Those with children, a business or other responsibilities should arrange an appropriate amount of life assurance

Insurance is a fairly modern development but it allows one to avoid a disaster for a relatively small regular payment – whether the disaster is a car wreck, the house burning down, or the death of the sole income-earner in a family with young children. Usually it is easy to work out how much insurance is required. In the case of life assurance it is usually approached as to what amount would be needed to replace the income of the deceased person, or, in the event of a house-person, what it would cost to cover all of the work that person does. This can be surprisingly large, with some research putting the equivalent cost for a house-person with children at as much as £25,000 to £30,000 a year, not including love and affection!

Life assurance is now available to many people who might have been turned down in the past because of some medical situation. It may cost more but it is worth checking it out. For example, we were surprised to learn recently that life and travel cover is available for those who have had breast cancer – on a case by case basis.

If you have a business, you do need to have a plan “just in case”. The loss of the business owner or a key person could be disastrous. Life cover could keep the business afloat while it is sorted out. A common calculation for this type of cover is five times the owner’s or the keyman’s earnings.

You need to arrange your income and expenditure to ensure you have more coming in than going out.

This is what the Government has been trying to do for decades and failing. You simply need to list out all your expenditures on a monthly basis and then compare it to the monthly take-home income you have received in the recent past – not what you are hoping you will make in the future. This will tell you whether you need to have your own “Spending Review”. Dickens had his character, Mister Micawber define the money “happiness” zone as having a few pennies more coming in than are going out. This is quite true.

This same exercise can be done if you have your own business. This will also help you review the charges you make for your service or product to ensure you are making sufficient profit.

SO HOW DO YOU CHOOSE WHERE TO INVEST YOUR MONEY?

There are many schools of thought on this but it is generally agreed that an investment portfolio (by which is meant any group of investments) should be diversified. In other words they should be spread out amongst the asset classes.

Why? Different asset classes react differently to changing market conditions. If you have your investments spread out amongst different asset classes, it is likely that at any given time, some may be rising while others may be falling. This helps to reduce the investment risk, but it can also act to hold back the overall return. As to how much to diversify and what asset classes to use, this is comes back working out what level of risk the client wishes to take. Different portfolios can be worked out to cater for different tolerances of risk.

All of us are invested in one asset class or many. We may have money on deposit in our savings. That is one asset class. If interest rates go up, it benefits. If they go down, it suffers. We may own residential property. The value of properties can go up or down. Many of us have some sort of pension investments. Often these are with some type of Managed Fund which has an investment manager in charge of working out which asset classes to put your money into, and who is actively trying to increase the value of your investment.

THE TEMPORARY ANNUITY

Rather than taking out a guaranteed for life annuity now while annuity rates are low, you can choose to take a guaranteed income for a fixed period of time, e.g. 5 years. You then have a guaranteed amount returned to you so you can either repeat the process or buy a lifetime annuity at that point. For some unwilling to take an investment risk, this can be a useful way to guarantee a level of return on your pension fund without investment risk.

MAKING INVESTMENT DECISIONS

You can invest your money in many ways. The different general groupings of investment choices are called asset classes. An asset class is a type of investment, which shares its characteristics with others in the class – both as regards risk and the way they behave in the investment market.

The three main classes of assets are as follows:

 Equities – by which we mean investment in companies either directly, e.g. buying shares in British Telecom, or through an investment fund, which invests in a number of companies, e.g. a pension managed fund.
 Fixed Income – referring to bonds (essentially loans to a company or the Government – when they are called “gilts”). The company or Government pay an agreed rate of interest on the loan and promise to return the capital at the end of the agreed term.
 Cash – usually money in a high interest savings account or ISA, but could also be actual cash you have in a safe or under your mattress.

In terms of risk, Cash is considered the lowest risk, followed by Fixed Income and then Equities.

Equities can be broken down by:

 Size – large companies or small companies
 Industry – health care, energy, technology, building, etc
 Country – any specific country or geographical area, including global funds

Bonds can be broken down by:

 Safety – a bond issued by the Government is considered safer than one issued by British Telecom, which in turn is considered safer than one issued by a relative small or new company, since they are more likely to run into trouble and have difficulty repaying their debt.
 Term – a short-term bond (i.e. one that will come due in less than 1 year) is not as risky as a longer-term bond (i.e. one due in 20 years time).

Other asset classes would include Property, Foreign Currencies, natural resources, precious metals like gold, collectibles such as art, coins, stamps – or even fine wine.

ANNUITIES – A LOWER RISK CHOICE

An annuity is basically the swapping of a sum of money in exchange for a guaranteed income for life or for a specified term of years. The Government backs these guarantees in most cases. So if you have £50,000, for example, and do not need the capital but do need to increase your income, you can go out to the market and trade the capital for an income. Once the deal is done you are guaranteed to get your income, so there is no investment risk – in most cases. Annuities are normally only worth considering by those aged 55 and older

Cash ISA transfer process - A fairer deal

Individual Savings Accounts (ISAs) are big business: over 17 million Britons hold a total of £143 billion in cash ISAs. However, recent investigations by the Office of Fair Trading (OFT) are set to ensure a fairer deal for ISA savers. Typically, around 11% of ISA holders will switch their cash to a new provider each year. However, in response to a "supercomplaint" from consumer watchdog Consumer Focus, the OFT found that cash ISA transfers take an average of just over 26 calendar days, with a quarter of transfers taking longer than 30 calendar days. Current industry guidelines indicate that the transfer process should take no longer than 23 working days. As part of its findings, the OFT has reached an agreement with the financial services sector to ensure that transfers and interest rates on cash ISAs are more efficient and transparent than at present. The OFT has recommended that, from 31 December 2010, transfers should take no longer than 15 working days. Consumer group Which? wants the transfer process to take no longer than 10 days, and also wants a fully electronic transfer system to be set up. The OFT has recommended the Financial Services Authority should undertake research to see whether an electronic transfer system is feasible. At present, the old provider sends details and a cheque to the new provider through second-class mail. The OFT found that, during the transfer process, there is a period of up to five days when the consumer receives interest from neither the old provider nor the new provider. The OFT has deemed this unacceptable, stating that transferring savers should always receive interest on their money. Moreover, the OFT announced that the new rate of interest should be paid after the recommended 15-day transfer period – even if the transfer remains incomplete – and wants interest rates to be published on statements from 2012. At present, only around 15% of ISA savers receive statements that include their interest rate. The OFT also wants consumers who have applied for fixed-rate products to be guaranteed the rate of interest advertised at the time of application. The OFT commented: “There is often strong competition between providers in this market to win new savings, the transfer of cash ISAs is taking too long and there is not enough transparency over interest rates. The voluntary changes announced today will give consumers a fairer deal and drive stronger competition.”