HM Treasury’s (reluctant) step in the right direction

Well that’s a step in the right direction. On the plus side the government is at last acknowledging that there is such a thing as financial advice and that it can add value. But this feels like a reluctant step – rather like shuffling outside on a cold wet winter day rather than a hearty stride on a bright spring morning.

Why, for example, insist that the £1,500 be taken in three chunks? This seems to fly in the face of the pension freedoms regime where the basic tenet is that the investor is responsible enough to manage their own money.

As things stand investors can withdraw every penny of their pension to buy a Lamborghini, but if they want financial advice their tax-free perk is limited to £500 a time.

This implies that the government sees financial advisers as less trustworthy and worthwhile than the average car dealer.

How much advice can be given for £500? Well, not a lot. This is more a guidance sum than an advice one. Unbiased suggests that full advice on a £200,000 pension put would cost about £2,500 based on its survey of 230 advisers in 2015. Even if the client knew what they wanted the cost would be £1,100.

Of course it may be possible to circumnavigate the rule that says each £500 must be taken in a different tax year by basing the advice around the end of one year and the start of another. But how about doing something really radical and making the £500 fee tax-free for advisers too? 

This would make it equivalent to around £830 for a higher rate taxpayer – though tax rates would depend on the business structure. Either way the proposition would look more attractive.

It would also cement the idea of pension advice at retirement as an essential service rather an optional luxury.

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Prejudice rules over Brexit doom and gloom forecasts

So, what do you know? The Bank of England has upgraded its growth forecasts and many of the economists who predicted Brexit doom are following suit. Does this not suggest that they put rather too much personal prejudice into their forecasts?

Surely this contributed to their certainty that the Brexit vote would trigger depression and gloom even though 52 per cent voted for it.

Forecasts depend primarily on two things: the data you put in and how you choose to manipulate that data.

A couple of years ago Morgan Housel of The Motley Fool compared Wall Street forecasts against blind forecasting (simply assuming the market would rise 9 per cent a year). The blind forecasts were off by 14.1 percentage points on average per year, while the Wall Street forecasts were off by 14.7 percentage points.

Go back to the most recent recession and economist Prakash Loungani with colleague Hites Ahir looked at predictions made by economists in 77 countries in 2008. The following year, 49 of those countries were in recession but not one of those recessions was predicted by a consensus of forecasts – this despite the credit crunch and the collapse of Bear Stearns and Northern Rock.

When weather forecasters predict a storm that turns into a squib, such as Doris at the end of January, people moan that they have made unnecessary  preparations.

Inaccurate economic forecasting could so easily become self-fulfilling prophesy. How many smaller businesses put off investing in the second half of last year because the nightly news consistently warned that the economic outlook was gloomy? How much job creation was put on hold because firms feared expanding.

Investors will have made decisions based on these predictions and I have little doubt that many financial advisers will have been noting them. You would like to think that economists responsible for predicting gloom would take a good hard look not only at their modelling but at how their own world view affects their forecasting.

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Clever wielding of NS&I axe

National Savings & Investments (NS&I) is to cut its Premium Bond prize fund by from 1.25 per cent tax-free to 1.15 per cent in May.

But NS&I is rather clever in how it handles these changes because the odds of winning a prize remain 30,000 to one. It is doing this by cutting the number of £50 and £100 prizes by more than 100,000 from 141,900 to 41,518.

But at the same time the number of prizes will rise by almost 100,000.

So those envelopes will fall on to the doormat just as often only now their contents are likely to be rather less exciting.

Tony Hazell writes for the Daily Mail's Money Mail section