Aviva and Tesco link – so who will benefit?
Last week, Tesco announced that it was linking with Aviva to sell life insurance and critical illness insurance to its customers. This will mean that along with the baked beans and eggs you can buy some term life or heart attack insurance!!
We believe that for life insurance, everyone should have both the right amount and the right type. There could be nothing worse than a father being killed in a car accident only for his widow to lose the house because she didn’t have enough money. We believe that a widow should be able to dress as well as a wife.
But is a tie-up such as this the right way forward?
We are sure that you will not be sold at the counter, but with Tesco’s massive database they know what you buy, and if you buy nappies there is a fair chance you have a baby, and so will probably receive a mailer for life insurance. But this can all go terribly wrong.
A number of years ago, a widow came to our practice for help after her partner died. They had small children and had purchased life insurance, in this case with a bank, for £100,000, in addition to a policy that paid offthe mortgage. She now had no mortgage to pay, but only received £60,000 in the insurance payout. Why? Because you must pay inheritance tax on life insurance policies if the value of your estate is over £325,000 (in those days it was £250,000). £60,000 is not alot to live on, even with no mortgage.
We realise that some people will buy insurance but will not know the right amount, or will not understand the tax implications of taking out life insurance, as happened in this case, and we fear the same may happen if insurance is purchased in an ‘unadvised’ way.
All life insurance needs to be placed in trust not just to protect it from inheritance tax, but also to protect it from being claimed by creditors, or lost in a second marriage divorce. If you know anyone who has life insurance, please make sure they have the policy in a trust. If not, have them call us; you could save them thousands of pounds.
Pensioners better off than the rest!
We hear so much about how badly off pensioners are, but a recent report by the Institute for Fiscal Studies says the reverse is true.
According to a new report by the IFS,more than 40% of pensioners are in the top half of income earners compared to 25% twenty years ago. The benefits of large numbers of final salary pension schemes mean that many pensioners continue to receive decent protected pensions, with at least inflation protected increases. Conversely, many earners have had pay freezes and struggle to keep up with inflation.
The recent changes in the Budget also benefit pensioners (or should we say they lose out less then the rest!).
The report states that pensioners will lose £316 per year from the Budget changes, whereas a couple without children will lose £715 and a couple with two children will lose £1,781.
Of course, rarely will anyone be the typical person that these types of report refer to, but it is interesting to see how things work out over time.
A small triumph for regulation
In January 2013, commission will be banned on investment products in the UK. Anyone selling you an investment will not be able to be paid by commission, but instead will need to charge a fee. We have reported on this twice before, and are pleased that, at long last, the impact of commission will be removed from selling investment products. No more will there be the bias caused by different commissions on different products.
There was always one small problem with the regulations, though; what about when a payment wasn’t commission, but looked like commission, tasted like commission and smelt like commission?
This is the case with a so-called ‘bundled rebate’. You may have noticed that some organisations selling investments advertise them to be free of fees and commissions. As we have mentioned before, if it looks too good to be true, it probably is. How is it that you can run any business without charging fees, or without receiving commissions? Clearly the answer is that you can’t. Therefore, how can an organisation, such as Hargreaves Lansdowne, for example, run its business if it makes no charge and receives no commission? Indeed, one of the last mailers that a client received said, transfer your ISA business to them, at no cost, and receive a cash rebate! How can this happen, and more importantly, how is it that so many people fall for it?
There is no such thing as a free lunch, especially when it comes to financial products. Everything must ultimately be paid for. And this is where the so-called ‘bundled rebate’ comes in.
Most providers (such as Fidelity, M&G, Jupiter, etc) pay a bundled rebate to the administrator of the investment. It is this payment that pays their costs and helps togenerate their profit. But because it is not called a commission,they don’t have to tell the customer about it. In effect it is a payment that they receive and you never know about.
It is this rebate that the FSA has become increasingly concerned about, because some providers can increase their rebate to attract more business. Often when you see an administrator recommending or promoting a fund, it’s because of the increase in the bundled rebate.
Last week, the FSA announced its intention to ban these payments from 2013. Unfortunately, those payments already being paid will continue. Therefore, those companies that have handed over money on this basis will continue to be paid this undisclosed ‘commission’.
In a world where there are so few of us that are trying to trade honestly, and tell the client exactly what they are paying, and what we earn (we have worked on the basis of not taking any form of commission, no matter what it’s called, for over 5 years), it is good to see the FSA taking a real stand against businesses that are not truly transparent in their dealings.
EEC focuses on evasion
It is a strange world. Europe is on the verge of imploding, especially Greece where there is a systemic culture of avoiding paying tax, and yet a small part of the EEC wants to change that culture. Algir das Semeta, a Lithuanian economist and European Commissioner for taxation, said last week that “tax evaders steal from the pockets of ordinary citizens”. The statement was made as the EEC looks to establish additional auditors to create a structure that makes it tough for people to evade tax. Unfortunately, our understanding is that this will focus on the super rich, and tax evasion schemes, to bring some consistency across the Union – in itself not a bad thing. However, until millions of ‘ordinary’ citizens are more honest and pay their normal day-to-day taxes, very little will actually change.
Is it right to reduce tax?
Last month, Jimmy Carr, the comedian, received a great deal of bad publicity following the disclosure that he used the K2 product to reduce his tax liability.
With K2,money is paid into a Jersey trust which then pays it back out as a loan. The idea is that the K2 trust has non-domicile status, and so pays no tax in the UK. It can then receive income, and make a loan to whomever it wants. Of course, the loan is repayable, but that seems to have been forgotten in the media frenzy.
We became aware of this particular technique about a year ago. Having reviewed it we decided that, while legal, it bordered on tax evasion rather than avoidance, and so decided NOT to recommend it to clients. Following this, a couple of clients who read about the scheme, and were ‘mailshot’ its details, approached us to use it. We advised them that if a scheme is appropriate we would approach them with it, and that we did not recommend thisone. One client went away happy, the other disgruntled, thinking that we were not being ‘aggressive’ enough. Interestingly, that client called a few days ago to say how happy he was at our recommendations and that we had stood firm.
Avoiding tax is a tricky area, and one requiringcareful consideration. Always take advice, and always take advice from someone you trust and who you know will be around in years to come to defend you if needed.
Book of the month
This month’s book recommendation is ‘Eat That Frog!: Get More of the Important Things Done, Today!’ by Brian Tracy.
Whilst I have read a number of books on time management, none have given so many brilliant ideas in such a short space of time. I cannot recommend this highly enough, as we have restrictedthe way in which we all work at Efficient Portfolio as a result of it.
A must for everyone that wants to be more productive as well as anyone that gets down by the constant list of tasks that life and work throw at you. Enjoy ‘Eating that Frog!’
