I am compelled to write to you after reading the latest piece of wisdom in the guise of the Lorna Bourke article (Money Marketing, October 11). The contents of the piece show an alarming lack of basic financial planning knowledge, risk management and basic arithmetic and will cause concern to all who read her comments.
Ms Bourke appears to have hit on the wonderful idea of borrowing money to fund a pension contribution as a way of clawing back the losses made within individual pension funds for those nearing retirement. She advises that, with mortgage interest rates at around 6 per cent, it would make sense to take on significant debt to fund a lump-sum contribution prior to the abolition of the carryback/forward provisions in January 2002.
She continues with her line of dubious logic to confirm that, as the FTSE is hovering around the 5,000 mark, clients close to retirement should plunge headfirst into the market on the basis that things can only improve.
She further suggests that if the client has an existing s226 (s620) policy, they could immediately use 33 per cent of the fund as tax-free cash to repay part of the debt incurred to fund the pension contribution. This approach is so flawed that it is difficult to know where to begin in pointing out potential pitfalls but the following may be a start.
In order to pay interest at 6 per cent, an individual would have to earn 7.7 per cent as a basic-rate taxpayer or, as is more likely to be the case in Ms Bourkes's example of a £100,000 contribution, 11.67 per cent as a higher-rate taxpayer to fund the debt out of taxed income.
If Ms Bourke is aware of an investment arrangement which will guarantee these returns without risk to capital, she should let us all into it. She would, I am sure, be highly praised for so doing.
This type of gearing for those close to retirement is extremely dangerous, particularly in the context of volatile global markets. I would imagine that the regulators would not look favourably on an IFA recommending this course of action and its consequent level of risk for a target market which generally seeks to reduce risk.
Ms Bourke gleefully confirms that, should the investor in her scheme have a s226 policy, they could use 33 per cent of the fund to repay part of the still outstanding debt at retirement. The rules pertaining to these plans state that tax-free cash is limited to three times the residual pension, which, in today's low interest rate environment, often means the percentage being as low as 20 per cent.
This is basic FPC1 stuff and once again leads the full-time professionals in the industry to feel exasperated at the lack of understanding of the fundamentals displayed by those who seek to educate the public through newspaper articles.
Furthermore, individuals with an existing s226 plan may continue to carry back and forward after January 2002 as the abolition applies only to personal pensions.
Some of my business contacts with a highly detailed understanding of the investment markets still believe that the market is too high and will fall further in the short term. Is Ms Bourke prepared to guarantee to those potential investors she has in mind that their geared investment will not fall further, leaving them with a large and ongoing outstanding debt and an asset valued at less than the debt in retirement?
As far as professionally unqualified financial journalists are concerned, they can file such tawdry copy all day long with no accountability whatsoever to the unsuspecting public who follow their advice.
It reminds me of the series of articles Ms Bourke wrote in the late 1980s (of which I still have copies) extolling the virtues of “unlocking your pension” and transferring from occupational schemes into personal pensions. Any more gems, Lorna?
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