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What can I do if my pension fund is suspended?

One of the major perils in the minefield that is pension funds is a fund being suspended, which can happen for a variety of reasons. David Lamb, from The Pension Sharing Service, explains what your options are if, like Karen, this happens to you.

Karen was awarded 100% of one of Norman’s pensions, and a smaller share of another. Their solicitors have been very prudent because one pension had a guaranteed annuity that would have been lost on transfer, meaning neither party would benefit. This is the plan that Karen received the smaller share of.

Unfortunately, this order cannot be implemented because a couple of the funds the pension holds are suspended from trading.

Karen has a problem.

The transfer process explained

When a defined contribution scheme such as a personal pension is to be transferred, the assets – effectively unit trusts held by the pension trustee – are sold and the cash is then transferred to the receiving scheme. It is invested in a new portfolio of funds, ideally recommended by the pension creditor’s financial adviser, based upon their attitude to investment risk.

The issue

Many modern pension funds do not invest the money themselves, instead offering an external investment fund with different fund managers and a wide range of objectives. This is generally good but, occasionally, the funds can experience issues which can result in them being suspended from trading (cannot be bought or sold and turned into cash).

This could be for a variety of reasons, most commonly with property funds suffering liquidity issues (an inherent risk with these funds). If too many people want to disinvest, the fund may not hold enough liquid assets (cash) to pay them and therefore it may have to sell properties to raise the cash, and this can take some time.

This would not normally cause a problem for pension sharing order (PSO) as most orders are made for less than 100% of the fund, therefore other assets can be sold to provide the funds to be transferred.

Unfortunately, for Karen, the 100% order meant that the transfer must be all or nothing; the pension provider cannot transfer less than the amount stated in the PSO (for example leaving the suspended funds and transferring only those that are tradable).

Karen is currently surviving on her State pension and desperately needs the money she has been awarded.

Karen’s options

Karen has three options.

The first is to be patient and wait for the suspensions to be lifted. Unfortunately, one of the suspended funds is the Woodford Income Fund, which due to problems with the underlying investments could take years for the suspension to be lifted and be very costly to the investor. Karen cannot afford to wait very long.

Secondly, Karen could instruct her financial adviser and pension company to individually transfer all the underlying unit trusts by stock transfer, but this could take a long time, therefore incurring extra costs and is littered with pitfalls. Even the pension company advises against this and, in the end, Karen will still be stuck with funds that she cannot convert into cash for the foreseeable future to provide her with an income.

Karen’s third option would be at to apply to get the PSO amended so that she either takes a greater share from Norman’s other pension, but he could be reluctant to agree with this because he will effectively be giving up a high guaranteed income for (potentially) worthless funds.

For an easy life, Karen could write off the Woodford fund so that the transfer could proceed which she considers unreasonable because she is taking the hit, not Norman, and he would benefit if the fund recovers. In any event, if the Woodford fund makes up only 5% of the total portfolio, Karen could be losing almost £15,000.  She cannot afford this level of loss.

Do not tread on the mines!

What can family lawyers do to avoid similar situations?

I would strongly recommend that when asking for details on pensions, a breakdown of the individual funds is requested. This information will help identify any funds that are currently suspended or run the risk of suspension at short notice. If a pension portfolio holds these types of funds, a request for a PSO should not exceed the percentage of funds trading without this risk.

Where possible, spread the PSO over other pension policies to avoid having to take 100% of one particular product.

Ensure that the PSO is implemented as quickly as possible as fund suspensions can occur at any time, with relatively short notice.

I was discussing these issues with my wife, who is a family lawyer, and the very next day Aviva, which operates some of the largest property funds, gave notice that its funds (which are currently suspended) are to be wound up, with the properties being sold. Aviva has warned that this process could take up to two years.

Be aware of pensions holding this fund and ensure the order excludes the percentage held in this fund.

Don’t worry – assistance is available

If you have any concerns about the issues raised in this article, please do not hesitate to contact The Pension Sharing Service.

Tel.      0808 1781695/07708 690811

Email: david.lamb@thepensionsharingservice.co.uk

Web:    thepensionsharingservice.co.uk

Why your biggest fear should be running out of time – not money

By David Lamb

In the last in our series of articles on the components that make up our lifestyle we look at abundance.

This is when you have more money than enough…enough to give you the lifestyle that you want without the fear of running out of money, whatever happens.

Many people do not realise they have abundance because they do not know how much is enough. This can result in them having more money than they need without realising it. And then it is wasted for years.

For many, their biggest fear is running out of money, but I would suggest that your biggest fear should be wasting your life and the time, not running out of money. This may mean that you have wasted the opportunity to use your wealth to enhance your lives and others you care about.

We only have two types of clients: accumulators and decumulators. Accumulators are, generally, those still working and therefore increasing their wealth. Decumulation would normally start at retirement.

Unfortunately, many people spend all their working lives saving for retirement but when retirement comes, they feel uncomfortable about spending their hard-earned money. This is probably because, not only do they not know how much is enough, but their brains are not wired to spend money after 40 years of accumulation.

Try this: fold your arms. Now fold them the other way. For most people this does not seem natural. This is because you have spent your whole life folding your arms one way and then, I come along and ask you to do it another way. It is a similar process, but your brain is not wired that way.

It is the same with decumulation, it does not feel right. Proper financial planning will help you rewire your brain by identifying how much is enough and then, with that knowledge, help you to structure your wealth to support an orderly the decumulation of capital. So long as it is controlled, and logical, you will feel comfortable.

Scottish-American industrialist and philanthropist Andrew Carnegie once said: “It is a sin to die with too much money.”

However, this does not mean you should waste your hard-earned wealth. When you are absolutely sure that you have the lifestyle that you want and are confident that there is nothing left on your bucket list, you can use your wealth help other people.

If you live to age 100, how old will your children be when they inherit? If you were 30 when you became a parent, your children will be 70. Will they really need their inheritance? They struggled to buy their home, put their children through university, probably worked long hard hours (possibly to the detriment of spending time with their children) and when they don’t need the money, it falls into their lap. But too late.

All the time they have been struggling financially, your wealth has been sitting in investments, not doing you any good (other than providing a feeling of security, because you don’t know how much is enough) because you are not spending it and it is not helping your family because it is lying in your investments.

It is, however, doing the financial services industry a lot of good because it is making money from your money (and it will continue to make loads of excuses why your money should continue to be invested). If you are never going to use that money, why not give it to your family now when they actually need it?

Of course, there can be other beneficiaries of your wealth, not just your family. Many people get a lot of satisfaction from supporting charities. I had a client who wanted to leave money to the Dogs Trust in his will. He was only 75 and he was never going to spend his excess wealth so why help his favourite charity in 25 years’ time? A lot of dogs would suffer over the next quarter of a century when he could be helping them now. Why wait?

I know older businessmen who still get a lot of satisfaction from work. Unfortunately, the longer they work and earn money, the bigger their inheritance tax liability. Why not use all that experience to help younger businesses and save them money and time by learning from the mistakes they had made 30 years ago? Invaluable knowledge that can be shared.

A friend of mine who is a solicitor has noticed that more and more people are investigating the establishment of charitable foundations (there are organisations that can help with this). His experience is that, because there are fewer burials and therefore fewer headstones, setting up such foundations is a nice way to be remembered.

Identifying abundance can avoid a lot of money worries, ensure that you get the most out of your life, and help other people. Do not let your money lie in investments to be passed to others when you die (because, hopefully, this may be a long time in the future). Do not die with too much; it is a waste of opportunity.

When you are aged 100, with one foot in your box, please do not look back and have regrets.

The most important thing about money? Knowing how much is enough…

By David Lamb

When I first started writing about the components that make up our lifestyle, I suggested that money was at number nine. We eventually got there!

It doesn’t matter how much money you have, if you don’t have quality physical and emotional health, good relationships, enough time, personal fulfilment, a satisfying career, enjoyable fun and recreation and financial independence, you will not have a balanced lifestyle. Life will not be brilliant.

Remember; money could make you happier, but love will make you happy.

I wrote this blog on the day that Eddie Van Halen, reputedly one of the world’s greatest guitarists died. According to the website Celebrity Net Worth, his estate is worth $100m. I would guess his family would give every cent of this to have him back with them.

Am I saying that money is not important? No.

Money provides security and safety for you and your family and pays for all the necessities such as a home, food, clothing, and general living expenses. After the basics are covered, money can provide funding for the fun things in life, especially time, fun and recreation.

An abundance of money can help others, which can provide great personal satisfaction. More on this in my next blog.

But money can also cause problems.

I have seen many people obsessed with getting more and more money and accumulating more than they need. This usually means they spend too long doing the things that they do not want to do (work), saving money to do things that they will never get round to doing. What a waste!

Money can also cause arguments. I think it is safe to assume that most of these arguments are not about having too much money.

The big question, which is a theme that has run through this series of blogs, is how much money is enough? Enough to give you the lifestyle that you want without the fear of running out of money whatever happens.

The key to a good financial plan is knowing how much is enough. If you don’t know how much is enough, you don’t have a financial plan!

A good lifestyle financial planner will identify your (realistic) desired lifestyle, calculate how much this lifestyle will cost and then answer the question ‘how much is enough’? They will then work with you, using the resources you have available, to work towards achieving that lifestyle.

Money underpins every other aspect of your lifestyle. It needs to be well managed.

Beige budget balances spiralling debt and stagnant economy

By David Lamb

Last Wednesday’s budget was quite beige, but what could Chancellor of the Exchequer Rishi Sunak do?

He must balance spiralling Government debt with an (almost) stagnant economy.

Hopefully that stagnation will turn into a coiled spring as we get closer to the end of lockdown and the £130bn that the British public has saved since the first lockdown is spent on haircuts, meals (eating in not takeaway), drink and holidays.

This massive government debt will have to be repaid, but now is too early so what has Mr Sunak done to get the British public to help repay those staggering amounts (£355bn according to the BBC)?

One way of increasing tax revenue, without blatantly increasing rates is to use inflation (not much of that now, but just wait until we get spending again).

The pension lifetime allowance – the maximum capital value you can have for your pension (LTA) – has been frozen at £1,073,100 until 2026. You may think that this is a lot of money and does not apply to you but, as inflation increases, for those in defined benefits this could become a real problem.

NHS staff could become some of the hardest hit, the weekly hand clapping long forgotten.

What can be done to reduce this?  If you are in a defined contribution scheme, you could pay in less, or reduce your investment risk profile to reduce the growth.  Members of defined benefit schemes could leave the scheme or simply work less hours (thereby reducing salary and pension benefit). 

Regardless of the type of pension, many people may become disillusioned with pensions and may consider other methods of savings, such as individual savings accounts. But all potential options have major disadvantages.

The inheritance tax threshold has been frozen at £500,000 (including the residential nil rate band) for a single person and £1m for married couples. As with the freezing of the LTA, this will raise taxes through wage inflation and asset price inflation.

Is there any other name for this, other than a wealth tax?

What can be done to mitigate this?  Possibly gifting, or spending more, but again there could be negative consequences; you could run out of money!

The annual personal allowance of £12,500 has also been frozen, as has the capital gains tax allowance, at £12,300 and the High-Income Child Benefit Tax Charge at £50,000. Because of wage inflation, more tax will be collected.

The freezes on allowances may only impact on a relatively small number of people now, but with rates frozen until 2026, more people will be caught as the years go on.

There is no easy way to mend the nation’s finances, and it is going to take a long time, but we do not want our personal finances to be negatively affected either. There are things we can do to reduce the impact of taxes (which are likely to get worse once the economy recovers), but these can have a negative effect on other areas of financial planning.

To help you make the correct decisions, it is essential to have a detailed, regularly reviewed financial plan, which will help you understand how much is enough. Enough to give you the lifestyle you want, without the fear of running out of many, whatever happens.

Once you know how much is enough, you will be in a good position to make sensible, informed, and logical decisions to adapt your plans to the current economic and fiscal climate. If you do not know how much is enough, do not have a plan.

As the old saying goes, failing to plan is planning to fail.

Who will look after your money if you can’t?

By David Lamb

Most of us do not want to do think about our loved ones – or ourselves – losing mental capacity and many people think ‘it won’t happen to us, we’re fine’. But what would happen to our finances if this were to happen?

Effectively the Court of Protection comes along and puts a padlock on that person’s finances, and they and their family lose control of their money.

Cheques can’t be written, money can’t be transferred, and bills cannot be paid. A deputy is appointed and so starts a long and expensive process.

The key to that padlock is a lasting power of attorney, but you can only buy that key when you have mental capacity. Once that is lost it is too late.

BBC Radio 4’s personal finance show Money Box featured the rules for taking care of some else’s finances in their programme last week. You can listen to it via the following link:

https://www.bbc.co.uk/sounds/play/m000sh8v

I strongly recommend that you consider establishing lasting powers of attorney whilst you still can before it’s too late. You never know what is around the corner…

Why financial independence may be a lot closer than you think…

By David Lamb

The next component of lifestyle, after fun and recreation is financial independence.

Financial independence can be described as having enough income to pay for your living expenses for the rest of your life without having to work or be dependent on others or a business.

At first this may sound quite difficult and daunting to achieve, but we have never had a client come through our doors where we haven’t been able to tell them to do a couple of things to achieve financial independence. It is easy!

All you need to do is:

1. Sell everything. Your house, your car, contents, everything! Turn all you have into cash.

2. Move to Malawi. Malawi is a generally peaceful country that has had stable governments since gaining independence from Britain in 1964. The cost of living is lower than the UK – the total cost of living for two people, with average consumption, for one month will be $705 (£546). The average salary for an accountant is $14,166 (£10.981), in the UK they can earn up to £60,000, or more. You will probably be the richest family in your new village and will never worry about money again!

But you may not have the lifestyle that you want……

Many people are under the misunderstanding that to achieve financial independence, they need as much money as possible. Unfortunately, we have seen many clients who continue to work long after they could have retired.

As I mentioned in an earlier blog, I don’t think it is a bad idea to work past retirement, so long as it is enjoyable and is keeping you young. But working unnecessarily often means that this is at the detriment to other areas of their lifestyle such as health, relationships and time doing the things you want to do.

Understanding your lifestyle (enjoying the good parts and being able to identify areas for improvement to give you more balance) should be at the heart of financial planning.

When you have identified the lifestyle that you want, you can then work out how much this will cost. When you have done this, using cash flow modelling, a financial planner can then calculate how much is enough. Enough to give you the lifestyle that you want without the fear of running out of money, whatever happens.

In my experience, this is quite often a lot less than people would imagine.

Financial independence may be a lot closer than you think. You just need to know how much is enough and then create a simple, realistic, and reasoned plan to get you there.

How good would you feel if you didn’t need to worry about money?

Leading investment firm highlights interest rate threat to fixed rate investments

By David Lamb

A couple of days after I wrote my last blog, highlighting my concerns about fixed rate investments, I found a very interesting article written by Giulio Renzi-Ricci of Vanguard Asset Management Limited – one of the world’s largest investment companies and a leader in passive investments.

Giulio is concerned that the correlation between fixed interest and equities have converged to such an extent that bonds can no longer be relied on to perform their primary role as an anchor in times of market stress.

He goes on to say that there is worry that portfolios are too heavily exposed to duration risk (longer term bonds) which will mean they could be vulnerable if interest rates increase.

Another issue Vanguard has identified is that the rock bottom yields are compromising the function of bonds as portfolio diversifiers. They analysed the distribution of UK bond returns when UK equity returns were negative between January 2003 and November 2020 and looked at two scenarios: when 10-year gilt yields were greater than or equal to 1%, and when 10-year yields were below 1%.

When equities fell, government bonds provided higher returns than corporate bonds and cash. Because of this, government bonds can be good ‘shock absorbers’.

There is also concern that, if interest rates rise, the returns from equities could also turn negative (it will be more expensive for companies to borrow money to fund their growth, for example).

Portfolios with high fixed interest and equity holdings could be hit twice. Giulio concludes by asking if interest rates increase because economic activity is recovering and earnings growth is also increasing?

Would equity prices move up or down?

This would depend upon the relative forces associated with earnings growth or rates growth. Higher interest rates do not necessarily mean negative equity returns. Central banks are unlikely to start increasing interest rates unless they are reasonably confident in the economic recovery. If so, expect a positive impact on equity returns.

This brings us back to my last blog: take action!

We strongly recommend that you review your investment portfolios (including your pensions) to determine how much fixed interest your portfolios hold and seek advice as to how you can minimise the threat to your wealth if inflation and interest rates increase in the capital value of your fixed interest investments falls.

Lamb Financial is here to help.

The information contained in this article is provided for information purposes only and is based on the opinion of Lamb Financial and does not constitute financial advice or a suggestion to a suitable investment strategy. You should seek independent financial advice in regard to your own personal circumstances before embarking on any course of action.

Lamb Financial is a trading style of Lamb and Associates Independent Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority. FCA number 782092.

Rising interest rates: be careful what you wish for

By David Lamb

Many people are hoping interest rates will increase, but a rise in interest rates could adversely affect your wealth.

Normally I prefer to focus my blogs on using your money to support your lifestyle but as we are living through exceptional times I thought it appropriate to make an exception.

In the first three months of last year, the UK economy suffered its biggest slump on record, shrinking by 20.4%. Factory and construction output fell, and household spending plummeted. This was probably only to be expected because the country and economy were effectively ordered to shut down, resulting in the first recession since 2009.

In November, the Office for Budget Responsibility (OBR) estimated that government borrowing for the current tax year could be around £394bn. That is the highest government borrowing in peacetime. Before Covid, expected government borrowing was estimated to be £55bn.

Eventually, when the world gets back to some level of normality, the economy will recover. But because of this eye watering government borrowing, there must be longer term consequences to the economy; predominantly return of inflation.

There are two main causes of inflation; demand pull inflation and cost push inflation.

Demand pull inflation is caused when demand grows faster than supply. Cost push inflation is caused when the cost of providing goods and services increases.

There is potential for an increase in demand pull inflation for many reasons. For example, many people due to lockdowns have not been able to spend money. Whilst many people have struggled financially due to Covid, a lot have actually saved money by not having to spend money on travelling to work, being able to browse in the shops or book holidays (my fuel costs have plummeted!) 

When eventually we return to normal, I think it is safe to say we can expect a lot of money to be spent. Obviously, there will be many unfortunate people who have lost their jobs due to Covid and this will also have an effect.

Government expenditure can also increase demand pull inflation because this increases the amount of money in the economy. If people have more money, the demand for goods and services will increase. As excess demand oversupply occurs, inflation will increase. Think about how much money the Government has pumped into the economy.

When their income is less than it is spending, governments may resort to printing more money, known as deficit financing. Longer term, this strategy will be inflationary because the amount of money in circulation increases but the total goods and services available in the country remain the same.

Many economists argue that there is a close link between supply of money and inflation and therefore controlling the money supply can control inflation.

When interest rates are low, like they are now, money is cheaper to borrow and when this happens the economy grows (obviously the lockdowns are currently preventing this, but they will not last for ever). To slow the economy down, interest rates can be increased to take money out of the economy and therefore reduce inflation.

An interesting article about this can be read here:

https://www.theglobeandmail.com/investing/investment-ideas/article-why-are-real-interest-rates-and-inflation-on-the-way-up/

We have many clients who are concerned that low interest rates mean that they are getting poor returns on the money they hold in deposit accounts (although this may not be strictly true – see my blog on our Facebook page dated 8 January 2021). If inflation increases, it is highly likely that interest rates will rise and many think that rising interest rates, whilst may not be good for borrowers such as those with mortgages, is a good thing.

Be careful what you wish for

Many people have money invested in fixed interest securities within their investment portfolios because they can provide a steady interest income to investors throughout the life of the bond, whilst reducing the overall risk of an investment portfolio because of their general low volatility.

These investments provide a format for governments and companies to borrow money. The Government borrows money via gilts or gilt-edged securities; companies issue corporate bonds.

The following is a very simple explanation as to how these investments operate.

Rishi (Sunak, the Chancellor of the Exchequer) asks to borrow £100 from me over the next 10 years. In return, he will pay me £1 every year over that term. This is a good investment for me because it is more than I could currently get with a bank or building society and in ten-year years there is a very high chance that I will get my money back because it is guaranteed by the Government.

Let us now assume that I want my £100 back in five years. I go back to Rishi (if he is still there!) and ask for my £100 back. Unfortunately, he says sorry you must wait another five years. I really need my £100 so say to my wife if you give me £100 for this investment you will get £1 every year from the Government and then they will give you your £100 back.

My wife (who is far stricter with money than I am) says ‘sorry, interest rates are now 2%. I am not going to give you £100 to get £1 back every year when I could be getting £2 elsewhere, but if you are really keen to get some of the money back, I will give you £50; I will get my 2% interest and you will get some money back in your hand’.

That is the risk with fixed interest securities. If interest rates go up, the capital value of your investment can go down.

If I needed my money in nine years, and my wife offers me £50 I can say but you will get £100 next year so why don’t you give me £95, you will get another £1 and then £100 at the end of the 10 years.

The closer you get to the redemption date, the less volatile the capital value.

If a large company approached me and said ‘you have just lent the Government £100 for a return of 1% per year, will you do the same for us?’ my response would be ‘you are a FTSE 100 company so you are big, but not as big as the Government and therefore there is more risk; you may not be around in ten years to repay me my money. If there is more risk, I want a higher return and therefore you pay me 2% per annum’.

The smaller the borrower, or the less financially secure, the bigger the risk, the higher the interest rate should be.

There is another interesting article on fixed interest securities at:

https://www.moneyadviceservice.org.uk/en/articles/fixed-interest-securities-gilts-and-corporate-bonds

So, in summary, at some point the economy will recover and inflation will increase (possibly quite rapidly due to the huge amounts of money the Government has been pumping into the economy), which will increase interest rates.

If interest rates increase this may seem good for people with money in deposit accounts (although, after inflation, their money may be going down in real terms) and this may have a negative effect on the capital value of fixed interest securities which many portfolios hold to help reduce volatility.

Take action!

We strongly recommend that you review your investment portfolios (including your pensions) to determine how much fixed interest your portfolios hold and seek advice as to how you can minimise the threat to your wealth if inflation and interest rates increase in the capital value of your fixed interest investments falls.

Lamb Financial is here to help.

The information contained in this article is provided for information purposes only and is based on the opinion of Lamb Financial and does not constitute financial advice or a suggestion of a suitable investment strategy. You should seek independent financial advice in regard to your own personal circumstances before embarking on any course of action.

Lamb Financial is a trading style of Lamb and Associates Independent Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority. FCA number 782092.