New Year’s resolutions.
They probably take 5 days on average to break. It’s probably because they are made with a bloated stomach and zero blood in your alcohol stream, but with little real drive or belief for the actual benefit at the end. If a real benefit was that you worked for four days and were paid for five would you think that a reasonable focus? A day is only 20% of a week so I will look at where we can be 20% efficient with our cash.
So, here are some New Year’s financial resolutions:
1. Investment bonds: Still today, investors are being advised (particularly by banks) to place large amounts of cash into investment bonds. They pay the largest commission at between 7-8% and are highly tax and charge inefficient. A unit trust for example will pay a commission based adviser 3% commission, and a fee based Independent Financial Adviser can take the overall cost of buying either of these products to nearly 0%.
A bond pays basic rate tax as it grows and investors could find themselves in a higher rate tax position when they encash. Most investors would benefit from an Isa (tax-free) or a unit trust where the gain can be offset against the capital gains allowance for the year to create tax-free gains.
They are often sold with access to external funds. The external funds, such as Fidelity Special Situations, are not actually the same fund as you think they are i.e. they are an expensive imitation. I recently did an article, which covered this but showed that someone who invested directly into the unit trust rather than the expensive imitation (called a mirror fund) was 33% worse off due to tax and charges. (1) Check with a fee based Independent Financial Adviser to see if you have a mirrored version.
3. Pensions: As with many of the older ‘retail’ pension products, you could save a fortune on the charges, and, as above, access to the real funds rather than expensive imitations. I have transferred a number of pensions this year where the charges where nearly eight times what you could buy in a non-retail world today. Strip out the middlemen, the commission, and the expensive insurance company retail products and achieving 20% more efficiency is a walk in the park.
4. Annuities: If you are ready to take your pension, go to an Independent Financial Adviser who can offer your pension fund to the entire marketplace to buy a better annuity. Also, if you have ill health you may be able to gain an uplift in your retirement income. Coldly put, if you have ill health, your pension company will be expecting you to live less, and so for your retirement fund, they will offer a bigger percentage income.
5. Spending: It’s all too easy to spend. It’s a bit like holding £1,000 worth of tenners and throwing them into the air (the spending part). It’s easy to do, but trying to pick them back up is a bit like trying to repay £1,000 of debt after spending. So, the tip here is to ask yourself the highly difficult and disciplined question before each purchase: ‘to what problem is this purchase a solution?’ I know what you are thinking, but it’s a highly effective solution against the incessant commercial missile world we live in.
6. Mortgages: It is estimated that there are over 2.3m people who are currently on their lenders standard variable rate (your mortgage just moves around with the Bank of England’s base rate). (2) Many lenders standard variable rates are excessive. In November, I looked at a table showing the standard variable rates and the worst offering by Paragon was 284% more expensive than the best with Direct Line. (3) The next best offering to Direct Line was more than 20% more expensive, with many of the ‘government funded’ banks more than 100% more expensive.
So with 20% efficiency easy to achieve, its just a case of ‘is it Friday or misery Monday?’ you take off?
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