Friday, 14 February 2014

Annuities Report - Stating the Obvious?

The FCA today reported that the Annuity market is not serving customers well within the UK.  Apparently, they have also noticed that the weather has been wet recently and that it gets dark at night!

Annuities are the traditional vehicles with which people convert their retirement pots into income for the remainder of their lives.  The value you extract from an annuity depends on a number of factors that you cannot control, such as mortality trends and the prevailing climate for Government Gilts.  However, there are several factors within your control as a client that do influence the amount of money you get.  Obvious in this regard are whether or not you select the option for a pension to continue after your death for your spouse and the ability to build annual increases into your payments.

Equally influential, but somehow missed by many of the 420,000 people who buy annuities each year is the commercial approach of the provider you choose to provide your annuity.  Some providers have slicker systems than others, some are better at purchasing the Gilts that secure the annuity and some are just plan greedier than others.

Because of these factors, notably the latter, the FCA claims that eight out of ten annuitants could be getting a better deal – typically 7% more income for life from the same fund value!

The Regulator further found that even comparison websites do not inform the consumer in a helpful or unbiased manner, some excluding a number of providers and some even skewed toward ‘favoured’ ones.

No doubt this research took many long hours and took in an enormous amount of data – at great cost to us all.  What absolutely staggered me in the interview I just watched with the Chief Exec of the FCA was the total absence of any mention of taking financial advice at this critical time.

Your existing provider regards you as an inert and captive audience and the urge for them to take advantage of this is predictably irresistible, while comparison websites are only as good as the data that drives them and the degree of research used in their upkeep.

An Independent Financial Adviser whom you engage to advise on your retirement options has a duty of care, not only to research the best solution for your needs, but also to demonstrate this with appropriate justification and reasoning.  The IFA will also guide you through the various options, such as spouse protection and inflation measures in such a way that you understand fully the background to this, one of the most important financial decisions of your life.

I absolutely agree with what has been said in this report, though I could have told you the same for free and, though I have not yet read the report itself, none of the verbiage blown out in its release even mentions the need for quality independent advice. 


For goodness sake!  There are professionals who are accustomed to understanding their clients’ needs and tailoring solutions to those needs.  In the same way that it would be inadvisable to attempt open-heart surgery after watching a ‘how to’ clip on YouTube, why are we even speaking about comparison sites and ignoring the valuable role played by professional advice?  

Come on FCA!  The role of a report such as this one is to help, inform and empower – not just to worry people.

We are now told that the FCA needs a further 12 months to come up with its 'solution' to this problem.  I can tell you now in twelve seconds - Take Advice!

Thursday, 14 February 2013

In-Out and Shake it All About!


David Miliband is apparently about to pledge that Labour would re-introduce the 10p starting rate of income tax, first introduced and later abolished by Gordon Brown before he toddled off into obscurity.  In Miliband’s case he says that the withdrawal of the starting rate was a grave mistake that he would correct as soon as he was able, probably funding the action by some sort of ‘Mansion Tax’.
The Mansion Tax has been ruled out by the coalition for the time being, despite being one of the Lib Dem’s great loves, so it might be that we have two parties campaigning the next election on that ticket.
It seems that U-Turns abound in politics at present.  Michael Gove famously was about to axe GSCE’s and then decided that he wasn’t and one wonders from where the next surprise change of heart will come.
For my part, I am actually quite positive toward the 10p rate as I feel that it promotes working and contributing, both of which have to be a good thing.  It does, however complicate the tax system once more and one also wonders how much it costs to administer a further rate band, both to HMRC and to industry.
What is interesting is that the next election may be a way off yet, but the jostling for policy high ground has very much begun and it is that which has thrown up some of these radical proposals.  We should give credit where it is due – after all, if ditching a piece of dogma results in a positive and progressive policy then it has to be a good thing – U-Turn or not.

Saturday, 9 February 2013

A Safe Pair of Hands


Noteworthy this week is the 25th anniversary of a fund that I use in many of my client portfolios.  This is of course the High Income Fund, from Invesco Perpetual, managed by veteran Neil Woodford.  I use the fund because of Woodford’s pragmatic and grounded approach to investing and because he has delivered solid returns through some truly dreadful periods. 

This fund has produced a total (growth plus dividend) return of 1906% over that period, compared to a mere 823% shown by the FTSE-100 over the same period and on the same basis.  This is a fair comparison, as Woodford’s fund invests in UK Blue Chip firms and it shows clearly how his approach would have trounced a ‘Tracker’ fund, most of which don’t even return the dividend income they receive to you, the investor.

It is also worth looking, graphically at how the fund has weathered the various storms it has encountered during this extraordinary time if the graph doesn't show in your browser then please click on the empty box) :

I remain in awe of the work that Neil Woodford does with this fund and the effect it has on client returns.
As a result of this expertise, a £10,000 investment into the fund in 1988 would now be worth £107,291, truly an astounding gain against the backdrop of the UK during that time. 
Please be aware that investments in funds such as this one and the returns achieved by them can fall as well as rise. This does not constitute an investment recommendation and any such decision should only be made as a result of a detailed discussion of objectives, attitude to risk and tolerance for loss.  These are the kind of discussions that a decent IFA would have with his clients prior to any recommendation.

Tuesday, 29 January 2013

2013 - The Year of the "Race to the Bottom"?


The Bank of Japan last week doubled its inflation target (from 1% to 2% before you get too excited) in the hope that this might finally lift their economy from the deflationary spiral that has gripped it for the past two decades.  This process is going to involve the Bank buying swathes of Japanese Government Bonds, which in turn should weaken the Yen against Japan’s target export markets’ own currencies. 

This process will be very much a repeat of what has been done and is still in wholesale progress both in the US and here in the UK. 

All of this raises uncomfortable questions.  Often dressed up by a desire to ‘increase liquidity’ or cause relief to some other symptom of the current malaise felt in all of these economies, this policy can also be seen as a deliberate and aggressive way to weaken one’s own currency in order to gain a competitive edge.  It seems to me that it is another form of trade war, similar to protectionist tariffs applied on imports and the like and should be regarded with great scepticism.

This kind of contest is not a pretty one and the outcome most uncertain.

Friday, 28 September 2012

FSA apparently happy to pay High Commissions ?


The advice community is presently undergoing great upheaval as the ‘Retail Distribution Review’ draws near. With it, will come the banning of ‘commissions’ for all investment-based financial arrangements from January 1st 2013. The move to fees may not actually be as much of a revolution as one might envisage, as it will still be permissible for providers to deduct an agreed ‘fee’ from arrangements for onward payment for advice.  

However, much is being made of this ‘Brave New World’ and the FSA seems genuinely proud to have taken this bold step. Which makes it all the more curious that they seem not to be demanding it from the contractors with whom they do business themselves: 

In a recent Freedom of Information request, the journal Professional Adviser discovered that the FSA had paid more than £6.69m in commissions to Recruitment Consultants and Head Hunters since 2007, with the most expensive year being 2010, during which £1.91m was spent in this manner. 

Financial Advisers face a continued squeeze on the viability of their businesses as regulatory costs spiral and clients become ever more price conscious. Since the regulatory fees are ultimately borne by clients in what they pay advisers, it seems all the more incongruous that such a vast sum of money should be spent on their behalf. 

If the extraneous costs of recruitment and selection look large to you, then consider the fact that the total estimated annual cost for the FSA’s conduct of all its operations now stands at £543.5m, of which £371.8m is earmarked for staff costs and recruitment. 

For me to comment on these revelations would probably be ill advised, so I merely pass them on to you here so that you may draw your own conclusions…..

Tuesday, 22 May 2012

Breaking up is always hard to do.....


For the past two years there have been two questions over Greece's future.  A question of "if" it might leave the Euro and a question of when that dramatic event might take place.  It seems reasonable to conclude from recent events that we may now be dealing with a single question: when?

The best that can be said is that the world has given itself two years to prepare for such an event. While that debate is going on, other developments pale in comparison, but there is some good news out there. In the UK unemployment fell again and there was an extremely welcome pick up in non-EU exports. The Eurozone as a whole avoided recession and its inflation rate fell. Meanwhile in the US, consumers are still spending, albeit a little less quickly and there is a bigger chance that the Fed will inject more funds to speed its recovery.

May’s Inflation Report made glum reading in the UK.  Each of the Bank of England’s main forecasts moved in the wrong direction this quarter. The Bank revised down its forecast for UK economic growth in 2012 to 0.8% from 1.2%. It also revised up its forecast for inflation as the Governor admitted that inflation would remain above its 2% target for longer than he had thought. That will tighten the screws on the UK economy, particularly on households. Wages are growing, but with inflation outpacing them, real wages have been falling for nearly two years. ‘Sticky’ inflation means that’s likely to continue.

UK unemployment fell to 8.2% in March and earnings growth stayed low. There was a second consecutive, and unexpected, fall in unemployment in March. This is great news, but it probably won’t give the economy that much of a boost because it was almost entirely due to more part-time workers. Part-timers now account for 27% of workers, up from 25% in Q1 2006. But some job is better than no job, and this is helping to keep a lid on pay growth. Average weekly earnings grew by just 0.6% year on year in the three months to March. The rate of total pay growth has now slowed in every month since August 2011, kept down in particular by lower bonuses.

More good news on UK trade:  The UK's trade deficit narrowed a bit in March due to growing surplus on services exports. Weak demand from the Eurozone is a drag and the Governor’s warning that the fallout from the Eurozone problems is ‘the single biggest threat’ to the UK’s recovery isn’t good news for UK exporters either. But a 12.1% month on month rise in goods exports to non-EU countries was great news, particularly as it easily outpaced a 4% rise in imports. Better trade with these countries will provide some welcome cushioning against problems in the Eurozone.

The Eurozone avoids recession – for now: A solid performance from the German economy kept the Eurozone out of recession in Q1. GDP growth was flat, but better than the 0.2% quarter on quarter fall that had been expected. This is good news, but don’t hold your breath. Eight out of the 17 Eurozone economies are in recession and a broad based weakness in industrial production, backed up by weak Purchasing Managers’ survey data, suggests that the industrial sector will still drag on the recovery.

Eurozone inflation slowed in April. There was a small, but welcome, fall in Eurozone consumer inflation (CPI) in April, to 2.6% from 2.7% in March. Budget cuts across most of the Euro area, rising unemployment, and an intensification of the sovereign debt crisis all pushed prices down. But the European Central Bank expects the inflation rate to remain above its 2% target this year, due to high energy prices and indirect taxes.

US retail sales grow in April – just: Retail sales rose for an eleventh consecutive month in April. But the 0.1% month on month increase was the weakest in that growth streak, which helped pull the year on year rate down to 6.4%. The slowdown probably reflects the unseasonably warm weather and the weaker pace of job creation in March and April.

US inflation steady in April, but a third round of Quantitative Easing looks more likely. A sharp fall in gasoline prices was offset by rises in other items, notably food, which kept the inflation rate at 2.3% year on year in April.  But core inflation, which strips out volatile items increased by 0.2% month on month to 2.3% year on year. Inflation is above the desired 2.0% rate, but the Fed’s dual mandate is to secure stable prices and high employment, which means that there is no prospect of tighter monetary policy.  Indeed the Fed is edging closer to a third round of quantitative easing, according to the minutes of its April meeting. "Several members indicated that additional monetary accommodation measures could be necessary," if the economy slows or downside risks become too great - i.e. if the euro area deteriorates markedly. In March, only two members voted that way.

So, amid the bleak headlines with which we are all faced, there are glimmers of hope for life after the break up.

Wednesday, 25 April 2012

On No, Not Again....

Witht he latest figures from the ONS showing a further contraction in the UK economy and the ensuing use of the "R word", today could be going better for the UK Government. Half of their critics will say that they have cut 'too far and too fast'and the rest feel more bold autserity packages are necessary. It's true that everyone will have their own view, driven largely by their own ideology, but amost all will agree that this is not where we want to find ourselves - again.

I heard one informed commentator saying today that we should follow the example set recently by Estonia, where they made breathtaking cuts to their Pubic Sector and as a result are now enjoying 8% GDP growth. On the face of it that seems like a great idea, but can you imagine the collective pain there would be having made such cuts, while we sat waiting for their expected beneficial outcome? Bravery is most definitely required from here on in, but will Democracy allow any government, of any colour, to do what is required and to stick at it for long enough for the desired result to emerge out of the gloom?

It is times such as these when a benign dictatorship (has there ever been such a thing, anywhere?) might allow policy makers the time to see their policies through to conclusion. That is never going to happen, when we seem if anything to be moving toward an even less well-defined political era where the colours have run in the wash and where blue, red and orange have become a pastel-shade messy purple.

Inflation will, over time ease the size of the debt mountain, as it always does. Though we may not have actively been seeking such an outcome, I think it hard to imagine our turning it down!