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Preparing for The Reaper – one year on

by The Greybeard on March 24, 2016

The Greybeard is exploring post-retirement money in modern Britain.

Almost exactly a year ago my friend David died, struck down by a heart attack just before his 60th birthday.

Within a particular part of my social circle, where David played a significant role, I and others still mourn his absence. Things just aren’t the same.

But as I wrote at the time, David’s sudden death also prompted something of a re-think here at Greybeard Towers.

Specifically, the realisation that my wife – who has never really been very interested in our investing – needed to be a lot closer to the management of our investments than she had been previously.

Because if I suddenly went the same way as David, she’ll be left on her own to manage not just her pension pot and ISA, but my own – somewhat larger – investments as well.

Hitherto, I’d been the one doing the wealth management for both of us.

Making a start

We began almost immediately.Progress has been good, although there’s still a considerable journey ahead.

The file for her pension now resides in her study, and not in my office. She has the login details, and she – not me – logs in to obtain valuations and make purchases.

Does she like and enjoy it? No. But I’m left with a sense of comfort that should I suddenly expire, the management of her pension won’t quite be the alien territory it once was.

Even so, I’m very aware that all our other investments are still under my care, spread across four other investment platforms. While the journey has begun, there’s still some distance to cover.

That said, it’s a journey that has been given a little extra impetus from three distinct sources.

Income as a carrot

The first was the fact that I had begun positioning our pension portfolios towards a more income-centric stance.

And while it’s fair to say that my wife isn’t especially excited by capital gains made by index trackers, income-focused investment trusts (and index trackers’ income units) are a different matter.

Particularly with interest rates still obstinately stuck at a historic low.

With the investment platform in question handily displaying annual dividend income at the click of a mouse, my wife can readily see how once-abstract investment decisions are contributing to her future standard of living in a manner that could hardly be more concrete.

Hello, retirement

Which leads us nicely to the second source of impetus.

For that future standard of living has itself acquired a certain immediacy.

Last summer my wife was offered and took early retirement, receiving a lump sum redundancy payment on top of her lump sum local government pension payment.

And so, at the beginning of August, she became a lady of leisure.

A lady of leisure with both the time to take more of an interest in her financial affairs, and (thanks to those two lump sums), some active investment choices to make, too.

Choices that, to her credit, she has been making.

Will power

The third source of impetus is a little more sombre.

Back in 1986, we each made wills, written for us by my bank, and with the bank nominated as the executor.

The bank in question has recently made some changes to its probate service, prompting us to re-think whether we wished to use it as an executor.

Particularly since we now have two more-or-less grown-up children, who hadn’t even been born when the wills were drawn up.

The result: A serious family discussion with the kids, on the subject of them taking over the role of executors. In the course of which, it became apparent just how much our investments had grown over the years.

So the wills are now in the process of being updated, with the kids appointed as executors.

Somehow, the whole investment management business now seems a little more serious.

What we’re managing isn’t just our retirement, but the kids’ inheritance.

Don’t fear the reaper

Where next? The journey continues, in short. Our investments need to become precisely that – our investments – and in due course, see the kids involved as well.

That said, I’m still several years short of the state pension age, and intend carrying on working long after it.

But should the Grim Reaper call, we’re rather more prepared than we were last year.

And going forward, I intend that statement to be true every year.

Do check out the rest of The Greybeard’s articles on the changing nature of pension investing and retirement in the UK.

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Lars Kroijer’s Talk In London: Recording

by The Investor on March 22, 2016

Photo of Lars Kroijer hedge fund manager turned passive index investing author

There was a lot of interest among Monevator readers about Lars Kroijer’s recent talk in London.

And plenty of you turned up on the night! But of course many of you couldn’t make it.

The good news is I’ve got a recording of the talk to share with you.

The bad news is the audio quality is somewhat terrible, and certainly not as good as Lars’ laconic delivery. It’s perfectly listenable though, provided you crank up the volume and wince a bit.

Here it is (sorry, no slides):

I really enjoyed the talk – and I suggest you listen to it all – but passive purists beware there’s far more about hedge funds than passive investing.

Here’s a quick guide to the contents:

Start-27:30 – Lars explains how he got started in finance and hedge funds
27:30-46.00 – A bit about his life and strategies as a hedge fund manager
51:20-57.10 – Let’s talk about fees
57.10-1.01.00 – Why Lars says you should rationally own index funds
1.01.01-End – What about Smart Beta? Why one global tracker?

For more from Lars, check out his articles on Monevator or read his book, Investing Demystified.

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Weekend reading: Budget 2016

by The Investor on March 19, 2016

Good reads from around the Web.

The Budget was kinder to the typical Monevator reader than might have been expected, though you probably wouldn’t guess it from the frosty reception some of you have given to Lifetime ISAs…

But remember what we dreaded? The end of pension tax relief as we know it. Higher capital gains taxes. Maybe even lifetime restrictions for ISAs!

Then consider what we got.

For starters those pension reforms have been postponed again, and for now we have a carrot instead with Lifetime ISAs for the under-40s. (Surely not a coincidence?)

Meanwhile capital gains tax rates are to be cut, not raised, and everyone’s ISA allowance is headed up to £20,000.

It could have been a lot worse (and it was for some unfortunate people, as we’re seeing reflected in Cabinet rows this weekend).

Certainly there was nothing as horrific for me as the upcoming increase in dividend tax rates, which will likely cost me six-figures over the rest of my working life.

Lifetime ISAs – the missing link?

Treasury documents state the Lifetime ISA is still being finalized in conjunction with industry feedback, and to be honest I’m not surprised.

To me the Lifetime ISA looks like something that was left on the chopping block after the Chancellor threw away his more ambitious recipe for a radical overhaul of the pension system.

The 5% charge on taking money out before 60 – unless you use it to buy a house – is a big departure from the normal ease-of-access ISA ethos, and it smacks of a legacy of some sort of Pension ISA plan.

As for buying a home with the Lifetime ISA, that’s great – but it does make the Help to Buy ISA seem a bit redundant, since when you buy you can only put money from one of the two Government top-up ISA schemes to work.

Given the Help to Buy ISA has a maximum and fixed Government bonus – and it’s only received at the end, on buying – I’m surprised at this additional complication, versus just letting the two bonuses from each ISA scheme be lumped together.

The government could have reduce the maximum annual Lifetime ISA bonus to say £800 if allowing both together was really not affordable.

Then again, the writing is probably already on the wall for the Help to Buy ISA.

There will be a one-year window from 2017-2018 in which savers can move their Help to Buy ISA money into their Lifetime ISAs, which I imagine many people will want to do.

And by 2019 Help to Buy ISAs could be gone, anyway, as that was the furthest out the commitment to making them available was made.

Tallying the Budget

Perhaps the mixed reception is reflective of how fiddly the whole system has become. It’s hard to know if you’re a winner or a loser until you’ve spent a few hours studying the detail.

That’s hardly tax simplification, let alone socially cohesive policy making.

I remember when Budgets were boring, but in recent years they’ve had the same “It could be you!” drama of the National Lottery draw on a Saturday night.

Were you a winner? Here’s a roundup of the roundups:

Budget 2016: How it affects you – Telegraph
What the 2016 Budget means for you – Guardian
How to benefit from the Budget changes – Telegraph
BBC budget calculator – BBC
Lifetime ISA: Four pros and two cons – Guardian
Pension reform by carrot and stick – FIRE v London
Budget tax implications for the very wealthy [Search result] – FT
Merryin S-W: Wider benefits of lower CGT rates [Search result] – FT
New £1,000 allowance for online entrepreneurs – This Is Money
Web traders tax breaks explained – BBC
As I’ve said before, personally I agree with I.D.S. on disability cuts – BBC
In-depth analysis of the budget by tax experts, with comments [PDF] – CBW

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Weekend reading: Free PDF on Modern Portfolio Construction

by The Investor on March 12, 2016

Good reads from around the Web.

I haven’t agreed with everything written by Cullen Roche of Pragmatic Capitalism over the years – for me he doth protest too much when it comes to dissing passive investors who dare to call themselves that – but I have linked to him plenty of times.

The man undoubtedly knows his investing onions. And even when he sees onions and I see – um – fennel, I usually find his writing a tasty broth worth consuming.

(Mental note: Don’t blog on an empty stomach.)

Cullen has now written a research paper, and it’s basically an investing mini book that you can download for free as a PDF from the SSRN website.

It’s got a serious title – Understanding Modern Portfolio Construction – and it’s a serious read. But not a difficult one.

You say potato, I say passive investor

I think Cullen’s hostility towards the concept of passive investing (as opposed to using index funds and ETFs, which he fully endorses) is made more articulate within the context of this greater work.

He writes:

One of the dominant themes in asset allocation these days is the distinction between “active” and “passive” investing.

While this distinction was once quite clear it has become increasingly muddled in a world in which most asset allocators have become asset pickers using low fee index fund products instead of picking stocks.

After all, a stock picker can be quite “passive” (for example, Warren Buffet has a very low fee and inactive management style), however, the stock picker is not merely trying to capture broad market returns. They are trying to beat the market.

This means that the most useful distinction between “active” and “passive” is as follows:

Active Investing – an asset allocation strategy with high relative frictions that attempts to “beat the market” return on a risk adjusted basis.

Passive Investing – an asset allocation strategy with low relative frictions that attempts to take the market return on a risk adjusted basis.

This macro thinking highlights the fact that most asset allocators deviate from global cap weighting and are therefore indirectly engaging in an effort to “beat the market” in an active manner.

As Cliff Asness of AQR has noted, one cannot deviate from global market cap weighting and call themselves a “passive” investor.

I’m still not entirely on the same page, but as (some) active fund fees come down and cheaper dealing fees and robo advisers bring down the cost of owning stocks, too, I guess the argument is moving in his direction.

Anyway, download the PDF, have a read and see what you think. (It’s U.S. but relevant – just remember the tax comments don’t tally exactly with the UK).

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