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March 2019 Podcast – All About Debt

Dealing with this area of your personal finances is really the kingpin or the starting point to improving your future wealth and happiness.

it does seem to be the case that we are all overloaded with debt of some description or another and this seems to be at the very start of people’s lives, my daughter was being offered credit on her 18th birthday, just as soon as she was legally able to consumer court. the problem with credit is the if it is not used correctly then it effectively steals your future. one of the reasons credit is such a powerful medium for those that are offering it is this, it guarantees them a share in your future income. Money that you should be using in order to provide the things that you need and want, ends up being paid in interest charges. But, it’s worse than that, the entire system is designed so that you never effectively repay debt and are caught on a treadmill of having to give up future income in order to service the financial liabilities you have. From the lenders point of you it becomes a very good stream of income from your point of view, it is a very large stone hanging around your neck.

Given that we now have things like student loans, it is accepted that every 24 or 25 year old will end up with some kind of long term debt. even if there is no student finance to be considered then there is car finance, lease plans and bank overdrafts and credit card lending. The numbers involved or truly fantastic, and I will cover more of these in the content below. The problem from your point of view, is this if you have any form of debt and you are currently still working your debt, is going to be serviced out of your future income. That is money you have not earned yet. if this money is going to be earmarked for somebody else, for example your debt repayments then it can’t work for you.

Importantly, most of the things we tend to buy on credit are the things that go down in value, or are consumable which makes things even worse. You end up with no long-term value and the benefit goes to the manufacture of the product or of the service and the credit card company. Sure it is the system of capitalism that gets us to this point, problem is far too many people don’t think about this subject in a mindful way or bother to really consider the options and the short term future.

This is exploited by the banks and credit card providers. If for a minute you did sit down and think about what today’s credit card borrowing was going to do for your future income, you probably wouldn’t borrow. You’d probably make a plan b. This is the plan b I would encourage you to consider sooner rather than later.

it is not possible for you to have a rock solid, and independent financial future if you have debts kicking around. Sure, there are such things as good debt – but in the main debt of any description is a bad thing. Over at moneytrainers.co.uk co.uk I have a couple of downloads on this particular subject.

It is vital that you review your existing financial circumstances as a matter of urgency and consider very carefully the level of debt but you have and what that is going to look like in the future.

DEAL WITH DEBT

“Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

Charles Dickens, David Copperfield

Current UK National Debt – the amount owed by the government is £2.156 trillion (at December 2018). At the end of December  2018 personal debt – the amount owed by us all personally was £1.65 trillion or £59,261 each.

UK National Debt now stands at £2,156 trillion. It’s currently increasing at around £5,000 per second. http://www.nationaldebtclock.co.uk. Someone will have to repay this at a future date.

Just so you know: a trillion seconds = 31,688 years or would take to back to 29,000 years bc.

Jesus was just a twinkle in an eye somewhere fact not born for another 27,000 years or so. These numbers are mind boggling.

There is something about debt, on one level it seems we can’t live without it, yet millions do manage it. Supported by the government and the banks we are encouraged to live now, buy now, have it all now on borrowed money – effectively mortgaging your future very nicely.

Borrow if you need, just understand how bad it can be for your financial health – like smoking it feels good at the time, but stuck in a cancer ward with terminal lung cancer does not seem that great.

The message we get from all of those trying to sell us things is this …Imagine how good you’ll feel when you have x or y. Just do it! There are many problems with this kind of thinking or approach to having stuff, and most of the stuff we all buy on credit is just stuff; first problem is this.

It’s a poor man’s (or woman) approach to life. The wealthy understand the truth about borrowing – you mortgage your future income in order to get that car or holiday this week rather than next month or next year, waiting for the right time, perhaps when you have saved enough.

Wealthy people, those that are able to earn and keep hold of money have very different spending patterns to most of us, and certainly don’t borrow to buy stuff. Working on your buying decisions is one way to ensure you become FI (financial independent) at some time in your life.

Long after the buzz of the purchase has gone, you will still paying for it out of your future income. Debt, effectively robs you of a future, an independent future.

It’s also stressful, and stress is a killer. Debt equals death, bit harsh, but go ask anyone in debt.

Repay/Overpay

I have a budget planner available from my website (email me on admin@moneytrainers.co.uk and ask me for a copy of it.

On the debt side of this planner I ask you to rank debt in order of it’s interest charge. Often you will find that the actual interest charge on much of your debt varies from 16% – 28% right down as low as 1% for mortgages.

You should then consider what borrowing can be repaid without penalty – credit cards are not normally a problem, but loans and other types of finance may have a penalty, check first.

Once you know what the most expensive debt is you should start to make larger payments to this, and maintain the minimum or contracted payment to the rest of your debt.

This method provides you with a ‘snowball effect’ as the more expensive debt starts to reduce, thus you’ll be paying less interest and more capital; forcing the debt to reduce.

True Cost Of Credit – Alison Average.

A few years ago Alison went on a very nice holiday and she put the cost of this on her credit card which leaves her with just half of the UK average debt of £4500.

This is likely to be paid off over the next ten years or so if she doesn’t spend any more on her card. Based on average repayment time, and an interest rate of 18.66% assuming she makes the minimum payment she should clear the balance completely in around 31 years, and pay £6350 in interest. Total cost is over ten grand.

March Update – Pesky Spam Filters

Pension Select Committee

I’ve been busy again in relation to this important committee  – that does seem to miss the point quite a lot. My most recent submission related to the ‘costs of pension transfer advice’ and the issues surrounding that – again we’ve seen a good deal of miss-advising going on with Defined Benefit Pension Transfers – notably with British Steel Members. My comments are here Pension Select Committee (link is not secure – can you believe)

Given that advice in mandatory for most of these transfers you’d think the regulator would be overly cautious  – reality is it’s not and a tiny number of really bad apples create chaos.  If you are lucky enough to have a final salary type scheme  – then it is unlikely it will be in your best interests to move it away – really.

Importantly if you are cold called or approached about moving it is more than likely a scam.

The really sad news is that last year 245 victims lost an average of £91,000 each – with few prosecutions so far. Sadly, the regulators, scheme trustees and our police service seem unable to stop it.  Spread the word, pension transfers are often a problem.  As a rule of thumb – never accept the advice of one adviser always get it reviewed independently, preferably by an independent Actuary.

House In Spain

I have finally purchased my holiday home in Spain. It’s taken a year. Some important lessons on that.

Use TransferWise for all overseas payments (even comes with a debit card if you choose) exchange rate and fees are far lower than the banks and for me better than the likes of Currency’s Direct. I’ll be honest, provided you are happy to deal online Transferwise seem hard to beat – all currency options and with the debit card and app means simplicity. If you are not tech savvy –  i don’t have any answers at the moment.  My purchase costs were about £1800 less than my bank (HSBC) quoted.

Second point – Spain seems to be pretty open to us British living and buying homes there, for me it was the weather and the beaches and the fact we seem to be wanted was a godsend.

Top Tip – I used a British Law firm to oversee the purchase, increased cost of about £900 but  I saved that on the currency switch. In Spain they only speak and write in Spanish  – the law does not accommodate any other language.

Financial Independence Retire Early (FIRE)

This movement has been getting quite a lot of flack recently – but I can assure you this.  In the past two years i’ve met over a dozen who have effectively retired – at 40 something.  The advisory industry seems to be disinterested in this kind of planning. What’s really interesting about what the movement is doing.

  • Not using pensions.
  • Investing their own money on a low charge basis.
  • Invest for income in the main – once it’s paid it’s yours.
  • Being mindful about what they purchase.
  • Having a side business if working full time.

Importantly, they are not spending hours of time managing or worrying about money – most of the time they are just making small tweaks to a handful of principles. I have some more to come on this, but here is a brief summary of what the #fire movement is doing.

Some of this is easy peasey, but when you dig deeper on these points the differences are profound, when compared with the usual advice.

  • Not using pensions.
  • Investing their own money on a low charge basis.
  • Being mindful about what they purchase.
  • Having a side business if working full time

That’s it for now.

Richard

Pension Scheme Trustees Obligations

In August of 2018 the Pensions Ombudsman upheld a complaint from a policeman after he had transferred his pension from the police scheme to scammer without the scheme carrying out adequate checks.
http://www.pensions-expert.com/Law-Regulation/Ombudsman-s-police-ruling-highlights-trustee-duty-of-care?ct=true

Now, on the face of it you could say that that was an acceptable approach from the scheme, in that a formal request submitted by the member in order to transfer benefits from one scheme to another should be processed,  and that they [the scheme] should accept that request and move the funds.

Considering it further, the trustees of the scheme do have an obligation to the member in order to ensure that the funds and benefits they hold on behalf of that member, are managed correctly. And in accordance with the normal rules and regulations that go with this type of scheme. Is it fair to expect the trustees to be ‘trusted’ to make sure that any transfer made fits with this obligation?  As the ombudsman ruled.

My view would be that, they do have some responsibility and a duty of care. The Pension Ombudsman agree.


https://www.gov.uk/government/consultations/ban-on-cold-calling-in-relation-to-pensions/ban-on-cold-calling-in-relation-to-pensions-consultation-on-regulations

There is also the issue of woefully adequate enforcement after the event of a transfer. When these dodgy transfer businesses are finally caught, it ends up with a major paperchase which it seems few police forces are able to cope with and the attitudes towards white collar crime mean that a lot of these people [bad guys]  get away with it. The National Crime Agency reports that it’s working with regulators – yet very little seems to be done – limited action.

http://www.nationalcrimeagency.gov.uk/crime-threats/fraud

Project Bloom also seems to be woefully inadequate in reporting on these matters and clearly not estimating the size of the problem correctly, based on it’s own assumptions.

https://www.parliament.uk/documents/commons-committees/work-and-pensions/Correspondence/Letter-from-Chief-Executive-The-Pensions-Regulator-to-the-Chair-relating-to-Project-Bloom-13-November-2017%20.pdf

In February 2017 the Pensions Regulator even called for a Safe Schemes list.

https://blog.thepensionsregulator.gov.uk/tag/project-bloom/

Fact is this important and no doubt expensive project has been around for a number of years and delivering very little.

I have been approached by several campaigners on this matter in recent months and the evidence is frightening, these firms are transferring pension business and committing crime on an industrial scale. This is not some backstreet firm, it’s organised and professional.

When I submitted my returns to the Pension Select committee a few months ago one of the things I suggested was that we should make the various regulators a bit more responsible for what is actually happening here.  Now I know that passing the buck to pension scheme trustees or to the pension regulator may not be the right answer. That said we have a particular problem, we have a problem where lots of individuals are losing big chunks of their hard-earned pension money.

My suggestion is we consider very carefully the obligations that trustees have in order to make sure pension money is protected and that it goes to the right place if moved.  We also make sure that any advice provided is, either second guessed by a third party advisor or actuary. Or indeed it is signed off or accepted by the trustee as being a legitimate transfer.

So far this year we’ve seen more pension mis-selling and poor advice in relation to pension transfers – despite pressure from the regulator –  nothing seems to change.

So, here goes.

The Implementation a very straightforward traffic light system –  red yellow green. Would help consumers, this would follow an assessment by a third party adviser/actuary/pension transfer specialist – and would consider the receiving provider along with (potentially) other issues.  The benefit of this would be to put in place a further checks on the quality of advice that is being provided but also to make the bad guys consider very carefully and understand that there is a checking process in place and they will have to deal with.

There is not an advisor in the country that should be concerned about having a third party check on their advice and to be under external scrutiny. Importantly, by transparently providing an additional check on their advice to a member of the public should make everyone feel a lot more comfortable.  

The truth is, on this matter Government and law enforcement seems powerless to be able to protect individual pension scheme members from the scammers. I would suggest therefore that the industry picks up the baton and puts in place its own systems of checks and balances to ensure the individual members are protected. It has everything to gain and little to lose.

I doubt the industry will because it feels that it has enough to do – but if the pension transfer side of  personal finance wants to be credible in the eyes of the public and doesn’t want to face future regulation it should act now.

Ban Commissions

A end on commissions based on fund value (yeah I know the industry calls them fees – however fees are traditionally paid direct, by  the customer, not from the value of the investment), the simple allowance for advice direct from the scheme. Puts advisers on a par with other professionals and means some of the bad guys won’t be able to function.

Also means that members can get access to high quality advice without having to find the costs of advice upfront.

There are many ways to deal with these issues and we know that under the current system, for some reason change will not be coming soon enough – which means there needs to be an alternative. At the moment, the industry ain’t looking that good and the bad guys are still getting away with it – so something needs to change.

Alison Average – average income, average taxes – not a lot left.

Alison Average – Just an Ordinary British Girl

Let me introduce Alison, she was wondering where all of her money went on a monthly basis, we helped her by showing how her lifetime would look if she did nothing. Her lifetime spend and taxation is below.

Alison Average was twenty years of age on the 18th January 2016. Her working life will be 48 years. Assuming she continues working she can expect to get £115 per week from the State Pension Scheme, starting on the 18th January 2064.

Alison works in an average job for average pay of £26,500. This means that over a lifetime she will earn £1,272,000. It’s likely to be substantially more than that, inflation and job progression etc will help to boost her lifetime earnings. She should be pleased with that, a lifetime millionaire – only it’s paid in instalments.

Ordinary people like Alison don’t get to keep all of their income. Some of it will be taxed and other bits forced into pensions; she also has living costs to find, she is the same as you and I.

After Income Tax and National Insurance Alison gets around £1758 per month, however her gross pay is £2208.33 per month, which means £449 is deducted before she gets it. Over her working life she gives to the government via taxes £258,624.

She did not opt do a degree or she would have had to fund the costs of that, and could have had £50,000 in debt to repay.

Alison does not have the means to buy a house on her own she could not afford one. But she has found a flat which is ideal, but she has to travel into London – it’s not possible to find a flat within walking distance of her work. She will have a season ticket cost of £1600 per year, or £76,800 over her working life.

She decides to buy the flat at £145,000 with a mortgage via one of the major high street lenders, she borrows 95% (£130,000). Her mum helped out with the deposit.

Monthly cost assuming interest rates remain the same is £685 which means she will pay back around £205,000 over the life of the mortgage, and pay around £1,000 per annum in Council Tax over her remaining working life, if Alison lives to average age (81.5) she can expect this to total over £61,500.

As she is buying her own home, she will also have to find Stamp Duty. Assuming she only moves three times during her lifetime than she’ll have to find another £7500 or so (assuming she buys at current prices). Of course if she is lucky enough, saves and invests wisely then she could end up investing in property (one strategy that works) under the new rules for stamp duty she could be substantially more.

Her mum got her a car for her birthday, and she spends around £20 every week on fuel, visiting family and her boyfriend. Based on an average of £80 month (£960 per year), she has to pay Fuel Duty at 57.95p per litre, and of course VAT. Fuel Duty is £556.32 per year and VAT making up another £192 every year. Over Alison’s working life that makes around £36,000 in additional taxation.

Alison also drinks the odd glass of wine with her friends; she’s not sure but thinks it’s around the government guidelines which is two 750cl bottles per week, meaning the total Wine Duty cost is about £5.50 per week or £13,728 over her working life.

She does have some other expenses, and Alison spends around £300 per month on food and clothing. Most of which has VAT added. She’s not sure of her itemised spending but she thinks most of it has VAT added, so around £60 per month goes to the Treasury. £34,560 over her working life.

A few years ago she went on a very nice holiday and she put the cost of this on her credit card which leaves her with just half of the UK average debt of £4500. This is likely to be paid off over the next ten years or so if she doesn’t spend any more on it (based on average repayment times). The current interest rate on her card is 18.9% and if she makes the minimum payment she should clear the balance completely in around 31 years, and pay £6350 in interest.

There are some incidental taxes, and these should be considered. Her home and car insurance has insurance premium tax (IPT) added at 9.5%. Alison pays £900 for her car insurance and £400 for home contents, making £123.50 per year or £5928 over her working life.

Another incidental is the effect of VAT on home energy, as Alison is conservative user she only spends £104 per month on both, however the vat is £5.20 per month or £2995 over her working life, increasing to £3837 over her lifetime.

Consider another of Alison’s additional payments – her pension. It’s likely she will be poorer to the tune of about £100 per month by making a pension contribution, however based on the level of charges (assumed 2%) she could expect to lose around 20% of her fund every ten years.

Noting that if her pension fund ends up as nothing because of poor investment returns there is no recourse on the state or the company – she would have some comeback for just about every other consumer purchase, but very little for pension non performance.

Despite various searches around the Government portals like Money Advice Service and the Financial Conduct Authority, the Pension Advisory service it’s not possible to clearly clarify the impact of charges, those sites that should offer calculators don’t. If she opts for Pension Freedom her overall charges will increase substantially.

There are a number of things Alison Average can do to help with the amount of tax she pays, and by arranging her finances differently she could be saving many tens of thousands of pounds over her lifetime.

If Alison saves at least some of her money for her use rather than for everyone else to use – spent money is enjoyed by others and not by you; she could…

Take longer holidays, perhaps a month off every year in the middle of winter.
· Take mini breaks of a couple of months every couple of years, like a mini retirement.
· Not worry about the pressures of work.

Even if she manages to build up as little as two years salary, invested this will make a massive difference to her pre zimmer and post zimmer life.

Don’t forget, if you want some angles on this – get on my email list. It’s got a shit load of stuff you should know.

Your best email address

Meanwhile, you’d better note that your personal information ain’t ever shared or loaned.

My Thirty Years In Financial Services

Thirty Years In Financial Services  – Here Are Thirty Things I Have Learned

Richard Smith is the explainer in chief over at Moneytrainers.co.uk in this short article he talks about what he has learned and now this can impact your own financial future

Start Making Your Money Work For You
Pay Yourself First
Start Slush/Rainy Day/Spending Pots Of Money
Spend Mindfully
Don’t Buy Stuff
If It Goes Down In Value – Lease It (Cars and Vans)
If It  Goes Up In Value Borrow Against It
Make Sure You Know What The Charges Are
Invest In Tracker Funds
Invest In Exchange Traded Funds (ETF’s)
If Using An Adviser – Ask For Evidence
Pensions Should Be A Last Resort As A Investment Wrapper
Trying To Beat The Market Is Futile
Invest For Income
Invest With Low Charges
Invest in Peer to Peer schemes (Funding Circle etc)
Never Invest For Tax Reasons
Use Tax Free Allowances
Make Sure You Use Capital Gains Tax Allowance
Set Up Your Own Business
Learn How To Trade Your Skills
Invest In Your Education
Learn How To Leverage Everything
Watch What Everyone Else Is Doing And The Do The Opposite
Avoid Investing In Areas Of Government Support/Legislation
Understand How Markets Work
Use The Online Platforms
If It Seems Too Good To Be True – It Probably Is
The Bloke Down The Pub Is An Idiot
You Know What You Need To Do In Order To Stay Healthy