View more on these topics

FSA would not look favourably on Lorna&#39s advice

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&#39s 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&#39s 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?

Name and address supplied

Recommended

Keeping a float

IFAs watching their clients&#39 stockmarket investments plunge over the last year might feel wary of subjecting themselves to the same rollercoaster ride.Lighthouse, Millfield, Kingsbridge and Inter Alliance are among IFAs who have already taken the plunge and are listed on the Aim.Cavanagh Group and Ber-keley Wodehouse are set to follow. DBS, Countrywide, IFA Network and […]

Skipton Building Society – 3 Year Fixed 4.99 Per Cent

Monday, 15 October 2001.Type: Fixed rate flexible mortgage.Fixed term: Until January 31, 2005.Fixed rate: 4.99 per cent.Minimum loan: £5,000.Maximum loan: Up to 85 per cent of valuation subject to a maximum of £1m.Income multiples: 3.5 times principal income plus second or 2.75 times joint.Features: Overpayments, payment holidays, interest calculated daily.Arrangement fee: £295.Redemption fee: 3 per […]

Norwich Union travels with cashplan

Norwich Union has introduced its individual cash plan, a healthcare cash plan that offers cash benefits towards the cost of travel vaccinations.The cash plan has five levels of cover available to single people, couples and families, including lower premiums for single parents. Premiums for single people range from £6 to £30 a month. Couples pay […]

Scotland international Chris Paterson celebrates

Scottish Mutual has teamed up with the Scottish Rugby Union in a six-figure deal to sponsor its autumn international tests.The sponsorship deal, which will run until 2004, includes pitch, scoreboard and ticket branding as well as VIP hospitality opportunities.The deal also includes a package to support grass-roots rugby whereby every child who attends a Scottish […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com