The latest house price survey shows a small fall, whilst the buy to let market continues to boom, especially in Nottingham and the East Midlands as the number of buy to let mortgages available rises.

In other news the government has announced more details on the NewBuy scheme designed to help kick start the housing market.

House prices show small decline

The Nationwide house price survey showed a slight fall in the first month of the New Year.

The UK’s largest lender has said that prices in January fell by 0.2% compared to December, taking the average UK house price to £162,228.

The survey also revealed that the annual rate of growth, which was 1% in December, has now slowed to 0.6%.

Responding to the figures the Nationwide’s chief economist, Robert Gardner, said: “Given the challenging conditions prevailing in late 2011, with the UK economy contracting in the final three months of the year, it is not surprising that house price growth softened at the start of 2012,” said Robert Gardner, Nationwide’s chief economist.”

Gardner continued: “The economy is not expected to gather much momentum until the second half of 2012 at the earliest, which suggests that labour market conditions and buyer sentiment may be slow to improve.”

Financial experts have been saying for some time that the housing market is subdued due to tight mortgage lending criteria, which is making it harder for some groups, particularly first time buyers, the self employed and people with a small deposit, to get a mortgage.

Until recently the number of mortgages available for people with smaller deposits were extremely limited, however data from Moneyfacts shows that those people with small deposits now have more choice. At the beginning of February the number of mortgages available for people with just a 10% deposit had increased to 343 from 280 in the previous month.

NewBuy Mortgage Guarantee Scheme launched

The government have released more details about its mortgage guarantee scheme which was first announced late last year.

The NewBuy Mortgage Guarantee Scheme, as it is now known, is designed to help kick start the housing market and will provide guarantees to lenders for mortgages of up to 95% loan to value.

The NewBuy scheme will be available to both first time buyers and home movers, but as the name suggests is restricted to new build properties, with a maximum purchase price of £500,000.

The government hopes that many leading lenders will sign up to the NewBuy scheme, the Nationwide Building Society have already agreed to take part, which will see the government underwriting losses should a property be repossessed by a lender and sold at loss. The government and taxpayer will meet the cost of the scheme.

Unveiling the scheme Mr Shapps said he wanted to “go the extra mile” to help people get on the housing ladder.

He continued: “The pattern of the past has been to produce endless policies and initiatives that simply gather dust on Whitehall shelves and lead to inaction and inertia.”

“But with the prime minister putting housing centre stage on the road to economic recovery, I am determined we shall not repeat these mistakes of the past.”

East Midlands buy to let landlords see rents rise the fastest

This week saw good news for buy to let investors in Nottingham and the wider East Midlands as a new survey showed that properties in the region are achieving the highest yield across the UK.

The research, produced by buy to let lender Paragon Mortgages, showed that the average rental yield in the East Midlands was 6.4% in the last three months of 2011.

Yields compare the rental income with the value of a property, are important for buy to let landlords when considering whether to purchase a property.

The next two regions were the South East (excluding London) and the South West, which saw yields of 6.1% and 6.0% respectively.

Interestingly the survey also revealed that detached properties produced the best yields giving an average yield of 6.6%, terraced houses were second at 6.1% and houses of multiple occupancy (HMO) third at 6.0%.

Paragon Mortgages Managing Director, John Heron, said: 

“The yield a landlord’s rental property generates is a key indicator of how well the property is performing and is an essential part of the landlord’s overall business plan.”

Mr Heron continued: “It is interesting to see the shift in the regions that are taking the top spots in the yield table and the fact that the East Midlands took first place from the West Midlands.

“As we progress into 2012 I suspect we will continue to see changes in yield patterns and how different regions fair against each other, with demand still at a peak I believe landlords will continue to achieve healthy yields in the coming months.”

Number of buy to let mortgage deals rise

New figures, released by Moneyfacts, have shown that the number of buy to let mortgage deals has jumped from 386 last February to 486 at the same time this year.

Interest rates have also dropped with the average rate now 4.79% compared to 5% a year ago.

Tight mortgage lending criteria has forced many people to remain in rented accommodation, causing a boom for buy to let landlords, something which  mortgage lenders are clearly trying to take advantage of with lower interest rates and extending their range of buy to let mortgages on offer.

Louise Holmes of Moneyfacts, said: “During the peak of the credit crisis the number of buy-to-let deals shrank considerably as lenders saw it as a high risk area of the market. “

Holmes continued: “Many aspiring home owners have had their property dreams dashed due to strict lending criteria and large deposits, meaning the only option left is to rent. This increase in demand for rental properties has resulted in a degree of competition returning to the buy-to-let sector, giving it a well-needed boost.”

“These latest figures, particularly a reduction in the average rate, should make pleasing and encouraging reading for landlords and property investors.”

Your property may be repossessed if you do not keep up repayments on your mortgage.

For providing mortgage advice we will charge an application fee of £299 and we may also be paid a fee from the lender, any fee paid by the lender will be disclosed to you. Alternatively we will charge an arrangement fee of 0.5% of the loan and refund to you any payment received by us from the lender.

The Financial Services Authority does not regulate some forms of buy to let mortgages.

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More information has been released about the government’s mortgage guarantee scheme.

First trailed last year as part of a package of measures announced by the government, the NewBuy mortgage guarantee scheme, as it is now known, is aimed at kick starting the housing market, which has been subdued for some time.

The housing minister, Grant Shapps, has announced that the NewBuy scheme will:

• Guarantee mortgages up to 95% loan to value for both first time buyers and home movers
• Be available only on new build purchases
• Have a maximum purchase price of £500,000

NewBuy scheme to launch in March

The scheme will be launched in March and will allow lenders to offer loans of up to 95% loan to value, for the purchase of new build properties, without taking on all the risk. A mortgage indemnity fund will step in if the property is repossessed whilst in negative equity to ensure that mortgage lenders will not lose out.

The guarantee will be funded by the government and taxpayer.

The scheme will be open to all buyers, providing they are UK citizens, and is available on new build flats as well as houses, providing it is the applicant’s main home.

Unveiling the scheme Mr Shapps said he wanted to “go the extra mile” to help people get on the housing ladder.

He continued: “The pattern of the past has been to produce endless policies and initiatives that simply gather dust on Whitehall shelves and lead to inaction and inertia.”

“But with the prime minister putting housing centre stage on the road to economic recovery, I am determined we shall not repeat these mistakes of the past.”

First time buyers

It is hoped that the scheme will be particularly helpful to first time buyers, the group probably hardest hit since the credit crunch.

The Prime Minister, David Cameron, has previously suggested that the scheme could help as many as 100,000 first time buyers get on the housing ladder, having been effectively frozen out of the market by tight mortgage lending criteria and the need to produce large deposits.

Home movers have also been hit by tighter lending criteria, with the falls in house prices meaning they often have less equity to use as deposit for their new purchase.

Mortgage lenders

A number of mortgage lenders will participate in the scheme. However, Nationwide, the UK’s largest building society, said yesterday that despite the March launch date it was still ironing out exactly how the scheme would work.

The Council of Mortgage Lenders (CML) also said that when the final details were announced the £500,000 cap could vary across the country.

Yesterday’s announcement was welcomed by housing experts who said that the scheme would increase the number of mortgage options for people with smaller deposits, which will in turn help more people get on the housing ladder and kick start the sluggish market.

An Annuity provider has called for joint life Annuities to be the default option for married couples.

The Annuity provider Partnership, are lobbying Government ministers to change the current situation where in the absence of any other decision a single life Annuity is provided, despite the fact that there may be a dependent spouse.

Spouse’s pension

Financial experts are concerned that dependent spouse’s could be left financially exposed because no decision was made to arrange a joint life Annuity.

The  cost of adding a spouse’s pension to an Annuity is not as high as many people think. Figures produced by Investment Sense show that the cost of including a 50% or two thirds spouse’s pension is generally around 10%.

You can work out the cost for your own specific circumstances by using an online pension Annuity calculator.

“Joint life Annuity more suitable”

Partnership chief executive Steve Groves says: “The Treasury should look at default retirement products. If you are married, a joint-life annuity is more likely to be suitable, so that is something that needs to be looked at.”

Speaking at a conference last week the pension’s minister, Steve Webb, said that the idea was being actively discussed.

Concerns over small pension funds

The proposals by Partnership could be included in a leading think tank’s recommendations.

The International Longevity Centre (ILC) are due to set out policy options next week amid concerns that those people with smaller pension funds will be disadvantaged by the Retail Distribution Review (RDR) when it comes into force in 2013.

Baroness Sally Greengross, chief executive of the ILC said: “At the ILC, we are concerned that the retail distribution review could lead to a reduction in the availability of advice. We need to ensure that people with small pension pots do not lose access to advice altogether.”

As savers and investors seek greater control over their retirement planning SIPPs (Self Invested Personal Pensions) have become more and more popular.

However, on the back of increased FSA scrutiny 2012 is likely to be a year of considerable change in the SIPP market with SIPP providers facing a range of challenges.

We’ve spoken to leading SIPP providers to get their views on what the next 12 months might hold for the SIPP industry, and how the changes might affect you, the SIPP investor.

Investment suitability

We all know that SIPPs have wider investment powers but recent years have seen the rise of the ‘alternative investment’. This has been confirmed to us by a number of SIPP providers. Matthew Rankine of Liberty SIPP who said’: “I believe the press releasing down beat macro-economic news over the past few years has pushed up the demand for these alternative products. From this we (Liberty) have seen a sharp increase in alternative investments from around 50 in 2007 up to almost 300 today.”

James Randall of SIPP provider IPM agrees: “The investments IPM are currently being asked to consider today are far more wide ranging than a few years ago as clients look to achieve yields on their SIPPs which previously may have been possible with more traditional investment structures.”

Take the past three weeks, we have heard of  SIPP investments including  hotel rooms, land in far off countries, particularly the Cayman Islands, car par spaces in Dubai, even bamboo and cemetery plots, all offered for SIPP investment.

Now some of these might be perfectly acceptable, albeit it at the higher end of the risk spectrum, but others could equally be perfect opportunities to lose a significant proportion of your pension. You just have to look at the likes of Keydata, Arch Cru, Lehman Brothers, amongst others, to see that a bad investment decision by the investor or indeed IFA can prove very costly indeed.

Its traditionally been the role of the IFA to review products, assess suitability and then make a recommendation, however the FSA are now suggesting that the SIPP providers themselves, in their role as trustee of the pension fund, should have some role to play in reviewing these more left field and unusual investments.

It’s fair to say that we have some sympathy for that argument, after all the SIPP provider is the trustee. Whilst we believe that the recommendation as to the suitability of a product or otherwise for a particular investor should always rest with the adviser, the SIPP provider, as the trustee of the pension, must also have some duty of care.

How far the FSA will push SIPP providers down the road of assessing SIPP investments only time will tell, but we are already seeing some SIPP providers engaging third parties to independently review more unusual investments before they will let them into their SIPPs.

James Randall of SIPP provider IPM again: “Whilst always looking to assist our introducers and clients, IPM has produced a Permitted Investments List that confirms in its broadest sense what we will and will not accept. We will not allow investments that we cannot administer efficiently or those that could give rise to an unauthorised tax charge. Our due diligence process is in place to ensure that we understand more about the investment. We are not afraid to say ‘no’ to an investment should it not satisfy our due diligence process.”

Investment suitability will undoubtedly be one of the themes of 2012.

Capital Adequacy

To protect the investor and promote business stability the FSA insist that all regulated firms, IFAs and SIPP providers included, meet certain Capital Adequacy criteria. It seems that 2012 will be the year the FSA shines a light on the capital adequacy of SIPP providers.

Currently SIPP providers must retain enough money to cover at least six weeks of overheads.

Last year Milton Cartwright (left), FSA manager of pensions investment policy, said: “What we have found is; for those Sipp operators that come into difficulty it takes a long time to sort them out.  At the moment its six weeks expenses. We have found that six weeks is inadequate when the schemes get into problems. Especially with Ucis or non-mainstream investments.”

The FSA have said they will consult during 2012 before deciding what level capital adequacy should be set for SIPP providers, one things seems certain though, it will be increase and potentially significantly.

So how does this affect you, the SIPP investor?

Well, depending on who provides your SIPP the effect of any changes could be barely noticeable, or indeed far more significant.

A profitable and well run SIPP provider, with a healthy balance sheet, has little to fear from these changes, but consider for a moment a SIPP provider who is not in such a strong position. As they face up to the challenge of maintaining sufficient capital to meet any increase required by the FSA could they put they charges up? Possibly. Could they seek to merge or indeed be taken over by a competitor? Possibly. Could this cause changes for your SIPP in terms of what you pay for your SIPP or who it is held with? Certainly.

Oliver Bowler of Talbot & Muir commented: “Advisers are looking more closely under the bonnet of the SIPP provider when making recommendations nowadays, the comfort of a brand name is no longer enough as profitability and financial stability raise to the top of the adviser’s wish-list.” 

The message is clear; when you or your IFA are deciding on a SIPP provider, make sure financial stability is one of the key criteria used in making your selection.

SIPP deposit accounts

Despite all the talk of high risk, left field investments the humble deposit account could come sharply into focus in 2012.

There is any number of reasons why you might leave cash sat in your SIPP, however the rates of interest paid by many SIPP providers on the SIPP bank account are in the most part horrendously poor. Typically the rate is less than Bank Base rate of 0.5%, indeed the UK’s largest SIPP provider, Hargreaves Lansdown pay a paltry 0.25% and even then this is only payable on balances over £50,000; below £50,000 the rate is between 0% and 0.10%.

There are of course mitigating factors, interest rates are at all time lows and there is little which can be done to buck this trend. Furthermore the SIPP bank account should be seen in similar terms to your own personal current account, which is not somewhere you would leave significant sums for a prolonged period, and the same should be true with regard to your SIPP bank account.

However, it is possible to get around 2% from the likes of Santander and AIB International Savings for instant access SIPP deposit accounts. Even this figure is below current levels of inflation, but it is significantly better than the average SIPP cash account.

You have a choice, you don’t have to put up with the paltry interest rates offered on the mandated SIPP cash accounts, shop around.

Our best buy table for SIPP deposit accounts gives details of a wide range of SIPP deposit accounts, including everything from instant access to long term fixed rates, use it and make your money work harder.

Closing thoughts

2012 could indeed by a year of considerable change in the SIPP market, FSA initiatives regarding Capital Adequacy and investment suitability will no doubt cause headaches for some SIPP providers, which could lead to significant consolidation, meaning the SIPP provider you initially choose might not be actually where you end up.

Of course some SIPP providers will be better placed to deal with any challenges that come along and will undoubtedly turn them into an opportunity.

Our team of Independent Financial Advisers are experienced and knowledgeable and here to help you with your SIPP questions and queries, call them today on 0115 933 8433 or email info@investmentsense.co.uk. You can see some example of where we have helped clients by looking at our SIPP case studies.

The rental market is booming.

Tight mortgage lending criteria is making it harder for house buyers to get a mortgage and saving the deposit required by most first time buyers these days is tougher than it’s ever been. As a result the buy to let market has seen something of resurgence, monthly rents are rising and in many areas the demand for rental property is outstripping supply.

Lower property prices have also tempted many would be landlords to dip their toe into this market, and those with existing portfolios are looking to expand.

We thought we’d use our experience in this market to come up with our six top tips for buy to let investors.

1. Make sure buy to let is the right thing for you

Think about why you are buying a property to rent out.

Perhaps it’s part of your retirement strategy, perhaps you have spotted a bargain, perhaps you need some extra income and are fed up with low interest rates.

Whatever the reason take time, and indeed advice, to make sure that buying a property is actually the best way of solving your problem.

2. Buy the right property

This might sound obvious but buying an easily letable property, for the right price, which will provide an acceptable yield, is the recipe for success.

This is an investment, you won’t be living there, buying an investment property is very different to buying your own home, it requires less emotion and more of a business head.

Every landlord has their own target for rental yield, typically we see landlords looking for an annual yield of 6 – 7%, it is however important you get a better return that you would do from less risky investments, such as deposit accounts.

Bear in mind too that buy to let lenders will want to see a certain level of rent before they will offer you a mortgage.

Considering how easily the property will be let is equally as important. Think about your target market and make sure you buy an appropriate property. Targeting the family rental market but buying a property in a well known student area is unlikely to lead to an easy let.

Estate agents and letting agents will be able to help here, as will your experience of your local area.

3. Get the right buy to let mortgage

Unless you are in the fortunate position of being a cash buyer you will need a buy to let mortgage.

As usual when it comes to mortgages there are a huge range of options, fixed rates, tracker rates, loans with redemption penalties and those without, the list goes on.

You also need to keep a careful eye on the fees. As interest rates have fallen, lenders have increased their arrangement fees in an effort to maintain their margins. It’s not unusual to see arrangement fees of over a thousand pounds, even for a relatively modest loan, these need to be factored in when comparing mortgage deals.

4. Letting agents?

When it comes to finding a tenant you have two main options, do it yourself or use a letting agent.

Most letting agents offer two options, full management and tenant find. With full service your agent will find your tenant, vet them and then manage the property for you, collecting and distributing rent, carrying out regular inspections and handling any issues which arise and dealing with day to day maintenance.

Tenant find is just that, the letting agent will find you a tenant, carry out the normal vetting procedures and then hand the day to day management over to you.

Many people in full time jobs prefer the convenience of a fully managed service, however if you are retired you might like the challenge of managing the properties yourself. The choice is yours, but just make sure you are ready for those calls at 3.00 am if you decide to do it yourself!

Choosing a letting agent can be hard; price is of course a major factor, but check out what you get for your money. Does your agent use the main property websites such as RightMove? If they don’t will they take longer to let your property? How do they vet tenants? Do they take references? Do they do a credit check?

We’d suggest speaking to at least three agents; compare their prices, service and their tenant finding methods before you make your final decision.

5. Consider void periods

Despite the increased demand for rental property there will inevitably be times when yours is empty.

If you have a buy to let mortgage you need to make sure you have a plan to meet the monthly payments; just because your property isn’t let, your bank or building society will still want their money on time!

Perhaps you have spare income, perhaps you have other properties with surplus rental income, you might even use your savings, just make sure you have a plan.

6. Remember tax

Paying tax is a fact of life and if you make a profit on your buy to let property then expect to pay your fair share. Recent research highlighted the increasing amount of income tax paid by landlords as rents rise and interest rates remain low.

So what do you need to remember when it comes to tax? We could write a whole article on that topic, but you should at least remember the following.

Before calculating your annual rental income you can generally deduct the cost of running the property, including agents fees, insurance costs, repairs (but not improvements) and of course mortgage interest. The figure you are left with is effectively your net profit and will be added to your other income before calculating your tax due.

Remember though, it is only mortgage interest that you can offset against your income, not the entire payment if you have a capital repayment mortgage.

When you come to sell you again may have to pay tax if the property has risen in value. Simply put the profit is calculated by deducting the purchase price from the sale price, you can also deduct the costs associated with buying and selling the property. The figure you are left with is your profit which will be subject to Capital Gains Tax (CGT) if it is above the annual exemption for the year in which the property is sold.

Next steps

Whether you are a first time buy to let investor or an experienced landlord, following these six tips will help you make a success of your property investments.

Of course getting the right buy to let mortgage in place is crucial and this is where we can help. Our mortgage adviser, Linda Wood, is highly experienced in this market and is here to help you make the right choice. Contact Linda today on 0115 933 8433 or email linda.wood@investmentsense.co.uk

Your property may be repossessed if you do not keep up repayments on your mortgage.

For providing mortgage advice we will charge an application fee of £299 and we may also be paid a fee from the lender, any fee paid by the lender will be disclosed to you. Alternatively we will charge an arrangement fee of 0.5% of the loan and refund to you any payment received by us from the lender.

The Financial Services Authority does not regulate some forms of buy to let mortgages.

This week’s housing round up includes news that the housing market remains stagnent, whilst lenders are pushing up mortgage arrangement fees and in some cases interest rates.

Mortgage fees rise by £600

House buyers with the largest deposits are perhaps surprisingly the group hardest hit by a rise in mortgage fees.

Research by Moneyfacts has found that the average mortgage fee has risen from £889 a year ago to £1,498; an increase of over £600.

The rises have not been distributed evenly, for example the average mortgage arrangement fee for a 60% loan to value mortgage has risen by 42% whilst loans in the 90% to 95% bracket have seen fees rise by only 11%.

It is clear that as interest rates stay low and mortgage volumes subdued, lenders are looking at other ways to maintain profits.

Mortgage experts warn that the arrangement fee can often be overlooked by borrowers focusing on getting a loan with the lowest rate of interest possible. Borrowers should factor in the arrangement fee, plus any other charges, into their calculations, to ensure that the loan with the lowest interest rate is actually the best deal over the longer term.

Slight rise in mortgage approvals

The British Bankers Association (BBA) has published figures which show approvals for mortgages have reached a 19 month high.

36,171 mortgages were approved for house purchases in December, up from 34,809 in November but still low compared to the height of the housing boom.

Mortgage approvals are seen as a bellwether for the housing market, a significant rise in approvals would signal a recovery, however the number of mortgages approved for house purchases has hovered between 30,000 and 35,000 for the past three years with little sign of a significant breakthrough.

Howard Archer, chief UK economist at IHS Global Insight, said: “Mortgage approvals remain persistently low compared to long-term norms. At 36,171 in December, mortgage approvals were only 64pc of the average monthly level of 56,544 seen since 1997.”

The number of remortgages approved fell very slightly from 21,788 in November to 21,164 in December.

UK mortgage market “difficult to call”

The Council of Mortgage Lenders (CML) have said that the state of the UK mortgage market in 2012 is “difficult to call”, with the effects of the Eurozone crisis still being felt.

The latest figures from the CML showed that gross mortgage lending reached £11.7 billion in December 2011, up 12% from the same time last year but down 12% on the preceding month.

The figures draw a line a year when the mortgage market remained stagnant, with total lending at £140 billion up by just 3% on 2010. This is of course partly due to the difficulty first time buyers, often with small deposits, are facing in obtaining finance.

However, a glimmer of hope was provided by lending figures for the last quarter which were up 11% on the same period in 2010.

Bob Pannell, chief economist at the CML, said: “The closing months of 2011 saw stronger mortgage lending activity and housing transactions, despite the fact that short-term economic prospects are challenging.”

Pannell continued: “There is a glimmer of light ahead for households in that real incomes could stabilise and perhaps even start rising by the end of the year.”

“But, continuing eurozone problems mean that mortgage funding prospects are uncertain, so overall UK mortgage market conditions for the year ahead remain difficult to call.”

Volatile mortgage rates ahead

Mortgage experts and brokers have warned that 2012 could be a volatile year for mortgage interest rates.

A number of lenders have increased their mortgage interest rates over the past few days, some by as much as 0.3%. The increases are largely due to continued economic uncertainty, the costs of wholesale funding, which is how many lenders raise money and nervousness around the housing market,

Other lenders have kept rates the same but have changed loan to value bands so the interest rate for the same size of deposit is effectively increased.

Mortgage lenders often follow each other’s moves, acting like a herd; lenders do not want to be caught out offering substantially cheaper mortgage deals than their rivals and then getting inundated with applications.

Mortgage experts have warned that with rates volatile, and currently rising, it has never been more important to shop around for the best deal, comparing fees, which can often mount up, as well as interest rates.

Your property may be repossessed if you do not keep up repayments on your mortgage

For providing mortgage advice we will charge an application fee of £299 and we may also be paid a fee from the lender, any fee paid by the lender will be disclosed to you. Alternatively we will charge an arrangement fee of 0.5% of the loan and refund to you any payment received by us from the lender.

The government this week announced a further delay in its Auto Enrolment program, meaning many workers will have to wait for much needed employer pension contributions.

Auto enrolment delay

Originally the government had intended that the Auto Enrolment program, which will force both employees and employers to contribute to a work place pension, would have been fully rolled out by 2016.

Auto Enrolment was supposed to help those people who had not yet save enough for their retirement, by forcing employers to contribution on their behalf.

However, pensions minister Steve Webb (right) has confirmed that there will now be a two year delay, with the scheme not coming into force for smaller employers until 2018; larger employers with more than 50 workers will have to stick with the original timetable.

Experts believe that the government have delayed implementing the changes to help small businesses who would have been hit hard, during tough economic times, by the additional cost.

However, the delay means that it will be a full 16 years between the full implementation of Auto Enrolment and the Pensions Commission’s investigation into the problems of people not saving enough for their retirement.

Workers worse off

Despite the delay it is clear that the government are committed to implement Auto Enrolment.

However, financial experts are also concerned that the government’s decision will reduce future retirement incomes and that workers should not delay in starting to make provision for their retirement.

Rudi Smith, a senior consultant with Towers Watson, a respected firm of financial consultants, said: “Auto-enrolment was conceived against a backdrop of rising personal incomes and a growing economy. It will obviously be tougher for employers and employees to absorb the cost of contributions in today’s environment but paying for retirement is not getting any cheaper. The Government is saying there will be no further delays regardless of what happens to the economy and employers will have to plan on this basis.”

Any pension Annuity comparison will show how far Annuity rates have dropped in recent months. Statistics showing that Annuity rates have fallen in each of the past four years and by around 40% over the past 16 years emphasise the point still further.

The Annuity problem

Whilst buying an Annuity when rates are low is understandably unattractive, for many people who need the income and want a simple and guaranteed solution the perception is that there is little alternative.

Enter the Fixed Term Annuity, could this be the answer to creating an immediate income, without locking into all time low Annuity rates?

For some the Fixed Term Annuity could indeed be an ideal solution.

How does a Fixed Term Annuity work?

Your existing pension funds, less any tax free cash that you wish to take, are transferred into the Fixed Term Annuity.

You then have a number of decisions to make:

Term. How long do you want the Fixed Term Annuity to run for? Typically a period of between 3 and 10 years is chosen, however you can opt for a longer period if you wish

Income. The level of income want. This can be set between zero, for people who simply want to take their tax free lump sum, and an upper level, which is decided upon by the Government Actuary’s Department but is broadly equivalent to a single life Annuity

Options. What options would you like to be included in the Annuity? All the usual choices, such as guarantee periods, spouse’s pension, and indexation options are available.

 These decisions, plus other factors outside your control, dictate the level of income available to you from the Fixed Term Annuity.

The guaranteed level of income is paid to you until the end of the fixed term, when you will be given a Guaranteed Maturity Amount (GMA) which you are then free to invest in another retirement income product. This could be another Fixed Term Annuity, a traditional Annuity or even an Income Drawdown plan.

How does the Fixed Term Annuity help me avoid current Annuity rates?

It’s a well-known fact that if you buy a traditional Annuity the rate you get will never change; if Annuity rates rise in the future you will not benefit. This is particularly pertinent at the moment as rates are so low.

There are essentially two ways in which a Fixed Term Annuity can help.

1. You will not be locking in for life to today’s low Annuity rates, clearly rates could have fallen further at the end of your fixed term, however the hope of course is that they have risen
2. You may be in good health now but delaying the move to a traditional Annuity may mean your health has deteriorated to a point where you qualify for an Enhanced Annuity. Which as we all know, can have a significant impact on your Annuity rate

Are there any other advantages of a Fixed Term Annuity?

Indeed there are:

1. Both the income and the maturity value are guaranteed and not subject to investment performance
2. You can reassess your circumstances at the end of the fixed term and tailor the next solution to your needs at that time
3. If you need less income than the maximum available your Guaranteed Maturity Amount will be higher, potentially giving you a larger income in the future
4. Your spouse or dependents will have the ability to receive a lump sum on your death

What are the disadvantages of a Fixed Term Annuity?

As with any financial product there are disadvantages:

1. You do not have a guaranteed income for the rest of your life. Your Guaranteed Maturity Amount may provide you with less income in the future, especially if Annuity rates have fallen further when you come to the end of your fixed term
2. Once the Fixed Term Annuity has started the level of income and options chosen cannot be changed until the end of the fixed term

So, is a Fixed Term Annuity right for me?

That really isn’t something we can answer without knowing more about your individual circumstances.

However, we can say that if you do not want to lock into today’s low Annuity rates then you should investigate a Fixed Term Annuity, along with other options such as Income Drawdown, to see whether it works for you.

Our team of advisers are highly experienced in providing independent financial advice to people nearing retirement. If you would like advice on your pension options do not hesitate to call them today on 0115 933 8433 or email at info@investmentsense.co.uk

We are often asked when the right time to buy an Annuity is.

As you approach retirement, more and more questions will pop into your head:

Should I wait until I actually retire?

Should I buy my Annuity now?

If I wait will Annuity rates have fallen further?

If I buy now will Annuity rates rise in the future?

Will I pay more tax if I take my Annuity whilst I’m still working?

It’s enough to confuse anyone so we thought we’d look at this in more depth and compare the pros and cons of buying your Annuity now or waiting until you actually retire.

Falling Annuity rates

Any pension Annuity comparison will show you that Annuity rates are currently low, very low in fact. During the last six months of 2011 our benchmark Annuity saw a drop of nearly 11%. If you wait to buy your Annuity rates may have dropped further leaving you worse off than if you had bought your Annuity earlier. We believe that the combination of falling gilt yields, Solvency II and the recent ruling banning gender discrimination when pricing insurance products, are likely to push Annuity rates still further down.

Of course, we might be wrong and the opposite could be true; if you buy now it is possible Annuity rates could rise and you are left with a lower income than if you had waited to buy your Annuity.

Investment returns

Many people protect the value of their pension fund by switching to Cash or Deposit based funds in the months leading up to when they will purchase an Annuity. The theory being that the fund will not fall significantly in value if the world’s stockmarkets go into meltdown.

However, the return you can expect to get from a Cash fund is low; according to Skandia the average Money Market fund on their platform produced a return of just 0.10% in 2011. Now, whilst past performance is not necessarily a guide to the future, very few people are predicting a rise in interest rates anytime soon. This means returns from such funds are likely to remain low and in many cases below what you are actually being charged for having the plan in the first place.

A 65 year old male, whose wife is three years younger, buying a typical Annuity including a 50% spouse’s pension, a 10 year guarantee and level in payment, can get an Annuity rate of around 5.5%; potentially more if he qualifies for an Enhanced Annuity.

Therefore does it makes sense to buy the Annuity now? Even if tax is paid at 20% or 40% the net return will be better than the pension will make invested in a Money Market fund.

Tax

Buying your Annuity early could temporarily increase your tax bill.

Any income paid to you by your Annuity will be added to other income you have and taxed accordingly, this could mean that you pay tax on your Annuity income at a higher rate than you might do in retirement.

Everyone’s circumstances are different but the tax you pay always needs to be factored into the timing decision.

Higher Annuity rates

It’s a well known fact that the older you are the better the Annuity rate you get, all other things being equal a male aged 65 will get a better Annuity rate than his friend who is three years younger.

But just how much difference does it make? The following pension Annuity comparison shows the current Annuity rate for a male approaching retirement, with a wife who is three years younger, assuming that he has a fund of £100,000 and wants to buy a level Annuity, with a 50% spouse’s pension and a 10 year guarantee.

It’s clear that waiting 12 months to buy the Annuity will currently give you an extra £187 per year; however the £5,430 which has been paid for preceding year also needs to be factored in, of course so must any tax payable.

Missing out on an Enhanced Annuity

As a very general rule the older you are the more likely you are to qualify for an Enhanced Annuity, which provides a higher income after taking into account medical issues and lifestyle factors such as smoking.

An Annuity can never be changed; therefore it’s too late to factor in an illness or other medical issue if it occurs after you have bought your Annuity. Buying too soon could potentially mean you miss out on an Enhanced Annuity.

Summary

Tough decision isn’t it?

Buy your Annuity too early and rates might rise, you could end up with a higher tax bill you could miss out on an Enhanced Annuity.

Wait, and Annuity rates might have fallen and your fund could remain static whilst you shelter it from the risk of stockmarket investments.

The right decision depends on your own personal circumstances and there is no simple answer.

We are of course here to help, our team of Independent Financial Advisers in Nottingham deal with people the length and breadth of the UK wrestling with just this problem.

If you are planning to buy an Annuity, but are concerned about the timing, then get in touch with one of our team by calling 0115 933 8433 or emailing info@investmentsense.co.uk.

Our advisers are experienced in helping people make this crucial decision and would be delighted to hear from you.