (even borrowing to make the investment). Regulated investments tend to operate in more conventional markets, and usually spread their investments more widely. Regulated investments tend to have a more easily defined risk profile, so you can select the ones most appropriate to your style of investing.
Controls
Regulated investments have strict controls and limits on their investment and borrowing powers. These can be checked before you invest, and need to be approved in advance. There are requirements for capital security for the underlying investments so that if something goes wrong with the holding company, your assets are protected. This is certainly not the case with unregulated schemes. Also, many unregulated schemes make wild and unsubstantiated claims about their investments, and may not be held to account if these prove false.
Complexity
We often find it difficult to understand the complexity of unregulated investments, so we would expect that you would too. Our general mantra is never to invest in what you cannot understand.
Liquidity
Our concern with many unregulated investments is that they could be very difficult to cash in should you need access to your capital. Most regulated investments trade on an exchange, leaving them much more liquid, should you need access to your money.
Value
It is much easier to value your regulated investments than with other types of investments.
Charges
There is nothing to say that unregulated schemes are more expensive, but this is often the case.
Due diligence
Because unregulated schemes are not confined by normal investment regulation, it can be very difficult to drill down into the methodology of the schemes, and how they are structured. This makes it very difficult for you to understand them, and for advisers to explain them to you.
The right to cancel
Regulated investments give you a cancellation period, during which you can change your mind; there is no such right under unregulated schemes.
Financial Ombudsman
It is unlikely that the Financial Ombudsman could come to your aid if you have a complaint with an unregulated investment.
Compensation scheme
Similarly, it is unlikely that the Financial Services Compensation Scheme would come to your aid if you lost your money.

As with all things involved with investing money, there are no guarantees: always seek the advice of a professional before you take the leap – it is important to consider all your circumstances.