Ms Reeves and the tragedy
by Doug Brodie
In this blog:
/1. Get the size right – too big can be catastrophic
/2. Getting the size wrong can be fatal as well
/3. Rachel Reeves and the Lifetime Allowance Show
These are the tables showing the total returns of the 82 core retail investment trusts (our selection), and the 604 core retail trusts, OEICS and unit trusts. The main criteria for selection were that they had to be run for retail investors and they had to be equity funds in the UK and global sectors. Why global? Well, that’s because every firm in the FTSE100 pretty much is global. (All data sourced using Financial Express).
This is the main selection of investment trusts in the last 10 discrete years:
You can see the impact of Putin’s War in 2022, however, in 6/10 years the trusts beat the index. The table below shows the cumulative returns.
Here are the same two tables for the combined trusts, OEICS and unit trusts:
It’s quite clear that when looking at simple returns there is a place for both passive and active funds. What this also shows is that timing is exceptionally important, which is why we are strong advocates for phasing investments into the market. The other relevant criteria revolve around picking horses for courses and not lumping all funds together – a trick the index marketeers are rather fond of doing. For example, there is no indication in the numbers here of the income data, an item we use to further filter trusts and funds.
/1. Get the size right – too big can be catastrophic.
Normally we understand downsizing as selling the family home and moving to a small bungalow either in Southend or Hastings, usually accompanied by an equally small dog and a bag of mothballs (when was the last time you saw one of those??).
This is NOT what we’re suggesting:
Following the growth in value of residential property in the UK it is very common, indeed it is normal, to see the balance sheet of a family totally skewed by the latent value of the family home, a situation normally accompanied by the homeowners’ complaint of ‘asset rich, cash poor’. A very simple alternative to moving to Hastings* is not to downsize the home but to downsize the equity – this is done by what the private banks call gearing or asset lending, and what you and I know as equity release.
This is not all bad, and the reverse mortgage products and facilities are nothing like the tawdry items of the 1980s; given that inheritance tax will take a guaranteed 40% of any ‘excess’ assets you leave, and that your pension is exempt from IHT, it is good tax planning if nothing else to draw down cash from your equity and spend it. Do consider that such a drawdown is your cash in the first place so is not taxable income, and income from pensions is taxable plus falls into the IHT snare (allowances excepted of course). Equity release is also available now as a drawdown account, not a lump sum, so a pretty smart and financially efficient way of plugging an income hole.
It's very stressful and completely pointless living in penury just to maintain an existence in a large property – keeping a family home in the family we understand, but demonstrating wealth by having a place way bigger than needed can often create stresses that are just unnecessary, and do not add to the quality of life.
*With apologies to the good folk, architects and town planners of that lovely seaside town.
If you don’t already, I can recommend a subscription to the New York Times – chiefly because it has a very broad range of articles and essays, much like our weekend broadsheets. There’s a fantastic recent article on alternative downsizing which you can read here. To summarise, this is a Dutch couple in their 50s who were looking for a bigger home to buy, and ended up with three smaller places instead – one by the beach on the North Sea, one in Sardinia and the third a self-converted camper van.
Now I’m not suggesting you run off to buy a campervan, however the concept of a pied a terre, a beach home and a small place somewhere hot sounds an excellent idea. When Cyn and Merv both retired at 52, they sold the family home in Derbyshire, bought a 2-bed cottage in Lymington, a three-bed holiday place near Biscarrosse and a 35-foot yacht in Vassiliki – they spend winter in the UK, a three-month spring on the boat in Greece and summer in France. Pourquoi pas?
Getting the size wrong can be dangerous as well: an anonymous not-yet-a-client whilst earning big figures in London bought a small estate in the north of Scotland. Retirement coincided with an industry turn down and the 13 year old’s fees at boarding school hitting record highs. Instead of enjoying life, he has reverted to the stage of leaving mail unopened on his hall table, and sometimes not answering the phone. It’s a very grand place, but way, way too big, and too big is not good for mental or physical health.
/2. Getting the size wrong can be fatal as well.
Last week was the Dusseldorf Boat Show, the largest boat show in the world.
It was full of men and women above the age of 50 – after all, if you’re in your 30s with a chunk of capital you generally look for a bigger house or a holiday home. Blue water cruisers need big marinas and lots of free time – ocean cruises don’t fit into normal work holiday patterns, it’s the land of the wedged-up baby boomers.
These yachts are aimed at the @retirement market, the very people we work with. As you know, money and confidence can lead to decisions that are not quite right.
This is a picture of a 66-foot deep water yacht, known as a racer/cruiser, a CNB66 and it is drop-dead gorgeous. It’s built for both speed and for comfort. The boat is called Escape and was built for AnneMarie and her husband Karl – they retired in Germany, sold up and ordered the boat of their dreams for around $2 million. Wherever possible it has got carbon fibre, including the mast and boom – the boom itself is self-furling which means there’s an electric motor that winds down the sail neatly around the boom when not needed. That alone cost around $140,000.
Frank was a sailor. They sailed from Bordeaux where she was built, and spent three years ending up heading from Bermuda to Nova Scotia in 2022. As the sea will do, they were hit by a ferocious night time storm (tropical storm ‘Alex’) and tragically both died. Any boater reading this will have raised an eyebrow at the first paragraph where I mentioned Escape’s size – 66 foot for a yacht is very big, it’s like the Scottish estate.
Annemarie and Karl were killed by rigging on the boat, the sails were way too big to be able to be controlled by a husband and wife team – sailing in friendly winds is always fine and dandy but that’s not how the sea works. They didn’t fall overboard, the boat didn’t fall apart, the engine was running perfectly. The sails on a boat this size will capture winds that exert tons of pressure Who needs a 66-foot cruiser racer for just two people? The picture above is a sister yacht to Escape – you can see both the alluring beauty of the boat, and also the sheer size. At night in the North Atlantic, pitch black in a tropical storm with huge rolling waves. (For non-boaters here, the usual size of a ‘big’ boat for a couple on their own would be 40-42 feet. How the tragedy unfolded is outlined on Blue Water Sailing).
My brother – a doctor in America – tells me there is clear evidence of retiring doctors in the US making similar errors – apparently, they take up flying and end up coming unstuck with crashing their aircraft, due to over-confidence that spills into abnormal situations. “There are old sailors and there are bold sailors, but you’ll rarely find old, bold sailors”.
/3. Rachel Reeves and the Lifetime Allowance Show
The senior doctors refused to work overtime, explaining that the way the Lifetime Allowance Cap worked they were taxed more than they earned after a specific amount. That being a daft and iniquitous scenario, invented by the actuaries deep in the bowels of the treasury, Jeremy Hunt scrapped the cap, and Rachel Reeves, on the shadow bench, immediately jumped up and announced that labour would reverse the removal of the LTA.
We don’t think they will – a thousand senior doctors, teachers, civil servants, military folk at age 55 or above will simply retire on the spot. Labour know this, Labour are already talking about how pensions are invested (get some private equity) and not about the personal tax structure. More, talking to the learned folk in the pension institutions they tell me that to re-introduce this tax (as tax it surely is) could only be done in the 26-27 tax year at the earliest, thus leaving all the final salary 50-somethings with a couple of years to get their affairs in order and jump.
We think a Labour government is most likely this year, and we think the pension solution that Ms Reeves will be allowed to take forward will be one of the restrictions but where the restrictions will not come into force until the current cohort of 45+ year olds have themselves retired. Today’s 40 year olds are more worried about mortgage rates than their pensions, and regard a £1m pension as aspirational. In this way, Labour will be able to claim success on capping the pensions of fat cats.
How the big boys do it.
If we had to summarise our role in our work, it is to ensure that our clients have correct expectations. The chart below is from the clever bods at Aviva Investors, the investment arm of the pension juggernaut. They surveyed the pension managers of around £1/2 trillion in pension assets, so they are probably up to speed with what should be happening, their expectations should probably be as good as any. This chart shows their expectations of the annual returns of thirteen different asset classes, over one, three and five years. One simple takeaway from this is that you should always ignore 1-year figures!
