2012 : The Year of the Churn

In China next year will be the Year of the Dragon - in the UK it looks set to be The Year of the Churn.

The reason? From 2013 IFA's will be banned from taking commission from clients, except there is a loophole as watchdog Consumerfocus notes.

It is particularly galling that existing customers will continue to pay trail commission on their newly written contracts – introduced just before the ban – potentially for several decades.

So there's an immediate incentive to get clients into contracts - or if they are already in contracts to switch them to higher paying one. And this process may may have already started - there's evidence of a pick up in activity in these areas.

Commission based advisors usually get paid a lump sum from companies they steer their clients into, plus an ongoing 'trail commission' of around 0.5% a year. Quite what this is for is unclear. Some see it as deferred fee, others as for 'continuing service'. And it can go on for years and years.

The RDR (retail distribution review) will end trail commission - but in the short term it may have increased it.

There's something weird about Warren

Warren Buffet's annual letter to share holders is out today and well worth the time spent reading it. (http://www.berkshirehathaway.com/letters/2010ltr.pdf).

Well the number one weird thing is the share price. $100000 plus. And part of the reason for that is the way Warren Buffet measures Berkshire Hathaway's (ie his) performance.

You won't find net income given much shrift as a useful figure - in fact it's booted into the long grass. But Warren's favourite metric - growth in annual per share book value - now has a competitor. The rolling five year return.

From 1965-2010 there are 42 five-year periods. Berkshire Hathaway beat the S&P in every period. This is a stellar performance. Not only that: the S&P had six negative periods in that time (nominally at least, the after-inflation picture would be less rosy). Berkshire had none. It was safer and more profitable than the index.

How did they do it?

Here's one quote from the letter:

'At Berkshire, managers can focus on running their businesses: They are not subjected to meetings at headquarters nor financing worries nor Wall Street harassment. They simply get a letter from me every two years and call me when they wish.'

They don't teach that at Harvard.

Pensions: the 10% cashback

So in the end it comes to this for the rich HRT (40% tax) payer: stick £1.5million into your pension fund, and the government gives you 10% - that's £150,000.

It used to be done in the name of pension planning, but under the new rules (from April2011), there needn't be any pension involved. As long as you meet the £20 000 pa minimum income requirement you can take all your cash out of your money-purchase pension scheme at age 55.

25% of that is tax free, and the 40% tax on that £375000 would have been £150000...... The figures work the same if you have £15,000 in your SIPP (self-invested pension plan), but that pensioner may struggle to meet the £20,000 pa income requirement, or pay 40% tax. And while £1500 is welcome, it is scarcely life changing.

it's true that even under the old rules, the 25% tax free cash effectively knocked the 40% tax payer into the 30% bracket. But now the process is more transparent, the income stream (aka pension) can be avoided altogether and the whole lot taken as a lump sum. Whether the rich need to be subsided to the tune of £150,000 under pension laws when there is no pension at the end of the process is a question well worth asking.