Studlea Takes A Safe Option.

Studlea Says… 5th February 2010.


“…a pilot suffering panic attacks, a chauffeur with multiple fractures, and an aircraft designer suffering depression…”

As promised, we put the rage against the economic machinery behind us, and get back to basics with a look at the first rule of financial planning and a news snippet about Employer Pensions for all employees.

First Rule of Financial Planning.
The first objective or rule of financial planning is protect what you have got. Now, this does not mean having a loyal crocodile go with you to the bank, wearing strategically placed armour or gluing your share certificates to a guard-dog. This short expression encompasses several issues, but for most of us the application will be one or more of the following: The ability to earn, being a provider, or securing your savings and assets to provide for you and yours in the long term. Securing assets, and the broader role of provider I will look at another time, but for now…

Your Ability to Earn.
Most of us who are not wealthy enough to retire, rely on our ability to earn to fulfil our plans in life. (M.P.s obviously excluded.) This is to pay the bills, provide for family, enjoy life, save for holidays, retirement, whatever. Many not only rely on this ability to earn, but have others dependent on them as well, be they a spouse, children or other relatives. In case nobody has told you, research confirms it is certain you will get older*, and without being too dark, I can guarantee that you will die*. (*I am reliably informed there is currently no known cure for either of these conditions.)

What we do not know however, is what health issues or conditions you might face between now and that point in the future, usually retirement, when you no longer NEED the ability to earn. If you fell ill and could not work, how long would your finances support you? Your employer might offer some sick pay, and if you are lucky enough to be funded by taxpayers, perhaps as a council employee or teacher, this might last as long as 6 months on full pay, and 6 months on half pay, but then what? (Early retirement ill health pension benefits are not what you think they might be.) For the majority however, such generous benefits do not exist, with many entitled to far less than this, and for most it is just Statutory Sick Pay, currently £79.15 a week for a limited period. N.B. The self employed get nothing of course. You might have some savings, but think about your expenses, how long will your savings last? Perhaps your spouse could support you and yours, but what if they fell ill? Stick with this, it gets funnier later.

In short, if you rely on employed or self employed income, you are in fact relying on having the health and ability to earn, and if this is you, then unequivocally, you should have in place Income Protection insurance. Let me stress however, I am not talking about those insurances linked to your mortgage repayments or a bank loan, for which so many of our lovely banks have been fined so heavily for mis-selling of late. Similarly, this must not be confused with ‘critical illness cover’.

(Critical illness cover is the payment of a lump sum only, on your diagnosis AND survival, of a list of very carefully drafted specific illness definitions. There is a whole raft of issues that will stop you working that are not on the ‘critical’ illness list, and sadly it is often over sold (mis-sold) as income protection.)

Income Protection on the other hand pays you a proportion of your income (maximum is usually around 65%), tax-free after an initial period, and pays this for as long as you are ill, WHATEVER THE CAUSE, or all the way up to retirement. If you go back to work the benefit stops, but if you fall ill again, with the same or different problem, it starts again. If you are only fit enough to return to work part-time, then a portion of benefit is paid.

How likely is it? Well, there are a variety of statistics out there but perhaps those that prove the point are that during a working life, 1 in 7 (14%) of the population will suffer an incapacitating illness lasting longer than 6 months. This means it is likely you know someone who has suffered such a lengthy illness. Where we live for example, is a road of 8 houses, and one occupant has suffered such a lengthy illness during their young adulthood.

Don’t whatever you do, get fixated on my use of the term 6 months or more either. Friends Provident tell me they have been paying more than half of their income protection claimants for over 5 years. As to critical illness, one of the insurance companies reports that over 75% of the Income Protection claims they are paying would NOT be covered by a critical illness plan. To illustrate, and without getting too graphic, ‘Unum’, a company specialising in this type of insurance report, recent paid claims include a pilot suffering panic attacks, a chauffeur with multiple fractures, and an aircraft designer suffering depression. I think we would all agree, best they take some time off.

There are detailed differences between the plans offered by the insurers, and so you or your adviser needs to have sufficient knowledge (you will not find the answers on comparison websites) to find the right policy for you, but by and large they all work in this way. Equally, if you are young and fit, now is the time to get some, because the older you are the more expensive it gets, and you don’t know if a health issue might arise which might make it more expensive, or difficult to obtain.

I have one, my wife has one, and I think all but three of my clients, (and you know who you are), who depend on the ability to earn have one as well. Have you?

Finally, How to Waste Your Money.
Some will be aware that as a vehicle to encourage large numbers to save for retirement, Stakeholder pensions have been a tremendous flop, and most popular usage has been for those with larger sums wishing to distribute wealth in a tax efficient way around family members. Greatest beneficiaries have been Ron Sandler, who thought of them (latterly chief executive of Northern Rock), the taxpayer funded mandarins who ‘rolled out’ his idea, and the marketing companies who introduced the concept. Anyway, your hard working and well expensed (and very well pensioned) politicians have been having another go. The plan is to re-hash the stakeholder pension, but this time automatically enrol everyone into it and have the employers run the schemes. (All employees aged 22 or over who don’t have a better pension already.) So will you be forced to save? No, because you will be able to opt out. Anyway, take up might be higher, but we will see if it actually helps. However, when the idea was launched in 2007, they were called ‘Personal Accounts’, and great swathes of your cash have been spent on discussion, sandwiches, press officers, sandwiches, websites, latte, sandwiches, salaries, marketing and brand agencies and so on. After three years of hard work, they have now actually achieved something. Yes, after incurring costs of several million pounds thinking about it, they have thrown another £300,000 at coming up with a new name and a funky logo. They are now nauseatingly called Nest Accounts, this being an acronym of National Employment Savings Trust. I wonder which came first, the name or the fluffy friendly warm acronym. I wonder…

An Unpopular View: Perception is Reality.

Studlea Says… 22nd January 2010.
Is it just me? Probably. In our small town, children and young people generally are being raised and cared for by one or more parent or guardian, and such parents and guardians receive non means tested financial assistance in the form of Child Benefit, and those with a household income of less than £60,000 receive additional means tested support. This additional support is claimed by making a phone call, stating a few facts and you’re off. The children and young people also have access to the local schools 39 weeks of the year, where they are cared for and trained by around 125 or more teachers. Obviously the school buildings and facilities are not cheap, and quite rightly, such institutions need support staff and incur other costs.

There is the smart Youth & Community Centre with an array of organised events, clubs and access to gaming and internet facilities. There are the Scouts, and the clubs and associations organised by the Churches, plus the football & cricket teams, and lest we forget the fantastic library, and all they organise for children. The Police even chime in with support and active involvement with other clubs and pastimes. Not being a child, I am sure there is far more out there as well, not least the actual surrounds which for the younger ones might mean muddy adventure, and for the older ones just some privacy.

All of the above is just a summary gleaned from reading local papers and looking around. More recently, we have the Town Council increasing the town council tax by 86% so as to have funds to further support (amongst other things) youth and children focussed activities.

Here is my point. In our small town, there are as many persons over the age of 65, as there are under 18, and almost as many over the age of 80, as there are aged 5 or under. A significant number of this older population live alone, and as we have seen in recent years, a number have fallen prey to distraction burglaries and perhaps the worst of all, anonymity. Being old is not a crime or an illness, but I feel it is worth considering that in a small town, around £6,000,000 (yes, six million pounds) every year is spent providing for, caring, teaching and funding the under 18’s. This is an average of a little over £2,500 per child in addition to the support offered by social services, and the obvious and ordinary financial support parents provide. This might seem like good value and I am sure it is by and large money well spent, but can anyone tell me how much is available for the older population? There is the weekly ‘Teapot’ club and the lunch clubs are a good opportunity to get together for those who can get around. Is that it? (N.B. These are organised and paid for by the users.) As to Long Term Care, national statistics tell us 1 in 5 older people eventually need a spell of full time residential care, and the majority of those who need it, pay for this care themselves, often from the sale proceeds of their home.

I have spoken to many older people in the local area, and views expressed range from staunch independence, to loneliness and fear. Although most children have a caring parent or guardian, only a proportion of older people have the support of an adult child. Some do not have children, some, as a result of modern economic mobility are geographically too distant to be on hand, some are sadly estranged.

Often, all that is needed to make a difference is help filing the forms in to obtain financial or care assistance, or simple information on where to obtain help. Not for the elderly the quick phone call. No, an 18 age questionnaire which has to be accompanied by original of all bank, pension and savings statements. Lest we forget, most of these people might be in receipt of state, personal or company pension, but all as a result of their own careers, contributions and taxes. For some, money is not the issue, but what many see as simple changes in technology have passed them by; access to the internet, or for some, just how to set up the TV to access freeview digital. Great work is done by some of the larger charities, but one adviser I discussed this with explained they have the expertise and the time to deal with many of these issues, but they cannot ‘find’ the people in need, or as is often the case, those in need do not seek help. There is a huge shortfall in take-up of Pension Credit, WarmZone grants, direct payment schcmes and the like. The reasons for this vary from ignorance and complexity, to pride and independent mindedness.

There Are None So Blind...

Studlea Says…

Studlea’s fans will recall the lambasting given to Gorgon Brown over his claims that he foresaw the need for global financial regulation. He has made the claims again, and once again ducked the need for the UK government and regulatory system to apologise for failing to protect the UK. In fact, he had was more than enthusiastic for securitised lending and false balance sheets that led to too much money being lent to people who couldn’t afford to repay it, with the resultant false house price inflation and subsequent crash. Again, Studlea followers already know these lessons have been learned time and time again but Gordon Brown knew better.

Gordon Brown has been writing for the Huffington Post this week, and as usual, blaming everybody else. If he foresaw the need for global financial regulation, why didn’t he do anything about it? In January of 2009, he stated, “As I said in Harvard ten years ago, we need an early warning system so that international financial flows are properly monitored". For most, if we spot a potential problem or risk, we do what we can within our power to avoid it.

If, in 1999, Gordon Brown had foreseen this need, he did indeed have the power to do something about it. He was the Chancellor, and to blame other countries for the complete lack of regulation of UK banking, is rather like expecting neighbours to build a higher fence to stop your dog escaping. For 10 years it seems, he could have regulated and protected the UK but he didn’t. He even made a speech (2003) in which he said: “We are learning the lessons from other countries, where for example in America they securitise long-term fixed rate mortgages…”

Those economies that regulated within their own borders suffered less, and some, not at all. The UK, as the Office For National Statistics points out this week, remains in recession despite growth in all other western, and quite a few eastern, economies. If you want to be amazed at the just how out of touch he is, read his article here.

Studlea Says…
Never underestimate a cat. Whilst I am not one for violence, discipline and control are necessary when inferior beings are placed in your home.



Given the news today about the UK office of fair trading giving up their attempt to have fair charges and practices from UK banks, perhaps the lesson is more cats should be in charge of the regulators. The backlash against those who have incurred the high charges is overthrown when one realises it is the banks that allow the customers to go overdrawn. If the banks didn’t allow unauthorised overdrafts, then such charges would not happen.

Notwithstanding, it is further proof it were needed that the banks are out of control and beyond influence of UK government. Is it any wonder the UK economy is still shrinking? Lest we forget, the banks most profitable customer is the poor worker with loans, credit cards, overdraft charges and so on. See the article in the Times Online here.

Studlea Can See The Problem

Email Studlea  As the UK continues to lag behind every other supposed developed nation, it is reassuring to know some of the finest academic minds have been able to figure out how to park a car (see telegraph article). Perhaps they can be employed to figure out why Lloyds Banking Group and RBS will not fulfil their lending obligations, despite this apparently being a condition of the bailout they received form the UK taxpayer. Public funds equivalent to nearly 75% of national income have been committed to saving the ‘city’ yet still the banks do what they want. The amount of the bailout is by a huge margin higher than in the US or any eurozone country, despite Gordon Brown and Alistair Darling claiming the problem was a disease from abroad. Martin Lewis, creator of moneysavingexpert.com’has been considered the best person to sort out the financial mess, yet he has been honest enough to state his limitations. It is a shame that those who do have the job of sorting out the mess cannot do the same.

Studlea Says Beware of the Tracker. 18th December 2009.

Studlea Says…Many mortgage borrowers it seems are opting for tracker rate mortgages at present, because they can get a mortgage loan at around 3% interest rate. The warning is, that trackers will do just that, track the Bank of England rate and so when that goes up, which it will, so will your mortgage payments. It wasn’t that long ago that tracker rates were base rate plus 0.5% or base plus 1%, but now, they are typically base plus 2.5 or even more. So when the base rate gets back up to 5% by the end of 2010, (which it will), many new tracker customers will find their mortgage rate hit 7.5% or more. On a £100,000 mortgage this is an extra £300 per month. As ever when humans have to deal with banks, most of the tracker deals also have fees to set them up, and penalties to get out in the early years so be careful.

The ‘canny scots trick’ of allowing the huge margins between what savers receive and what borrowers pay has perhaps worked too well, and now we have the debacle of trying to tax banks. More on that another time.

This all restores my faith in cynicism.

Studlea Looks Back. 17th December 2009.

Email Studlea

Quote of the week: “When we uncover failings in a firm we expect them to put it right immediately and to take special care to ensure it does not happen again.” Financial Services Authority. 17th December 2009.

Studlea Phatt Katt says: I think the operative part of this is “When we uncover…” which they didn’t do in relation to the banks which recklessly lent money they didn’t have to those who couldn’t afford to repay it. As with most public organisations, they have no penalty to pay and have responded to their failings by massively increasing their budget, which is of little comfort to those who lost out because of the assorted uncovered failings at Equitable Life, Northern Rock, HBOS, Lloyds TSB…

Speaking of banks, Robert Peston explained yesterday that there are attempts by some in the banking industry to negotiate an alternative to paying Darling Alistair’s new banker bashing tax. It is no surprise such people believe taxation might not apply to them, or is a matter for discussion and negotiation, because every other aspect of their business that requires regulation or legislation, is then discussed and negotiated until a result in their favour is agreed. Perhaps what is the more incredible is the fact that so far the Chancellors office has rejected these advances. I stress however, he has only so far resisted. Watch this space.

Almost finally, speaking of the Chancellor, he has been in for criticism (you don’t say…) for not making known quite how much annual interest the taxpayer will be paying to service the huge amount of Government borrowing he has taken on. Some informed commentators have estimated it to be twice as much as the entire Ministry of Defence annual budget, much of which will be paid to holders of Gilts.

Finally, speaking of Gilts, with inflation on the way up, as discussed here around a year ago, (See “Feeling Gilty Darling? of Friday 28th November 2008), if you don’t have index linked gilts or index linked national savings certificates, now is the time to think about some.

SPK.