Postcode annuities may penalise healthy pensioners

July 24, 2008 | posted by Pam Atherton in Pensions | Print This Post

It’s all change in the once sleepy world of annuities. And before you yawn with boredom, be aware that you may well have to buy one yourself, whether you like it or not.

This is because three quarters of final salary (defined benefit) schemes are now shut to new employees and more workers belong to group personal pensions or have some form of individual personal pension arrangement, such as a stakeholder or Sipp.

All these types of personal  pension require you to buy an annuity with your pension fund when you come to retire (unless you decide to do income drawdown instead, but that’s another story).

The cost of buying an annuity has soared over the last 15 years, as bond yields have fallen and longevity has increased.

In addition, whereas most insurers used to assess annuitants’ likely life expectancy based on gender, age and marital status, the business of rating how long someone is going to live is now a much more sophisticated.

This is because the difference in lifespans in different parts of the UK is quite stark. People living in Glasgow, for instance, have the shortest likely lifespans for anywhere in the UK, whereas men living in West Dorset have the longest.

Hence, the shift to what is known as ‘postcode annuities’ whereby insurers look at geographical, as well as health and socio-economic, factors when estimating life expectancy.

The idea is that if you live in an area with a history of people dying early, the insurer will pay you a higher annuity income because you are likely to die much sooner than someone living in a ‘long life’ hotspot,  such as Bridport in Dorset.

There are also strong correlations between blue collar workers living in the north of the UK and shorter life expectancy, and wealthy white collar employees in the south and longer life expectancy.

Norwich Union is to follow Legal & General and to start using postcode annuities from September this year. Annuitants will be divided into nine groups based on geographical life expectancy, with those with the shortest life expectancy receiving up to 2 per cent more than those with the longest expected lifespans.

NU admits that this will mean that around 30 per cent of ‘healthy annuitants’ will be worse off.

Defaqto pensions principal Matt Ward says: “This development is yet another sign that annuity rates are moving towards an individual pricing basis. The onus for consumers who view annuities as their preferred method for translating retirement savings into retirement income is to shop around to find the best annuity rate in the market for their individual circumstances, whether this be through their smoker status, health outlook or postcode.”   

Currently only one in three individuals approaching retirement bothers to seek out the best rate in the annuity market by using what is called “the open market option” - or the right to shop around, to you and me.

By doing so, you could obtain up to 16 per cent more than the standard rate if you are a smoker, and up to 30 per cent more if you have a life threatening illness or medical condition.

It is best to use an Independent Finacial Adviser when looking to purchase an annuity as it is a complex business and once you have bought an annuity you can’t change your mind afterwards. 

It really is a ’once-and-for-all’ decision which will affect your income for the rest of your life.

 You can get an idea of how much your pension fund might buy you  by using the Defaqto Annuity Calculator:http://www.defaqto.com/consumer/pensions.aspx

IFAs specialising in the annuity market include:
http://www.williamburrows.com/
http://www.retirement-partnership.co.uk/
http://www.annuitydirect.co.uk/
http://www.annuity-bureau.co.uk/

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Insurance myths fuel rejected claims

July 23, 2008 | posted by Pam Atherton in Insurance | Print This Post

Research by car insurer LV= has found that over half of all motorists don’t understand their insurance cover and, as a result, could be breaking the law.

The insurer has compiled a list of the  seven of the most popular misconceptions and urges motorists to bear these in mind when buying or renewing motor cover or risk in order to avoid suffering a rejected claim.

MYTH 1:  “If I have comprehensive cover, anyone can drive my car”
 
FACT: If you lend your car to someone else who is not named on your policy, you need to ensure they have comprehensive insurance in their own name that includes a “driving other cars” clause. Otherwise, they will be uninsured. 

Even if they do have comprehensive insurance in their own name, they will still be covered for third party only when driving someone else’s car and you will not be covered for any damage they cause to your vehicle. 

If they have no insurance in their own name, they could be convicted of driving while uninsured and receive up to six points and a significant fine.
 
MYTH 2: “Unless I am at fault in an accident, my no claims discount will remain the same.”

FACT:  It’s important to remember that a ‘no claims discount’ does not mean ‘no blame discount,’ so if you make a claim, your discount will be affected, even if you are an innocent party to the event. (The exception to this is where the other party admits liability in an accident). 

An example of where the innocent motorist is penalised is if their  car is stolen or  hit by another motorist whilst parked and they did not leave their details.
 
MYTH 3: “Third party car insurance is much cheaper than comprehensive insurance.”

Fact: Drivers who take out third party cover are more likely to make a claim on their insurance than drivers who take out comprehensive cover.

Emma Holyer, press officer at LV= says: “It is younger, higher risk, drivers who tend to buy only third party cover and because they make more claims, the difference in cost between the two type of cover is minimal. For this reason, some insurers, such as NU, have stopped offering third party cover altogether.” 

MYTH 4: “Restricting my car insurance policy to just myself will make it cheaper.” 

FACT: Adding a spouse or partner often reduces the premium, because married people or those living with a partner are statistically less likely to be involved in an accident.
 
MYTH 5: “If my car is being paid for with a personal loan, the insurance will cover the cost of paying back the loan if the car is written off in an accident.”

FACT: Your insurance will payout for the value of the car at the time of the accident. But because cars depreciate quickly, the payout may be substantially less than the original cost of the car and the size of loan taken out to pay for the vehicle.

MYTH 6: “If my car is a write off following an accident and I decide not to buy another car with the money I claim, I will get back the remaining insurance premium for the rest of the year.”

FACT: A car insurance policy is agreed at the outset for a period of 12 months and once you have claimed for a write-off, the insurer has fulfilled its part of the contract, so no balance of premium will be returned  to the insured. 

However, if you replace the written-off vehicle with another car with the same insurance rating, then your premium will remain the same, and any no claims bonus will remain in place, for the rest of that policy year.

MYTH 7: “Courtesy cars come free with most car insurance policies and are provided in the event of the car being written off or if the car is stolen.” 

FACT: Many policies offer a ‘free courtesy car’ but it is often provided by the garages on their network and you may only receive one if your car is being repaired, and not if it is written off or stolen. 

Other insurers offer a courtesy car as an optional extra, in which case, you are guaranteed a car in the event of any claim.
Mike Powell, Defaqto insurance principal comments: “If you couldn’t manage without your car, it is best to go for this option. If you have a high class vehicle, some insurers offer  ’enhanced courtesy cars.’ Other extras to check out when purchasing cover  are child seat cover and legal expenses.”
 
Take a look at the Defaqto car insurance Compare Tool which enables you to analyse policies in detail:
 http://www.defaqto.com/consumer/insurance/motor/compare-car.aspx

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Rush to find inflation beating savings accounts

July 22, 2008 | posted by Pam Atherton in Banking, Savings | Print This Post

With Consumer Price Inflation hitting 3.8 per cent and Retail Price Inflation 4.6 per cent  in June, savers need to invest in the top paying accounts, just to beat the rise in prices.

But savers also need to factor in the effect of tax.  Most UK savings accounts  automatically deduct 20 per cent income tax (unless you are registered for gross interest) and higher rate taxpayers are liable for further 20 per cent tax on their savings.

Even though a few fixed term accounts are paying 7 per cent gross interest, Defaqto’s banking  principal, David Black, warns: “Higher rate taxpayers will now have to obtain a gross rate of interest of  7.67 per cent,  just to keep pace with inflation.”

National Savings & Investments’ three and five year index linked savings certificates pay 1 per cent over RPI, giving a current pay rate of 5.6 per cent.

As these are tax free products, this equates to 7 per cent for higher rate taxpayers and 9.33 per cent for basic rate taxpayers.
 
If you have £3,600 to spare, there are few better places to put your money at the moment than an index-linked Cash Isa. National Counties Building Society is paying RPI plus 2.6 per cent annually for three years, equating to an annualised return of 7 per cent (assuming that RPI remains at 4.6 per cent rate for the next three years),  the society says.

The inflation return is measured by the change in the RPI from October 1 to September 30 2011. Before that, deposits earn interest of 6.75 per cent tax free.

Another Cash Isa worth looking at is Leeds Building Society’s Inflation Buster ISA which guarantees to pay RPI, plus 2.5 per cent. If the RPI were to  average 4.3 per cent over the period of investment, this would give a tax free return of 6.8 per cent.

Elsewhere, Northern Rock’s one year fixed rate bond is paying 6.75 per cent, which while taxable, may be attractive to nervous investors because Northern Rock deposits are effectively guaranteed by the Government.

Bradford & Bingley is paying 6.51 per cent gross. Savers worried about the future of B&B should bear in mind that only the first £35,000 of savings with a financial institution (and any of its linked subsidiaries) are protected in the event of a bank going bust.

Meanwhile, there are a number of taxable accounts which top the best buy tables, but only because they include bonuses which last typically for one year. These are fine providing you are prepared to switch accounts when the bonus expires.

For instance, Derbyshire Building Society’s online account is paying 6.55 per cent, but with a bonus of 1 per cent for the first year.

Another example is Alliance & Leicester’s Premier Direct Current Account, currently paying 8.19 per cent gross for the first year, after which it falls to base rate less 1 per cent (or 4 per cent if  base rate is 5 per cent in a year’s time). The 8.19 rate is only available if you deposit at least £500 a month.

If you prefer a branch-based account, Abbey’s Instant Access Saver 2 provides a rate of 6.39 per cent, including a 1 per cent bonus for 12 months.

For more information, visit  Defaqto’s best buy tables:

http://www.defaqto.com/consumer/savings-accounts/cash-isas.aspx
http://www.defaqto.com/consumer/savings-accounts/regular-savings-accounts.aspx
http://www.defaqto.com/consumer/savings-accounts/instant-access-accounts.aspx
http://www.defaqto.com/consumer/savings-accounts/term-accounts.aspx
http://www.defaqto.com/consumer/savings-accounts/notice-savings-accounts.aspx

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LV= offers guarantee on drawdown plan

July 21, 2008 | posted by Pam Atherton in House prices, Mortgages, Pensions | Print This Post

With soaring inflation and pensions proving to be disappointing, an increasing number of retirees are looking to release equity from their properties as a means of bridging the gap between their actual income and their financial needs.
 
And the equity release market is becoming increasingly flexible, with more and more schemes allowing pensioners to draw down  small sums of money from their property, as and when they need to.

This is more cost effective, as the homeowner only has to be pay interest on the amount drawn down, rather than on a large lump sum which might be more than the pensioner needs at the start of their retirement.

The mutual insurer, LV=, has recently launched a Flexible  Lifetime Mortgage that allows homeowners to access funds,  as and when they need to, together with a 15-year guarantee on the maximum loan amount that can be drawn down.

This means that whatever happens to interest rates and property prices, homeowners have the peace of mind of knowing that throughout this period they can access the total amount agreed at the outset.
 
The product comes at a time when research commissioned by LV= indicates that 6.5m people over the age of 50 admit they are more concerned than ever about their income in retirement.

On average they would need £20,400 a year in retirement, but believe they would have a real income of only £17,200 a year.
 
With the LV=’s plan, homeowners between the ages of 60 and 95 can draw down a minimum amount of £10,000 and subsequent additional withdrawals of at least £2,000, up to the maximum loan agreed at outset.

The rate of interest is 6.95 per cent, or 7.1 per cent APR, fixed for the lifetime of the loan.

As an example, a couple aged 70 and 75 years respectively, living in a property valued at £325,000 could take a starting loan of £15,000.

At the same time, they could agree a maximum loan giving them access to a further £30,000 which they could draw on any time.
 
The initial application fee of £695 includes the cost of two further property re-valuations throughout the lifetime of the loan.

The scheme also comes with an all-important ‘No Negative Equity Guarantee’  which means that both the customer and their beneficiaries will never have to pay back more than the value of their home on death or permanent entry into long term care.
 
Other insurers offering similar equity release drawdown products include Just Retirement and Prudential.

David Black, banking principal at Defaqto comments: “If house prices fall significantly, equity release providers will fear potential liabilities as a result of their no negative equity gurantees. But LV=’s  guarantee that it will honour its initial drawdown offer for 15 years should give customers some reassurance.”

For more on equity release, see the Defaqto guide:

http://www.defaqto.com/consumer/mortgages/equity-release.aspxase

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Good and bad news on the mortgage front

July 17, 2008 | posted by Pam Atherton in Banking, Mortgages | Print This Post

Many mortgage advisers are failing to do their job properly,according to an undercover investigation by Which? Money researchers, with only four out of 50 advisers found to be giving acceptable advice.

80 per cent of them failed to provide one or more pieces of key information and 35 failed to do proper checks on the applicant’s ability to repay the mortgage.

Two out of three of advisers tried to sell the mortgage applicant insurance at the same time, often for an unsuitable product, and many failed to tailor their advice to the individual’s needs.

Which? Money editor, Martyn Hocking, said: “With mortgage costs soaring and the spectre of negative equity returning to the property market, it’s important that people get help to find the right deal.

There are still more than 3,000 mortgage deals out there, and the difference in cost can be thousands of pounds a year, so it’s vital people do their homework and chose the right adviser with care.”

The good news is that Nationwide is to cut the cost of mortgages for new borrowers from tomorrow, with rates falling by up to 0.46 per cent on some of its fixed rate and tracker home loans. 

Mortgage rates have fluctuated during the credit crunch due to the cost of wholesale borrowing for lenders. Swap rates, the rates at which banks lend to each other and which influence mortgage rates, have been stubbornly high until recent weeks, when they started to fall.

Nationwide is cutting the rates on its two year fixed rate deal (75 per cent loan to value with a £599 fee), from 6.48 per cent to 6.18 per cent. For 90 per cent LTV mortgages, the rate drops from 6.88 per cent to 6.58 per cent.

On its Lifetime Tracker mortgage, Nationwide has reduced its rates to 5.98 per cent (on up to 75 per cent LTV) and 6.38 per cent (for 75-90 per cent LTV).

Ray Boulger of mortgage broker, John Charcol, commented: “Swap rates peaked in mid-June at 6.5 per cent, but are now 5.82 per cent. Nationwide has also aligned its purchase and remortgage rates making it possible for existing customers to enjoy the same deals as new customers.”

Nationwide attracted a great deal of criticism a few years ago for limiting its best deals to new customers only.

But the mortgage market is expected to remain difficult and volatile in the coming months as the credit crunch continues to take its toll and the outlook for interest rates remains unclear.

Take a look at Defaqto’s uniuqe mortgage calculator to see how much you can afford to borrow:

http://www.defaqto.com/consumer/mortgages.aspx

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Banks take another bashing from the OFT

July 16, 2008 | posted by Pam Atherton in Banking, Savings | Print This Post

Retail banks are in trouble again with the Office of Fair Trading  -   this time over current accounts, with the watchdog accusing them of  levying opaque charges, totalling £8bn a year.

 OFT chief executive, John Fingleton, accused the banks of   “charging more and more for things we can’t see” on the BBC’s Radio 4 Today programme this morning and that personal bank account holders were paying an average of £152 a year for the privilege.

He accused the banks of charging the most financially stretched individuals the most, with 1.4m customers paying over £500m in charges - or an average of £357 a year.

Today’s OFT report shows that of the £8bn revenue banks receive from current accounts,  £2.6bn derives from overdraft charges and £4.1bn from the difference between the interest banks earn on customers’ in-credit balances and the lower rate of  interest they pay to customers.

Mr Fingleton said that three out of four customers have no idea how much interest they are earning on their accounts and that the complexity of the charges made it difficult for customers to compare accounts.

“Few customers know how much they will be charged either before or after costs are incurred. To switch accounts, people need to know the average monthly balance on their account which only the bank can tell them. The complexity and lack of transparency mean people have little incentive to switch,” he said.

But the British Bankers’ Association hit back saying that free in-credit banking was almost unique to the UK and that those customers who don’t go overdrawn can get exceptionally good deals.

A case in point is the Lloyds TSB Classic and Classic Plus accounts which are currently paying 6 per cent on in-credit balances up to £2,500, despite base rate being at 5 per cent.

That said, many banks pay as little as 0.1 per cent on current accounts, particularly where the customer pays in small amounts or less than £500 a month.

Elsewhere, the legal fight between consumers and the banks over the fairness of overdraft charges looks set to be a drawn out battle lasting several years.

David Black, Defaqto banking consultant, comments: “I expect we will see a cap on overdraft charges and eventually the banks will recoup this revenue by ending free in-credit banking.”

In the meantime, you can compare account features in detail by using the Defaqto current account Compare Tool:

http://www.defaqto.com/consumer/current-accounts/compare-current-accounts.aspx

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Intestacy law due for a shake-up

July 15, 2008 | posted by Pam Atherton in House prices, Investments, Taxation | Print This Post

The antiquated rules which apply to the estates of people who die intestate urgently need updating if they are to reflect today’s property values and lifestyles.

 Currently, if you die intestate (without a will) in England or Wales, and are legally married or in a registered civil partnership, your spouse or partner will inherit only the first £125,000 of your estate, plus possessions. Different rules apply in Scotland and Northern Ireland.

 If there are children, your spouse or civil partner will receive the first £125,000, personal possessions and the right to income from half of the rest of the estate. The rest passes to the children.

If there are no children, but your parents are still alive, your spouse or civil partner will receive the first £200,000 of the estate, plus half the balance, and the rest goes to your parents.

The same applies (as above)  if your parents are dead, but you have siblings.

It is only in the unlikely event that you have no surviving parents or siblings that your spouse or civil partner will receive everything.

These rules have meant that bereaved spouses have been left with inadequate funds to live on because their deceased spouse’s estate over £125,000 has gone to the children who may have to pay inheritance tax at 40 per cent.

This has recently led to a mother having to sue her own children for a larger share of the assets because her husband died intestate and the bulk of his estate passed to her two dependant children.

According to the National Consumer Council, only one in five parents writes a will, demonstrating the degree of ignorance in the general population about the law of intestacy.

However, the position is even worse for the unmarried partners of individuals who die intestate. In this case, if there are no children, the estate goes to the parents, or if they are not alive, to any brothers and sisters.

If you are not married and have children, the estate is shared between offspring. This often comes as a complete shock to individuals who may have been in an enduring relationship and have children, but who never got married or registered a civil partnership.

The surviving partner is entitled to nothing. The term ‘common law’ wife or husband has no standing in terms of inheritance rights.

The £125,000 limit was set in 1993 and has long been overdue for updating, given the huge increase in UK property values in the last 15 years and the fact that 40 per cent of children in the UK are born out of wedlock.

Another pitfall is that it is only spouses and civil partners who have any exemption from inheritance tax, so if dependant children inherit directly from a deceased parent, they may well  be liable to pay inheritance tax at 40 per cent, which might trigger the sale of the family home.

For more on inheritance laws visit: The Society of Trust and Estate Practitioners website: www.step.org

Read our guide on inheritance tax:http://www.defaqto.com/consumer/investments/tax/inheritance-tax.aspx

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New mortgage protection product worth a look

July 14, 2008 | posted by Pam Atherton in Insurance, Mortgages | Print This Post

It’s not often that I’m impressed with a new product launch, but LV= (formerly known as Liverpool Victoria) has recently launched a mortgage protection insurance  plan which doubles up as an income protection plan.

Crucially, it offers ‘own occupation’ cover to all but the riskiest of jobs, allows applications up to age 65 and only charges ‘guaranteed’ rates, which means that your premiums will not rise as you grow older.

It provides cover for accident, sickness and unemployment, with level mortgage payment protection and a choice of level or index-linked living expenses protection.

You can choose a deferred period of one, two, three or six months and waiver of premium automatically kicks in during a claim.

Another plus point is that the plan allows you to run the plan until you are able to resume work, until the end of your mortgage term or until you die, unlike most MPPI policies which terminate at age 55, 60 or 65.

LV= employs telephone underwriting which means that clients are interviewed over the phone by medically qualified staff - a process which has been found to lessen the risk of the insured failing to disclose relevant medical details and hence the chances of non-disclosure disputes.

Premiums reflect age, gender, smoker status and occupation and premiums for lower-risk occupations are especially competitive.

The product has a Defaqto 5 Star rating. Defaqto insurance principal, Mike Powell, says: “This product is flexible, simple and easy to understand, and can be tailored to the consumer’s needs. The introduction of a long term contract with guaranteed premiums for an MPPI product is a massive step in the right direction for the MPPI market”

For more on income protection, read our guide: http://www.defaqto.com/consumer/insurance/life/income-protection.aspx

For more on LV=s products visit: https://www.lvmlp.co.uk/

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Are aggregator sites more aggravation than they’re worth?

July 4, 2008 | posted by Pam Atherton in Insurance | Print This Post

Defaqto’s sixth annual home insurance report “UK Home Insurance – Aggregation or aggravation?” comes to some pretty damning conclusions  as to the quality of home insurance aggregator sites.

The report looks at the problems that consumers  face  when purchasing home insurance through  such sites, based on detailed analysis of the services offered by 28 aggregators including Comparethemarket, Confused.com GoCompare, Moneysupermarket and Tesco Compare.

Defaqto concludes that only five of these sites merit the title ‘aggregator,’ but is unable to recommend any of them for providing true ‘whole-of-market’ coverage, despite the bold claims many of them make about their breadth of coverage.

A further criticism is that few sites allow customers to compare policies on anything other than price. Even worse is the fact that some sites make a number of dangerous assumptions about underwriting factors in order to obtain quotations.

 These include assumptions as to  occupancy periods (that the property won’t be unoccupied for more than 14 days|), type of construction (conventional brick), the nature of usage (permanent residence,  not a holiday home) and that the property has not suffered from flooding.

 If these assumptions are not correct, they could invalidate the policy, so customers need to  check the eventual quotation from the insurer extremely carefully. Other sites do not allow you to cover all your insurance needs, such as cover for “possessions outside the home.”

Excesses should also be checked as they may be higher in practice than those originally quoted online.

Defaqto general insurance consultant, Mike Powell, says: “The home insurance aggregation market is no where near as developed as the car insurance market….Our research into this market has left us with the opinion that there are only five true aggregator sites. The remainder predominently provide quotations from intermediary panels, which could easily be obtained from a local broker.”

Brian Brown, head of the Defaqto Insight team,  says that aggregator sites can play a useful role in giving consumers an indication of what they might pay, but that they need to check with the provider’s site as to the exact terms and conditions of the policy.

So you need to check that the assumptions made are correct, particularly those regarding job title, occupancy levels, type of property, flood risk and claims history.

“The onus is on the consumer to check that all the details the insurer holds are correct,” says Brown.

By contrast, the Defaqto buildings and contents insurance comparison tools allow you to compare policies based on cover, rather than  price.

Visit: http://www.defaqto.com/consumer/insurance/home/compare-buildings.aspx
http://www.defaqto.com/consumer/insurance/home/compare-contents.aspx
http://www.defaqto.com/consumer/insurance/home/compare-high-net-worth.aspx

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Savings protection not all its seems

July 3, 2008 | posted by Pam Atherton in Banking, Savings | Print This Post

The Government’s proposed increase in the savings compensation guarantee from £35,000 to £50,000, while a welcome  improvement, will provide scant reassurance for many savers.

The problem is that the £50,000 limit is per person, per bank. If you happen to save with a number of  institutions which are all  authorised by one parent bank, the £50,000 compensation would cover all these accounts in aggregate, not individually.

For instance, if you save with Bank of Scotland, Halifax, Birmingham Midshires, Intelligent Finance and St James’s Place bank, the savings guarantee would cover £50,000 of your savings in total, not per institution. 

The same principle operates under the current £35,000 savings compensation guarantee, so anyone with large amounts with institutions which are linked in this way might wish to consider spreading their risk across other banking groups.

The British Bankers’ Association recommends that savers check on the FSA website to see how an institution is authorised by visiting  www.fsa.gov.uk/register and typing in the firm’s name. This will show whether it is separately authorised or authorised by a parent bank. By typing in ‘Intelligent Finance,’ it is clear that IF is linked to Bank of Scotland and all the firms mentioned above.

However, just because one institution owns another, does not mean that they can’t be separately authorised. Although Royal Bank of Scotland owns NatWest, the two banks have separate authorisations, so a saver could hold £35,000 with both banks and be eligible for compensation  of up to £70,000, in the unlikely event that both banks went bust. 

But the FSA recommends that savers check with the institution itself as to its status with regard to compensation. Robin Gordon Walker of the FSA press office says: “Brands come and go, so it is advisable that savers check on the institution’s website or with the customer service helpline as to the extent of compensation.”

The limited nature of bank deposit compensation rose to prominence last year when the run on Northern Rock revealed some savers with deposits of £1m  and who would only have been covered for £35,000, if the Bank of England had not stepped in to guarantee customers’ deposits.

For the top instant accesss savings rates visit:
http://www.defaqto.com/consumer/savings-accounts/instant-access-accounts.aspx

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