Money Box - Saturday 24 March 2001

THIS TRANSCRIPT IS ISSUED ON THE UNDERSTANDING THAT IT IS TAKEN FROM A LIVE PROGRAMME AS IT WAS BROADCAST. THE NATURE OF LIVE BROADCASTING MEANS THAT NEITHER THE BBC NOR THE PARTICIPANTS IN THE PROGRAMME CAN GUARANTEE THE ACCURACY OF THE INFORMATION PRINTED HERE.

Tape Transcript by JANE TEMPLE

MONEY BOX

Presenter: Paul Lewis

TRANSMISSION 24th MAR 2001 2030 - 2100 RADIO 4

Stock Market Decline

Foot & Mouth Crisis

Penalties for Late Retirement

Stakeholder Pension Decision Trees

ANNOUNCER : Now it's four minutes past twelve and time for MONEY BOX with Paul Lewis.

LEWIS Hello. Today's programme as the stock market continues its decline, we ask what it really means for all of us, for our homes, our jobs, our debts, as well as our savings. The High St. banks are accused of not helping businesses hit by the foot and mouth epidemic. Sarah Pennells is with me this week.

PENNELLS And I've been hearing from someone who's discovered his pension provider wanted to charge a penalty on his fund because he was going to retire late.

LEWIS And I talk to one Money Box listener as she finds out how complicated stakeholder pensions can be.

WOMAN I just thought there was just one type of stakeholder pension and that was it - I didn't realise there were different types.

LEWIS All that in Money Box today. First though it's been another week of drama on stock markets around the world, despite gains on Friday share prices in London and New York ended the week lower than they started. The FTSE index of our biggest 100 companies was down another 3%, more than 22% below the peak of 6930 it reached just over a year ago. Well serious enough, but what does it actually mean for our finances? With me is Michael Savory who's the director of HSBC stockbrokers. Michael first the scale of this. I mean if you look at the way the markets have moved you do see these falls and it always recovers?

SAVORY Yes it does and we've seen a 20% fall really over a 12 month period. That technically classifies it as a bear market but we've seen falls of this sort in the past and rallies do take place quite quickly on occasions. Other times they drag out over a long period. In 1987 it took 4 years for the market to recover.

LEWIS We did see small gains on Friday. Were these artificial as was being said, or do you see this - this as a turn around?

SAVORY No there was a little bit of buying. In fact activity levels have been very high this week which is in a sense healthy. It could imply that there's a final sell off taking place in the market, but on Friday the buying was selective. It was stimulated by some quite good figures the previous day from the retailing sector and investors were just choosing cheap stock.

LEWIS Why have share prices fallen so rapidly particularly in the UK where our economy seems very strong - low unemployment, low inflation, low interest rates?

SAVORY It's not our market in fact. It's the sentiment coming over from the Atlantic, from America and from Japan where the recession is rather more serious. There's been a downturn there for the last 6 months. We're getting some very disappointing results. The quarterly figures are showing some companies, particularly in the manufacturing industry are seeing profits fall by as much as 25% and we are reaping the fear that that recessionary impact will come to Europe.

LEWIS You're using the word recession. That's not America though is it, that's Japan but not the United States?

SAVORY Well the United States is in trouble. The inflation rate there's still very high. And as I've said corporate earnings are falling. Consumer spending is likely to be affected as well by the stock market fall.

LEWIS And how do you think this will affect the rest of the economy, I mean our own personal economy? What should we be doing to plan for the future?

SAVORY I think we've got to be fairly cautious. The government will undoubtedly be slightly worried that the impact of a falling market will force interest rates downwards yet again, and that inflation might be stimulated. In fact inflation is going fairly low at the moment. It's monthly on a 1.5% rate, and the next year it will tick up a bit.

LEWIS Thanks for that Michael. Well stay with us, and let's talk though to to Saran Allott Davey in Cardiff - she's a financial planner from Heron House Financial Management. Saran let's talk first about people without savings - those with debts as many people have. What affect's this going to have on them?

DAVEY I think people with debt will be seriously thinking perhaps about reducing those levels of debt rather than investing because when you see the stock market going through a phase like this it always worries people, and I think it's quite sensible for people to consider reducing debt rather than investing.

LEWIS So perhaps even

DAVEY As a first stage

LEWIS Even paying off a mortgage or as much of it as you can?

DAVEY Well I think as a general rule it's sensible for people to try and keep their overall borrowing down to around three times their annual income and often people have debt way above that level when you take into account things like car loans, credit cards and mortgages.

LEWIS Indeed. And what about house prices? You mentioned mortgages - what about people who are thinking of buying or selling now - should they be waiting? Will house prices be affected by this in 12 months time?

DAVEY I think they'll be affected to a degree, but I think there's very strong demand in the UK for houses at the moment, but I think at the top end we'll see prices faltering a little bit because often very expensive houses I think are bought by people who will see their stock market investments doing very well and will feel very confident if for example in the last year they've had you know technology shares that have - have done well. I think that's why we saw house prices doing so well last year and I think that the fact this year that the stock market has for most people given them significant losses will certainly have some sort of negative impact on house prices at the top end of the market.

LEWIS And people who do want to invest - there is this ISA deadline if you haven't put your ISA money in this financial year coming up. Is there a way of investing it to protect it against these - these falls in the stock market?

DAVEY Yes, people can invest in a maxi ISA and put the full £7000 into a stocks and shares ISA but they can initially put their money into the cash element and then move it over into stocks and shares on a gradual basis.

LEWIS So you could put all - all £7000 into cash if you're going to move it into shares shortly?

DAVEY that's correct.

LEWIS That sounds quite a good deal but should it be going into stocks and shares at all? Should we be investing in - in safer things like corporate bonds, investments in companies?

DAVEY Well I think the timing is great at the moment for people who have got lump sums to invest and they feel comfortable to tie it up for a 5 year or more period and in fact I think corporate bond funds offer slightly lower risk for capital but considerably lower potential returns, so I really think people should go for well diversified UK managed funds particularly if they've got a longish time frame to invest.

LEWIS So it sounds very familiar advice even though the stock markets are falling. Thanks for that Saran Allot Davey in Cardiff and Michael Savory, very briefly, house prices - are we going to see them falling or faltering over the next 12 months?

SAVORY Well certainly the high value houses - the affect of the recession in the City's going to impact the - the big money spenders who have huge bonuses, but whether that will filter out across the country's another matter.

LEWIS We'll have to wait and see. Michael Savory from HSBC thanks and earlier Saran Allot Davey from Heron House Financial Management. Now the High St banks are being accused today of not doing enough to help the growing number of businesses affected by the foot and mouth epidemic. A Money Box survey has found that although the High St banks expressed sympathy and say they'll offer help to individual businesses, none of them has a scheme in place to help everyone affected. Only Barclays has made a specific offer to farmers - they can defer interest payments for 3 months. But at the end of course their debt will be bigger. The Federation of Small Businesses is holding its annual conference in Plymouth this weekend. Members there have called for a windfall tax on banks with the proceeds spent on helping small businesses affected by foot and mouth. Well live now to Plymouth to talk to Stephen Alambritis of the Federation. Stephen, what's the mood like among your members there?

ALAMBRITIS The mood is one of concern for all businesses, including farmers about the outbreak and the impact on business turnover. A lot of them reporting that their turnover is down by 70-80% and what's happened is that they've all heard and seen that the Competition Commission earlier this week suggested a windfall tax on the banks as a result of their profits on the backs of small businesses as well as other consumers - this is all triggered off by Don Cruickshank some months ago and went on to have an emergency motion that they passed quite comfortably calling for directional taxation - a windfall tax that would be used by the government to help businesses adversely affected by the foot and mouth epidemic.

LEWIS Well that's a sort of political point, and I can understand that and obviously your members will be pleased if it happened, but what experience have they had individually when they've gone to banks with their problems?

ALAMBRITIS It's been patchy - one in particular and we're very very concerned about this one - a member in Cumbria went to the bank for an increase in the overdraft facility as a result of turnover down and the bank manager started negotiating and said I'll offer you an overdraft on 4 above base. Now that would have been touching 9.75% for money and then the business had to negotiate and the bank manager said - okay we'll make it 3 above base. Now that is not the way to approach businesses in dire trouble.

LEWIS Well stay with us Stephen, but let's talk to Tim Sweeney who's director general of the British Bankers' Association representing the banks. Tim, why are the banks being so mean?

SWEENEY Well the banks aren't being mean at all. I think this is - is a national emergency which we must all take extremely seriously. We've got working parties which are constantly in touch with the Ministry of Agriculture. We've talked extensively to Michael Meacher and his task force and we have made it absolutely plain that the industry will respond positively and supportively to all - all businesses that are in difficulty. The important thing is to go and talk.

LEWIS I understand that, but why don't you say for 3 months we will not charge interest for - on loans where people are in difficulties? That would be a genuine offer that would cost you money - deferring interest simply stores up the debt?

SWEENEY I think each case must be judged on its - on its own merits. And the reason for that is because there's not even a single accepted definition of small business let alone a single accepted definition of what is an agricultural, what is a tourist business, and where there is a small business which is in difficulties, rather than having some blanket solution which may not be appropriate for that business it's much better for them to be able to go to their bank and say well in my case this is what I think would help me. Now if there are examples, and let me make this point very clear - if there are examples - we're in constant touch with all the small business representative bodies - if Stephen there has clear examples of people who don't think they're being treated fairly we will - we'll be happy to hear of them, and I'll make sure that they're drawn to the attention of senior management at the top level, but the basis of the case by case approach is the right way to tackle this, and we will respond positively.

LEWIS So even with banks making 10 billion pounds profit between them they're not prepared to put any real money into reducing the debts or the interest payments for farmers and others?

SWEENEY Paul I'm sorry. I don't normally get cross with you in these sorts of programmes, but that is a silly point. The level of profit has got nothing to do with this. This

LEWIS Well it has something to do with the banks being able to afford it - to help businesses that are making huge losses.

SWEENEY But banks you have to understand - banks are not depositories of isolated money. They only have 2 forms of money - their shareholders' money and their depositor's money and they must use those responsibly and carefully. They can't just make blanket - blanket gifts to different parts of the economy. But what they can do

LEWIS Let me ask

SWEENEY Very very carefully and very positively and very supportively and the Minister has made it clear on public record, in the House and on television that he accepts that assurance.

LEWIS Well let's hope they do. I was going to go back to Stephen Alambritis. Stephen Alambritis are you still there?

ALAMBRITIS Yes

LEWIS Do you - do you accept what Tim Sweeney says? Do you think that the banks will be doing this?

ALAMBRITIS What we want the banks to do is to go out to the businesses. I think case by case studies fined, but we want branch managers to allocate staff to actually go out and phone up all their clients who they feel maybe be adversely affected and- it's quite easy - it's either a tourist industry or a farm. Just phone them up. Are you okay? - do you need any help?

LEWIS Well let's see if that happens, and perhaps you should get on the phone to Tim yourself and perhaps make more sensible points than I managed to. Anyway, Stephen Alambritis from the Federation of Small Businesses, Tim Sweeney from the British Bankers' Association. Now businesses maybe angry with the banks but what help really is there out there for people affected by foot and mouth? The government announced a package of help for small businesses - cuts in rates, more time to pay tax and national insurance and a speedier repayment for VAT. But how easy is that help to get? Simon Cannell is a partner at accountants KPMG and covers the South West of England where of course many businesses are affected. Simon, what is the government offering?

CANNELL The government is actually offering a very wide range of assistance and help, initially through the rating system because of course peoples' rates bills are now coming through their letter boxes and that is something that will be of worry to everybody in the rural community that suddenly they have another liability and another debt to pay so very welcome is the fact that the government is giving help to the local authorities to help reduce some of those bills. They're also going to help with the valuation of properties. Obviously peoples' properties are reducing in value and they can go along to the valuation office and negotiate reduced rates through that particular area.

LEWIS So a reduced valuation can feed through to the rates very quickly then?

CANNELL It can - it can and - and you know that is the thing about these measures. Some of them actually can be quite quick which is what people are looking for. They're looking for something which is really going to give them sort of fairly instant help and - and the other area is on the mandatory help which they're going to extend to sort of small shops and rural communities which could reduce rates by up to 50% which again is quite significant for those small shops and pubs in local areas.

LEWIS You mentioned speedy help - the government is offering to allow late payment of tax and national insurance and early payment or repayment of VAT incurred by - by farms particularly. Will that happen quickly? Will that really be offered to all the people affected?

CANNELL I - I would hope so. I mean clearly I think that you know the Inspectors of Taxes, the Customs and Excise - they live like us in the rural community and they are well aware as to how critical this crisis is.

LEWIS But again it's not a blanket offer. It's a case by case offer, a bit like the banks are making?

CANNELL It is a case by case basis you're absolutely right. But in the past it has actually worked well where people have had hardship and concerns that they can't pay their bills. Often you know with our encouragement and help in speaking to Inspectors of Taxes and the Customs and Excise, it's surprising how - how helpful those bodies can be. It's when you don't talk to them that you have problems.

LEWIS Indeed - talk to them soon and get your accountant's help. Simon Cannell from KPMG thanks for talking to us. Now when you start a pension plan it's very hard to know when you'll retire, but some people with older pension contracts may find they're penalised in they change their minds. Sarah Pennells with me - an alarming story Sarah?

PENNELLS That's right Paul. Large penalties for talking your pension early are not unusual but you probably don't expect to pay them if you decide to work on beyond the age at which you originally said you'd retire. Robert Bell certainly didn't. He's a retired concert pianist and music teacher. In l978 he took out a retirement annuity contract with Abbey Life, now owned by Lloyds TSB. At the time he didn't know exactly when he wanted to retire but opted for the age of 60.

BELL It was pointed out to me that if I had a retirement date of 60 although that was probably much earlier than I would really retire because musicians go on forever, at least I would know that there was a fund of money there which I could draw on when I was 60.

PENNELLS Robert reached 60 in l997 but didn't retire. Instead he chose to carry on teaching and thought he'd increase his pension fund still further by making extra payments. Events took an unexpected turn 2 years later when he lost his teaching job. So at the age of 62 Robert contacted Abbey Life to withdraw his pension fund and to his surprise he was told he was now being penalised for retiring early and it would cost him money:

BELL I was a bit upset when I got in touch with them and they were now thinking my retirement date would have been when I was 65 and they were going to make penalties and asked me to get medical reports to say that I couldn't work.

PENNELLS Abbey Life was imposing a penalty of £1600 because its own paperwork had his retirement date as 65 not 60. Robert didn't sort it out at the time as his father was seriously ill and later died, but last December he contacted Abbey Life again. He says the replies he received were so complicated he needed to employ an independent financial advisor, Peter French of Troy French and Partners to help him. And Peter French says it's not only the figures that can be hard to understand but often the policy documents as well. And the worst offenders could be those for policies that were sold before personal pensions began in l988.

FRENCH There are quite a number of companies which in the past have had pages and pages and pages of small print which required a lawyer to really unravel the implications of it and they certainly were never designed to be consumer friendly.

PENNELLS In February this year Abbey Life admitted it had made a mistake and offered compensation, but Robert still hasn't received the correct amount and is unclear how the whole pension muddle has occurred. So we asked Abbey Life for an explanation. They told Money Box that when someone asked to defer their retirement the standard procedure is to update that person's actual retirement date by 5 years. In Robert's case that meant to 65. In its rather confusingly worded statement Abbey Life said:

WOMAN An administrative error was made which resulted in this customer's nominated retirement date being changed. Consequently when he asked for his retirement fund in 2001 the system assumed he was retiring early and imposed a surrender penalty. This was not correct.

PENNELLS So when Robert carried on paying into his pension Abbey Life assumed he would retire at 65. That meant when he wanted to retire at 62 it penalised him for retiring early and this is where the mistake occurred. But Mark Howard, an independent financial advisor with Lamensdorf Group says some companies did sell pre l988 retirement annuity contracts with exactly this type of inflexibility.

HOWARD People who've got the old style pensions and indeed I have one myself, one of the old style retirement annuities need to be aware that they are inflexible in that once you have nominated your retirement date which might be 60 or 65 you actually suffer penalties if you want to retire earlier or indeed there's a double whammy - if you retire later without informing the particular pension provider.

PENNELLS Mark Howard of the independent financial advisors Lamensdorf Group.

LEWIS Thanks Sarah. Well since l988 pensions have been getting more flexible and from April the new stakeholder pensions should be more adaptable still and to help people understand them the Financial Services Authority is putting a lot of effort into what it calls 'decision trees' - questions and answers to help you decide if stakeholder is for you. I visited Kate Stephens in North London and we logged on to her computer to check out the Financial Services Authority website. Kate lives with her partner Alan a teacher but she spends most of her time now looking after her two under 5's Tom and Emily. So you've been reading this information that they get you to read but is there anything interesting or useful yet?

STEPHENS The fact that it's quite flexible that I could pay occasionally rather than regular monthly payments.

LEWIS Okay so this is the first page and you have to say are you employed, not employed, or self employed. Right so what this shows you is roughly at your age if you save £20 a month you'll get a pension from that when you're 65 of £76 a month, so how much do you think you could save?

STEPHENS Well at the moment it would be about £50 a month.

LEWIS Right so that shows you get £191 a month pension if you save £50 a month.

STEPHENS It's not going to give me much of a monthly income when I retire but in a couple of years I'm hopefully going to be working again so I would increase my contributions.

LEWIS So let's go on to the next page and see what's next. Okay so now it says consider starting a stakeholder pension which we've been talking about. If in doubt seek help from an expert advisor because the next stage once you've decided to do it is well which stakeholder? And let's just see if this gives you any help with that.

STEPHENS Right so I can call a helpline - it does give me a few people that I could talk to. It's not something that I'd thought I'd have to do actually. I did think there would be - I just thought there was just one type of stakeholder pension and that was it - I didn't realise there were different types.

LEWIS So Kate where would you - where would you first of all think of going for a stakeholder pension?

STEPHENS My first port of call would be my bank - to see what they have to say and if they do offer a stakeholder pension. I'd probably, I'd check it out and then I'd compare it with at least one other.

LEWIS Kate Stephens struggling through the Financial Services Authority website. So what should Kate do next? With me is Tudor Taylor a director of financial advisors Towry Law. Tudor these so called 'decision trees' from the Financial Services Authority - are they useful?

TAYLOR Well I'm quite amazed that she's got through the 17 pages to the point of actually deciding that she thinks that a stakeholder pension is suitable.

LEWIS I was there quite a while

TAYLOR Yeah I can imagine you would be because there's 13 pages of notes and 4 pages of decision trees quite a struggle to say the least. Now where does she go? Well you pointed out or she rightly pointed out that there were 2 choices at the end of the form - she could phone up the helpline or ring up one of the advisors. The helpline would refer her on actually to the Occupational Pensions Regulatory Authority who would suggest 37 companies that have stakeholder pension plans to choose from.

LEWIS This is not very helpful is it - because I mean her first reaction and I'm sure it's a very common one was was oh I'll go to my bank - is that a good idea?

TAYLOR Well she also hinted that she should shop around - there's a nervousness there wasn't there - she'd go to the bank first and then perhaps shop around. And at the moment there are 37 - all have a slightly different charging structure despite the 1% amc and the investment choices will be various. She is right to shop around but the very process of shopping around is quite difficult, onerous, looking through all the small print etc.

LEWIS And of course in the context of the falling stock market there is that fear of trusting our long term money in stocks and shares?

TAYLOR Well the bigger risk factor as you quite rightly say is the investment choices available - these are long term products with the short term falls in the market - hopefully they are short term falls in the markets shouldn't really prejudice the - the starting of a pension arrangement.

LEWIS So for something that's going to last 10, 15, 20 years, stick with the stock market?

TAYLOR Exactly and those small contributions actually in the short term are buying better value in falling markets.

LEWIS And briefly you say it's complicated - out of the very small fees that are charged with stakeholders, can financial advice be afforded?

TAYLOR I think independent financial advice would be very scarce indeed for her. If she picked up the phone to an independent financial advisor they would probably charge a fee and that fee would be in excess of £100 and she mentioned she's gonna pay £20

LEWIS Two month's contribution?

TAYLOR Exactly so a lot of the money's gone - straightaway.

LEWIS Tudor Taylor from Towry Law thanks, and for more on stakeholder pensions you can ring Money Box Live on Monday when Vincent Duggleby and his panel will be here taking your calls on all you want to know about the stakeholder. And that's all we have time for today. If you would like anymore information about any of the items on today's programme, call the BBC Action Line: 0800 044 044 Calls are free : 0800 044 044 Or you can look at our website: www.bbc.co.uk/moneybox which will be updated shortly after the programme. Personal finance is there throughout the week on Working Lunch - BBC-2 at 12.30 You can e-mail us on [e-mail]. I'm back at the same time next week. Today the reporter was Sarah Pennells. The producer was Paul O'Keeffe and I'm Paul Lewis.

Links:

Stakeholder Pensions

Foot and Mouth
HM Customs and Excise and the Inland Revenue have set up a special hotline for businesses in financial difficulty due to the current Foot and Mouth outbreak. Telephone [phone], lines are open from 8am until midnight every day.

For relevant websites, click on the links above right.