The Christmas mail brought a pensions update from a former employer, a FTSE 100 engineering company.

In four years’ time, it proposes to pay me around £5,500 each year.

Not bad going for a job that I was in for just five years, and which I left in 1983.

What was especially interesting, though, was the half-page of information devoted to warning people about the various pension scams going the rounds, with murky companies apparently offering dubious ways to ‘liberate’ pensions and provide early access to funds.

So avoid cold-callers or website pop-ups offering ‘a free pension review’ or ‘legal loophole’, it advised – and be especially cautious of overseas money transfers or paperwork delivered to your door by courier, requiring an immediate signature.

Even when outright theft isn’t the objective, it added, so-called pension liberation can still see retirement savers hit by usurious fees and commissions, sometimes amounting to a third of their pension savings.

These are, indeed, shark-filled times.

Take care out there.

Freedom versus responsibility

But is Chancellor George Osborne one of the biggest sharks? Or, if not an actual shark, at least helping to encourage the feeding frenzy?

Because data crossing my desk certainly points me in that direction.

Yes, the 2015 pension freedoms have done much to put retirees in the driving seat, giving them more control over how they access their pension savings.

But control isn’t always exercised responsibly. And to borrow an analogy from former Lib Dem pensions minister Steve Webb, if you put just-qualified 17-year old drivers behind the steering wheel of one of Webb’s famous Lamborghinis, you’re going to get a certain number of car crashes.

Now, call me old-fashioned, but as a (hopefully) responsible parent, I can’t help but think that while the 17-year old deserves a lot of the blame, the person who handed over the keys should not be beyond reproach, either.

Spend, spend, spend

There’s a popular perception that George Osborne’s pension reforms arrived fully-formed, rather as with Moses and the tablets.

In fact, they have their roots in similar freedoms granted to retirees in a number of overseas countries.

And a report from the (admittedly left-leaning) Social Market Foundation has examined how those freedoms have worked in practice.

It makes for sobering reading.

In Australia, for instance, four out of ten Australians with pension savings had spent them all by the age of 75.

Americans, meanwhile, typically withdrew at an unsustainable rate of 8% a year – double the 4% many observers recommend.

To the Foundation, this is a warning that the same thing could happen here, throwing destitute retirees onto the mercies of state benefits – although, as I’ve pointed out, those mercies can’t be guaranteed.

At last: hard facts

So how are Britain’s retirees handling their now-found pension freedom?

In the weeks following last April, a number of financial providers and commentators issued bulletins on the proportion of new retirees cashing-in their pensions, often incurring a hefty tax charge in the process.

Nor were these withdrawn funds necessarily reinvested elsewhere. Anecdotally, a proportion of pension savings seem to have been spent on paying off debt, holidays, and new cars and kitchens.

But hard facts, drawn from across the market, have been missing.

No longer.

On 7 January, the Financial Conduct Authority (FCA) – the successor body to the old Financial Services Authority – published its latest Retirement Income Market Data survey, covering the second three-month period that the new freedoms have been in place.

Adding a further 178,990 retiree data points to the 204,581 retirees who accessed their pension pots in the April-June quarter, we can now see how almost 400,000 real-life pension savers have made use of Mr Osborne’s freedoms.

Why the especial significance of this second quarter of data? Because it’s likely to be cleaner data than the first quarter, given that the first quarter’s data is anomalous, combining:

• Pent-up demand from savers determined to withdraw everything and consequently delaying their pension decision until the freedoms came in;

• Under-informed pension savers who lacked the education that has since started to emerge from more informed advisers, more (and better) media exposure, and the government’s new Pension Wise service; and

• A number of known data collection errors in the first quarter’s data.

What we’re all doing

So what do these hard facts add up to? Let’s take a look:

• Overall just 13% of retirees elected for the annuity route – a very sharp reversal of the annuity industry’s past fortunes. But the proportion of annuity purchasers shopping around for an annuity actually fell, which is both disturbing and odd.

• Instead, the greater proportion of retirees (34%) chose to access their pension savings through the new Uncrystallised Funds Pension Lump Sum (UFPLS) route to taking pension benefits. Of the options on offer, that’s probably the smartest, and the one that’s probably of the greatest appeal to Monevator readers.

• A further 23% of pension savers fell into the £30,000 ‘small pot’ bracket, and so took the lot as cash. This group accounted for 88% of the total number of full withdrawals, with a massive 57% of full withdrawals being pension pots of less than £10,000 in size. Even so, many of those individuals with £10,000+ pension pots will likely have been hit by a thumping tax charge, assuming average earnings.

• 30% of pension savers opted for income drawdown, the traditional alternative to annuities.

• In terms of income withdrawal, including both UFPLS and income drawdown retirees, almost three-quarters (71%) of those accessing their pension pot took an annual income of less than 2% of their fund. A further 13% took an income of 2-3.99% of their fund.

• 12% of those individuals making full withdrawals had pension pots valued at above £30,000. Somewhat incredibly, roughly 1,200 people fully cashed-out pension pots of £100,000-£149,999 in value, suffering a significant tax hit in the process. (Did these people take Steve Webb literally?)

Mine, all mine

On the face of things, then, in the vast majority of case, Australia this isn’t.

Except that for the fact that while most retirees appear to be sensible, a significant minority buck the trend.

• Over the quarter, one in ten of those accessing their pension pots (10%) took a rate of income withdrawal of 10% or more of the value of their pot. That isn’t a sustainable rate of annual income withdrawal, for sure – unless such retirees are in their eighties.

• Which seems unlikely, because it was individuals aged 55‑59 who took the highest rate of income withdrawal, with 27% of those individuals aged 55‑59 taking an income of 10% or more of their pot after any tax free cash was deducted. Again, this isn’t sustainable, and these individuals’ retirement prospects look set to hit the buffers. Perversely, the higher the individuals’ age, the more prudent their income withdrawal rates.

• The proportion of individuals making full withdrawals (and taking a likely tax hit, to boot) is worryingly high. 31% of those making full withdrawals had pension pots valued at between £10,000 and £30,000, and 12% of those individuals making full withdrawals had pension pots valued at above £30,000. And £100,000+ withdrawals are not a fantasy: it is happening.

What to make of it all?

Clearly, the FCA has further work to do in refining its data collection methods. At several points in the report there are evident data collection ambiguities, which the FCA acknowledges.

It’s also — frankly — not the clearest-written of reports, which again doesn’t help.

So if anyone from the FCA is reading this, I can be contacted via the comments box below, and my rates are reasonable.

Overall, though, the picture is moderately encouraging.

Most people are being sensible, and most people are doing something other than a) withdraw the lot, or b) hand it over to an annuity provider.

But the fact remains that a significant minority of people are heading for what appears to be a penurious old age.

And while some of you reading those words might not mind this too much, a central plank of past government pension policy has always been to protect people from themselves.

Now we are seeing why.

• Read more of The Greybeard’s articles on pensions and deaccumulation.

I spend so little time on my investments that it feels wrong. How can I expect to succeed without any effort?

You get back what you put in, right?

Wrong.

Investing is one of the most counter-intuitive of activities going, because we can only meaningfully judge the results over several decades, not the hours or days our human brains are wired for.

Just how counter-intuitive is it? In investing:

• You don’t succeed by trying harder.

• You don’t get what you pay for.

• Doing nothing is generally better than doing something.

• The herd usually gets fleeced as they stampede from gold to Russia to pig trotters in search of the jackpot.

As legendary investing strategist Charles D Ellis said:

The saddest chapters in the long history of investing are tales about investors who suffered serious losses they brought on themselves by trying too hard or by succumbing to greed.

Don’t be a postscript to the next sad chapter.

Ignorance is bliss

Because I’m into investing, friends will often ask me what the FTSE 100 is doing or whether yak futures are hot or not.

Embarrassingly, I don’t know.

I just don’t worry about it, because knowing how many points the FTSE moved last week doesn’t help me achieve my goals.

If anything knowing that sort of stuff is counter-productive. It’s akin to being afraid to go out at night because you’ve watched too many episodes of Crimewatch.

Instead, my passive investing operation works like this:

Here’s how it fits together:

• The direct debit automatically deducts money from my account.

• My online broker silently funnels that cash into the funds I’ve preset as regular investments.

• The funds reinvest the dividends.

• My asset allocation already contains all the mutually supporting investments I need to grow my nest egg and hopefully weather any storms that come along.

It all ticks along famously without bothering me.

The passive investing revolution will not be televised

It takes me just 30 minutes a month to double-check that everything has gone according to plan between bank and broker. Nothing is ever amiss, but I’m a paranoid soul.

I also tune in every now and then to update my portfolio tracker. And I rebalance my holdings annually.

Rebalancing and reassessing my contributions once a year takes a few hours in total.

The rest of the time, I’m really not needed. It’s like a clockwork machine that just needs a bit of oil and a service now and then.

Sounds too easy? Well, we already know that passive investors will beat active investors on average.

If you think that you can pay someone to help you top the investment hi-score tables – and for some reason you think you need to top the tables to succeed (you don’t) – then there are plenty of people who are willing to charge you a massive fee for believing in fairy tales.

A crash course

The effort you need to put into investing is front-loaded. It’s worth understanding how the basics work at the start, so you don’t get ripped off or self-sabotage later.

Think of it like the time you put into buying a house. Doing some legwork is the best investment you can make in yourself because it’s incredibly important to make the right choice. Your future happiness depends upon it.

Here are some pointers.

• For the quickest summary of the basics, read William Bernstein’s If You Can. It’s 40 pages short and it is free on Kindle.

• For a fuller but amazingly easy to understand picture of what you need to do, read John Bogle’s Common Sense on Mutual Funds.

You’ll now understand why passive investing is the best way for you to go.

To turn that underlying philosophy into a concrete plan of action then UK investors just need to pick one book from the following:

• Investing Demystified by Lars Kroijer.

• Or Smarter Investing by Tim Hale.

Finally, if there’s anything you’re not sure about or want more practical help with, then not even modesty can prevent me from admitting that there’s no better place to go in the UK than our own passive investing HQ.

Get rich slowly

That’s it. Read two books – one easy, the second more comprehensive – then reinforce your understanding with our series of key passive investing posts.

You’ll be better informed than the vast majority of investors out there. You should easily know enough to manage your own investments with minimal impact on your time1.

There’s always more to learn, of course, especially for investing nerds like yours truly.

But if you haven’t got the time or the interest then at least you can move on in the knowledge that once you’re set up, the hard work is already done.

Whatever you do, just don’t end up writing a blog about it.

Take it steady,

The Accumulator

1. Note you may need professional assistance if you’re trying to do something fancy, to do with taxes for example. If you need financial advice, look for a flat fee adviser with a good reputation who charges by the hour. [↩]

Good reads from around the Web.

I don’t easily back down in what I’ll pompously call ‘intellectual debates’ (which I have all the time with everyone, to everyone’s annoyance).

But I will change my mind, if persuaded.

For example I was far more left-wing at University – having been “to the right of Genghis Khan” as a schoolboy, as my dad once quipped.

Today I’m pretty centrist (though libertarian if not an outright anarchist on personal freedoms and so on).

Traveling from Left to Right with age is not an unusual journey, but I do think it demonstrates the flexibility to change my mind.

Being wrong the right way

This is relevant to our discussions here, because if I was to pick one thing that’s most changed my active investing after more than a decade at the coal face, it’s probably that I’ve cultivated an ability to more quickly decide I’m wrong.

And then to sell, sell, sell.

This is not as easy as it sounds.

As the on-point Morgan Housel recently noted in a Motley Fool article:

One of the hardest parts of investing is finding the balance between:

• Riding out periods temporarily unfavorable to your views.

• Realizing your views are wrong and moving on.

It’s the difference between patience and stubbornness, and can separate the ruined from the rich.

Sell your lagging value shares too readily, and you’ll cultivate a Buy High, Sell Low strategy that’s bound to end in tears.

Or on the growth investing angle, be to quick to dump winners because you now see they’re possibly overvalued, and you’ll probably never enjoy big gains from the handful of hot shares that generate most returns in bull markets.

Obvious corollary alert: This challenge is exactly why most people will be best off not trying to pick stocks or to time markets, and to invest passively instead.

(Maybe me too! Time will tell.)

One career ruining call

For instance, Barry Ritholz reminded us this week at Bloomberg about the fall of the once-famed market timer Joseph Granville.

Granville moved markets. He made millions of dollars a year from his newsletter business, and when he urged his subscribers to sell everything on 7 January 1981 he apparently sent the US Dow index down 2.4%, on then-record volume.

What power!

Sadly, though, he was wrong. In fact America was just on the cusp of its greatest ever bull market.

Worse was his inflexibility. Ritholz notes that:

Granville, who died in 2013, never managed to admit his error or reverse himself; he ended up being consigned to the dustbin of history, his track record in tatters.

Mark Hulbert, who tracks the performance of investment newsletters, noted in 2005 that Granville’s letter was at the bottom of the “rankings for performance over the past 25 years – having produced average losses of more than 20% per year on an annualized basis.”

To be an active investor, you need to take a different view from the market. It demands a certain arrogance to take a contrary view to the world’s best guess.

But to believe the world is wrong and you are right for three decades! That’s hubris on a par with the great Greek myths.

Certainly, admitting you are wrong can get harder with time. But it’s doable.

It took me about a decade to finally concede I was wrong not to buy a London flat in 2004, for instance. (And who knows, perhaps in 2025 I’ll see I am wrong not to buy one now…)

Staying humble and reminding yourself daily of your limits is I think essential – whether you’re an active investor, or a sensible passive investor whose strategy is built from day one on understanding the difficulties of all this decision making.

Foxy forecasting

We might ask why we find it so hard to intelligently prevaricate?

I suspect it’s to do with incentives.

In investing – and in much of the rest of life – people prefer you to be bold and wrong than to be undecided.

As a result, you’ll hear an active fund manager say “I don’t know” about as often as you’ll hear them say: “Yes, let’s see what we can do about the fees on that.”

As John Kay wrote this week:

In Expert Political Judgment, Philip Tetlock demonstrated to little surprise that forecasters were not very good.

More surprising was his identification of the characteristics of good and bad forecasters.

Tetlock employs a distinction, credited to the Greek poet, Archilochus, but popularised by the philosopher, Isaiah Berlin, between hedgehogs and foxes.

Hedgehogs know one big thing; they have an all-encompassing world view and discover facts that confirm what they already know to be true. Foxes know many little things; they are eclectic in their sources of information and nuanced in their judgments.

Hedgehogs command more public attention but foxes make better forecasters.

Harry Truman, the former US president, (perhaps apocryphally) sought a one-handed economist who would not say “on the one hand” and “on the other”.

The two-handed approach corresponds to the reality of most complex issues. Yet modern business people, politicians and media seek the Truman type and find it in hedgehogs.

To grab attention and build a reputation, it is more important to be unequivocal than to be right.

[continue reading…]