all true but isn't there also the danger of the scheme collapsing or scaling back because of lack of sufficient investment to cover pension payments required from the scheme?
My specialism was dealing with schemes in wind up and before the introduction of the ppf I would agree with you there were some horror stories. Less so now but deferred pensions are covered to 90% and pensions in payment to 100% albeit on different increase basis.
I have transferred my db and dc benefits to a Sipp and have a good Ifa and like the control and flexibility it gives me and my family. I too will be smoothing my drawdown based on receipt of the state pension at a later date. I also like the principle that all of the funds will eventually pass to my family be it my wife or children.
I have also found that the charges for changing drawdown amounts etc are a little high so flexibility comes at a cost. The other issue is the proportion reserved for drawdown in gilts cash means in retirement/drawdown the rates of return are likely to be lower than pre drawdown.
However having been in the industry I recognise the work that goes on behind the scenes and why fees are what they are.
My main issue is the reference to frozen pensions and their underlying actuarial value as this is often misunderstood. I would hazard to guess that those on here who have been happy to see the investment returns on their sipps may have seen similar or greater growth in the transfer value over the corresponding period and so the timing of a transfer is a key part of the decision process under these new regulations.
I would like to ask for some guidance about bonds. We are often told that they should be a part of a sensible portfolio (e.g. in a SIPP) but I have never fully understood how to understand that investment.
I understand the basics, that there are two types, government and corporate. Governments and corporates use them to raise money. We are lending to them by buying them. Correct? I also thought that when they issue these bonds they have a certain interest rate at which they pay back. So they are supposed to be boring but reliable (government more than corporate, but the latter has higher returns)
OK but why then do the professionals talk about the 'bond market" and whether or not it is a good idea to be in it. When is it a bad idea? What goes wrong and why?
I only invest via unit trusts, not directly. In my SIPP, my IFA put me into a few unit trusts which invest in the bond market. i understood that to be part of the "balanced portfolio" approach. If markets tank, the bond funds at least, would hold up. One of them was Artemic Strategic Bond. Well the performance charts suggest its a bit of a turkey, but if you look at the one year chart, both this fund and the relevant index found themselves in negative territory earlier this year. I guess my question is, how can they actually lose you money if the bonds are all paying interest and presumably do not default?
A corporate bond at the outset is simply you lending your cash to a company for a fixed return, say 5%, over 10 years i.e. on a £1,000 bond it would be £50 p.a, with the £1,000 being paid back in a lump sum at the end or in instalments.
So total repayments would be £1,500. Because inflation will reduce the value of future payments, you will pay a discounted price, rather than pay the full £1,000, say £900. The yield on the loan is therefore not 5% but something higher as the £50 interest is the return on £900, not £1,000 say 5.5%. So a higher discount rate is the same as saying a higher yield, which in turn is the same as saying a lower bond price.
That discount was built in at the outset of the bond’s issue and whenever the bond is sold on for someone else to collect the income stream left on the bond.
So if after a bond has been issued the prospects for inflation worsen, someone is going to pay a lower price to get payments of £1,500 than you were. The yield would have risen for the bond because the £50 interest payments are a now expressed as a return on say £800. So you would sell your bond at a loss, or you hang on to it.
It seems counterintuitive that an increase in yields means a fall in value of the bond, but it simply a pricing mechanism and makes more sense if it’s thought of as a worsening discount rate rather than an increase in yield.
A government gilt is no different form a corporate bond apart from not having a material default risk. This lack of risk means its discount rate should always be lower than corporate bonds which equals a higher price for the same future income stream. Corporate bonds will always have a default risk built in appropriate to the financial standing of the bond issuer. The higher the yield/discount rate, the greater is the implied risk, and the lower the price paid.
The bond market is simply trading between those who are buying and selling bonds. Some might seek to take a profit/cut a loss after a change in discount rate and the likes of pension funds might buy a future income stream at whatever the market rate. Pension funds need to match the assets they hold against future pension payment liabilities. They can invest £100 in equities today but they need to generate cash and might need to sell investments at an unknown future value and incur a loss. So they are prepared to pay for a secure future income stream at a known cost today. Pension funds and anyone reliant on receiving a fixed future income stream will buy bonds to match the income stream and are not concerned with capital value because they hold the bonds to maturity. Private investors on the other hand are interested in total return, capital appreciation to cover inflation, and income to reward risk.
If markets only went one way and you wanted optimum real return you would not invest in bonds. However, discount rates also affect equity prices (market view on future dividends, inflation, deafult etc) and the discount rate on bonds historically tends to move in the opposite direction to the discount rate on equities. So bond prices move down when equity prices move up. So holding bonds is a risk diversification to counteract the downside when equities fall and nothing to do with assumed investment return. The more nervous of a fall in equities the more the manager will hold bonds.
all true but isn't there also the danger of the scheme collapsing or scaling back because of lack of sufficient investment to cover pension payments required from the scheme?
My specialism was dealing with schemes in wind up and before the introduction of the ppf I would agree with you there were some horror stories. Less so now but deferred pensions are covered to 90% and pensions in payment to 100% albeit on different increase basis.
I have transferred my db and dc benefits to a Sipp and have a good Ifa and like the control and flexibility it gives me and my family. I too will be smoothing my drawdown based on receipt of the state pension at a later date. I also like the principle that all of the funds will eventually pass to my family be it my wife or children.
I have also found that the charges for changing drawdown amounts etc are a little high so flexibility comes at a cost. The other issue is the proportion reserved for drawdown in gilts cash means in retirement/drawdown the rates of return are likely to be lower than pre drawdown.
However having been in the industry I recognise the work that goes on behind the scenes and why fees are what they are.
My main issue is the reference to frozen pensions and their underlying actuarial value as this is often misunderstood. I would hazard to guess that those on here who have been happy to see the investment returns on their sipps may have seen similar or greater growth in the transfer value over the corresponding period and so the timing of a transfer is a key part of the decision process under these new regulations.
all true but isn't there also the danger of the scheme collapsing or scaling back because of lack of sufficient investment to cover pension payments required from the scheme?
My specialism was dealing with schemes in wind up and before the introduction of the ppf I would agree with you there were some horror stories. Less so now but deferred pensions are covered to 90% and pensions in payment to 100% albeit on different increase basis.
I have transferred my db and dc benefits to a Sipp and have a good Ifa and like the control and flexibility it gives me and my family. I too will be smoothing my drawdown based on receipt of the state pension at a later date. I also like the principle that all of the funds will eventually pass to my family be it my wife or children.
I have also found that the charges for changing drawdown amounts etc are a little high so flexibility comes at a cost. The other issue is the proportion reserved for drawdown in gilts cash means in retirement/drawdown the rates of return are likely to be lower than pre drawdown.
However having been in the industry I recognise the work that goes on behind the scenes and why fees are what they are.
My main issue is the reference to frozen pensions and their underlying actuarial value as this is often misunderstood. I would hazard to guess that those on here who have been happy to see the investment returns on their sipps may have seen similar or greater growth in the transfer value over the corresponding period and so the timing of a transfer is a key part of the decision process under these new regulations.
I am cynical about SIPPs, they were designed to give access to assets that retail insurance company products couldn’t, like direct property, stocks and shares etc.
If you are only invested in traditional asset classes there is no need for a SIPP, just advice. The selection of funds and the implementation is being bundled into a SIPP without good reason. Providers arbitrarily restrict access to some assets unless you use a SIPP purely to force you into a SIPP and extract higher charges. If you are in a SIPP and using passive tracker funds you might not realise that the big players like Black Rock and L&G don't actually need to charge a management fee, they make their money by stock lending, so your manager has scope to charge you 0.50% for a fund that he pays virtually nothing for as the likes of L&G will give it away to the big intermediaries like HL who can deliver large blocks of investment.
Control and flexibility does not add value, but SIPPs are marketed as if they automatically increase returns by giving wider choice. Sorry, it’s a marketing pitch, nothing else. There are statistics that prove chasing performance by moving between managers results in a worse performance than making no change of manager at all. SIPPS justify their existence by pandering to the idea that the more you are active in moving your money around the higher will be the returns. The only switching should be between asset classes, not managers, because it's asset class selection that makes the difference, not managers. Problem is, no one can predict assets class movements in advance with any reliability. I attach a chart that shows how different asset classes performed over the last eleven years. If anyone wants to know why a diversified range of asset classes is conventional wisdom, and why taking a punt on a particular sector is risky, they might want to look at it.
We have been running drawdown in our master trust for no charge beyond standard administration charges since 2008. One client started drawdown in 2008 without any advice apart from talking to us about the various options. He chose a split between two funds, equities and index linked gilts and invested £270k. He reviewed two years ago following revision of annuity purchase rules, he spoke to us and put everything into a single diversified growth fund. He has drawn £120k in income drawdown and his fund is quite by coincidence, currently around £270k, the same as his original investment. He has now appointed an adviser, so will be interesting to see what changes are recommended.
On transfer from DB, the positive in favour of transferring to DC is the way DB transfer values are calculated. The discount rate (the future return on assets assumed by the trustees) is very low because of the prudent investment strategy. And a transfer value is based on the scheme's discount rate which will be nearer to bond rate than the higher equity rate. So a DB scheme that reckons your pension of £10k a year in ten years time has a capital value of £250k would work out a transfer value as the current cash required if invested at the bond yield of say 4% for ten years e.g £170k. You can take £170k and by adopting a less prudent, but not reckless investment assert allocation of higher equity allocation, gamble on getting a better return than 4% so potentially end up with a higher pension pot value. What you lose is the mortality and inflation risks protection once you start drawing income, but these need not be insurmountable risks to manage if the advisory industry gets its act together.
as BestInvest describe their annual review of dog funds, the worst performing funds in various sectors. Very good prompt to review your holdings. But they only cover equity funds, not bond funds of the type I've been discussing, nor specialists in say gold and gold miners (I shudder when I think about my 60% losses on such a fund).
Rob, we need to know how long ago you transferred, and what the £4000 pension would be now, to know if that was a good decision. If the pension was now £5000, then is the £150,000 such a master stroke.
UK Regulators are currently probing P2P and the Crowdfunding Sector as there is a potential mismatch between three to five year terms of the loans and the promise to repay investors within 30 days.
The mis-selling of $22m worth of loans by US P2P giant Lending Club has increased concerns about another sub prime scandal.
There are also concerns about the liquidity of Corporate Bonds and the funds that have piled into them in the race for higher returns.
P2P is lending money for greater return. The return mirrors the risk. There would be no FCSC protection for speculators and that is effectively what you are doing.
I was tempted by the returns but have serious concerns about these companies, very very few have seen a recession as the majority were started post 2008/09.
Things to think about:
- they say your cash can be accessed any time by selling your stake, if the market tanks there will be no one to buy it at par so you will be stuck until whatever project is complete. - some allow you to pick a specific project, others allow you to spread risk across many. Think about what risk profile suits you.
My personal feeling is they are an accident waiting to happen and some of them will collapse in the next recession so be picky which ones to invest money into. That being said, I have an exceptionally low risk outlook on my personal investments so you should read my post in that context.
You've posted my thoughts entirely.
If the big banks can go "tits up", then I don't fancy this at all, without FSCS protection.
Also, they have to hold £50,000 cash reserves ! What sort of a cash reserve is that !
Even if you are invested in shares or corporate bonds, it would appear to be much simpler & less risky to withdraw funds immediately, if things are looking grim, unless you are invested in a fund like corporate property.
I'm not surprised, which is why I said what I said. The last financial crisis was partly caused by disguised financial packages, that were bought, without the institutions (in the main) understanding the risk that was being taken on, be it through naivety or fraud.
P2P may do really well, but it may not & the lack of protection and clarity concerns me.
Just seems to me that P2P is only utilised by those people or businesses who are unable to finance through traditional means.
You need to ask yourself why this is, particularly in the current climate where it appears the banks are encouraged to make (relatively) cheap finance available.
The default risk I would suggest is fairly high. Some will get lucky, but a lot will struggle. The opportunity to walk away from this kind of borrowing seems to much of a temptation to me.
You also have little control over the ethics of those you fund.
Just seems to me that P2P is only utilised by those people or businesses who are unable to finance through traditional means.
You need to ask yourself why this is, particularly in the current climate where it appears the banks are encouraged to make (relatively) cheap finance available.
The default risk I would suggest is fairly high. Some will get lucky, but a lot will struggle. The opportunity to walk away from this kind of borrowing seems to much of a temptation to me.
You also have little control over the ethics of those you fund.
Well I would be interested in whether banks really are lending now, especially to SMEs. I thought one reason P2P got started was that banks had virtually stopped lending to that sector completely.
Just seems to me that P2P is only utilised by those people or businesses who are unable to finance through traditional means.
You need to ask yourself why this is, particularly in the current climate where it appears the banks are encouraged to make (relatively) cheap finance available.
The default risk I would suggest is fairly high. Some will get lucky, but a lot will struggle. The opportunity to walk away from this kind of borrowing seems to much of a temptation to me.
You also have little control over the ethics of those you fund.
Well I would be interested in whether banks really are lending now, especially to SMEs. I thought one reason P2P got started was that banks had virtually stopped lending to that sector completely.
With a doubt they are. They're just carrying out more due diligence into the SME before they are prepared to provide them with funding.
Half the reason the banking collapse occurred in the first place was that credit was far too easy to obtain and the banks got their fingers burnt with toxic loans.
Just seems to me that P2P is only utilised by those people or businesses who are unable to finance through traditional means.
You need to ask yourself why this is, particularly in the current climate where it appears the banks are encouraged to make (relatively) cheap finance available.
The default risk I would suggest is fairly high. Some will get lucky, but a lot will struggle. The opportunity to walk away from this kind of borrowing seems to much of a temptation to me.
You also have little control over the ethics of those you fund.
Well I would be interested in whether banks really are lending now, especially to SMEs. I thought one reason P2P got started was that banks had virtually stopped lending to that sector completely.
With a doubt they are. They're just carrying out more due diligence into the SME before they are prepared to provide them with funding.
Half the reason the banking collapse occurred in the first place was that credit was far too easy to obtain and the banks got their fingers burnt with toxic loans.
That and the fact they're immoral tossers.
Not wishing to doubt you but would be interested to hear if anybody who has tried to get a business loan recently has the same positive experience.
They are indeed immoral tossers. Here is a reminder of the HSBC files. They are my UK bank. I was so disgusted with them that i thought about moving. Thought about the nice ethical Co-Op. Only for the scandal of their CEO, and their books, to come out. Tried Triodos. Their online offer is crap, kept claiming I didn't have the right password. Gave up. You can perhaps start to see why I would like to back P2P.
Anyway you can come back to this thread in a year's time and see if I lost my shirt on it.
Question for all the diligent savers on this thread.
Have you all paid up your mortgages?
Mine is up this year and as things stand I could potentially fix with HSBC for 0.99% which is a ridiculous rate meaning I can probably take a few years off the mortgage.
Surely at the moment its better to overpay the mortgage as much as possible rather than save (other than kids accounts which generally pay a higher rate and its for the kids future)
Question for all the diligent savers on this thread.
Have you all paid up your mortgages?
Mine is up this year and as things stand I could potentially fix with HSBC for 0.99% which is a ridiculous rate meaning I can probably take a few years off the mortgage.
Surely at the moment its better to overpay the mortgage as much as possible rather than save (other than kids accounts which generally pay a higher rate and its for the kids future)
Yes. I had an interest-only endowment-based product. But I'd already paid it off before the endowment policy matured.
The perceived wisdom used to be, if you've got spare cash, pay off your mortgage before you think about savings.
BUT, that was back in the day when interest rates were higher and when people tended to have a decent work-place pension scheme. Now? I guess you could make an argument for keeping a historically low interest rate mortgage going because after inflation (which will be going up) the value of the capital you owe will be less in real terms and the interest charge is peanuts. So, personally as a starting point I'd consider some form of stocks and shares ISA investing in stocks with higher dividend yields. I'd guess FTSE 100 shares are yielding an average 4% pa now.
Just seems to me that P2P is only utilised by those people or businesses who are unable to finance through traditional means.
You need to ask yourself why this is, particularly in the current climate where it appears the banks are encouraged to make (relatively) cheap finance available.
The default risk I would suggest is fairly high. Some will get lucky, but a lot will struggle. The opportunity to walk away from this kind of borrowing seems to much of a temptation to me.
You also have little control over the ethics of those you fund.
Well I would be interested in whether banks really are lending now, especially to SMEs. I thought one reason P2P got started was that banks had virtually stopped lending to that sector completely.
With a doubt they are. They're just carrying out more due diligence into the SME before they are prepared to provide them with funding.
Half the reason the banking collapse occurred in the first place was that credit was far too easy to obtain and the banks got their fingers burnt with toxic loans.
That and the fact they're immoral tossers.
Not wishing to doubt you but would be interested to hear if anybody who has tried to get a business loan recently has the same positive experience.
They are indeed immoral tossers. Here is a reminder of the HSBC files. They are my UK bank. I was so disgusted with them that i thought about moving. Thought about the nice ethical Co-Op. Only for the scandal of their CEO, and their books, to come out. Tried Triodos. Their online offer is crap, kept claiming I didn't have the right password. Gave up. You can perhaps start to see why I would like to back P2P.
Anyway you can come back to this thread in a year's time and see if I lost my shirt on it.
@Covered End is worried about corporate bonds, and I am not going to argue with him.
Equity markets are barrelling upwards when most expected a post Brexit slump. Probably driven by the sentiment that there is nowhere else to put all this money.
Gold. Well not for me thank you. This sodding fund is (was) my worst ever investment, unless you include my CAFC plc shares, which I considered a duty rather than an investment.
Seriously. If you have cash now (I liquidated my SIPP holdings) what would you do? Sit out and see how the markets pan out until year end?
@Covered End is worried about corporate bonds, and I am not going to argue with him.
Equity markets are barrelling upwards when most expected a post Brexit slump. Probably driven by the sentiment that there is nowhere else to put all this money.
Gold. Well not for me thank you. This sodding fund is (was) my worst ever investment, unless you include my CAFC plc shares, which I considered a duty rather than an investment.
Seriously. If you have cash now (I liquidated my SIPP holdings) what would you do? Sit out and see how the markets pan out until year end?
@Covered End is worried about corporate bonds, and I am not going to argue with him.
Equity markets are barrelling upwards when most expected a post Brexit slump. Probably driven by the sentiment that there is nowhere else to put all this money.
Gold. Well not for me thank you. This sodding fund is (was) my worst ever investment, unless you include my CAFC plc shares, which I considered a duty rather than an investment.
Seriously. If you have cash now (I liquidated my SIPP holdings) what would you do? Sit out and see how the markets pan out until year end?
Long-term investment - bricks and mortar.
Still have my UK house. Eggs in baskets, and all that...
Anyway, people are lary about property too, had that conversation this morning. British mate out here has 200k to invest, wondered if he should do what you just suggested. 200k won't get him anything in the south east, will it? Outside the south east, where to buy property that you would be confident will hold value. Somebody suggested Harrogate to him.
@Covered End is worried about corporate bonds, and I am not going to argue with him.
Equity markets are barrelling upwards when most expected a post Brexit slump. Probably driven by the sentiment that there is nowhere else to put all this money.
Gold. Well not for me thank you. This sodding fund is (was) my worst ever investment, unless you include my CAFC plc shares, which I considered a duty rather than an investment.
Seriously. If you have cash now (I liquidated my SIPP holdings) what would you do? Sit out and see how the markets pan out until year end?
Long-term investment - bricks and mortar.
Still have my UK house. Eggs in baskets, and all that...
Anyway, people are lary about property too, had that conversation this morning. British mate out here has 200k to invest, wondered if he should do what you just suggested. 200k won't get him anything in the south east, will it? Outside the south east, where to buy property that you would be confident will hold value. Somebody suggested Harrogate to him.
£200k would buy two three bed terraced houses in Hull or Stoke - both Uni towns that would give something like £900 per month each in rental income to students (around £300 per room). After letting agents fees/insurance/routine maintenance you would get c£600 per month for each property. Let for 10 months of the year = £12k net income (6% yield). The value of the property would rise steadily but by no more than 3 or 4 percentage points below national average (that would have been around 4% for Stoke in the last year). So net yield c10% and absolutely safe.
Assuming the experts are right in predicting a 10% fall in house prices in the next couple of years then what I'm suggesting would probably be best delayed - keep in cash until then.
Hi Prague. 200k should get you a nice 2/3 bed in Canterbury. University town so good rental. Around Gravesend should be good long term as theme park now has funding and is said to be definitely going ahead.
@Covered End is worried about corporate bonds, and I am not going to argue with him.
Equity markets are barrelling upwards when most expected a post Brexit slump. Probably driven by the sentiment that there is nowhere else to put all this money.
Gold. Well not for me thank you. This sodding fund is (was) my worst ever investment, unless you include my CAFC plc shares, which I considered a duty rather than an investment.
Seriously. If you have cash now (I liquidated my SIPP holdings) what would you do? Sit out and see how the markets pan out until year end?
Long-term investment - bricks and mortar.
Still have my UK house. Eggs in baskets, and all that...
Anyway, people are lary about property too, had that conversation this morning. British mate out here has 200k to invest, wondered if he should do what you just suggested. 200k won't get him anything in the south east, will it? Outside the south east, where to buy property that you would be confident will hold value. Somebody suggested Harrogate to him.
Funnily enough, been looking at properties in North Yorkshire and Harrogate in particular.
Just to say the property bubble is not only in London. Harrogate is on the high side of home county prices.
Best property investment is currently as Bob has suggested - student accommodation, especially as they are not too particular! So many university towns now that you can pick and chose. Bear in mind that you don't get income in the summer though.
Comments
I have transferred my db and dc benefits to a Sipp and have a good Ifa and like the control and flexibility it gives me and my family. I too will be smoothing my drawdown based on receipt of the state pension at a later date. I also like the principle that all of the funds will eventually pass to my family be it my wife or children.
I have also found that the charges for changing drawdown amounts etc are a little high so flexibility comes at a cost. The other issue is the proportion reserved for drawdown in gilts cash means in retirement/drawdown the rates of return are likely to be lower than pre drawdown.
However having been in the industry I recognise the work that goes on behind the scenes and why fees are what they are.
My main issue is the reference to frozen pensions and their underlying actuarial value as this is often misunderstood. I would hazard to guess that those on here who have been happy to see the investment returns on their sipps may have seen similar or greater growth in the transfer value over the corresponding period and so the timing of a transfer is a key part of the decision process under these new regulations.
So total repayments would be £1,500. Because inflation will reduce the value of future payments, you will pay a discounted price, rather than pay the full £1,000, say £900. The yield on the loan is therefore not 5% but something higher as the £50 interest is the return on £900, not £1,000 say 5.5%. So a higher discount rate is the same as saying a higher yield, which in turn is the same as saying a lower bond price.
That discount was built in at the outset of the bond’s issue and whenever the bond is sold on for someone else to collect the income stream left on the bond.
So if after a bond has been issued the prospects for inflation worsen, someone is going to pay a lower price to get payments of £1,500 than you were. The yield would have risen for the bond because the £50 interest payments are a now expressed as a return on say £800. So you would sell your bond at a loss, or you hang on to it.
It seems counterintuitive that an increase in yields means a fall in value of the bond, but it simply a pricing mechanism and makes more sense if it’s thought of as a worsening discount rate rather than an increase in yield.
A government gilt is no different form a corporate bond apart from not having a material default risk. This lack of risk means its discount rate should always be lower than corporate bonds which equals a higher price for the same future income stream. Corporate bonds will always have a default risk built in appropriate to the financial standing of the bond issuer. The higher the yield/discount rate, the greater is the implied risk, and the lower the price paid.
The bond market is simply trading between those who are buying and selling bonds. Some might seek to take a profit/cut a loss after a change in discount rate and the likes of pension funds might buy a future income stream at whatever the market rate. Pension funds need to match the assets they hold against future pension payment liabilities. They can invest £100 in equities today but they need to generate cash and might need to sell investments at an unknown future value and incur a loss. So they are prepared to pay for a secure future income stream at a known cost today. Pension funds and anyone reliant on receiving a fixed future income stream will buy bonds to match the income stream and are not concerned with capital value because they hold the bonds to maturity. Private investors on the other hand are interested in total return, capital appreciation to cover inflation, and income to reward risk.
If markets only went one way and you wanted optimum real return you would not invest in bonds. However, discount rates also affect equity prices (market view on future dividends, inflation, deafult etc) and the discount rate on bonds historically tends to move in the opposite direction to the discount rate on equities. So bond prices move down when equity prices move up. So holding bonds is a risk diversification to counteract the downside when equities fall and nothing to do with assumed investment return. The more nervous of a fall in equities the more the manager will hold bonds.
If you are only invested in traditional asset classes there is no need for a SIPP, just advice. The selection of funds and the implementation is being bundled into a SIPP without good reason. Providers arbitrarily restrict access to some assets unless you use a SIPP purely to force you into a SIPP and extract higher charges. If you are in a SIPP and using passive tracker funds you might not realise that the big players like Black Rock and L&G don't actually need to charge a management fee, they make their money by stock lending, so your manager has scope to charge you 0.50% for a fund that he pays virtually nothing for as the likes of L&G will give it away to the big intermediaries like HL who can deliver large blocks of investment.
Control and flexibility does not add value, but SIPPs are marketed as if they automatically increase returns by giving wider choice. Sorry, it’s a marketing pitch, nothing else. There are statistics that prove chasing performance by moving between managers results in a worse performance than making no change of manager at all. SIPPS justify their existence by pandering to the idea that the more you are active in moving your money around the higher will be the returns. The only switching should be between asset classes, not managers, because it's asset class selection that makes the difference, not managers. Problem is, no one can predict assets class movements in advance with any reliability. I attach a chart that shows how different asset classes performed over the last eleven years. If anyone wants to know why a diversified range of asset classes is conventional wisdom, and why taking a punt on a particular sector is risky, they might want to look at it.
We have been running drawdown in our master trust for no charge beyond standard administration charges since 2008. One client started drawdown in 2008 without any advice apart from talking to us about the various options. He chose a split between two funds, equities and index linked gilts and invested £270k. He reviewed two years ago following revision of annuity purchase rules, he spoke to us and put everything into a single diversified growth fund. He has drawn £120k in income drawdown and his fund is quite by coincidence, currently around £270k, the same as his original investment. He has now appointed an adviser, so will be interesting to see what changes are recommended.
On transfer from DB, the positive in favour of transferring to DC is the way DB transfer values are calculated. The discount rate (the future return on assets assumed by the trustees) is very low because of the prudent investment strategy. And a transfer value is based on the scheme's discount rate which will be nearer to bond rate than the higher equity rate. So a DB scheme that reckons your pension of £10k a year in ten years time has a capital value of £250k would work out a transfer value as the current cash required if invested at the bond yield of say 4% for ten years e.g £170k. You can take £170k and by adopting a less prudent, but not reckless investment assert allocation of higher equity allocation, gamble on getting a better return than 4% so potentially end up with a higher pension pot value. What you lose is the mortality and inflation risks protection once you start drawing income, but these need not be insurmountable risks to manage if the advisory industry gets its act together.
"The Kennel of Shame"
as BestInvest describe their annual review of dog funds, the worst performing funds in various sectors. Very good prompt to review your holdings. But they only cover equity funds, not bond funds of the type I've been discussing, nor specialists in say gold and gold miners (I shudder when I think about my 60% losses on such a fund).
That's what pushed me towards P2P...
The mis-selling of $22m worth of loans by US P2P giant Lending Club has increased concerns about another sub prime scandal.
There are also concerns about the liquidity of Corporate Bonds and the funds that have piled into them in the race for higher returns.
And Old Masters.
P2P may do really well, but it may not & the lack of protection and clarity concerns me.
You need to ask yourself why this is, particularly in the current climate where it appears the banks are encouraged to make (relatively) cheap finance available.
The default risk I would suggest is fairly high. Some will get lucky, but a lot will struggle. The opportunity to walk away from this kind of borrowing seems to much of a temptation to me.
You also have little control over the ethics of those you fund.
Half the reason the banking collapse occurred in the first place was that credit was far too easy to obtain and the banks got their fingers burnt with toxic loans.
That and the fact they're immoral tossers.
They are indeed immoral tossers. Here is a reminder of the HSBC files. They are my UK bank. I was so disgusted with them that i thought about moving. Thought about the nice ethical Co-Op. Only for the scandal of their CEO, and their books, to come out. Tried Triodos. Their online offer is crap, kept claiming I didn't have the right password. Gave up. You can perhaps start to see why I would like to back P2P.
Anyway you can come back to this thread in a year's time and see if I lost my shirt on it.
Have you all paid up your mortgages?
Mine is up this year and as things stand I could potentially fix with HSBC for 0.99% which is a ridiculous rate meaning I can probably take a few years off the mortgage.
Surely at the moment its better to overpay the mortgage as much as possible rather than save (other than kids accounts which generally pay a higher rate and its for the kids future)
The perceived wisdom used to be, if you've got spare cash, pay off your mortgage before you think about savings.
BUT, that was back in the day when interest rates were higher and when people tended to have a decent work-place pension scheme. Now? I guess you could make an argument for keeping a historically low interest rate mortgage going because after inflation (which will be going up) the value of the capital you owe will be less in real terms and the interest charge is peanuts. So, personally as a starting point I'd consider some form of stocks and shares ISA investing in stocks with higher dividend yields. I'd guess FTSE 100 shares are yielding an average 4% pa now.
You are in cash. For which you will get max 0.3%
Some people say P2P is dodgy.
@Covered End is worried about corporate bonds, and I am not going to argue with him.
Equity markets are barrelling upwards when most expected a post Brexit slump. Probably driven by the sentiment that there is nowhere else to put all this money.
Gold. Well not for me thank you. This sodding fund is (was) my worst ever investment, unless you include my CAFC plc shares, which I considered a duty rather than an investment.
Seriously. If you have cash now (I liquidated my SIPP holdings) what would you do? Sit out and see how the markets pan out until year end?
Anyway, people are lary about property too, had that conversation this morning. British mate out here has 200k to invest, wondered if he should do what you just suggested. 200k won't get him anything in the south east, will it? Outside the south east, where to buy property that you would be confident will hold value. Somebody suggested Harrogate to him.
Assuming the experts are right in predicting a 10% fall in house prices in the next couple of years then what I'm suggesting would probably be best delayed - keep in cash until then.
Just to say the property bubble is not only in London. Harrogate is on the high side of home county prices.
Best property investment is currently as Bob has suggested - student accommodation, especially as they are not too particular! So many university towns now that you can pick and chose. Bear in mind that you don't get income in the summer though.