Leave me alone Mrs Vanderbilt…
by Doug Brodie
In this blog:
/1. Is cheaper better in investments?
/2. What are you expecting?
/3. It’s not just you – the proof
/4. Chapter 5 – your retirement
/5. This is the new Key Chart
/1. Is cheaper better in investments? Comparing annuities to the Vanguard All Share Tracker for £100,000.
The 9-year table – we had intended to do a flat 10 years but the Vanguard fund doesn’t have that long a track record, so we’ve stuck to 9 years, 2015 to 2023 inclusive.
If you take natural income only, this is the income that Vanguard paid:
The income ranged from £3,102 to £4,949, and by the end of the nine years the capital had risen to £118,067.
A single life annuity for a 65-year-old healthy male, with no increase, paid 5.49%:
The annuity paid a higher income every year, more than £13,010 extra income over the years, around 36% higher. The trouble is that the total return to the investor via the annuity is just £49,410 whereas the Vanguard investor has had £154,467 (£36,400 + £118,067) – the extra income the annuity provided doesn’t stack up – or, the price paid for the ‘guarantee’ in the annuity is very, very expensive. Now the Vanguard fund costs just 0.06% per year, and the annuity provider doesn’t tell us the underlying cost, however, we know it’s at least £100k on day one (you give them all your money).
The more insightful analysis is using an annuity quote to tell us what a guaranteed income rate is – in this case it’s 5.49% - and then to draw that £5,490 from The Vanguard capital manually to see what happens to the capital. This is the result:
The Vanguard distributions are simply reinvested each year, and a fixed £5,490 is drawn by selling units. The end result is still very healthy, it still exposes the cost of the guarantee in the annuity, and you can see the capital sum is about the same as the start after nine years, meaning the underlying capital growth through the years was around 5.5% pa.
We run quite a few £million in Vanguard funds, but not for income. I haven’t shown you any trusts in the table above so as not to cloud the message – that annuity income has a very expensive price tag hidden away that investors are never shown. Lastly, if you think annuities are ‘stable’, then consider this chart showing the annuity rates from 2007 to now. If you happened to have retired with an annuity in 2012 and 2022 you’ll probably feel hard done by, and we’d agree. Exactly the same amount of pension bought an income of 4.696% fixed for life in 2016 and 7.474% in 2022.
Credit: www.sharingpensions.co.uk
However – remember, these annuity rates are only males aged 65 with no increases ever and no widow’s benefit, so this would rarely be a great idea.
/2. What are you expecting?
Perhaps the main function of our working face to face with clients is managing expectations. If you haven’t spoken with us already then we’d recommend you first mentally tick off what income you expect from your pot of money, either in £sd or % terms, and then measure it against a static, relevant reference point. For investments, I’d suggest the FTSE All Share is a potential reference point, and over the last 50 years that returned a smidge over 9% per year, including income. Almost half of that return was the income, so that then tells you if you are drawing income the capital will grow sedately. Unless you have an annuity and then you don’t have to concern yourself with the capital as it’s all gone.
Lastly on this point, if you don’t have expectations then you can’t judge and assess the success of our work for you – which is why every client (bar none), comes into the firm via a discussive financial planning exercise. This allows us to identify how much income is needed so that you and we both know what the expectation is, in specific, personalised cash terms.
/3. It’s not just you – the proof:
When things don’t go smoothly with your pension, it’s not just you. Welcome to Planet Pension.
/4. Chapter 5 – your retirement.
We had a meeting this week with a successful professional who is having a second stab at retiring at the end of this year – having failed once already and now with a threat of personal injury from the partner if it doesn’t happen this year. The role in retirement is not to become an amateur investment manager, it’s to spend time with family, finish and enjoy the new home development and all the other things in life that work curtailed.
The evening discussions with the partner, over a bottle or so, would not be about how a life of financial independence is best filled with work on asset allocation, Asian credit opportunities or the impact of Chinese GDP on world currencies. The ‘Chapter 5’ in your book will indeed cover family, travel, food, past-times and then a bit more travel.
Discussions on asset covariance calculations are likely to lead to divorce:
I always thought one of the measures of life is having an interesting-looking headstone. This one is in Southampton:
/5. This is the new Key Chart.
This is the basis of all long-lasting pensions, whether they be final salary schemes, SSAS schemes, collective pension income schemes of any hue. We may not know anything about maxillofacial surgery, intricacies of cross-border M&A law, governmental obligations for national IT programmes, comparative naval engineering designs, the thin line between broadcasting permissions and the watershed, or the inner business models of inter-disciplinary investment bank, the DNA of gels, however, the kernel of what we do know about, all long term pension arrangements, is in this simple chart:
The red line is the income – it’s not rocket science, not smoke & mirrors nor financial engineering. It does what it says on the tin – don’t fiddle, don’t chop & change and don’t touch – you’ve got a life to be getting on with.