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Why your relatives will be glad you’re a DIY investor

close relative of mine has reached retirement age and she needs help with her finances. The situation is not great:

  • A settlement left her with a modest pot that must last her the rest of her life.
  • She now handles her own financial affairs after decades of delegating that trust.
  • While she can shish-kebab a bargain at 20 paces and haggle like a souk trader, she has no experience of the complex financial decisions she now faces. Tripwires are everywhere.
  • She’s terrified of the stock market and sits mostly in cash. Like most people, she can’t equate inflation’s slowly corrosive impact with her eventual ruin.
  • Tentative consultations with financial advisors have taught her enough to be wary.
  • She’s scrambled by a fad-hungry media that treats investing like fashion. The constant switchback of advice leaves her prey to so-called ‘experts’ who offer to make sense of it all.

The reality is she has run out of track. The pot struggles to generate enough income in a low-interest rate world. Inflation is eroding it, but equities are too risky: there’s no crumple zone to absorb a stock market crash.

Spending less is the only emergency lever left to pull (and it’s not like the ambition level was particularly grand to start with). It’s too late to work longer or save more.

DIY investors can help retiring relatives

What a mess

As the holes in the safety net widen and more people are increasingly being left to fend for themselves, DIY investors like us will need to fill in the gaps.

It’s an unnerving responsibility. My own retirement is many years away, so plenty of the details can be left to ferment in a tank marked ‘the distant future’.

But in this role, precision guidance is needed. My relative’s problems need definite answers but, as it turns out, a caring amateur can do a better job than a careless professional…

As I excavated the stack of valuation statements, brochures, and key feature documents, I uncovered a haphazard clutch of active funds and insurance bonds full of stuff that my relative would never have chosen for herself.

It turns out she is 20% in equities. Plus every shade of corporate bond right down to junk, distressed companies, futures, and the same high-yielding UK blue chips in fund after fund – HSBC, BP, Glaxo, Vodafone, Royal Dutch Shell, BAT, and so on.

The usual suspects staff the top 10 holdings in no less than eight of her funds! That’s more redundancy than in the Greek civil service.

The incoherence of it all makes me angry. There’s no strategy, no sense of an architect who has carefully designed an investment machine that operates in all weathers, while taking into account the needs and abilities of its owner.

It’s just a Katamari ball of a portfolio that has rolled around picking up whatever sounds good and pays juicy commission to previous advisers.

Meanwhile the key feature documents all play the same soothing marketing lullaby:

Achieve a sustainable level of income combined with the prospect of long-term capital growth.

Beautifully chosen words that press the retiree’s happy buttons while amounting to absolutely naff all.

The brochure risk indicators offer further reassurance with middling scores that tell you nothing about the risks of putting eight near-identical funds in the same portfolio! Like state propaganda, it’s so much window-dressing that provides cover for misdeeds.

You could blame it all on my relative for not having the nous or desire to rigorously research and question all that they have been told.

Or you could imagine yourself next time you’re handed a bill for the repair of your car. Squinting at the list of meaningless charges and hoping that the reason you can’t see any cowboy hats is because you don’t know any cowboys.

So what to do…?

The primary goal of the strategy I’m working on for my relative is to meet her minimum spending needs while removing as much risk from the equation as possible.

The impact of inflation, stock market volatility, tax, the state pension and a long-lived retirement all need to be taken into account.

The product costs need to be dramatically reduced and the advisors who are still siphoning off commission must be unhooked. I’ll need to be wary of any exit charges here.

Annuitisation is looking inevitable, but a rump of the portfolio will remain to cover the unforeseen.

I want to keep this rump simple so my relative can understand what each component part is for. Hopefully this will provide some kind of defence against future temptations to mess. Maintenance needs to be a doddle, too.

Fancy stuff like desired spending needs and legacies can be dreamt about once we’ve secured the minimum spending floor.

I’ll report back once I’ve firmed up the strategy. In the meantime please do let me know in the comments below about your experiences in this realm – either securing your own retirement or the retirement of someone close to you.

I’d be fascinated to learn what others have done in this situation.

Take it steady,

The Accumulator

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{ 37 comments… add one }
  • 1 Mike June 4, 2013, 9:38 am

    Hi Accumulator, I read your article last week about investing for beginners. I wondered if you could point me in the direction of any other articles you have for beginners/novices so i can make more sense of the terms and ideas presented in the piece above.

    Thanks

    Mike

  • 2 gadgetmind June 4, 2013, 9:40 am

    I wasn’t quite that bad before taking the reigns myself but not far off.

    Whatever could I have said to an IFA to make him think that I wanted a portfolio with 30% UK commercial property? How hard is rebalancing that it requires an annual fee of 0.5% on top of 1.5% fund charges?

    I weep at the thought of what I’ve lost in the past but smile whenever I look at my current portfolio.

    We live and learn.

  • 3 Grumpy Old Paul June 4, 2013, 10:57 am

    @Accumulator,

    I can only write about my own approach and will restrict myself to those aspects relevant to someone already retired.

    Simplicity is a key point. I have a simple, documented broad approach which I plan to follow. I also have a contingency plan to follow if I find maintaining my own portfolio becomes too burdensome or I decide I’m really bad at it: this is to switch all of my ISAs to the Vanguard LifeStrategy 40 fund or similar.

    Use ISAs as much as possible because pensioners may become much more heavily taxed in the future. A future government may merge tax and National Insurance, for example.

    Index-linked saving certificates are no longer available and, even on rolled over certificates, the terms are far less attractive with a very low interest rate and penalties for early withdrawal.

    A will, of course, is essential and, indeed, your relative’s intentions in that are may shape your strategy. In my case, apart from ensuring that my partner is secure if I predecease her, I have no particular desire for distant relatives to inherit large sums, so I’m quite content to run down my funds slowly over 30 years or so. And if I eventually have to pay for care, so be it. But different people will have differing aspirations which a strategy needs to be designed to deliver.

    Then there’s the issue of income versus capital growth. With funds outside an ISA, there’s an argument that the UK tax regime strongly supports going for growth rather than income. With funds inside an ISA, arguments will rage but I take a total return view and will eventually draw a percentage each year and not concern myself whether it comes from income or growth.

    You’ll need to cover the eventuality that your relative lives to a ripe old age and also that you may no longer be able to offer assistance in this area. So you need to document your strategy and its rationale and find a
    suitable person to step into your shoes, if necessary.

    Good luck.

    Ah, insurance bonds! Have these ever been subject to mis-selling investigations such as PPI? My very first investment was an insurance bond; I should have been sold a unit trust, of course, but the commission wasn’t there. Once I realised what had happened, I vowed never to buy any investment or savings product from a sales person.

  • 4 BeatTheSeasons June 4, 2013, 12:02 pm

    Thank goodness your close relative is willing to reveal this information to you and then listen to your advice. In my family we suffer from a dangerous combination of pride and naivety. Since I tried to do something about the situation, secrecy has become a third barrier.

  • 5 Dylantherabbit June 4, 2013, 12:20 pm

    I would consider a portfolio of Investment trusts, such as EDIN , PLI etc about 7-10 trusts covering a range of investments. These should do most of the work for you. Some cash in ISAs and maybe investment grade bonds. The trick will be to KISS, which is not always easy.

  • 6 Luke June 4, 2013, 12:22 pm

    As well as organising a will, your relative should consider whether it is appropriate to consider putting arrangements in place for power of attorney (should it be required at a later date). Obviously, there needs to be someone who is willing (and trusted to take on this responsibility).

    I have a relative who started off as BeatTheSeasons described, but is now afflicted with a degenerative condition that affects their reasoning. Chosen secrecy and a lack of willingness has now made way for habitual secrecy and distrust. As power of attorney was not put in place in time, there is nothing much that the family can do beside watch said relative burn through their (cash) as inflation takes its toll.

  • 7 Paul Claireaux June 4, 2013, 12:38 pm

    It is to assist such people that I’m slaving away now in writing my books.

    Financial planning is too broad a subject to be dealt with here and guidance can only be given if all (ALL) the facts of the case are known.

    My focus is to provide guidance and ideas to those who are some way off retirement. As these younger folk have time to build funds (and think through different life strategies) for the later years.

    Hitting your later years with neither is very challenging indeed.

  • 8 Jen June 4, 2013, 2:20 pm

    I’ve recently taken over my mother’s affairs which were in a similar state. We redeemed all of her insurance bonds/with profits bonds (after taking some advice) and am in the process of re-investing in a core of vanguard lifestrategy funds with some actively managed funds on the side. We’re looking for a simple solution that doesnt need much fiddling. Holding a power of attorney has been invaluable.

  • 9 Greg June 4, 2013, 3:51 pm

    A close friend of mine asked me to take a look at her situation and educate her on how things work. Her portfolio was almost entirely a life-insurance wrapped Irish Property OEIC opened in 2006. It was labelled “moderately cautious” or something like that. It would have been liable for _income tax_ on any profits, though of course, as it had lost 20%, that wasn’t relevant! Upon her deciding to close it, they wouldn’t let go of the money for more than 6 months, enabling them to lose another 5% during a bull market for everything else. I’m still angry about it now, and it wasn’t even my money!

    You need to be very careful not to give ‘advice’ as that’s a crime (!) and could cause serious disharmony in future if things take a dive.

    I spent a long time (dozens of hours) showing her how to analyse your situation, requirements, biases, emotions etc. as well as understand the different asset types and investment units. I then showed her a selection of various ITs, ETFs and the Vanguard LS funds, (limiting to ones that couldn’t go too far wrong) and with a bit of support, she made a portfolio of mostly ITs, based around a V LS100 core with a bucket for dipping into for nebulous expenses, as well as a sensible cash safety net.

    However, for almost anyone else, I’d just tell them:
    0) Consider seeing an IFA but only for information, not letting them get their hands on your money. They might know tricks to minimise tax etc. This depends on how much they have though!
    1) Sit down and write a detailed statement saying what your requirements are and what you would do under various hypotheticals.
    2) Get an emergency fund at whatever level you are comfortable with and put it in an instant access cash ISA. >£5k, possibly much more
    3) Have a savings bucket, possibly in cash, for saving for things!
    4) Dump the rest in a Vanguard LS fund of an appropriate %. (Probably a 80%-100% as you can always have a larger cash holding to balance it.)

  • 10 gadgetmind June 4, 2013, 3:59 pm

    The last IFA I met (perhaps for ever!) told me that no-one had ever made money from equities, but if I moved my entire SIPP to him, he’d use it to provide mezzanine loans to property developers.

    When I suggested that perhaps 5% was plenty enough exposure for me to have to that asset class, he lost interest and I never heard from him again.

    It’s an odd game this financial advising lark!

  • 11 oldthinker June 4, 2013, 5:38 pm

    @Greg

    > Get an emergency fund at whatever level you are comfortable with and put it in an instant access cash ISA.

    I am all for having an instantly accessible emergency fund, but I would challenge the wisdom of keeping it in a cash ISA while investing in an investment fund (presumably partially outside the ISA wrapper) as recommended by you. The ISA limit is better utilized by placing funds and shares inside it because the going interest rate paid by cash ISAs is a disgrace, so there is very little to be gained by not paying tax on that interest. You would be better off not paying tax on investment returns from the same sum instead, even after accounting for the inflation-driven loss on the emergency fund after taxable interest. Having to top up that fund from time to time may feel painful, but you would be better off overall.

  • 12 Greg June 4, 2013, 6:07 pm

    @oldthinker

    No – I maintain my view. It’s only 1/2 a year’s allowance (or possibly a couple of 1/2 year allowances) and the tax benefits are significantly better for cash ISAs than for stocks. I would then shuffle the VLS money into an ISA over the next n years, hopefully avoiding having to pay CGT due to the fact that only 11k is sold each year.

    I do see your point but this is the very fine tinkering that isn’t appropriate for most people. (I wouldn’t advocate people faffing around moving their £5k ISA about each year either – I’d just get the Virgin money one and forget about it.)

  • 13 oldthinker June 4, 2013, 6:31 pm

    @Greg

    Instant-access Virgin ISA recommended by you pays 2.15% per year. If you expect to get more than 2.15% average capital gain from a Vanguard LS fund (which you presumably do, as you have suggested using cash as an emergency fund only), you would be better off keeping this fund, rather than cash, in the ISA wrapper.

    > the tax benefits are significantly better for cash ISAs than for stocks

    For capital gains they are exactly the same as for interest on cash: no tax whatsoever. Dividends are not quite free of tax in an ISA, but this is irrelevant as long as you get more than 2.15% average capital gain; dividends would be a bonus on top of an already superior return. So what exactly would be the point of keeping the emergency fund in a cash ISA?

  • 14 ermine June 4, 2013, 6:40 pm

    Unfortunately the problem is the beneficiary needs to understand what they are doing and why.

    And most people can’t be bothered. Most of this blog’s readers and nearly all the commenters are PF geeks. What’s right for us isn’t necessarily right for someone with less of a passion for that.

    I’ve experienced the problem, both in highlighting to people they need to at least inform their old pension provider they have moved and get some idea of what the fund is and how much. And to counter irrational thinking – this in someone perfectly capable of understanding but with a psychological blockage to engaging with pensions because it’s all so far away.

    And, TBH, in myself. Once I retired I found micromanagement less interesting. I still have the majority of my investing ahead of me, but I am drawn to the simplicity of that lifestrategy product, because the more I study the less I seem to know. And I have the experience that the largest enemy of my investment performance looks at me in the mirror every morning. That’s not to say I won’t play, but it’ll be a smaller part fo the whole.

    If your relative doesn’t understand what they are doing and why, they risk being panicked out of the market at the very time they should be running towards it. That’s something you have to learn by doing it. You only know you can land solo after you walk back afterwards 😉

  • 15 oldthinker June 4, 2013, 6:47 pm

    @ermine

    > Unfortunately the problem is the beneficiary needs to understand what they are doing and why. And most people can’t be bothered.

    You are very right – and this applies way beyond the PF realm…

  • 16 Andy June 4, 2013, 9:31 pm

    @Greg

    “You need to be very careful not to give ‘advice’ as that’s a crime (!)”

    Are you sure? What is the actual law that states this.

  • 17 dearieme June 4, 2013, 10:31 pm

    A friend coming up to retirement asked for my views about pensions: he had a defined contribution fund. I pointed out that he was from long-lived families on both sides, had always enjoyed good health, and had therefore better plan for living another 30 years or more. I said that I thought that buying a level annuity would be far too risky and described the merits of income drawdown. He said that he couldn’t face the prospect of managing the money himself so instead went off and bought a with profits annuity.

    Though I wouldn’t buy one for myself I imagine that it might suit him pretty well. The lump sum will be used, I think, to move house to a more attractive part of the country.

  • 18 dearieme June 4, 2013, 10:38 pm

    I have a defined benefit pension from which I took maximum lump sum, using it (i) to clear debts, and (ii) to spend, allowing my wife to defer her State Pension. As long as the politicians honour the promise to pay her extra pension as a reward this will probably prove to be an unbeatable investment.

    We have much of our other money in cash ISAs on excellent terms; as they mature, though, we’ll be wondering what to do next. I’m hoping that equities will be better value then.

  • 19 Greg June 4, 2013, 10:48 pm

    @oldthinker
    > So what exactly would be the point of keeping the emergency fund in a cash ISA?

    The point is not really about returns here. £5k is effectively meaningless in any sensible long-term portfolio, which (including pension and property) should end up as hundreds of thousands of pounds. 2.15% is a rubbish return, I agree, but isn’t too far behind inflation and it will adjust to remain reasonably competitive and the rate may eventually exceed inflation. Therefore its real value will remain about the same and won’t need looking after. In addition, having it separated like that will make it less likely to be used as a holiday fund etc.

    I myself do not have a cash ISA, but I’m abnormal. 😉

    @Andy
    I got warned when posting ideas I was coming up with to the forums of a finance site that used to be good but isn’t now. the link I was sent was this one:
    http://www.fsa.gov.uk/doing/do
    (I know the FSA is obsolete now but I’m not going to spend my time looking up financial regulation…)

  • 20 Andy June 4, 2013, 11:44 pm

    @Greg

    Unless you are running a business providing investment advice, I can’t see that the Financial Services and Markets Act is of any relevance.

  • 21 The Investor June 5, 2013, 1:03 am

    @Greg — As Andy says, as I understand it giving advice to a family member or anyone else is not financial advice unless you’re doing it “by way of business”. So don’t let them pay you for it, to be doubly safe! If you’re a financial adviser working in a regulated industry, you need to be more mindful, but you’d already know that.

    Obviously if the advice you’re giving breaks some other law (e.g. fraud) then that is illegal.

  • 22 Steve June 5, 2013, 7:39 am

    –“As Andy says, as I understand it giving advice to a family member or anyone else is not financial advice unless you’re doing it “by way of business”.”–

    Yes, that’s absolutely correct. Otherwise we’d all be behind bars by now.

    –“Obviously if the advice you’re giving breaks some other law (e.g. fraud) then that is illegal.”–

    I don’t think that advising your mother to rob a bank is actually illegal. It’s the actual robbing of the bank that’s illegal.
    Maybe I’ll put this to the test next time I visit Mum. She’s got the stocking, I’ll supply the bag with ‘Swag’ written on the side! 😉

  • 23 The Investor June 5, 2013, 9:57 am

    @Steve — Yes, sorry, I wasn’t clear. 🙂 I meant you committing fraud or some other crime as part of your advising. Good luck with the bank caper! (You could always suggest she buys RBS shares, instead… some claim they are still a steal on a price-to-book basis…)

  • 24 Monk June 5, 2013, 10:02 am

    So there you go Greg, your well intended advice about giving advice looks like it has ruffled a pedantic feather or two.

    Given the lurch to US style ambulance chasing we’ve witnessed over here, I’d say it’s good advice if it avoids the where there’s blame there’s a claim crowd.

    Which is a shame given the good advice available here and elsewhere, but common sense was legislated out of everyday life some time ago despite the protestations of the legislators, hence the proliferation of Simsonesque warnings on the side of anything capable of facilitating a caveat, along with oversized packaging where it previously wasn’t.

    Caveat emptor evolved into a defunct warning from a defunct language only to be replaced with an equally defunct caveat venditor…

  • 25 Len June 5, 2013, 10:41 am

    My own solution was to use two thirds of my pot to buy two annuities. One guaranteed and one with profits. The other third was put into a Sipp, invested in a Harry Browne Permanent portfolio – 25% in each of FTSE all share tracker, sixty year gilt, Physical Gold ETF and cash. When I reached age seventy five in April, I put the Sipp into income drawdown for the maximum available. I arranged my tax affairs so that I am paying 20%. I want to get as much out as possible before I die and my dependant has to pay 55% tax. The amount I withdraw is reinvested into a S&S ISA, invested 90%into the same HBPP and 10% into whatever takes my fancy, for a bit of excitement. For those who don’t know about the HBPP, it’s been around for about forty years and has lost money (in small amounts) in only three of those years. It has averaged about 9% compound growth over the whole of that period.

  • 26 The Investor June 5, 2013, 11:00 am

    @Monk — I take your point about caution always being prudent, but I’m going to be pedantic about your use of the word ‘pedantic’. 😉

    Greg described (with best of intentions) the giving of advice to as family member as *a crime*. That’s serious, and as I’ve said, I don’t think that’s the case at all. Given the nature of this post, I think we needed to correct that.

    I fully agree with his second point — that if things turn out badly, your relationship could sour. Personally I don’t give any kind of share advice to friends or most of my family at all, despite them knowing my interest in active investing etc. I point them to passive investing repeatedly, even if some notables resist it!

    The one exception is my mother, where I’m happy to help out more explicitly. I think that relationship is pretty bombproof.

  • 27 Snowman June 5, 2013, 11:34 am

    I advise my mum on her financial affairs. As a result she has index-linked pensions that cover her day to day living expenses (including added years purchased through an occupational scheme) and some savings and tracker investments on top (in ISAs) for any other needs.

    As a result her financial affairs are very straightforward and yet work and she understands them. Had she used a financial adviser instead I am doubtful her affairs would be so simple and a lot of the returns would have disappeared in fees.

    I am not saying that using an IFA is always a bad thing, but I think the choice is a lot more balanced than vested interests in the industry would like us think. If you are expecting to get say 3% above inflation (on a middle range scenario) on your savings and investments and the total charges for advice and products are 2%+ it is not hard to see how most of your returns go in charges. So using an IFA say rather than getting help from a friend or relative with some common sense and a little financial knowledge can be a bad mistake. And if you don’t understand your own investments following that advice, as often happens, then that is a recipe for trouble. A trusted relative or friend is better placed to provide that ongoing support to help someone understand their financial affairs. They may not have the same knowledge as a financial adviser, but they can more than make up for that by understanding the person and their capabilities, because they have that person’s interests at heart, and by providing ongoing support, as well as keeping costs down.

    I have also had to help friends and relatives in unravelling complex products and arrangements that are already in place or about to be put in place, invariably arrangements set up through financial advisers or suggested by financial advisers. As long as you avoid those complexities in the first place it becomes much simpler and a little knowledge and common sense is all that is needed.

    Advice from financial advisers is always very narrow in nature also. Where an individual can also help a relative or friend is about making sure you are controlling expenditure (through not overpaying on utilities etc) and getting the best rates on any savings by switching accounts.

  • 28 Monk June 5, 2013, 1:34 pm

    Never one to be knowingly outdone on the pedantry front TI 🙂 it was actually a close friend of Greg’s who sought out his solicited advice at the moment in question.

    Although she may well have married him or one of his relatives since…

  • 29 Greg June 5, 2013, 2:09 pm

    Actually, she’s marrying a lawyer who doesn’t like me…

    While I was mystified at how draconian the law sounded at the time, it does seem to be so when I read it. To be honest, I can’t imagine it being for cases like ours, but I suppose it is meant to protect the majority from themselves. (e.g. Forcing people to wear seatbelts by fining them, as if the increased likelihood of dying isn’t enough, which it isn’t!)

    I deliberately used the strong interpretation here to bring it to people’s attention, and you are all reacting as I did! I’m not going to post a link to the original discussion as I don’t like leaving an electronic paper trail that could be used to find out all sorts of things, some personal, about me and my friends.

    Of course, the more serious threat is the “fix someone’s printer and are now suddenly at fault when the hard drive fails” effect…

    Be careful everyone!

  • 30 Neverland June 5, 2013, 2:24 pm

    “The pot struggles to generate enough income in a low-interest rate world.”

    There’s your issue right there

    Deliberate government policy to take money away from savers and give it to borrowers

    Some people may remember when ten years ago savings bonds from reputable institutions paid inflation +2-4% a year

    The “pot” being mainly in cash, hasn’t benefitted from QE

  • 31 The Accumulator June 8, 2013, 3:40 pm

    Hi all, great comments, sorry I wasn’t able to respond earlier, been a beast of a week at work.

    @ Mike – The initial set of linked articles from here will set you on the right path: http://monevator.com/category/investing/passive-investing-investing/

    @ Grumpy – thanks for your insights. I hear you about documentation. I especially like the idea of a failsafe command like “Switch it all to Vanguard LifeStrategy 40 in my absence.”

    @ Luke and Jen – great idea regarding the Power of Attorney. That is a topic that will need to be broached.

    @ Greg – good initial advice despite the enjoyable pedant’s duel afterwards 😉 I think I’ll take my chances in front of the judge.

    @ Len – Your approach is very interesting. What made you decide upon those types of annuities? Was there a particular reason why you weren’t converting your SIPP holdings into ISA holdings between 65 and 75?

    @ Snowman – amen on the role of a caring family member with financial nous.

  • 32 Len June 9, 2013, 11:46 am

    I wanted a guaranteed income no matter what, but also wanted a chance of growth in the with profits annuity, without too much risk. The annuities were meant to give me sufficient income, with a safety margin, for the foreseeable future. So far (age 62/75) they have done so. The other 1/3 of my pot I placed in a SIPP (not available when I started) so that I could control the investments myself, and hopefully grow them as a source of future income, if needed. I also decided not to make any more contributions, but to invest any further amounts I could manage, in my S&S ISA, for flexibility. I was lucky to have come across the HBPP because this suited me perfectly. Like most people my financial plans have evolved over time, and I can’t say for certain how or when I decided to go into drawdown and invest the annual income in my ISA. I hope this has been of some use, but if you have any more queries, I’ll do my best to answer them.

  • 33 ivanopinion June 24, 2013, 1:41 pm

    I went through a similar process with my mother-in-law a few years ago. She was divorced more than a decade ago and received a lump sum in settlement. Her IFA put the whole amount into three with profits bonds. After eight years, they had consistently lost money. Her primary requirement was for sustainable income to pay her living costs (over and above certain pension income). The with profits bonds had spectacularly failed to deliver this, but of course the IFA claimed it was a perfectly reasonable decision to have made at the time. As the bonds were delivering none of the income that she needed, she was gradually eating into other capital, such as cash savings. She was in severe risk of falling into a vicious spiral, where her capital fell and so the income from it fell, which gave rise to bigger income deficits and therefore ate further into her capital.

    I was reluctant to give specific recommendations, but she is elderly and cannot get her head round the relevant concepts. She insisted that she wanted to do whatever I thought was best. I put together a recommendation and insisted that all of her children should review it and say whether they agreed that it was the best option.

    After some lengthy discussions, we decided to sell the with profits bonds, taking a loss. And we invested in a range of investment trusts which were yielding 4-5%. We chose ones that have a record of increasing their dividends every year for several decades. (In the case of City of London, more than 40 years.) The idea is that this should give a level of income that, in practice, is extremely unlikely to fall, so it is similar to an annuity, but it has the advantage that the dividends are likely to increase over time and therefore give some inflation proofing, and the underlying capital will not be forfeited (and might benefit from capital gains).

    In practice, she has made 20 or 30% (unrealised) capital gain and has more income then she spends, so we reinvest this from time to time.

    The only real downside is that she does have a small risk that the income is not guaranteed. However, we held a family meeting of her children and they all agreed that if she had a shortfall of income they would help her out, which pretty much eliminated this risk. So income risk did not force us into buying an annuity and accepting poor rates and forfeiting the capital.

    There is a risk that the value of her investments might fall, but this is a risk that does not matter for her, because she is unlikely ever to want to cash in the investments. All that she needs from the investments is to generate income, so the capital risk is irrelevant. However, she was very keen on the idea that there might be some capital value in her estate, whereas with an annuity she would have left nothing to her children. This was not something that was of concern to them, but it was a big deal for her.

  • 34 The Investor June 24, 2013, 2:00 pm

    @ivanopion — Very interesting, thanks for sharing. I’d love to get a few of your thoughts on the discussion we’re having over here: http://monevator.com/weekend-reading-drawdown-dramas/, if you have a few minutes to spare.

  • 35 The Accumulator June 24, 2013, 9:12 pm

    Thanks, Ivan – so many of the details of your story chime with my own experiences.

    An interesting rule of thumb I picked up (either from Wade Pfau or William Bernstein) is to only count 50% of your dividends as reliable income. This is based on the US experience of a near 50% decline in dividends during the Great Depression. It’s only a rule of thumb of course and highly debatable, but I thought it a useful yardstick.

  • 36 ivanopinion June 25, 2013, 9:03 am

    What was interesting is that I started off with the assumption that the IFA who had been collecting commission for the last eight years would take the lead in dealing with the problem that her income from the with profits bonds was inadequate. I had previously written to him after a year or two of the with profits bonds, expressing concern that they had stopped paying any bonuses, but he had said that he was confident that they would pay off in the long run. I wrote again saying that after eight years surely even he must accept that perhaps we should be thinking about switching. Rather than constructively engaging in a discussion about the pros and cons, he only seemed interested in defending his original recommendation.

    He appeared to be under the impression that the only investment risk that he need ever be concerned about for any client is the risk that the value of their capital might decline. In fact, if the with profits bonds had been delivering the annual income of at least 6%, which is what he originally promised, the capital value would have been irrelevant for my MIL. Even more bizarrely, he insisted that we should stick with with profits bonds because they are managed conservatively to preserve capital, and did not seem to think it was relevant that they had in fact failed to preserve capital value.

    I remember an extremely frustrating phone call with him when I was trying to suggest that the major risk that was relevant for my mother-in-law was the risk that her income might be inadequate to meet her expenditure (which is what had been happening for the last eight years). His replies always referred to the risk that the value of her capital might decline. He was unable to see that this is not the same as the risk that the income might be inadequate.

    The level of incompetence was staggering. I do have a low level of training on economics and financial management from a long time ago, but not remotely sufficient that I would feel confident to charge anyone for my professional advice regarding investments. Nevertheless, I clearly knew a lot more than this guy. I would say that anyone who is reasonably numerate and who bothered to read a couple of books on personal finance, such as the Tim Hale book, would have known much more than this IFA.

  • 37 The Investor June 25, 2013, 11:22 am

    @ivanopinion — I think the clue to why your IFA was so hapless was contained at the start of your dismaying comment:

    the IFA who had been collecting commission for the last eight years

    My bold. Your mother-in-law was very lucky to have you to hand!

    There are certainly some good IFAs out there, and hopefully RDR has begun the process of beginning to weed out the dross. I look forward to the day when my impression of IFAs is finally out-of-date.

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