AUTO-ASSIMILATION

Don’t get me wrong. I believe in pensions. But sometimes my faith is tested by the arithmetic.

From October the pensions faith will be spread through our largely agnostic country as almost everyone at work will begin to be enrolled willy nilly into a pension scheme.

Auto-enrolment will start with people working for the biggest employers and by February 2014 will include everyone in a firm of 250 employees or more.

After that it will reach out to assimilate even ‘micro’ firms with fewer than 30 employees by April 2017. A few exceptions will then be mopped up and by February 2018 every UK employer – even with one employee – will have to enrol staff automatically into a pension scheme and pay into it. That will bring pensions to between eight and ten million more than now pay into one.

I have no problem with that. Everyone paying into a pension scheme is a Good Thing.

It’s my faith.

But it is challenged by the arithmetic, especially during this five year ‘staging in’ period.

Throughout that time the compulsory amount paid into the scheme will be 1% of pay by the employer and another 1% of pay by the employee. But that does not make 2% of pay. Because ‘pay’ is only between a lower and upper limit, probably £5,564 and £39,853.

For someone on minimum wage of £12,600 a year the total going into the pension will be just 1.1% of gross pay, barely £140 a year. Even at average earnings of £26,000 contributions will total a miserly 1.6%, a fraction above £400 a year. And that includes the tax relief.

Although joining the pension scheme is compulsory, everyone will have the right to leave at any time. The hope is that contributions will be so low people will barely notice. Even if they do leave they will be re-auto-enrolled every three years or whenever they change jobs.

So inertia will keep most people in the scheme. The Government estimates that between 2 and 4 million will opt out leaving 5 to 8 million newly in a pension scheme.

In October 2017, five years after it begins, ‘staging in’ will be finished and contributions will rise to 2% from the employer and 3% from the employee. A year later they will rise again to 3% employer and 5% employee on the band of earnings. That makes 4.5% of gross pay on minimum wage and 6.3% on average earnings.

Those final amounts paid over a decade or two (or preferably three or four) might buy a half half-decent pension. The average paid into this kind of scheme now is 9.3% and the employer pays the bigger share.

But in the early years when it is well below 2% it will be impossible to say honestly ‘stay in auto-enrolment because it will give you a good pension when you retire’. The amount going in is far too tiny to do that. 

I probably will say ‘don’t opt out because pensions are a Good Thing’. I believe in them. And most of it is paid by your employer and the Chancellor’s tax relief. And you can pay in more. Etc etc.

But when I do I will be ignoring the arithmetic and relying on my faith.

__________________________________________________________________________

NOTES

1. People under 22 or over state pension age will not be automatically enrolled nor will those with an income below the trigger point – expected to be £8,105. Anyone over 16 can join and if they earn over £5,564 the employer has to pay in too.

2. The figures are based on the latest proposals from the Government’s Dec 2011 consultation paper. The final figures may differ slightly. Employers and employees can pay in more than the minimum.

3. Average contributions into pension pot schemes are 9.3%, split 6.4% employer and 2.9% employee (Pension Trends Chapter 8, ONS, September 2011 http://www.ons.gov.uk/ons/rel/pensions/pension-trends/chapter-8--pension-contributions--2011-edition-/index.html )

POVERTY LINE

I was on Radio 5 Live today and was shocked when – I’ll call her Jayne – rang from Dorset to say she was a single mum with a 17-year-old son and they were both living on her income support of £67.50 a week. Her child benefit had been taken away, she said, and so had her child tax credit. Her income had fallen from £138 to less than half that.

“What did you eat last night?” asked host Nicky Campbell. “He had beans on toast, I had nothing” she replied.

Jayne is in her fifties and has severe arthritis. She has been unable to find a job herself and gets income support as a disabled person of £67.50 a week. Her Housing Association rent and council tax are paid for her but she has to find £40 a month for her heating and £19 a fortnight for her water bill. That leaves her about £48 a week.

Out of that she now has to keep her son (I’ll call him Jack) as well. A benefit intended for one person now has to feed and clothe two people, one of them a 17-year-old. As Jayne says “He needs a lot of food.”

It didn’t seem right to me. But when I looked into it I found that it was.

Jayne and Jack have fallen into a gap in the system.

Child Benefit - £20.30 a week for the first child – is not paid now for 16 or 17-year-olds who are not in education or training. Child Tax Credit – the full amount is £59.50 a week though Jayne says hers was £55 – stops then too. So when Jack left his course those benefits ended.

If Jack went back to college or into a recognised training scheme they would be restored. But he can’t find a place. So Jayne’s income has fallen by more than £75 a week to less than half its level when Jack was in education.

For a limited time after Jack left college Jayne could have applied for what is called a ‘child benefit extension period’. That can last for up to of 20 weeks and would restore child benefit and child tax credit. She has to apply within three months of him leaving. No-one had told her about it but she is still in time to claim and is now going to do so.

Jack wants to find work. But that is proving very hard for a 17-year-old in his position. And although he is looking for a job he cannot claim Jobseeker’s Allowance until he is 18 at the end of 2012.

He may still get something – if he asks. To do that he must go back to the JobCentre and apply for Jobseeker’s Allowance on grounds of ‘severe hardship’. There is no definition of what that means but the Under-Eighteens Support Team can award it on a discretionary basis.

As he has no income or resources of his own and his only parent lives on a means-tested benefit intended to keep one person he has a chance.

That would give him £53.45 a week. But it will only last a maximum of eight weeks and then he has to ask for it to be renewed. If his Mum’s claim is unsuccessful he may try this route.

One way or the other the family might get a bit more money for a limited time. But well before Jack is 18 both will almost certainly run out. Then single parent Jayne and 17-year-old son Jack will be living on the money the Government says is enough for just one adult.

PEOPLE’S BIG POWER SWITCH

Can thousands of households get together to negotiate a better deal from the energy companies?

Two organisations think they can and are busy signing up thousands of people who hope to save money on their energy bills.

The consumer organisation Which? together with the campaigning group 38degrees – is in the lead with nearly 90,000 signed up on the two sites.

And thepeoplespower, which introduced the idea to the UK, aims to have at least 10,000 names – and hopes for 20,000 – by the end of March.

When the signing up period ends the two not-for-profit groups will go to the major energy suppliers, as well as most of the smaller ones, to negotiate a deal on price. Give us a good price, they will say, and we will bring thousands of customers to you.

Which? says it will operate a reverse auction – starting at, say, 5p per kWh for gas or 15p for electricity. When one firm offers that price Which? will then ask for a lower bid. And carry on until the lowest price is achieved.

That deal will be offered to the people who have signed up – who will be free to accept or reject it individually.

It is too early to say what people might save. Thepeoplespower says it could be £100. But Which? claims that a similar scheme in Holland resulted in 120,000 people switching in 2011 and saving on average more than €300 each.

Signing up costs nothing and you make no commitment. And the bigger the pool Which? and thepeoplespower take to the negotiating table the better the deal they should be able to get.

You can sign up to both or either – or neither of course – at the websites below. Which? and 38 degrees are the same scheme. In a few weeks you will be asked for more details of your current deal. Negotiations should begin in April.

www.thepeoplespower.co.uk

www.whichbigswitch.co.uk or www.38degrees.org.uk/page/s/the-big-switch#petition

I wish these schemes well. But will they work?

1. Will the energy companies play?

The big six energy companies already have millions of customers so even a block of 100,000 may not attract them. They are saying little except they are aware of the plans.

The small energy companies measure their customers in the tens of thousands and most could not cope with an influx which would more than double the number of customers overnight. It could be that Which? goes for the big six and the largest of the smaller firms, leaving thepeoplespower to deal with the smallest ones. It is likely to have signed up thousands rather than tens of thousands and is also looking for at least one supplier to offer green energy deals which some of the smaller ones do.

2. Will Which? or thepeoplespower be able to negotiate a good deal?

The negotiation will depend crucially on offering the energy companies a large number of new customers. But with no commitment from the people who have signed up it will be very hard to predict how many will eventually take up the deal. The final number is likely to be well short of the total who have signed up.

Energy companies are past masters at confusion pricing. Can even good negotiators outsmart them to get a deal which is genuinely better? The big companies offer new customers deals which make a loss and then push up prices later. But they are unlikely to want to do that for tens of thousands of customers at once. So the Which? deal may not be as good as a deal an individual could get.

Comparing the offer with the current deal may be difficult – though Which? says it will do that work for people if they email details of their current energy supplier and bills. How accurately that will work is hard to know at this stage.

3. Who will be helped?

At the moment an email address is essential just to sign up and it may be that the best deal can only be negotiated for online customers who read their own meter and get electronic bills. People who do not have internet access may be left out. The same may be true for those unwilling or unable to make a direct debit commitment.

Which? is trying to negotiate a dual fuel deal and an electricity only deal for those without mains gas. There seems little scope to include those on pre-payment meters, who are often the poorest.

There are already other free ways to save money on energy – switch for the first time, change to direct debit, get free insulation from the energy companies, put on a jumper. Will the negotiated deal be better than those – or work in addition to them?

4. What will be the long-term effect?

Will the new deal set a benchmark for cheaper power? Will it introduce real competition into the market? Will it change energy company attitudes to their customers? Or will it just make a relatively small number of middle-class and middle income people feel, or perhaps even be, better off?

Don’t get me wrong. I hope these schemes do work and do change energy company behaviour. But my job is to ask the questions.

PROMISING THE IMPOSSIBLE

Dear listener

Thank you for your recent email.

I am sorry to hear your investment of £100,000 has fallen in value to £45,000 and that the guarantees you were offered have been withdrawn.

But I am not surprised.

You were trying to do two impossible things.

First, you were trying to invest with no risk that you could lose money. Such schemes are fraught with difficulties and any ‘guarantee’ that losses will be protected can never be relied on.

Second, you were trying to hide your assets from Inheritance Tax. That is difficult to achieve and can never be guaranteed against changes in the law or action by HM Revenue & Customs to render the scheme ineffective.

Schemes which attempt to achieve either of these objectives tend to put your money at more risk and have higher charges than straightforward investments.

Higher charges of course erode the value of your investments more quickly.

Such schemes are widely sold even though the outcomes they offer are extremely difficult to achieve and impossible to guarantee. Of course selling them will make money both for the adviser and the scheme managers even if the objectives are never achieved for the investor.

You may well have a claim for mis-selling against your financial adviser if he or she did not explain the risks clearly at the outset. In addition the marketing material you were given may well have breached the FSA principle which says it has to be ‘clear, fair and not misleading’. Other principles, including treating customers fairly, paying due regard to their interests, and conducting business with due skill, care and diligence, may also have been breached.

You should make a formal complaint to your financial adviser saying that you do not believe you were treated fairly or with due regard for your interests. Set out the promises you understood were being made. If you consider that the information you were given breached the principle of being ‘clear, fair and not misleading’ then say that too. Mention those other principles which, from what you tell me, may also have been breached. Ask to be put back in the position you would have been in if those promises had been fulfilled - in other words you would at least have not lost any money. 

If you did not say specifically that were willing to take a risk with your money – in other words you did not agree that you were happy to lose money as well as make it – then you could also ask to be put back in the position you would have been in now if a risk-free investment had been recommended. Such investments are offered by National Savings and Investments and, for amounts up to £85,000, by any deposit account at a bank or building society.

The adviser has eight weeks to deal with your complaint to your satisfaction. If they do not reply or the reply fails to meet your expectations you can refer the complaint to the Financial Ombudsman Service http://www.financial-ombudsman.org.uk which I recommend you do.

best wishes

Paul Lewis

AUCTION BUYERS HAMMERED

If you want to invest in art or antiques the auction house is far more likely to make money than you are. If you buy at auction and then sell your bargain later at another auction you will have to realise a hammer price of more than 50% above what you originally bid before you begin to make a profit.

Here is the arithmetic.

You see a wonderful decorative item in a London auction with an estimate of £700 to £1000. You swear you will not bid more than the top end and when the hammer comes down you are thrilled to be the highest bidder at precisely £1000. You go to pay. The bill is £1300. That is £1000 plus 25% commission (£250) and VAT on the commission of another £50. You pay up.

A year later you have heard that wonderful decorative items like yours have risen by as much as 50% in price. You are proud of your good judgement and send it back to the auction house which catalogues it with a hammer price of £1000 to £1500. You smile at the profit you will make.

At the sale the estimate is right and the hammer does fall at £1500. You are pleased. And excited a month later when the cheque arrives. But when you open the envelope it is for just £1230 – less than you paid a year ago. The statement itemises the costs. Hammer price £1500 less 15% commission which is £225 and VAT on that takes another £45.

So even though the hammer price had risen by 50% in a year, you have made a loss of £70.

At those rates your £1000 object needed a hammer price of £1586 – a rise of nearly 60% – before you would make a profit.

That is why the ‘hammer price’ is called the price the buyer doesn’t pay and the seller doesn’t receive.

Auction houses charge different premiums and commissions, some may be lower others higher. If you sell or buy a very expensive item the percentages may be reduced. And of course a small fraction of the amount you pay, as buyer or seller, will go the Chancellor.

But for most people most of the time it is the auction house that makes the most money, whether you are buying or selling – and especially if you do both.

CHINESE TALES

So I wasn’t surprised at the figures for the record breaking Qianlong reticulated vase, sold for a record £43 million in November 2010, which is apparently still in storage after the wealthy Chinese buyer, named as Wang Jianlin, refused to pay the buyer’s premium.

The hammer price was £43 million. Bainbridge’s, the Ruislip auction house which sold it, charges a flat rate 20% buyer's premium (as a foreign buyer no VAT would be due). That comes to £8.6 million. In addition the seller has to pay commission of 17.5% plus VAT. That would be another £9 million leaving the couple who inherited the vase with £34 million, the auction house with more than £16 million, and the Chancellor with £1.5mn.

Press reports suggest that the seller’s commission was rather lower – around 12% before VAT. In that case the lucky owners should – eventually – get nearly £37 million, Bainbridge’s will trouser nearly £14 million and the Chancellor £1 million. If Mr Jianlin pays up.

http://www.telegraph.co.uk/property/interiorsandshopping/antiques/9075120/Mystery-over-51m-sale-of-Chinese-vase.html

http://www.guardian.co.uk/culture/2011/mar/18/chinese-vase-centre-auction-row

POUNDS SHILLINGS AND PENCE IN BLEAK HOUSE

For anyone not familiar with the peculiarities of pre-decimal English coinage this passage from Dickens's Bleak House is almost impenetrable. The meal is over. Guppy will pay and he asks Mr Smallweed what it comes to. 'Small' rapidly assess the total price of a meal for three people for the benefit of the waitress, Polly.

"Then I'll pay," says Mr. Guppy, "and we'll go and see him. Small, what will it be?"

Mr. Smallweed, compelling the attendance of the waitress with one hitch of his eyelash, instantly replies as follows: "Four veals and hams is three, and four potatoes is three and four, and one summer cabbage is three and six, and three marrows is four and six, and six breads is five, and three Cheshires is five and three, and four half-pints of half-and-half is six and three, and four small rums is eight and three, and three Pollys is eight and six. Eight and six in half a sovereign, Polly, and eighteenpence out!"

Bleak House Chapter XX

From this initially difficult paragraph we can deduce the price of everything on the menu which the three men - Jobling, Guppy, and Smallweed - ate. Smallweed adds up the amounts in his head and keeps a running total of the bill as he does so.

The three of them ate four helpings of veal and ham with french beans - Jobling had two. The total, Smallweed says, "is three" or three shillings. Three shillings is 36d so each veal and ham was 9d.

Such calculations, knowing that four ninepences were three shillings, would have been second nature to most Victorians. Jobling also had double potatoes, so four helpings make the total "three and four". So potatoes are a penny a portion bringing the total to 3s 4d.

Jobling's summer cabbage - no-one else ate that - adds another 2d - total now 3s 6d or "three and six".

After that came a helping each of marrow pudding taking the bill from "three and six" to "four and six" in other words adding a shilling. So each helping must have been 4d as there are twelve pennies in a shilling.

Six helpings of bread (two for each diner) at 1d each adds 6d making 5/- "is five".

A portion of Cheshire cheese is also 1d, add three of those to get to 5s 3d (five and three). Four half pints of half and half - a drink comprising equal measures of ale and stout - add a shilling taking the total from "five and three" to "six and three" or 6s 3d. Jobling had drunk two and so they are 3d each.

Four small rums are clearly 6d each, four of them come to 24d or 2/- , bringing the total to 8s 3d "eight and three".

Finally, Polly's waitressing service for three people is 1d each adding threepence to make a final total of 8s 6d. Smallweed gives Polly half a sovereign, which is ten shillings, leaving 1s 6d change or, as Mr Smallweed puts it, "and eighteenpence out!"

Simple!

CHARLES DICKENS BY WILKIE COLLINS

Charles Dickens’s 200^th birthday on 7 February 2012 will be just the start of a year of hagiography. But in the past, not everyone revered his work in the way many do today.

His greatest friend, the writer Wilkie Collins, had a more balanced view of it. Some stories he thought brilliant; others he found poor.

We know this from private pencil annotations by Collins in his copy of John Forster’s 1872 biography of Dickens which was sold after his death.¹

On the first page of the book, Forster writes

‘Charles Dickens, the most popular novelist of the century’

Collins added ‘after Walter Scott’.

Collins never did put Dickens in the top echelon of novelists. That honour he reserved for James Fenimore Cooper, Walter Scott, and Honoré de Balzac whom in 1883 and 1884 he called ‘the three Kings of Fiction’ and of those Walter Scott was ‘King, Emperor, President, and God Almighty of novelists’.²

His annotations then turn to individual Dickens books.

Oliver Twist – ‘the one defect in that wonderful book is the helplessly bad construction of the story. The character of “Nancy” is the finest thing he ever did. He never afterwards saw all the sides of a woman’s character – saw all round her. That the same man who could create “Nancy” created the second Mrs Dombey is the most incomprehensible anomaly that I know of in literature.’

Barnaby Rudge – ‘...the weakest book that Dickens ever wrote.’

Martin Chuzzlewit – ‘Chuzzlewit (in some respects the finest novel he ever wrote) delighted his readers and so led to a large sale of the next book, Dombey.’

Dombey and Son – ‘...the latter half of Dombey no intelligent person can have read without astonishment at the badness of it.’

David Copperfield – ‘incomparably superior to Dombey’

The Mystery of Edwin Drood – ‘...cruel to compare Dickens in the radiant prime of his genius (referring to Oliver Twist) with Dickens’s last laboured effort, the melancholy work of a worn-out brain.’

Collins was asked to finish Drood but ‘positively refused’, though rumours persisted that he had.³ In response to one he complained that the conclusion was ‘an outrage offered to Dickens’s reputation to associate his great name with rubbish which is utterly unworthy of it’.⁴

Apart from these private annotations, in 1860 Collins called A Tale of Two Cities ‘the most perfect work of constructive art that has ever proceeded from his pen.’ ⁵

And in a letter in 1854 describes Dickens’s contribution to the Christmas number The Seven Poor Travellers as ‘a noble, an exquisite story’.⁶

Collins was asked to write a biography of Dickens, an offer he also refused. In 1886 he wrote in a letter to one would-be biographer

‘He more than once expressed to me his dislike of being presented to public curiosity by means of “pen-portraits”, and his desire to be only known to the great world of readers after his death by his books.’⁷

A lesson for the many biographers clamouring for our attention in 2012.

________________________________________

NOTES – references to letters are to The Public Face of Wilkie Collins - The Collected Letters 2005 and its seven supplements. The [numbers] are assigned by the editors.

1. The annotated volume was sold by Puttick and Simpson on 22 January 1890 but its location is now unknown. The notes were recorded in Pall Mall Gazette, 20 January 1890.

2. See Wilkie’s letters [2182] to Miss R 12 July 1883, [2304] to Paul Hamilton Hayne, 3 May 1884, and [2102] to William Winter, 14 January 1883.

3. [3185] to George Barnett Smith, 4 December 1878.

4. [1831] to Georgina Hogarth, 18 March 1879.

5. From the preface to The Woman in White London 1860.

6. [0188] to Edward Pigott, 18 December 1854.

7. [2598] to Frederick Kitton, 2 August 1886

BENEFITS AND THE F-WORD

Never ever use the F word when you are discussing benefits. It’s not clever. It’s not grown up. It’s just lazy.

But in almost every piece you read now about benefits that four-letter F word is central to the argument - even if it is politely unspoken.

Take The Sun front page lead on Saturday 4 February 2012. Below the strap line ‘EUROMILLIONS SCANDAL’ the half-page deep headline runs “£10M LOTTO PAIR STILL ON BENEFITS. Jackpot winners claim £500 a month...6yrs on”.

As a family newspaper, The Sun does not actually use the word ‘f***’ directly.

If we turn to the “Full story - pages 4 & 5” we discover that 73-year-old Mick O’Shea won the Euromillions game in 2006. Ten years earlier the ex-builder had claimed Disability Living Allowance on account of his severe arthritis and, says his wife Jean, his eyesight.

Neither condition improves with age so he is still entitled to DLA which Mr O’Shea says is “about £500 a month”. That implies he gets the top rate for his care needs of £73.60 a week and the top £51.40 a week rate for his mobility needs, the latter being used to provide a suitable vehicle through the brilliant Motability scheme.

Could Mr O’Shea pay for these things himself? Of course he could. Does that mean the DWP should stop paying him? Of course it doesn’t.

Disability benefits are given because of the condition not financial need. Society recognises that severe disability brings its own needs and those of us who are not – yet – disabled pay a small amount to help meet those needs for those who are.

As Mr O’Shea himself says “I’ve worked for forty years and I’m entitled to it.”

But to The Sun Mr O'Shea’s DLA is a “disgusting abuse of the system by the mega-rich”. A neighbour asks if it is “morally right” and the head of the Taxpayers’ Alliance calls it “barmy that taxpayers are funding benefits and new motors for a multi-millionaire.”

At 73 Mr O’Shea and his wife will also be getting retirement pension. Should that be taken away? Of course not. He paid for that too while he worked. He can also get free treatment from the NHS, drive without charge on the roads, and rely on the police to protect him.

Should those rights all be taken away because he is rich and could afford to pay for them himself?

No.

But if you follow The Sun’s logic you might think they should be. After all, they are all paid for by hardworking taxpayers almost all of whom are far less wealthy than Mick and Jean. 

But that card is always trumped by our belief that the Government should use our money to build roads that are free to travel on, an NHS free at the point of need, and a state pension paid to all who have done a lifetime’s work.

In a similar way disabled people get a small weekly amount as a recognition of their extra costs. And whether they are rich or poor, destitute or lottery winners the amount they are given by the healthy is the same.

That makes me proud. 

If the O’Shea home was burgled or flooded would the insurance company say it wouldn’t pay up because he could afford to meet the loss himself? Would the Insurance-premium-payers’ Alliance wade in and add that it was “barmy” to take premiums off hard-working families to pay for this multi-millionaire to replace his carpets and television? No. Because he had paid his premiums and was entitled to the benefits.

And every day we live in the UK and contribute in our own way to society we pay our premiums. And that makes us entitled to the benefits when our circumstances – not our wealth – determine that we should get them.

It has nothing to do with fairness.

So never even think of the F word when arguing about benefits. It’s not clever. It’s not grown up. And it is lazy.