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  • Carl Brown
  • June 25, 2015 10:14:08 PM
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A blog devoted to all things financial, including saving, spending, investing and retiring.

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What really makes us happy?

It’s a question that’s preoccupied sages for centuries: what is the key to happiness and satisfaction? Study after study has shown that stress, the polar opposite of happiness, has a negative effect on life expectancy, even at to the molecular level. So while industrialized countries aren’t rushing to imitate Bhutan’s decision to replace GDP with...

It’s a question that’s preoccupied sages for centuries: what is the key to happiness and satisfaction?

Study after study has shown that stress, the polar opposite of happiness, has a negative effect on life expectancy, even at to the molecular level. So while industrialized countries aren’t rushing to imitate Bhutan’s decision to replace GDP with a Gross National Happiness Index, first world countries like France and the UK are increasingly investigating the happiness levels of their citizens.

Numerous factors play into happiness, but the three of the biggest come up again and again. It’s probably not a great surprise that these are wealth, health and having access to nature.

So we’re investigating and seeing how significant these are to your happiness, as well as looking at an outlier that might turn some pre-conceptions on their heads.

Surely It Is All About the Money?

It’s easy to think that money is the key to happiness, especially when you want that latest gadget or luxury holiday that’s just out of financial reach.

A 2010 survey showed that once you dip below a GDP per capita income of $15,000, happiness levels plummet. Countries like China, Russia and India reported noticeably lower levels of happiness than wealthy developed countries like the USA, UK and Denmark.

800px-Paris_Tuileries_Garden_Facepalm_statue

What the same survey shows though, is that once a country crosses that vital $15,000 threshold, happiness levels don’t increase with income levels. So British people have similar happiness levels to Americans, despite having a per capita income that’s almost $10,000 less than the States.

It’s Official: Trees Are Good For You

Perhaps the stereotype of the tree-hugging hippie has something going for it after all. Surveys have shown that being in green spaces reduces stress levels. This might be because trees decrease environmental stressors – they absorb pollution and lower the temperature.

If you want to boost your creativity and levels of focus, research undertaken by the University of Kansas suggests that you need to spend more time in nature. People who spent just 3 days in nature in, scored 50% higher on creativity tests, suggesting that regularly spending time in nature could have a huge payoff.

But don’t worry if you don’t have time to go hiking or camping. Another study from the University of Illinois in the 90s showed that just having a view over a grassy courtyard rather than urban sprawl meant that the subjects experienced major improvements whilst dealing with major life challenges.

Iceland: The Exception that Proves the Rule?

Iceland is a tree-less country that went through one of the more spectacular economic meltdowns of the financial crunch. Yet it’s one of the most highly ranked countries in the Better Life Index.

As you might expect given the financial turmoil the country’s undergone since 2008, the average Icelandic disposable income in $23, 047, putting in under the OECD average.

However, this is balanced out by the fact that employment is 11% higher than the OECD average, and 98% of Icelanders feel that they have someone they could call on in times of need. These factors could significantly reduce the type of anxiety and worry that feeds into high stress levels.

Although Iceland doesn’t boast the type of green, tree-studded landscapes that many other countries do, it does have much lower levels of pollution than many other countries. Its citizens aren’t going to be relaxing in leafy parks at the weekends, but Iceland’s small population of just 321,857 people gives it a low population density.
This means that even Reykjavik, the capital city, is small yet spacious city where people can make the sort of connections that can be difficult in large metropolitan cities like New York or London.

Iceland has some incredible unique scenery. What better way to get away from it than relaxing in a geothermal pool or visiting a waterfall?

The Better Life Index survey isn’t a one-off either. Iceland is the best country in the world to be a woman, and has an above average life expectancy of 82.

So, it looks like wealth and being able to access green spaces are just some of a complex matrix of aspects that feed into happiness.



Should pension enrolment be compulsory?

Auto-enrolment has been rolling out for a couple of years now, first with large private sector employers, then public sector, and SMEs are in the implementation process now. So far, opt-out rates have been very low, and the government now only expects 15% of employees to opt out, rather than its initially predicted 30%. This...

Auto-enrolment has been rolling out for a couple of years now, first with large private sector employers, then public sector, and SMEs are in the implementation process now. So far, opt-out rates have been very low, and the government now only expects 15% of employees to opt out, rather than its initially predicted 30%.

This is very good news. The uncomfortable truth surrounding all pension reform – including unsavoury public sector pension reform – is that everyone needs to pay longer, for less in order to pay for retirement. If we’re going to navigate our way through this mess everyone needs to contribute.

Compulsory pension enrolment

However, we’re still in the early stages, and contribution rates are still low – 1% from the employee, matched by the employer. For some people that’s on top of their salaries, great, for others, that’s up to 2% more taken out of their pay packet. Not so great. That’s easy enough to swallow when it’s just 2%, but by the time it gets up to 8% – or higher; many experts recommend contribution rates of around 15% – opt-out rates are bound to rise.

That’s not something we as a nation can afford. The question hanging over auto-enrolment from the beginning has been whether it should be compulsory. There’s certainly a strong case for mandatory workplace pensions.

If people can’t pay for their own retirement – and the evidence is that most people don’t save enough by themselves – then they end up relying on others to pay for them. And that means the taxpayer. And when the tax base is smaller than its dependants (as is set to happen with an ageing population) that’s a recipe for disaster. You can’t turn to a pauper for help.

Although the libertarian lobby will rail against anything mandated by government, when some organisations estimate we’ll need a £400,000 pension pot for a ‘basic standard of living’ and the average British pension pot, when left to our own devices, is only around £40,000, we clearly need more than a nudge. The argument to leave us alone only works if we follow it through to being allowed to die alone in our freezing flat at the age of 79. Which is something the British welfare state will not allow.

But libertarians do have a point. Individual liberty should be primary in a liberal democracy. Mandatory pensions makes sense because failure to save enough for your own retirement harms other people (violating the principle of liberty) but there are situations where it would be appropriate to opt out.

For example, high earners or those with substantial capital could find themselves violating the £1.5 million lifetime allowance through participation in an auto-enrolment scheme they neither want nor need. And financially savvy workers, of all income levels, may wish to build up their pension in another way, or through a different scheme to that their employer subscribes to. If that’s what they intend to do, they would be permitted to do so.

So what’s the solution? If opt-out rates do rise to unsustainable levels, particularly in time for the pension review set for 2017, and compulsory pensions take on the air of necessity, then we need ensure the scheme answers the arguments against.

Opting out should still be permissible, but to do so must be a means tested, active process. You are only allowed to opt out if you can demonstrate alternative means. Much as the old rules for annuitisation used to be before Osborne’s liberalisation of the process. This would cover people who wish to pursue retirement savings in a different way, and those on higher incomes seeking to avoid tipping over the lifetime allowance.

Workplace pension schemes should be excellent value for money, so that financially savvy workers don’t even want to opt out. This should be requirement anyway, but doubly so if compulsory. If I’m forced into doing something, it’d better be unequivocally good for me. This means ensuring annual management fees are reasonable, and returns are consistent with alternative schemes.

The latter point cannot be guaranteed, though steps can be taken to support it. The former may mean instituting Dutch style collective pensions and using bulk bargaining power, along with economy of scale, to drive fees down. Approached correctly, workplace pensions could be the most value for money pensions on the market.

If the opt-out rates stay as positive as they are now, then mandatory pensions may never come up. But if participation drops significantly, there is a strong case for compulsory enrolment done right. On pure economics, compulsory pensions makes most sense, and auto-enrolment is, as an OECD review into the Irish pension system put it “second best”. You have to make it politically palatable.

Not to sound paranoid, but starting with auto-enrolment at a low contribution rate seems a good place to start.



Are things looking up for savers?

The banking crash of 2008 created a perfect storm for savers. Record low interest rates – designed to stimulate spending and borrowing – allowed rising inflation to far outstrip the returns achievable by saving alone. Savers were confronted with three choices: watch their capital depreciate in value, invest in an uncertain stock market or simply...

The banking crash of 2008 created a perfect storm for savers. Record low interest rates – designed to stimulate spending and borrowing – allowed rising inflation to far outstrip the returns achievable by saving alone.

Savers were confronted with three choices: watch their capital depreciate in value, invest in an uncertain stock market or simply spend it. In a recession sparked by unsustainable debt, the financially responsible were made to suffer.

But with inflation finally falling to the Bank of England’s target 2%, a number of products are already beating inflation. Are things – finally – looking up for savers?

Falling inflation

After years of inflation holding relatively steady at around 5%, inflation finally fell back to 2% on the CPI measure in December 2013.

This means two things for savers. Firstly that even with historically low interest rates, there will be more inflation beating savings products available. Secondly, as wages start to rise again, there will theoretically be more money left over at the end of the month that can be saved.

poor pig

Ultimately this means a return – albeit a slow one – to saving being a profitable pursuit, rather than a ‘least worst’ option.

Recovery confidence

Lower inflation means more than just low interest rates finally winning out. Low inflation has a reciprocal relationship with wider economic confidence. Aside from rising wages, this will also feed into banking activity.

It’s difficult to imagine now, but there was a time – not so long ago – when banks used to compete on who could offer the best interest rate on savings. As the recovery takes hold and banks become more confident, we will eventually see a return to a competitive savings market.

This won’t send rates shooting back up to the heady heights of 5% any time soon, but even decimal increases make a difference.

Until then, savers with a bigger appetite for risk can cash in on the increasingly confident recovery by taking advantage of the buoyant stock market. The FTSE 100 recently celebrated its biggest annual climb since hitting an all-time low in 2009, ending 2013 at 6749.1 points – 14% up from the end of 2012.

While interest rates remain low, investing is easily the most viable option for beating inflation by anything more than whisker – try comparing what you can get with Fidelity’s Stocks & Shares ISA calculator and ISAs.com’s Cash ISA calculator. Although it goes without saying that stocks can go down as well as up.

Base rate rise?

Of course, the biggest boon for savers will be when the base rate is finally pulled up from its historic low of 0.5%, raising interest rates across the board – bad news for anyone servicing variable rate debt – but a long overdue windfall for those with capital and little appetite for investment.

When Mark Carney took over as governor of the Bank of England he issued ‘forward guidance’ that he would consider raising the base rate once unemployment fell to 7% – it was a move designed to signal to an anxious business community that a rate rise would not come soon, and when it did, only when the economy was decidedly on the mend.

With unemployment having already fallen to 7.1% in the three months to November 2013, Carney has been forced to offer repeated assurances that the base rate isn’t coming up any time soon. The soonest a base rate rise is reasonably expected is the second quarter of 2015, with cynics predicting a post-election (May) bump.

It may not be coming for at least another year, but the take-home for savers is this: a base rate rise is coming.

The fixed rate question

All the above raises the question: what to do about fixed rates?

Relatively lengthy commitments of 3-5 years for fixed-rate ISAs and savings bonds have long been the only way to get anything approaching a decent rate. But with confidence rising, an impending base rate increase and lower – and therefore easier to beat – inflation, making such a commitment now would seem an unwise move. But to avoid fixed rates altogether would be to confine yourself to the lowest of low rates, in all likelihood continuing to depreciate the value of your capital.

Predicting the future may be foolish, but a certain amount of crystal ball gazing is necessary in financial planning. The only reason to avoid medium to long term fixed rates now is because rates are set to rise within the period you’d be committing to. But let’s look at that a bit more closely.

Let’s assume the base rate is going to go up in May 2015. If you take out a 3 year fixed saving bond now, that would be around a third of the way through the period. The truth is that as the economy is still fragile – and will be for quite some time – the rate rise is likely to damage confidence more than bolster it at first. There will be a period of adjustment, which will eat into the interest rates banks are willing to offer. And the rate rise will likely be small – quarter of a percent, half a percent – not exactly an interest bonanza.

Realistically, rates won’t return to ‘normal’ for quite a while. As ever, the best approach is likely a mix of fixed and variable rates, savings and investments. Missing out on an interest bump may be a risk you have to take to avoid depreciation. It all depends on your personal circumstances.

In short? Things are looking up for savers. But there might be a bit of neck ache along the way.



The recovery is here – will you be better off?

The UK economy grew by as much as 1.4% in 2013, and most forecasters expect this to improve over the next two years. While the government points to this as a success of their economic policy, the opposition insists the recovery is failing to benefit ordinary people – the much talked about ‘cost of living...

The UK economy grew by as much as 1.4% in 2013, and most forecasters expect this to improve over the next two years. While the government points to this as a success of their economic policy, the opposition insists the recovery is failing to benefit ordinary people – the much talked about ‘cost of living crisis’.

That the economy is on the up is in no doubt. But are Labour right to assert that the link between GDP growth and living standards has been severed?

Green shoots

It’s not just GDP showing signs of recovery. The kind of modest growth we have experienced so far could easily be attributable to the finances sector, which recovered early from the crash.

The construction industry has posted eight months of consecutive growth. UK manufacturing is projected to grow 2.7% in 2014 – stronger than any other European country. Car sales are at their highest in five years. The engines of economy are revving up.

With cheap credit hard to come by, how is demand increasing? Simple: unemployment is falling, and at a higher rate than initially predicted by Bank of England chief Mark Carney. This is probably the most significant sign of recovery – the more people in work, the more money they have to spend, and the better for everyone.

car and money

A closer look at unemployment

Although falling unemployment is undoubtedly a Good Thing, the figures warrant closer inspection.

The headline rate – 7.1% in the three months to November 2013, a total of 2.32 million – only counts those classed as ‘economically active’, defined as people out of work but actively looking, and able to start within a fortnight. This leaves out huge swathes of ‘economically inactive’.

The zero-hours contracts controversies that emerged in the latter half of 2013 also highlighted that going by the above definition, people on zero-hours contracts, in part-time work or on dubious ‘self-employment’ contracts are rightly not included as unemployed, but may have no guaranteed income, anything approaching a full-time salary, or the employment rights that come with full-time employment.

Figures on this segment of the working population are harder to come by, so it’s difficult to pin down the scale of the problem. But it’s important to bear in mind. The greater the proportion of the working population on less than full-time, the less money available to go into the economy, and the less well-off people may be individually than implied from the headline figures.

Wage growth… or not?

Adding to the pile of modestly positive economic news at the end of last year, a CBI survey found that “more British firms expect wages to rise in line with inflation [in 2014] than at any time since the 2008-2009 recession”. The survey revealed 42% of firms believing salaries would grow in line with the higher Retail Price Index (RPI) measure of inflation.

Wage freezes have become commonplace since the crash, during a period of high inflation; meaning many people’s salaries were actually decreasing in value every year. So a return to wage growth that keeps pace with inflation is excellent news.

However, individuals may not feel the benefit of this key measure of economic improvement for two reasons. Firstly, it comes after five years of stagnation, meaning they are starting with a devalued salary. Until wage growth outstrips inflation, people who maintained the same salary over this period will still be poorer than they were five years ago.

Secondly, wages outside of the boardroom have been falling in real terms for decades. Taken in a long-term macro-historical context, the link between wages and GDP growth has arguably already been broken – as demonstrated in a 2011 Resolution Foundation report. People are unlikely to see significant earnings increases in line with the recovery.

Taking in interest

A similar story can be told with savings. The low base-rate introduced as part of the stimulus package has kept interest rates low – far below inflation – for the past few years. This means that just as average wages have been losing real value, so have savings pots.

For young workers saving for retirement now, the passage of time should smooth out the dip. But workers coming up to pension age will have suffered significantly.

Even a relatively modest retirement lifestyle – equating to 40% of the average UK salary of £26,500 – requires a pension pot of £633,000. Those coming up to retirement now will find that even if they had amassed such a pot, due to the depreciation in real-term value, the annuity they buy now won’t produce the same level of income as it would have five years ago, or hopefully will in five years time.

As with wages, until interest rates significantly outstrip inflation, savers won’t see the benefits of recovery. Even then it will take a long time for savings to be worth what they were pre-crash.

The bottom line

So will you be better off now the economy is on the mend? Not for a while anyway. Although consumer confidence is on the up, the outlook for real, substantial change on an individual consumer level will be modest at best in the short to medium term.

Image: http://www.flickr.com/photos/59937401@N07/5474756536/sizes/z/



Is this the end for derived pension benefits for spouses?

Nearly 300,000 people are due to receive lower pensions in a move announced in December last year. The government plans to scrap the ‘derived benefit’ top-up for spouses worth up to around £66 per week, a benefit that disproportionately benefits women. It’s the latest in a salvo of policies designed to reduce pensions spending at...

Nearly 300,000 people are due to receive lower pensions in a move announced in December last year. The government plans to scrap the ‘derived benefit’ top-up for spouses worth up to around £66 per week, a benefit that disproportionately benefits women.

It’s the latest in a salvo of policies designed to reduce pensions spending at a time when every pound has to stretch further.

Derived benefit explained

The top-up is awarded to people who have failed to accrue the required 18 years of National Insurance contributions required to receive the state pension, but whose spouses have met the requirement. Approximately 3% of all pensioners receive the derived benefit top-up.

It was introduced in the National Insurance Act of 1946, under the dominant societal model of the male breadwinner. Women were extremely likely to reach state pension age without qualifying for their own pension, and so were awarded up to 60% of the full pension while their husband was alive, increasing to the full rate once widowed.

By design, the majority of claimants are still women, who may have taken career breaks to look after children. Of the roughly 300,000 pensioners expected to affected between 2016 and 2030, 190,000 are women.

The top-up is expected to be scrapped when the single-tier pension is introduced in 2016.

senior citizen

The case for cutting

The government’s case for cutting the derived benefit top-up is three-fold:

  1. There is a need to cut the pensions budget.
  2. The benefit no longer fits the times.
  3. The majority of claimants live overseas.

That the pensions budget needs cutting is clear and undisputed. 30% of government spending is on welfare, and retirement benefits (including state pension) amount to more than half of that. The ageing population means this spending is only going to balloon unless radical, structural changes are made.

The most interesting reason for cutting the benefit is based on recent trends. Looking at the government’s own graph, we can see that the proportion of women reaching state pension age who are entitled to the full state pension has increased dramatically even in the last 15 years.

graph

As put in a statement by the DWP: “We have always said that under the new single tier pension everyone will build up a state pension on their right. This will put an end to the outdated notion that a man needs a pension while a woman needs a husband.”

Scrapping the top-up then, is both in keeping with the contributory principle of the welfare state and a shift in keeping with demographic shifts.

The final reason, and what seems to be the real thrust of the argument, is that the majority of claimants are actually living overseas “with little or no connection to the UK”. For example, based on the most recent figures, “nearly 70% of the awards to date relate to married men living outside the UK.” Quite rightly, and again in keeping with the contributory principle, the coalition takes the view that the pensions budget is best spent on people who have worked, and are living, in the UK.

Defending the benefit

The government’s case is certainly persuasive, particularly considering the relatively small number of people affected – and their concession that to take away the benefit overnight would be conspicuously unfair, putting transitional measures in place. However, like all government cuts, their reasoning deserves further scrutiny.

The principle defence of the benefit is that cutting it completely simply doesn’t make sense. Yes, the majority of women now qualify for a full state pension themselves. But there is still a sizeable proportion that don’t. Women are disproportionately affected as they are more likely to take career breaks. The solution to that problem, whilst still in keeping with the contributory principle would be some sort of derived benefit based on their spouse’s NI contributions…

That the pensions bill needs curtailing is irrefutable. But to take the other side of the argument, retirement is becoming progressively harder to pay for from an individual point of view. Pensions minister Steve Webb has admitted himself that the state pension provides only a bare minimum. According to pension provider Fidelity’s pension calculator, it takes a pension pot of hundreds of thousands on top of the state pension for even a modest retirement income. In this context, taking away the top-up seems perverse. The contributory principle is important, but so is welfare-as-safety-net; protecting the most vulnerable in society.

That there has been a growth in men living overseas able to claim the benefit – presumably because they emigrated and so have not built up their NI contributions – is a reason to clamp down on awards to emigrants, not to scrap the benefit altogether.

The bigger picture

The government needs to reduce the pensions bill however it can. As such, it’s hard to shake the feeling that the derived-benefit top-up has come under fire mostly because it affects a relatively small number of people, and therefore will go relatively unnoticed. The move to scrap it has certainly received very little media attention.

Similarly to raising the state pension age with no regard to national and professional disparities in life expectancy, it seems like another case of using a blunt tool where sharper nuance is required.

Image: http://www.flickr.com/photos/dark_ghetto28/407953159/sizes/z/



Working while travelling the world

Working while travelling is a dream for many of us. Is it really possible? Here’s how to make it happen. Image by Giogrio Montersino Rent out your home The easiest way to find a steady income stream is to rent out a property, if you’re lucky enough to own one. Being a landlord is about...

Working while travelling is a dream for many of us. Is it really possible? Here’s how to make it happen.

Image by Giogrio Montersino

Rent out your home

The easiest way to find a steady income stream is to rent out a property, if you’re lucky enough to own one. Being a landlord is about more than just receiving rent – it comes with responsibilities including keeping the property in good working order. Organising a boiler repair from the other side of the world isn’t going to be easy.

There are a number of options but the easiest by far is to hire a letting agent. This does mean some of your income will go on fees, but you can also rely on letting agents to take the stress out of administration and maintenance.

UK rent prices look set to rise this year but you will have to pay tax on this income.

Freelance

If you don’t have a property to sell then there’s another option. There are plenty of people who simply work while they travel, often as freelancers. This means they work for themselves rather than as an official employee of a company.

Thanks to technology there is a lot of work that can be done from almost anywhere with a laptop and an internet connection. There are a whole host of freelancer websites including oDesk.com, Elance.com, PeoplePerHour which help freelancers find people willing to commission paid work assignments.

It’s not easy to make a living as a freelancer, but by building good relationships with existing clients and finding new ones it can be done. It might be beneficial to do some groundwork by building a client base before you jet off on your world tour.

If you’ve got a skill you think you can turn into a profession, this Mashable article is a good place to start. Be warned though, it’s a risky position to put yourself in. Work can dry up without notice and being without an internet connection for a day or two could considerably impede your ability to do or deliver the work.

Work and move

There’s one more option. It’s more popular with the younger crowd as they’re more likely to take on the work that’s suitable. Essentially you show up in a new place with some cash in your pocket and then try to find a job to support yourself.

The work could be anything, and flexible jobs like bar work are popular. These jobs are easy to leave behind when you decide to move on. Alternatively you might be able to find temp work in an office for example.

A proper temp job means putting your holiday on hold in some ways, but it’ll likely give you more cash to have extra time between jobs where you can relax and enjoy yourself. Cafe or bar work will get you less pay, but won’t be as stressful and could give you more time to enjoy yourself between shifts.

There’s a lot of flexibility here, but you’re relying on the job market too. There won’t always be work available and if your job suddenly disappears you’re going to need a back-up plan.

It’s also essential to research labour laws in your chosen country. Some will need you to get a work permit or other documents in order to earn. If you fail to do so, your holiday may come to a very abrupt end.

There are also a number of important financial decisions around savings, investments and pensions which need to be considered before you jet off.



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