It looks like Vanguard is no longer the undisputed consumer champion of old. Vanguard’s USP has been waning for a while but the recent announcement of a £4 per month minimum charge for DIY investment services has put the tin lid on it. (Note: this price rise does not apply to Junior ISAs.)
Previously, Vanguard’s DIY investors paid a 0.15% platform fee calculated on their account balance. That made Vanguard excellent value for beginners, young investors, and anyone who can’t afford to put much away.
But from 31 January 2025, customers will pay £48 annually for portfolios worth less than £32,000.1.
This is a huge change.
How Vanguard’s price rise affects small portfolio owners
Anyone with a £1,000 portfolio will pay £48 in charges or 4.8% of their account balance.
Previously they would have paid £1.50.
The numbers may not seem large until you consider that global equities post an average annual return of around 8%2.
At that rate, most of the example investor’s return will be consumed by fees. Precisely the fate that Vanguard’s founder, John Bogle, worked to help people avoid.
As Vanguard itself says, quoting Bogle:
Investors need to understand not only the magic of compounding long-term returns, but the tyranny of compounding costs; costs that ultimately overwhelm that magic.
Very true. And while all brokers are grappling with their own rising costs, an informed investor surveying the options will find that several other platforms are now more competitive than Vanguard for small portfolios.
Costly consequences
Vanguard’s £48 minimum means the platform is now only worth considering once you’ve amassed at least £19,200 in an ISA / GIA or £13,700 in a SIPP. (See below for our alternative picks).
You can sense-check your own numbers using the method we’ve previously outlined: How to work out which platform is cheapest for you.
Do that and if your portfolio is worth well over £32,000 then you may be left wondering what all the fuss is about. You won’t see any fee hike at that level.
On the other hand…
Vanguard alternatives for small portfolios
Disclosure: Links to platforms may be affiliate links, where we may earn a small commission. It doesn’t affect the price you pay nor how we judge the brokers. This article is not personal financial advice. Your capital is at risk when you invest.
The best Vanguard alternative right now is InvestEngine. InvestEngine’s platform charges and dealing fees are precisely zero for all account types including SIPPs.
InvestEngine hasn’t previously enabled SIPP transfers. But it’s now making an exception for Vanguard customers.
If you’re wondering how InvestEngine can afford to offer its services for free, here’s its own explanation. But please read our zero commission broker article, too.
InvestEngine is covered by the standard £85,000 FSCS investor compensation scheme.
Unlike Vanguard, InvestEngine is an ETF-only platform. I don’t think that’s a barrier though as ETFs are now cheaper than funds for many asset classes. And InvestEngine offers plenty of options, including non-Vanguard providers.
- Here’s our take on ETFs vs index funds.
Another zero-fee alternative is Prosper.
Prosper is every bit as cheap InvestEngine. Again, you can read its own explanation on how it makes money.
Prosper is an app-only investing service, offering a limited number of index funds and ETFs – though Vanguard products are prominent. The range may be small but it has the main asset classes covered, and typically includes a competitive index tracker in each category.
Prosper also includes a SIPP in its account line-up, alongside an ISA and GIA as usual.
The firm itself is relatively new. But it is protected by the FSCS scheme.
Cheapest Vanguard alternatives if you prefer better known brands
These options are worth considering because they couple free fund trading with a low percentage platform fee:
Close Brothers:
- Pros: 0.25% platform fee, zero dealing fee on funds.
- Cons: Expensive SIPP.
HSBC Global Investment Centre:
- Pros: 0.25% platform fee, zero dealing fee on funds.
- Cons: Restricted number of non-HSBC index funds. No SIPP.
Fidelity:
- Pros: Cheap SIPP so long as you invest monthly – 0.35% platform fee, zero dealing fee on funds.
- Cons: £90 minimum annual charge if you don’t invest monthly. Applies to accounts worth less than £25,000.
Santander Investment Hub
- Pros: Cheap SIPP – 0.35% platform fee, zero dealing fee on funds. The same price as Fidelity but no penalty for failing to invest every month.
- Cons: Bad Trustpilot reviews albeit from a limited pool.
Dodl by AJ Bell:
- Pros: Dodl by AJ Bell is cheaper than the rest except InvestEngine and Prosper – but only once your portfolio passes the £4,800 mark.
- Cons: Highly restricted fund and ETF list. £12 minimum annual account charge.
Any other contenders?
There are a few more zero commission trading apps available but they don’t occupy the same space as Vanguard. While such firms offer ETFs, they’re primarily focussed on trading and speculating on high-risk assets.
Still, you can check many of them out via our broker comparison table.
Transfer day
There aren’t any exit charges to pay if you’d like to transfer your account away from Vanguard.
Transferring is simple enough though it may take a few weeks.
If your new broker doesn’t offer a Vanguard product then your investment will be sold to cash and the money moved over instead.
Here’s Vanguard’s page on transferring out.
These pieces explain what to watch out for:
- How to transfer a stocks and shares ISA
- How to transfer your SIPP
- What are the risks of being out of the market?
What a pity
This isn’t John Bogle’s Vanguard anymore.
A fee cut on its index funds is vanishingly rare these days. Over the past several years, the company focused more on adding higher-fee active funds to its roster. Now it’s squeezing small investors.
Under Bogle, Vanguard changed the face of the investment industry through its relentless pursuit of a simple proposition: If it’s good for our customers, it’s good for us.
In so doing, it forced its competitors to become more like Vanguard – to the benefit of millions of people.
Now though Vanguard is starting to look more like everyone else.
Take it steady,
The Accumulator
@TA:
Re: “This isn’t John Bogle’s Vanguard anymore.”
Says it all really.
Do you happen to know if this rot only applies to Vanguard in the UK?
Thanks so much @TA for getting this out so quickly, such stars you are! Agree this is disappointing and a bit concerning. The question raised for me (or to be more precise, Mrs 2MY) is where this leads in decumulation, as the SIPP total quickly drops below the threshold (TFLS), followed by small, tax-efficient drawdowns which are, of course, now fee-inefficient! Many of the ‘comparable’ alternatives cited are not so hot on drawdown, rather limiting the field.
I’m rather inclined to swallow the marginal cusp fee difference for the remainder of accumulation – eponymously two (but actually now one!) more year – and see how this all shakes out.
Always an interesting position for an investor-safety over cost savings?-it’s a perennial question
Vanguard putting up its up its fees for small portfolios shows the current cost pressures platforms are under-straws in the wind?
At the end of the day it’s a gut feeling or investor instinct needed to decide where where to put your hard earned monies-not an entirely satisfactory way of making investment decisions!
The old saying “If it’s too good to be true then it probably is!” still has value as a guide to investment
As an Equitable Life survivor early on in my investment career I learnt quickly to fly investment wise just below the radar-safety first-slightly lesser interest rates,slightly more expensive platforms but portfolio has survived and prospered plus I can sleep at night!
xxd09
Thank you! You are indeed a star.
Thank you for the write up TA. Vanguard transfer process is already very slow but the rush for exit now will probably make it even worse. I’m not sure I like the idea of Vanguard giving only 6 weeks notice for affected customers to transfer out. And as you pointed out, their costs are no longer competitive (e.g. VWRP vs ACWI / HSBC All-World).
I am not directly affected by the fee change due to the current balance levels, but decided to finally move away. The SIPP will go to Fidelity and ISA to IWeb.
PS:- IWeb transfer web form said Vanguard supports electronic transfers and I don’t need a signed form. But on completion of the process it asked me to print, sign and post a transfer form anyway. Not sure if it’s actually needed.
I’ve decided to change from regular investments to annual so I can make use of iWeb’s ISA without the trade penalty. The decision was mainly to keep invested in the same assets as I had with Vanguard and in a platform I trust (Halifax group).
I’ve asked Propser support some questions and they just responded. Hope it’s of use to anyone looking into them.
1. Do you accept transfers in for SiPPs and ISAs?
– Yes
2. Is in-specie transfer in and out supported for both SIPP and ISA?
– Yes
3. Do you support fractional shares for ETFs?
– No – this is something we may consider in the future.
4. Is regular investment via direct debit available?
– No. You can set up a standing order with your bank.
I am unaffected due to my
balances with Vanguard but I don’t like the direction they are going in. An advisory team (thankfully short lived) but now a focus on a Managed ISA proposition as an entry point, which is intellectually the same thing as an advisory team. Newer funds with higher fees rather than low cost focus on the ones they have.
They had a clear proposition that made them stand out in a crowded field. I hope this is a blip.
Thank you TA for another timely piece – I have been reading for a few years now but this is my first comment.
I was concerned about the fees on our daughter’s Junior ISA which is currently under £10k but I called Vanguard and was told that this £4/mth charge would not apply. Thought I would share in case of interest to others.
Otherwise, yes I agree this is a huge departure from Vanguard’s core ethos and a disappointment.
They cut the fees on their managed isa though and if that’s all you have, you avoid the 4 per month, I read it in the ft that they’re sheparding people with smaller balances towards that.
Imagine what you could do with the money you’d save :p
Iweb waiving their 100 opening fee on isa…
@WinterMute
Amusingly, I was just comparing VWRP or HSBC All-World today, and it seems like a wash.
HSBC All-World has lower OCR headline rate, but they seem to take 25% of the monies from securities lending, and their tracking of the index is FAR inferior to Vanguard’s VWRP. Admittedly, HSBC’s 5-year performance seems marginally better, but as that comes from over and under-shooting their index it is a dubious advantage at best.
In the end, I am happy to be invested in both, but if I had to choose, I would go with the Vanguard offering.
(Note that technically I am not using VWRP but 90% in Vanguards FTSE Developed World UCITS ETF (VHVG) and 10% in Vanguard’s FTSE Emerging Markets UCITS ETF (VFEG). This is effectively the same as VWRP, but a lot lower OCR.)
Hi, I have a query. Is £32,000 threshold apply to all accounts collectively or on each of the accounts separately, like on SIPP, ISA and trading account ? If I add up my Vanguard shares in all these accounts it goes up to £32,000 but if I look at these accounts individually they are all below £32,000.
Can I ask a silly question just for clarity. Does this fee apply if you have vanguard funds held with another provider like HL (i know not the best value but just as an example). Or does this fee only apply to investors who invest into vanguard funds using their own vanguard platform?
I moved an ISA from a high cost platform (HL) to a low cost one (iWeb). I would say that I am very happy with this decision except that the iWeb interface is awful on a mobile and on a PC, plus the login authentication is antiquated. I am basing my approach, influenced by the excellent Monevator site, on keeping costs low at both at platform and fund level. However, based on my experience with iWeb it is true that cost isn’t everything when it comes to platform choice. Low cost platforms that DO have good interfaces/apps/autentication AND low costs and include Vanguard (though per article now only if you have a larger amount), Interactive Investor, and Invest Engine. I agree IE is an excellent choice, especially the rebalancing function which is utterly cool. It is genuinely different, but I am still a bit cautious about what you could call its gamification side. Still trying to decide if I’m too old for IE!
@Mona
I believe that the fee threshold refers to the total value of the pot across all your accounts. So you should not see any difference as the total value of your holdings is above £32K.
@OT
The fee will only apply to people who hold Funds/ETFs with the Vanguard brokerage. So people who hold Vanguard Funds/ETFs with other brokers (for example HL) will not be affected.
@Mona – The minimum fee threshold is applied on the total amount invested across all accounts, although if you don’t pay fees by direct debit the fee is split per account (e.g. 2 accounts, each of them charged £2/month)
@OT – the fee only applies to accounts held with Vanguard, not their funds on a 3rd party platform.
Thanks for covering this issue! I will be affected by this change and a switch to InvestEngine makes sense for me. I hold a Vanguard LifeStrategy 80% equity fund. Could anyone please advise the most obvious switch to make from the choices offered by InvestEngine?
@Al C – from what I’ve read, US commentators have noticed the slide too.
@2More – good point! If you didn’t fancy Santander then:
-Aviva offer 0.4%, no drawdown charge.
-AJ Bell offer 0.25% at £1.50 a trade, no drawdown charge. Could work if you operated a 1 or 2 fund portfolio and withdrew annually.
-Beyond that it’s the heady heights of Hargreaves Lansdown.
@Winter Mute – great stuff, thank you for the extras.
@Clay – Thank you! I should have mentioned that.
@Matthew – it’s a fair point. Depending on the fund costs, the managed ISA could work out more cheaply than some of my alternatives at 0.2%. I’d guess that there are plenty of people in the market who would prefer this approach. But much depends on the fund choice.
@Mona – you add them all up, so you’re over £32K. Which means you should already be paying around £4 a month for your Vanguard services i.e. £32,000 x 0.15% = £48 annually.
@Ben Ber : Thank you, that’s good point regarding the HSBC All-World fund. I’ve also noticed that it’s more volatile compared to VWRP.
Guess I’ll stick with VWRP in my ISA for now. I’m happy with SSAC is my SIPP although it’s tracking the MSCI ACWI index.
@Sue:
80% VWRP
20% IGLH
If you want to keep the multi-asset fund approach then take a look at:
LifePlan 80
https://investengine.com/etfs/lifeplans/73/?back=%2Flifeplans%2F&analytics-breakdown-tab=composition
It’s approx the same as what you’re paying at VG (before the price rise) when you add the platform fee and TER/OCF together.
Alex on email has pointed out that Barclays Smart Investor also offer 0.25% platform fee, zero dealing fee on funds for ISA and GIA.
I kept them off my list because Barclay’s only offer 12 tracker funds versus a broader selection at its 0.25% rivals – Close Bros and HSBC.
That’s possibly a bit harsh though as HSBC only have 15.
I don’t imagine Prosper being sustainable as it is, keeping the interest on cash seems like they’ll generate a fraction of a pittence…
Thank you for the article perfect timing. My Daughter has about £9K in her Vanguard Sipp which has been funded by me. She also has a Nest 2047 Retirement Fund which is currently not being added too. This only has about £6K in it.
I am planning to add £3K per year to her pension going forward and am currently looking at the options. If I add to the Nest pension, they charge 1.8% on any new contributions and then 0.3% management charge. They also have very limited funds to choose from.
I think in this instance she would be best to transfer her Nest Pension to Vanguard giving a total of £15K before my contributions. I certainly do not want to contribute to the Nest Pension.
If you have less than £32k in a SIPP I wouldn’t get too worried about the Vanguard price hike. If you’re a DIYer, a decade or more away from retirement, and still working you can just go to one of the no-fee houses like InvestEngine and put your money in a Vanguard S&P tracker like VUAG (TER 0.07%) and let it ride. Or blend yourself a simple three-fund portfolio and rebalance it every quarter or so.
The point is, for smaller balances there’s not any real advantage to getting full service portfolio management, so why pay for it? DIY is pretty straightforward and there are plenty of great low-cost fund choices around that cater to whatever risk profile you want.
I hope that anyone deciding to close their accounts, then I hope they have a better experience than us. My wife instructed Vanguard to transfer her ISA to HL back in 2022 and then close the account. They eaked it out for as long as possible: taking a month to acknowledge the request, and then another 30 days to transfer the cash. Even then they didn’t really close her account (despite several further requests to do so) and they still send her statements and T&C notices to this day. Useless.
@TA (#18):
Thanks, but that news might just be a tad more worrying.
Could I bother you for some examples please?
Perhaps a silly question but could I ask where the figure of £19,200 comes from (as what one should have in their ISA for it to be worthwhile staying with Vanguard)?
@TA One other advantage I don’t see covered is that Barclays Smart Investor is a flexible ISA. Not sure if HSBC is? That was a key reason for me in picking Vanguard, though my balance there is now transferring to iWeb and like many I’m in the process of choosing an alternative for accumulation, so thanks for the timely article on this!
@Nostalgia
With a balance of 19,200 the new Vanguard minimum fee of 48 is equivalent to 0.25% which is a common rate at competing platforms.
@Hal – I didn’t realise Nest charges were that high. I’m a bit shocked.
@Al Cam – Allan Roth has written a handful of articles over the years discussing pros and cons. Though he remains with Vanguard AFAIK. Harry Sit has left. The Bogleheads is good for taking the temperature on Vanguard.
@nostalgia – it’s a very fair question! Take the Vanguard minimum fee of £48. Divide by the percentage fee of nearest paid rival:
48 / 0.0025 = 19,200.
Though if you compare against Dodl, Vanguard can only draw level at £32,000 and can’t beat a zero fee broker.
@Hapshade – Cheers! Nice point on the flexible ISA. None of my listed alternatives offer one. (I list all the flexible ISAs I know about on the broker table). Trading 212 does have a flexible ISA though, and is zero fee. There I’ve said it 😉
The price competitor to VWRP now is FWRG.
If you compare the performance (I use JustETFs charting) since inception they are within a few bps over 18 months.
Perfect pairing on these cheap (or free) ETF platforms like InvestEngine
The Global All Cap fund can be replicated almost perfectly with a few ETFs on IE as well, at a lower total fee. I do 80/10/10 SWDA/WLDS/EMIM which weighs in at 0.21% for exposure to 8,000 stocks tracking the ACWI IMI.
@TA (#30):
Thanks for those tips.
I can certainly see what you mean re the rot/slide (#1, #18).
A platform fee with a minimum amount is probably a sensible business approach to be fair to Vanguard
Vanguard is the USA is a mutual , not so for its international operations.
Vanguard’s cap of £375 pa is quite high, preference would ii or HL with their fixed cost offerings.
@Andrew
Good alternative, but bear in mind that you can also replicate VWRP by
90% in Vanguards FTSE Developed World UCITS ETF (VHVG) and 10% in Vanguard’s FTSE Emerging Markets UCITS ETF (VFEG).
This is effectively the same as VWRP, but a lot lower OCR (0.13%). As Vanguard tends to be really good with tracking error this is a very efficient option.
Admittedly, you do lose the small cap element of the FTSE Global, but that element is very expensive OCR wise, tends to have much higher tracking error and being small-caps by definition means it barely makes any difference to a market-capitalisation based portfolio.
So while I had previously used FTSE Global funds, nowadays I simply stick with my VWRP replicating portfolio of ~90% VHVG and ~10% VFEG. I get these percentages by simply looking up the percentage of Developing Markets (~VFEG) in the fund page for VWRP.
But honestly, this really is tinkering aroung the margins as all the options mentioned are very good.
There is a lot of mention of InvestEngine but would you trust them with say 500k+ portfolio?
For Prosper as an alternative platform, what do people think of their current offer of refunding the OCF and transaction costs on a subset of funds? It doesn’t seem sustainable for the long term, but are people finding it compelling enough to change investment strategy for a while? E.g. move money into something like Fidelity World Index?
@Hapshade – from what I see it looks like they only have fscs coverage for cash? – not funds?
Not ideal with a dubious business case and unknown fundamentals
@HariSeldon. I agree. The issue Vanguard UK has it’s that total managed AUM (end 23) was just £18bn, but with 560,000 clients. So around £32k/per client account. Just very low and not viable.
Fixed costs just keep rising as they add staff count to cope with the number of clients. The fund themselves are already being subsidized. You can’t actually run these funds for at these fee levels and breakeven. So they really need to start making the business financially viable. Charging smaller clients a fee is the fairest approach.
I think people need to remember that the likes of InvestEngine cannot actually make money on these accounts either. It’s just as a start-up they are allowed by their backers to burn through cash to grab market share and to hope to upsell. At some point, they will also need to become economically viable though.
Thanks @TA, really helpful. Seems early days accumulators may want to switch and there’s good options, but at the other end the VG offering remains compelling for smaller SIPPs nearing decumulation, unless the pot is heading quickly below c.£15k. Possibly then bail to annuity.
@ZX (#38):
Fair enough – but does this logic/explanation apply to V/G in the US too?
@Matthew – Prosper’s funds are held with a custodian that has FSCS coverage.
@Alex – I wouldn’t trust anyone with a £500k portfolio. I’d always diversify a sum that large.
But really your question relates to something Matthew is touching upon, as is ZX, do you trust zero fee brokers?
I think of the zero fee approach as a loss leader. It’s obviously a marketing ploy as these businesses have to make money to survive.
So cross-sell is one avenue – Prosper are indicating this is where they’re headed long-term.
Using the cash as a float, mark-ups on spreads, all of the above and more:
https://monevator.com/how-do-zero-commission-brokers-make-money/
Some just up their prices – Freetrade have taken this path, as now, are Vanguard.
I’m currently enjoying a similar journey with Evernote (not investing related) who – having wormed their way into my life with a freebie early on – are now tightening the nipple clamps 🙂
There seem to be plenty of viable paths to profitability. Zero commission brokers have been around for a while. Robinhood launched in 2013.
What happens if one goes bust in the UK? (Hasn’t happened yet. The two examples from the last decade both charged for their services).
Well, they’ll probably be taken over and you’ve got your £85k FSCS coverage, if you have chosen wisely.
And therein lies the rub. If you’ve got a £500k portfolio then why not pay a tenner a month or whatever to a mainstream broker? Makes sense, sleep soundly at night, all that.
But if you’re starting out, haven’t got much to invest, haven’t got much invested? Well, you need all the help you can get.
So why not take advantage of a handy freebie, make sure you stay comfortably within the FSCS limit, and then consider paying more once you’re better established?
I do think there are broker red flags. But a zero fee offer – in isolation – isn’t one of them for me.
I remember when HL tagged on that £2 per month, per ‘passive’ fund many years ago. Before that they were a great combo of good support and cheap. Obviously wasn’t sustainable then either. Finding a broker is a bit like hiring a trade, you get a bunch of quotes and never pick the cheapest or the most expensive.
On Vanguard UK vs US…
Annual fee: UK 0.15%, US 0%
Trading fee: UK £0, US $0
Funds available: UK – vanguard funds only, US – vanguard funds plus thousands of funds from other providers
Fund fees: UK roughly twice as expensive as US , example Lifestrategy fee in UK is 0.22%, US is 0.14%
Conclusion is that Vanguard provides a much poorer offering to UK customers compared to those in the US.
And somehow thrives as a zero fee broker in the US. Why doesn’t Vanguard UK follow suit?
@PJ — Interesting numbers, thanks for sharing. With that said I don’t really think the UK can consider itself a peer of the US anymore, though in the long-term broad trends will still apply of course.
Vanguard may have its own competitive market analysis that suggests it doesn’t need to offer lower costs anymore in the UK, though like you I’d be a bit befuddled if so.
I think it’s more likely though that it doesn’t believe the average small portfolio owning UK investor is going to grow to cover (in aggregate) zero fees, or at least not to the level it considers worth the hassle.
All these platforms who are doing what @TA termed above ‘loss leading’ marketing — whether they offer free trading, pay a lot to acquire customers, or some other load balancing of their costs and potential returns — will be doing a lifetime value (LTV) analysis on a customer captured. (As, indeed, will those with higher explicit costs). This is standard nowadays for any sort of recurring revenue / subscription type businesses, which is effectively what we have here.
And in that light (and at the risk of getting political) I am very sure a UK customer with a small portfolio has an expected LTV much lower than a US customer.
We have had stagnant wage growth for decades and over the past decade ever higher taxes, and as a country we have structurally impaired own terms of trade with a consequence for economic growth that will play out indefinitely. Remember the statistic that ex-London the UK is poorer than the poorest US State, Mississippi?
This might not matter if you’re a high-end platform targeting wealth (e.g. Interactive Brokers or HL perhaps) but mass-market players will want to see portfolio values growing and the potential for ancillary service upselling from ever wealthier customers. I’m certain that looks more favourable in the US, making (say) $48 a year upfront more easily offset in the LTV spreadsheet.
On the other hand, perhaps Robin Hood is just a fiercer competitor in the US than Freetrade / InvestEngine / T212 / whoever in the UK, and Vanguard feels it doesn’t need to compete.
None of which is to stand-up as such for the price hikes. I agree that the Bogle Vanguard that took over the world and changed forever the investing business kept its fees low, and figured out afterwards how to profit as best it could.
p.s. Interestingly, Googling around it’s not clearcut on a per capita basis, though we do have to remember there are 5-6x as many Americans to spread the costs of Vanguard US over. Perhaps another issue though is that even where a middling UK household has a fair bit of worth, far more of it is in the equity in their home versus self-directed investment assets?
@TI:
Not to forget: https://earlyretirementnow.com/2023/12/03/we-are-all-millionaires/#comment-32381
although, as you said, a lot of the UK [median] wealth is in property!
@PJ. Vanguard global AUM is now around $7 trillion. The UK AUM under management is possibly $30bn now (assuming an increase since end 23). The UK isn’t even 0.5% of Vanguard’s business. That’s despite a decent marketing push by Vanguard across Europe. I’m in the VTI fund and that alone has an AUM of $445bn, so 15x the UK AUM. You cannot compare tiny apples with massive oranges
@AlCam. Vanguard in the US has different issues. Massive scale but razor thin fund margins. I own the US Total Stock market VTI. It charges 3bp/annum. That doesn’t even cover custody costs. So, they do securities lending to make up the loss on that fund. I’m take the tail risk to save a few bps.
What has helped all these big US asset managers is the sheer increase US equity market AUM. Plus, the ever-increasing concentration to a few stocks, which allows them to cut costs by using optimized replication without incurring big tracking error. Woe be-tide the S&P fall, since their fees would fall proportionally but their costs would not.
The issue is that moving tracker type fund costs from 1%+ to 0.25-0.5% was cutting out massive fat in the fees. Moving to 0.10-15% was tolerable as long as the market scaled, which it has given the long bull run. Lower than that though and it’s just not really viable without making money from taking risk (say securities lending) or upselling other products. Hence why Vanguard US is now promoting more managed accounts and active funds.
Witness the InvestEngine push to expand their managed account offering with Lifeplans AKA LifeStrategy rival.
Other providers offer self-selection “guided” by “Wealth Lists” and “expert commentary” and the like for a slightly higher fee.
It’s all “added value”, innit? Two of the most chilling words in the free world.
@ZX (#47):
Thanks for that.
The upshot of both [UK & US] scenarios however is the same – possibly pxxxing off their clients and seemingly turning their back on pretty much everything that they stood for under Bogle. Numerous MBA (or similar) case studies to follow?
Interesting to see how it develops. If the scenarios are as you describe I suspect we may start to see other providers following suit – and probably soon (ie before any market reset) – as they would then IMO be able to use any S&P fall as an excuse for further increases. As usual, time will tell but it is IMO extraordinary that at market record highs costs are actually going up!!!
Something just does not seem quite right to my eyes, or ….
Vanguard have been disappointing the last few years. Great when they first launched in the UK and helped to drive down investment costs, but they no longer seem interested in competing or innovating. ETFs are available from iShares, SPDR, Amundi and others that undercut Vanguard. eg SPDR have replicating S&P 500 ETFs for 0.03% compared with Vanguard’s 0.07%, with Invesco and iShares offering swap based ETFs at 0.05%. It’s a similar story with OEICs.
The retail platform started off reasonably well, but many others were better for larger accounts due to the high £375 cut-off and with this minimum £4 charge they are no longer competitive at the low end. It’s a shame as continued competition from a heavyweight such as Vanguard would be a really good thing.
I look after a Vanguard SIPP for a relative. The platform is a bit clunky but is generally ok. Only £3600 pre year going in as my relative has no employment income. I just checked and the account was at £30,600 so probably no point moving it for now.
@Al C – I agree. Vanguard have one of the most powerful brands in finance. Seems like a mistake to me to dilute that. TI made a similar point with his point about the “Vanguard that took over the world.” They’re squandering goodwill in exchange for better Q4 results. Time will tell how profitable that proves to be.
If you can’t trust Vanguard who can you trust?
Really interesting to read some of the opinions here. When I first saw the news I was straight into research mode to find an alternative. However, on reflection, Vanguard are a reputable company that I trust with my thousands of pounds; I’m not convinced that fee-free brokers have the protection of my money as their core objective. Yes you’re covered by FSCS insurance, but how long does that take to pay out?
The other factor is that my wife (who leaves the implementation of our finances to me, although we agree on the approach and what we’re investing if in together) knows Vanguard and can easily access it if I’m incapacitated. There’s a balance between chasing minimal fees and having a usable interface.
Further to remarks on minimal fees and usable interfaces-it was interesting to see many complaints from investors trying to trade during the 2008 drop and other similar periods and finding it not possible or so slow that market recovery was often underway before the desired trades went through
Minimal fee platforms provide a certain level of service-(so much cheaper than a stockbroker) -therefore investors must realise that you only get what you pay for -perhaps Vanguard is only being realistic in a very competitive marketplace
xxd09
Well, I opened an account with Invest Engine today, after initiating the sale of all my funds in Vanguard. I do feel that in one fell swoop, they betrayed just about everything that Jack Bogle stood for. I see that a new CEO arrived a few months ago, a former McKinsey type ( Yeuck ). Presumably to make his mark, he reached into his McK toolbox, and came up with this.
Thing is.., if he’s destroyed the USP, and blackened the reputation, what is Vanguard actually for… ?
I do appreciate that a large number of the regular commenters on here, well fattened with large investment sums.., can sit back and rationalise it all, or hey, what’s £48… ? I do not have large invested sums, and it matters to me.
It only takes moments to destroy reputations built up over years.
I must admit I went into full action mode when I saw the article, ready to transfer my Junior ISAs out straight away…however a closer look at Vanguard’s website seems to reveal Junior ISAs are excluded from the fee hike.
I use Hargreaves Landsdown to invest in Vanguard funds. Does this price rise also apply to me?
@Gill #57 This article is about using Vanguard as a platform. You use HL as a platform, so you are fine.
In the background, there’s an argument that HL being acquired by Private Equity is a different problem worth worrying about. Private Equity makes its money by raising the debt levels of companies so they can extract higher payouts. This usually increases the fragility of the company to go bust – see Thames Water etc for worked examples.
But in terms of the issues in this article, stand at ease.
It would be fine for Vanguard to subsidise small investors if the latter had a long-term outlook and stayed the course. But alas that doesn’t tend to be what happens in the UK. And Monevator didn’t help things with the ill-advised piece on the ‘excellent cash interest rate hiding in plain sight’, which had any number of rate tarts rushing in to open accounts to stash short-term cash, which doesn’t count towards the investment balance on which Vanguard charges its .15% fee. And then of course they rushed out again when Vanguard correctly reacted to manage its costs, and the main losers were those who had benefited from the higher rate without announcing it to the entire world. Sorry to sound a sour a note about this, but it’s a bit rich for the Investor to be lamenting the latest development.
@Lozza – I’m sorry for the alarm. Have updated the intro to say the increase doesn’t apply to JISAs. I should have done this in the first place.
@trufflehunt, #55
I doubt that the CEO had any input into what a miniscule part of his empire charges customers in a far off land.
He may have set out a new strategy that each business unit needs to cover it’s costs, or make x% contribution to global turnover / profits but the “how” will be down to local managers typically as they should know their local market and customers.
On a more general point £48 to administer a SIPP is still very good value. Mine is lower than the quoted £19200 so I will look at alternatives but nothing in the article or the comments jumps out as the obvious answer.
I’m only contributing £3600 a year for the 6.25% tax benefit and am more interested in costs (if any) and ease of making withdrawals than base cost.
My wife’s is of a higher value and will be going across to her other SIPP with Fidelity in the new year to take advantage of their cash back offer which will make that one “fee free” for 3 to 5 years
@Keith (#59):
Interesting point. Do you have any data to substantiate the scenario?
Also:
a) if the “rate tarts” “rushed out again”, then the associated costs should have all washed through and should not recur; and
b) the scenario would definitely have applied to other providers too – see #49 above
@Keith — You write:
You may well be right that the great rates on short-term cash that were temporarily available proved unsustainable as wider knowledge of the rates grew.
However I think you’ll struggle to find much reader support for the notion that we should selectively highlight the attractive features of different investment platforms or services based on how popular we think they might be.
Or that we should censor what we write about based on our second-guessing a company’s response to customers taking advantage of what’s on offer… 🙂
@Al Cam
I do know that people rushed in. It was all over the easy access discussion threads on the monesavingsexpert forum, with a number of ‘Oh well, it was nice while it lasted’ comments when the rate was pulled. I don’t however know what it cost Vanguard to set up and close these accounts, but it couldn’t have been nothing. But my point is, for people who complain now that Vanguard is violating its principles in upping its fee, that using its accounts as an instant access substitute was not in keeping with its principles either, and perhaps if the fee had been in place then it would have deterred them.
@Keith,
Thanks for the prompt reply.
FWIW, I reckon Alan’s observation (#61) re the new CEO has a ring of truth about it. IMO, such a situation is more likely to be specific to V/G than any/most of the other ideas/thoughts offered.
But then again (as at #49) time will tell and perhaps V/G are just the first out of the traps and changes from other providers will be upon us soon.
On a personal note, I am slightly wound up about these changes even though they do not (as things stand) impact me – which is pretty unusual. However, I suspect I am not alone? If this is the case, then this must be a bad move by V/G.
@AlCam. From the start, Vanguard US offered two classes of shares: investor shares and admiral shares. Admiral shares had lower expense ratios but required a higher minimum investment. Vanguard was also was very keen on using dilution levies for new investors. So Bogle never had much interest in subsidizing smaller investors (or short-term ones) at the expense of larger ones (or longer-term ones) since that wasn’t fair.
I’d also point out the Vanguard is noted for it’s creaking technology infrastructure. The last CEO spent a billion on that with little to show for it. Costs are rising because as Vanguard gets ever bigger, those legacy systems just creak ever worse. While putting in new systems becomes an ever more distant dream. So it tends to fall back to more bodies and bodies cost. Vanguard just ain’t no agile tech start-up.
@Keith – Vanguard have been heading in this direction for a while. But let’s review what happened:
You could earn 3.1% on uninvested cash in a Vanguard account vs 3.4% in its own money market fund.
Word was spreading on the forums because Vanguard were temporarily topping the best buy cash savings rates. A strategy that plenty of firms employ from time-to-time to attract new customers. Trading 212 are doing it right now.
I don’t think that was Vanguard’s aim, especially as they lowered their rate ten days after we published. Meanwhile BOE base rate was 3.5% so it was a matter of time before the ‘best buy cash saver’ pack was shuffled again.
Now here’s two conversations that could have occurred at Vanguard if your thesis is correct:
“Hey guys, we messed up a bit there. We have $9 trillion in assets under management but we must make sure this never happens again! Two years after the fact, I want you to impose a minimum fee on UK accounts worth under £32K.”
Or
“Hey guys, we messed up a bit there. I tell you what lower our interest rates, but otherwise don’t let it derail our strategy because we have $9 trillion AUM. The most important thing is to retain our brand positioning as the investment house that relentlessly squeezes cost for consumers.”
It seems to me that if Vanguard were concerned with their prior brand positioning then this minor interest rate mishap is neither here nor there.
And given this move is happening two years after that event, I think you’re drawing an improbable cause and effect. But I guess you were enjoying that interest rate at the time as a Vanguard customer?
Some platforms have imposed a minimum fee. Some haven’t. Seems more likely they’re making strategic decisions about who they want on their books. See ZX Spectrum’s (comment #38) and The Investor’s comment (#44).
@Hapshade – Prosper’s ISA is flexible.
It’s a shame this is the case for Vanguard. One would have hoped that in the age of AI it would have been the big beasts that could have automated customer onboarding and account management to the extent small accounts were economically viable and the bottom rung of the ladder made as cheap and accessible as possible. No doubt there is significant room for improvement on the regulatory side too in enabling providers to develop platforms that are both robust and cheap to run. Investengine operating as a loss making social enterprise for the good of the small investor funded by venture capital doesn’t sound like it can last forever.
@Accumulator, Investor
Happy to put my hands up here. Yes, I was enjoying the rate. I was annoyed with you for shouting it out.
But no, I didn’t for a moment believe you had to censor yourself about this or any other matter. I didn’t think it would end well, because I didn’t believe it was consistent with what I understood was Vanguard’s own understanding of an appropriate use of its platform.
And I do not believe there is any direct cause and effect relationship here, but possibly this was one piece of evidence about how people in the UK make investment decisions that contributed to the recent announcement. I would be interested to understand their reasoning, but it may be that there was clear evidence of smaller investors moving in and out of their platform in response to short term incentives like cash back offers and teaser rates which tend to come at the expense of existing long-term clients.
The non-application of the new fee to JISAs is a good-faith nod to clients one would expect to have a longer-term investment horizon. And for the rest of us: maybe we should view it as a spur to save and invest more, faster and reach that 32k threshold.
@Alan – AJ Bell is worth a look if you rarely trade. Aviva charges a straight 0.4% for its SIPP, £0 dealing fee for funds.
@ZX (#66):
Thanks for tip re different US V/G share classes. I get the idea. There is a lot of additional info @bogleheads and it seems that the distinction has morphed/evolved somewhat over time. Which is probably not surprising.
Incidentally, there are some pretty out there suggestions @bogleheads as to what may be going on at V/G – but I tend to ignore such things.
Re IT: from my relatively uninformed user perspective V/G is amongst the best I have ever used. I do not recall it ever having changed over the last decade or so – but I actually like that a lot. As to what goes on behind the scenes – I have no idea, but a sunk cost of 1bn “with little to show for it” is noteworthy. There may well therefore be some issues unique to V/G thereabouts.
Thanks again for your further input.
Time will tell if this change is unique to V/G.
@Keith — Cheers for coming back, in my view there’s probably a lot of different things going on but I’d refer to my earlier comment about ‘lifetime value’… and yes, perhaps at the margin a transient population of rate tarts could have been costing more than Vanguard had anticipated.
I suspect we’d all be surprised just how sticky most money is, though. Consider how few people change bank accounts versus all the coverage about interest rate offers, cash bonuses for switching, and so own.
Monevator readers would certainly be in the more mobile cohort. But that cohort is surely a minority…
@Keith – thank you for that excellent response. That’s fair enough. I can imagine feeling the same thing once the secret was out. The irony is, whatever money came in would have earned an even better cash return by being promptly invested in Vanguard’s money fund.
Meanwhile, we also know that some platforms view customer’s uninvested cash as an arbitrage opportunity. I agree with you that Vanguard decided they’re not that kind of broker.
@Keith:
Re: “The non-application of the new fee to JISAs is a good-faith nod to clients one would expect to have a longer-term investment horizon. ”
Or maybe V/G are just mindful of stories like this that was all over the press for a while: https://www.ndtv.com/world-news/uk-teen-discovers-child-trust-fund-left-with-just-12-pounds-after-surprise-fees-6889944
Is it possible that as U.K. under Labour (was going that way under Tories?) moves away from the Anglophone economic model of encouraging businesses,lowering tax rates and less regulation towards the EU protectionist,high tax and highly regulated economic model that Vanguard is responding in kind?
It is surely possible that we will be seeing more of these increasing business costs being passed on to the consumer /investor as these policies start to take effect
xxd09
I’ve been thinking further about this situation and about our expectations and relationships with companies as either a CUSTOMER or a part OWNER via investments or often both at the same time.
With an owner’s hat on we want the board and the managers to act in the interests of shareholders and grow our income and wealth. The route might be to offer low cost, high volume to lots of customers e.g. Tesco or higher cost, lower volume to fewer customers e.g. Fortnum & Mason.
As a customer we want lower costs, or at least good value for money.
So as the owner of something like Vanguard we want our representatives to maximise our returns but as a customer we want as near as dammit a free service or the absolute minimum cost at worst.
Presumably all of the people making negative comments on here, on MSE and no doubt elsewhere are “active” investors in so far as they take an interest, consider options and pass comments on sites such as this.
Do you object to Unilever, Apple or whoever changing their pricing model (usually upwards) in response to changing economic and market conditions?
Or, are you grateful they do when necessary and thus help to protect and maybe grow the value of your part ownership?
This isn’t aimed at anyone in particular, I was as disappointed as anybody when I first read the email, more of an observation on the human internal conflicts that see us wanting to have our cake and eat it.
A further thought on VG itself and this announcement.
VG is owned as a mutual by it’s US investors I believe with the UK operation and others across the globe as subsidiaries if some kind.
Is it reasonable for the US customers/owners to subsidise UK customers on an ongoing basis when the costs of such a subsidy could he better employed in a different way?
Putting the shoe on the other foot how would the customers/owners on here of Nationwide feel about subsidising an ongoing effort to establish themselves in a competitive US market?
Would they rather have lower UK mortgage rates and higher UK savings rates instead?
@Alan – I think you raise some interesting issues which I’ve been mulling over too. My response is meant purely to further that discussion.
I could have written the post from a purely neutral standpoint… “Here’s a big brand, they’ve raised their prices, here are the alternatives if you don’t like it.”
I probably would have felt that way about most other investment firms. But this isn’t most investment firms. It’s Vanguard. They built their reputation on relentless cost-cutting and empowering their customers.
They were so good at it that they changed the entire industry and the lives of millions of retail investors. They entered the pantheon of brands that stand for something more than higher profit margins.
So I think it’s ok to lament that Vanguard are slowly abandoning that position. They’re becoming just another brand. Another brand with a ‘mission’ but less vision.
Maybe that’s because they won the last war so decisively. Perhaps it doesn’t need to be fought anymore.
And I’m happy to accept that I could credibly be accused of naivety or wishful thinking for suggesting that Vanguard represent a better way of doing business. Nonetheless that has been their pitch.
I also hear what I think you’re saying that imposing a minimum charge on small investors might protect some fraction of everyone else’s TERs.
But I think the strong should protect the weak where they can. Sometimes it really pays off.
@Alan
Ah, Tesco. The masters of illusory pricing.
@Alan,
I seem to recall that a lot of well-known UK companies that have tried to expand into the US ultimately abandon their venture and retreat, somewhat chastised, a few years downstream with their tails definitely between their legs. It would be a shame if that fate befell V/G [in the UK] for all the reasons @TA gives, and more, but …
I think this might just be something to keep an eye on.
RIP J. Bogle – you are most definitely missed.
@Alan @Al Cam @TA — The big picture reality is that US asset managers are currently eating the world, or at least the ‘Western’ portion of it.
From the FT this week:
https://on.ft.com/3DkrIUF
Blame the US scale advantage, lighter / more pro-banking/(US)asset-manager-friendly regulations than in the UK/Europe, Barclays having to sell off iShares (a disaster for UK financial services IMHO), and as mentioned above our old friend Brexit of course, the ruinous gift that keeps on giving.
I have a rather different take on this Vanguard platform business, and that is to question why anyone wanted to invest on it in the first place, given that you could only invest in Vanguard products.
Back in the day we bought (expensive) funds directly from the fund manager. Then PEPs, followed by ISAs, came along and most fund managers allowed us to buy their products within these shelters, usually for no additional charge. If we wanted to diversify among managers, we needed to open a new PEP/ISA with a different manager each year.
Then platforms came along and gave us the freedom to hold funds (or later ETFs) from different managers in the same place, but now with an additional platform charge. This was more than compensated, though, by decreasing fund/ETF charges, led by Vanguard and followed by others such as iShares.
However competitive Vanguard’s platform charges may once have been, I never understood why people wanted to go back to the days of being restricted to a single fund manager when so many platform alternatives are available that still allow you to invest in Vanguard funds/ETFs as well as those from other providers.
@Alan (#77)
You stated, re Vanguard,”Is it reasonable for the US customers/owners to subsidise UK customers on an ongoing basis when the costs of such a subsidy could he better employed in a different way?”
Why do you think that Vanguard are subsidising their UK operation? According to their accounts, the UK Vanguard group of companies made a profit of £24m in 2023 (£20m in 2022).
https://www.msn.com/en-gb/news/news/content/ar-AA1waElo?ocid=sapphireappshare
I was reading the mainstream media today and you guys are on to something. 13 million I think the article said moved already to other platforms. That’s a lot of people with under funded accounts.
Sometimes I need to take a step back and think I’ve worked really hard on not spending all that money. I was thinking about the 85k compensation limit and how many platforms should I use as I’ve gone over.
@DavidV (#82)
We have our investments on two platforms: iweb and vanguard.
For a two or three fund index investor vanguard’s selection of funds is sufficient (i.e., a choice of various global equity funds and various global bond funds, or the lifestyle type funds).
Vanguard has fairly low platform costs for the amount we have invested and the number of transactions we undertake in a year (funds for our retirement are withdrawn twice per year). For the last two years, the fees incurred on vanguard have been about twice those on iweb (overall our annual platform costs are currently about 10bp). I note that part of the cost saving on iweb results from being able to fiddle with some relatively small transactions on vanguard.
However, as others have noted, the new changing structure does make it impossible to recommend vanguard for small or starting out investors.
@Alan S (#85), @DavidV
Re: “We have our …”
Snap. I also have holding elsewhere too; which is a longer story, but my plan is to rationalise these over time.
Using the two [iWeb & V/G] together to manage your [trading] costs can be a smart move. Especially if you trade relatively frequently and you ultimately want V/G funds. IIRC @ermine has recently played this game fairly extensively and wrote a post about it not so long ago. You could also exercise the flexible nature of V/G ISA if you so desired.
For buy & hold iWeb wins handsomely* (vs V/G) in most (soon to be all I suspect) cases – although I have not checked the detailed numbers.
So in this case two platforms can provide you with more than just +1 redundancy – which may, of course, be enough on its own anyway.
*in terms of costs
@DavidV (#82) Like AlanS I have vanguard and iWeb platforms, for my sins I have HL too.
I just decant vanguard into HL every so often. HL and iWeb are over FSCS limit.
What amazes me about attitudes here is the disregard for the size and capitalisation of your platforms Tradingweb revenue 114M cap 22M ( I think that was AUD, but it doesn’t matter what currency, it’s too damn small). And mobile only FFS, and the opacity of private finance.
No, I’m not trusting my money to that sort of opaque unlisted fly-by-nights. I am already thing about where to off the HL ISA to as they come under the private equity aegis. Private Equity is universally evil and good for nothing other than private equity, watch for the next stage in the playbook. Elevate debt, from which the private equity criminals will extract copious money, leaving the company fragile, and flapping in the wind. We’re seen this movie before.
I was unable even to determine any estimate of Investengine’s market cap. Much breathless puffery showing gorgeous GenZ ers diddling with their fondleslabs in public places.
I want size, longevity, decent market cap, public listing, pref FTSE100 of my platforms. Sure in theory client segregation lalalala but in practice, you don’t want to rely on that. I find the fondness for mobile investing absolutely mad, carry around your life savings so some yoof on an ebike can have the lot away in an instant, it appears that facetracking security is worthless and the crims have a solution/app for that.
Why is basic security such a dirty word for customers? Sure, if you are a day trader mobile is your friend. If you are an investor, you don’t need all this convenience.
Avoid fly-by-nights unless you can afford to lose the lot – in which case perhaps just live higher on the hog and eat out more. I’m perfectly happy to pay Vanguard a little bit more for the peace of mind of size. I am also just above the apparent threshold here so perhaps this doesn’t matter to me. But seriously, investing isn’t a computer game. It’s trying to make the stored hours of your human work into a claim for more hours of other people’s work when you can’t or don’t want to put in so much yourself. The cavalier disregard for security relative to flaying costs and pretty baubles and Doing It On Your Mobile, risking snatchers Doing It On Your Mobile amazes me.
I am already coming to the conclusion having banking apps on my mobile was a tactical error. I will probably get a secondhand Iphone 16, as the battery in my old Samsung is fading. I will keep finacial apps well off that and just use fin apps on the samsung, which will stay inside my house. And I will uninstall any investing fin apps – I am prefectly happy to put up with the aggravation of using the web version, I don’t need the extra physical attack space, though I accept a competently designed fintech app running on an always updated mobile platform is probably IT security fine. But the snatchabilty, I’ve read so many sob stories of young folk losing their mobiles and their money from their fintech apps that I wonder why they do it to themselves. About three credit debit cards, one in a separate pocket from your wallet is good enough for what matters. You don’t need to track your investments in the coffee shop or bar.
Lots of excellent thoughts above. Thank you @everyone!
Especially taken by the points made by @ZX #47, @DavidV #83 and @ermine #87.
The most important thing is the financial stability of the platform provider and cyber security at both the platform and personal levels.
Set against that, a few quid a month extra or an additional few basis points per year of costs shouldn’t move the dial much.
That said, product range is important and, all other things being equal (spoiler alert, they never are), it does seem a bit weird to go back to a world where the platform was in effect tied to the product provider.
Of course, the inflexibility, cost and inconvenience of the ‘old ways’ did help to build better habits – Not checking the portfolio value every day/week/month. Not trading. Thinking in terms of years and decades, not quarters and months.
But it also came at a mightily high (and compounding) cost in terms of both the direct and indirect fees and frictions levied and incurred by brokers/ platforms and fund houses.
The good old days weren’t so great.
@Ermine – you could always put your financial apps on a mobile you don’t take out of the house?
I’ve been thinking for a while there’s a disconnect here between the needs of those who “have already won the game” and those who are starting out – who can afford to take more risk. It’s the same reason the young can allocate more to equities – they have more human capital.
Arguably, we also put too much store in longevity and size as a proxy for trust.
@TA > you could always put your financial apps on a mobile you don’t take out of the house?
That’s exactly what’s going to happen. I will take the SIM out of my existing mobile, then use that on wifi. With the financial apps on it. I was under the mistaken impression that the phone number was important to the app security access method but somebody set me right, it isn’t and is not used within the app, though a SMS text may be used to set up the app. We all know that that SMS is secure as Fort Knox and bad guys can’t slam your mobile number
But I am going to stand down the HL app, I just don’t need it. I never installed the Vanguard app because I came to the conclusion investing apps = fail. Just no damn point.
I do see the point in banking apps for some, but I am rich enough to keep enough float in Starling to just use the card, and I discharge my credit cards in full. I don’t usually just walk out and spend > £2k on a whim, so I have more than enough spare capacity on the credit cards and Starling.
And in real cards I trust. I see people waving their mobiles to pay for stuff and think to muself is it really so much more convenient to haul out some great big thing to pay for your bus ticket/Lottery ticket/coffee compared to a basic card like has served me all my adult life? I don’t have to worry if the card is charged
and if some thieving git has away with it the downside is livable with.
Redundancy is important in things that matter to you, and the flipside is needless complexity is to be shunned. A credit card is the minimum viable product in an increasingly cashless world. I don’t even have google or apple pay – less to go wrong if someone pinches my phone. I’m not going to fight for it, which means it needs to be as vanilla as possible. No email on it either, that being another attack vector. Why do it to myself?
Totally off topic but got my weekly “best annuity rates” email. Driven higher by the recent sharp move up in Gilt linker real yields, a single life, RPI-linked annuity for 55 year old finally hits 4%. That was 1.6% in late 21 for comparison.
Despite equity valuations, a 4% SWR is hard to argue with when I can buy an annuity at that level. It’s 4.75% for a 65 year old. Hope this persists since I’m a bit young to take advantage.
> there’s a disconnect here between the needs of those who “have already won the game” and those who are starting out – who can afford to take more risk. It’s the same reason the young can allocate more to equities – they have more human capital.
totally agree, if a reader is in their 20s and with < 85k FSCS then knock yourself out, use investengine, perhaps think about using funds rather than ETFs (if that is possible in their universe) because of the better FSCS protection of the fund, as well as that of the platform. And if you enjoy watching it in your coffee shop great.
I don't know what the assurances are if someone snatches your mobile and breaks into investengine, but you probably can't lose more than you had, and you have years of life ahead of it to recover compared to an ermine who has earned all the money he will ever earn.
But as the numbers go up and your human capital fades the downsides matter. And true, I am using size and longevity as a proxy for trust, I am not clever enough to to the detailed due diligence on is this firm any good. Though there are some decent heurists – private equity = bad untrustworthy operators you shouldn't trust with anything of value to you. The only exception is inveting in PE – be the bad guy, it's probably profitable. That's irrelevant to qualifying an investment platform.
Diversification is a different tack, I really ought to get another two providers on board. But decent large market listed platforms are hard to find in the UK, the loss of HL is quite a blow.
Anyway, I wish the young investor using InvestEngine on their fondleslab all the very best, my concerns aren't yours, FSCS will probably help. And you have done better than this old git had at your age – by starting.
But do watch over your shoulder 😉 I don't understand why there isn't an option to carry your own AirTag/wotsit in your back pocket and as soon as your mobile goes out of Bluetooth range of that shut off all financial apps until it's back in range and you enter some key code. It would crap on the snatcher's business model bigtime.
@ZX (#91):
So a good time – if you are sufficiently mature – to give some serious consideration to taking some of your gains off of the table and locking them into an annuity. Sound familiar – see e.g. https://monevator.com/managing-60-40-risk/#comment-1851188 and subsequent chatter.
Re: “Hope this persists” – there is the rub!
@Ermine (#92):
Re: “Diversification is a different tack, I really ought to get another two providers on board. But decent large market listed platforms are hard to find in the UK, the loss of HL is quite a blow.”
Diversification beyond +1 is hard to evaluate* and IMO is both a function of additional costs/complexity and the increased likelihood of being with a platform that could fail**. And as the platforms re-shape it may become increasingly hard to execute too. What knock-out advantages do you see (purely for diversification) over and above +1 of platforms and products?
*I assume you are still ruling out FSCS-limit balkanisation
**in extremis: if you use all providers and one fails you will be impacted
@AlCam #93
> taking some of your gains off of the table and locking them into an annuity.
You are making a hidden assumption here about inflation being low and/or the GBP remaining a serviceable store of value.
Many of the drivers in the world now are inflationary. The peace dividend has gone, remilitarisation will cost money. Anything to do with Net Zero will cost money that we don’t have. High levels of government debt is a bit inflationary due to a larger amount of the pie going to service the debt. Deglobalisation/increase in tariffs is similarly inflationary as it burns off some of the cost of trade, Americans will win if it MAGA but you and I won’t.
Europe (as geography not EU) in particular is in a very weak position IMO. We will be rule takers rather than rule makers, I was particularly tickled by our future US ambassador saying we should send Nigel Farage in as horse-whisperer to stroke Trump’s ego 😉 I admire his thinking out of the box, realpolitik and acknowlegement of the power balance. I’m not absolutely sure that Taking Back Control is going to be so easy from the position of abject supplicant on our knees, but we’ve been pretending ever since Dean Acheson’s pithy West Point observation of our relative strength in 1962
The truth hurt then, and it still seems to hurt.
Say ZXSpectrum48k has perhaps another 40 years to cover. Let us look back 40 years, I was in my first job. The pound coin had just been introduced, and I was talking to a colleague who said he couldn’t imagine buying a pint of beer with a coin.
Last week I paid for a pint of beer in Suffolk with a plastic £5 note. Apparently on inflation alone it should be £3.30.
I would be surprised if inflation is lower over the next 40 years than the last
#94 > Diversification beyond +1 is hard to evaluate*
True, and in relatively stable times 1+1 is about right for me in terms of reducing the tail risk of 100% wipeout. I could eat a 50% loss and while I’d be sore it wouldn’t necessarily mandate fish fingers rather than lobster.
These are not stable times, I feel there is fire underground and the finacial system’s endless answer to making more money is to build increasing complexity. I feel this is getting frothy, I see no fundamentals supporting current valuations other than inflation making all the numbers bigger.
I want more larger ships in the hope that some will survive the incoming storm. We last saw the power of finacial complexification in the GFC, it didn’t end well. I have no idea what lurks beneath, but I think 1+1 is definitely not big enough. I am less fussed about costs than I would be at 20, because they have less time to compound. And TBH if I get my trading for free and everything over £85k is lost, was that really a good move – return of capital matters more to me than return on capital.
I am in the awkward position of perhaps being a bit too large for the typical retail investor but by no means large enough to dally with the Real Men using IBKR* etc, which seems the obvious way forward
*I don’t understand half the lingo IBKR use, and as far as relying on Uncle Sam for deposit protection, I’m sure he’s got the firepower but I do also know he DGAF about non-americans. While they claim to be FCA registered from their tone I’d imagine they’s laugh out any account with < 100k in it.
Here, here. Well said @ermine. Thought this for years – totally agree. Just as easy to pull a card out and much less risk. Why everyone needs everything on the old fondleslab is totally beyond me as well and the need to do investments/banking outside of their own castle (preferably with drawbridge pulled up). Not necessary and asking for trouble which most of them are. I don’t even agree with refunding all the numpties who let this happen to themselves – such a clamour for banks to refund everybody even when it’s clear they’ve been complicit/negligent or whatever by doing stupid things like logging into accounts in public/using public wi-fi – inputting log-ons. Who could be watching you on that bus/in that cafe – maybe even on a pinhole camera you don’t even know is there? Nothing wrong with progress but is this really it? Don’t think so – what is the need/how much time is it saving if any? If you need money transferred for that big a purchase that can’t do on credit card – you know in advance about it – just do it before you leave the house so you can then use debit when you go out. Simple really and no chance of losing a shitload of wedge. A fondleslab sticking out your back pocket – you might as well just have a big slab of cash notes sticking out of it that everybody can just take for free.
To me it just seems it’s a pretty shallow and dumb street cred sort of thing with GenZers – “hey look at me” similar to what smoking was back in the day (and now with vaping instead). Then there’s the dumb boy racers flashing past you at warp speed stupid with the loud pipes on their latest “pile o crapmobiles.” Some of them just need to go back 2 school and attempt to develop even half a brain, TBH.
On Vanguard though, I can’t see how they’re so much still rated as the “great messiah” of investment providers. I do have an account, amongst many others, but find them very very average/poor for customer service. If the question is not simples, they don’t know or fob you off but the worst thing about them is their transfers, in or out, seem to take forever with numerous delays and issues as many have said before. Their Trustpilot rating is currently only 3.8 (pretty average) and although latest ones obvs complaining about the fee increase to low value accounts – before that most complained about problems with transfers. I’ve done quite a few over last few years and all but one were delayed/had issues – one ongoing for around 7 months and still not able to correct my online account after over 4 years (although not financially out of pocket). Gave a measly £50 compensation! In my opinion they’re the worst out of all the 8 broker accounts I have currently and if I didn’t have GIA/SIPP/ISA accounts with them, I’d probably bail based on their rubbish service and this is coupled with many of their fund/ETF charges not being that competitive anymore as others are cheaper, although platform fee for accounts >32k is still not too bad in the scheme of things.
Reaches for the sherry…, and when I were a lad, I could watch my Mum pressing the clothes with a mangle, I could warm my bottom up against the fireguard, my Dad would come home from a hard day’s belting the kids at school, and a few years later I could buy a pint of Watney’s Starlight for 2/6d.
Ah, them were the days.
I quite like my mobile, and Starling. Though the latter does seem to be going through a process of ‘enshitification’ ( Cory Doctorow ).., ditching interest on saving pots, and replacing it with just a savings account, just like all the other banks do…
Sorry for the dumb question but I was reading the breakdown of costs from iWeb and it says Stamp Duty is 0.5%. I don’t remember this charge when I signed up for Vanguard but I am guessing it is the same for every platform?
Will I pay stamp duty on VAFTGAG or is it only for individual shares?
I appreciate this is slightly off piste,I was wondering if you/I have held LS40 for the last 8 years and will continue to hold them for another ten does the bond crash a few years back still have any consequences for good or ill? .
Thanks
@Gabriella – you’d only pay stamp duty on individual shares and investment trusts. Vanguard don’t offer those on their own platform.
@David – the rise in bond yields that accompanied the bond crash means expected returns have risen. Essentially bonds are better value than they were before the crash. Doesn’t mean bonds are safe, of course. They wouldn’t be a great place to be if inflation ran amok, for example. But their role as a portfolio stabiliser if equities crash hasn’t changed.
@Curlew, #83
I don’t know for sure that the UK is being subsidised but if we make the reasonable assumption (IMO) that VG have increased fees on low value accounts to make them at least break even then up until the increase they were being subsidised, by higher value account holders at least.
The logical extension of that thinking is VG UK were not maximising their profit and so the owners in the US were not getting as great a return as they could and are the ultimate providers of the effective subsidy
@Ermine, “You are making a hidden assumption here about inflation being low and/or the GBP remaining a serviceable store of value.”
He isn’t. Inflation (RPI) linked pension annuities with no cap on the increase really are available now at rates over 4%. Excellent value diversifier AFAIAC and we will be buying a couple in the new year.
Agree with most of what you say about phones. I would never pay using a phone, but there are some worthwhile innovations out there. I love my Chase account. They give you a debit card with no bank account details on it (these are visible in the app for online purchases) and you can move cash from a savings account to the current account using an app. That way even if you lose the card the maximum anyone can do you for is the amount in the current account. The card works well abroad, no FX fees on payments or ATM withdrawals and you get 1% cashback on purchases for the first year (up to £15 per month).
@ermine (#95):
FWIW, all annuities mentioned were RPI linked.
Accept, GBP is another thing all together though. I have no idea if you can buy an overseas annuity, but I take your point about Uncle Sam.
Re: diversification beyond +1:
Thanks for your interesting thoughts. Tricky, but it sounds to me like what you might really be looking for is something more like a safe harbour (or two/more)?
Tricky times ahead me thinks.
If GBP loses value, the consequence is inflation. There’s no need for overseas annuities, just hedge inflation.
Higher debt interest payments are surely deflationary assuming you’re paying for it with higher taxes rather than money printing.
One hypothetical doing the rounds in the event of 60% US tariffs is China flooding European markets with cheap goods. Not inflationary for us. Still, there are already signs of Trump backing off his more extreme pre-election promises.
@Naeclue #103 Alcam #104
> Inflation (RPI) linked pension annuities with no cap on the increase really are available now at rates over 4%.
I had no idea this was even possible, when I looked there was always a cap and the price of inflation linkage was shocking.
Now that 4% becomes 3.2% as I get to pay tax on it, but high inflations is something I fear because so many issues are inflationary.
So thank you for the tip and clearly my bad for being uninformed!
The disdain for the young and not well off is palpable in some of these comments. In my opinion, the VG fee discussion is not really aimed at someone with more than the FSCS limit in their accounts.
Although I’m not a GenZer, I like my mobile and the apps! Even if it’s snatched, I’m confident that the biometric security in the apps is sufficient to deter anyone draining my investment accounts (and that can only be done to the registered bank account).
I keep a credit card in my car, but post-covid, exclusively use my phone for payments. It’s not to show off anyone but for the convenience factor. The Wallet have my Amex and various cash back Visa/Mastercard cards added to it allowing flexibility when making payments. It also carry my loyalty cards (Tesco Club / Nector / Morrisons / B&Q / Boots etc.). Bottom line I don’t carry my wallet with all these individual cards on me anymore! 🙂
@Ermine, you will pay income tax an a pension annuity, but you will also pay it if you use drawdown.
@WinterMute — I’m the same. I haven’t routinely carried wallets/credit cards since at least 2020, and that includes for shopping, but just use the phone. It’s full of membership passes etc, crowdfunded company discount cards etc too.
I only take my wallet out if there’s likely to be something weird or if there’s any danger of running out of battery.
Since getting an Apple Watch a couple of years ago I often don’t even take my phone out! Never to the gym, for example, yet still do my shopping on the way home, listen to podcasts etc. It’s a small thing but I love going through the tube barriers with a wave of my arm.
I do agree there are security risks with using mobiles for payments — and I’ve included a couple of horror stories in the links this year — but I’m sceptical they’re that much worse than when we all used to carry £100 around in cash and a couple of credit cards in our pockets.
Different risks, of course. Possibly worse in a catastrophic outcome (access to all apps somehow) but probably a lot rarer than the petty crime of old.
@WinterMute
I have a standing order setup into my Prosper ISA – the money is not automatically invested, you have to manually do this once the money arrives in the account.
@Al Cam (#103)
As well as TA’s observation in #104 (i.e., with RPI protection, no need for an overseas annuity), I doubt that you could buy a well priced annuity overseas since, even if it was allowed*, the actuaries would struggle to work out your mortality (and would err on the side of caution). From a US perspective, CPI annuities are no longer available.
* I assume if you had an address and leave to remain, it might/would be possible.
Naeclue-does the tax regime for annuities differ from drawdown-something to do with repayment of capital when using an annuity causing a different tax regime?
xxd09
@xxdo9 – you’re thinking of a Purchase Life Annuity (PLA) – a small proportion of the income is treated as return of capital and isn’t taxed. A PLA is bought with funds that lie outside of a pension. A pension annuity on the other hand doesn’t benefit from the return of capital tax treatment.
@TI and WinterMute – yep, same. Switched to using phone. Just more convenient. There’s plenty you can do to protect yourself – security features that allow you to remotely lock the phone etc. There’s no need to link the phone to lootable accounts anyway.
The only time I’ve been the victim of fraud was after handing over a plastic card to pay for petrol. The bank automatically stopped payments when they saw I’d suddenly started an online gambling habit. Not really my style.
The broader point I’d like to make is that most tech can be used for good or ill. I witnessed friends and family in the generation above me effectively cut themselves off from the Internet because they didn’t understand it. And because they kept reading scare stories in the paper about all the scams.
Society kept digitising and they missed out on the good without realising they could protect themselves from the bad.
In each case, they were brought back into the fold by their kids buying them an ipad. You literally could have sold the thing using the tagline: “So easy, my mum can use it.”
There was one old boy who didn’t want any part of it. His “good old days” thinking was like a mental prison. But he did concede to an Amazon Echo because it told him the football scores like a fancy radio. His daughter installed it so he could call for help if he fell over and broke his hip.
@Alan S (#110), @TA (#104)
I suspect for most cases you are correct, however, we did have some interesting FX chatter previously at https://monevator.com/how-to-buy-index-linked-gilts/ about (amongst other things): pair wise currency hedging and regular overseas expenses.
@Alan S (#110), @TA (#104), @Naeclue (#102),
That you can no longer purchase an inflation linked annuity in the US might be a sign of things to come in the UK. In which case, time may be running out to get one here whilst they are also well priced!
FWIW, I happen to think think @Naeclues strategy is smart – especially if you also feel the markets are toppy!
@Alan S (#110), @TA (#104), @Naeclue (#102), @ermine (#105)
Fearing inflation once retired is entirely rational – especially if you have no (or somehow limited) inflation protection – which I suspect applies to a lot folks. FWIW, nominally (£ for £) I am well ahead of when I pulled the plug eight years ago and in real terms I am also ahead – but I was a bit behind when I started my DB pension a little over a year and a half ago. Having said that in real terms I am still down on my all time high that occurred about one and a half years after I pulled the plug. Lessons: a) nominals are often very misleading; and b) it can take a long time to recover from a bout of (uncompensated or even partially compensated) high inflation even with markets storming ahead.
Such great comments, thanks everyone – I do so love that the original post is just the starting point to infinity and beyond! Having strayed a squeak off point, wonder if I could follow an interesting tangent and suggest/request @TI a future piece on annuities as have noticed that rate movements are turning them into a thing again.
I have never shared the antipathy to annuities that, certainly in the past, has been so prevalent. I do have a small, level annuity that I bought, to be honest, because it was the most expedient course for the taxable part of a Section 32 pension that provided enhanced tax-free cash.
The only reason I haven’t bought a further annuity is that my existing additional secure income, DB and state pensions, appears to be sufficient for my needs. Also, as inflation and fiscal drag has brought me hovering just below the HRT threshold, I cannot afford to lock in further non-adjustable income.
I have always, however, since retiring, kept a keen eye on annuity rates. My go-to source is the ‘Best annuity rates’ page on the HL website. Especially interesting is the graph towards the bottom of the page which shows the rate movements. There has been a slight downturn in the last few weeks.
@DavidV,
You are clearly in a nice play, and I agree that over annuitizing is/can be wasteful – and not just wrt income tax.
OOI, had your small annuity been inflation linked would you now be a HRT payer?
@Al Cam (117)
“OOI, had your small annuity been inflation linked would you now be a HRT payer?”
No. The RPI-linked annuity rate at age 65 was about 62% of the level annuity rate in December 2018 when I received the quotes and submitted the application. The RPI index then was 285.6 and is now 37% higher at 390.9 (interestingly it dropped in Jan 2019). It would have needed an approximately 61% increase in RPI for crossover to occur and provide me a higher income now.
@2 more years – deffo need to write about annuities in 2025. The topic crops up so often now.
Thanks for clearing that tax point up
xxd09
@DavidV,
Thanks for additional details – I’m sure you get why I asked.
BTW, it is not unusual for any UK inflation index to go backwards in January wrt the previous December. I think it has something to do with “chaining”.
@Accumulator, thanks for your reply (which I’ve just seen)that’s good news as it’s the only plan I have (to hold and hold)
@Al Cam (#114)
Re: end of US CPI annuities
Interestingly, it would appear no-one actually knows for certain why they were withdrawn from sale. In his book (Safety First retirement) Pfau presents some data suggesting the uptake was very poor and concludes this was the reason, which seems plausible enough. The most recent FCA data (https://www.fca.org.uk/data/retirement-income-market-data-2023-24) suggests that, of annuities sold in the UK, 81% were level and the remaining 19% had some form of escalation (although there is insufficient information to determine exactly what type of escalation), so whether the subset of 8000ish escalation annuities with RPI protection sold over a 6 month period is sufficient to keep selling them is the question. It is interesting to note that the recent bout of high inflation has increased the fraction of annuities with an escalation from 13%-16% (pre-2021) to 19% (March 2024).
I also note that US TIPS (i.e., the equivalent of UK inflation linked gilts) only go up to 30 years maturity which means real liability matching for those less than about 70 years old at the time of annuity purchase would have come with some interest rate and/or inflation risks.
@ZXSpectrum48k (#91)
Re: Persistence of annuity rates
Some complexity involved, but, in the absence of deferred annuities (unless anyone knows different), one way to lock in the current RPI payout rates is to use inflation linked gilts to match the duration of the potential, future annuity.
Roughly speaking, the duration of an annuity is about half the life expectancy at purchase (e.g., see Figure 5 in my paper at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4957553 to get an idea of how approximate that is). For example, currently a UK 65yo male has a life expectancy of 20 years, i.e., to 85yo) and therefore the duration of an annuity bought at 65 is approximately 10 years.
So, at 55yo, a person intending to purchase an annuity at 65 would need to buy ILG that had a mean duration of 20 years (10+10). TR46 currently has a modified duration of just over 20 years, while a 50/50 combination of T41 (duration 16 years) and T51 (25 years) could also be used. These would then be held until the time an annuity is purchased at which point they would be sold.
If yields go down, annuity payout rates go down but gilt prices go up to compensate
If yields go up, annuity payout rates also go up, but gilt prices go down.
Real growth of about 1.5% per year (i.e., current yields) over 10 years would also add to the eventual income in this example.
@Alan S (#123):
I have wondered about their disappearance too. It could be down to numbers sold – in which case the future for inflation linked annuities IMO does not look too clever in the UK – see #114. One additional thing that occurred to me is how a US inflation linked annuity would interact with [increasing percentage, at least] RMD’s and in such a scenario a nominal annuity might possibly be a better choice to manage your income tax implications. But as you say, who knows.
I think it is pretty clear now that insurers do not use just (or even in some cases any/much) indexed gilts in the UK to back annuities but rather commercial debt, etc. I assume this may also be the case in the US. Such gilts are however still used as a proxy for annuity pricing.
@Alan S (#124):
Re: “Some complexity involved, but, in the absence of deferred annuities (unless anyone knows different), one way to lock in the current RPI payout rates is to use inflation linked gilts to match the duration of the potential, future annuity.”
I am far from expert, but IMO your suggestion must be worth further consideration. Personally, I am not sure about: a) accuracy/longevity of the indexed gilts proxy (see #125); b) pitfalls of duration matching vs cash flow matching, etc; c) availability of sufficient/suitable linkers; d) costs; e) wrappers, etc.
But for anyone in the market for todays annuity rates to be purchased later rather than currently, this seems like a potential pathway.
@Al Cam (125)
“One additional thing that occurred to me is how a US inflation linked annuity would interact with [increasing percentage, at least] RMD’s”
This confuses me. Once an annuity is bought, isn’t the capital involved no longer subject to RMDs as it is out of the tax shelter and the resulting income taxed as normal?
“I think it is pretty clear now that insurers do not use just (or even in some cases any/much) indexed gilts in the UK to back annuities but rather commercial debt”
I think this is well-established in the case of level annuities, but is it necessarily the case for the much smaller market of inflation-linked annuities? The risk for the insurer here is such that index-linked gilts may be the only suitable liability matching instrument.
@DavidV,
You may be correct about index linked annuities – I do not know. Also,
not sure if there are sufficient linkers to support your suggestion?
Re RMD’s – what you say is correct.
The point I was trying to make is that as you age the RMD percentage increases* and thus the taxable income forcibly drawn from the Pot may well also increase (assuming the Pot does not decline too much) – hence potentially reducing any headroom to the next tax band**. If your annuity is also increasing that will also be gobbling up more of that dwindling headroom as the years pass too***. Add to this that your spending may decrease as you age then ….
Hope that helps paint a clearer picture?
From what I can see, RMD’s do seem to drive quite a lot of draw down thinking in the US. Fortunately, to date at least, they are an additional complexity we just do not have to deal with in the UK.
*IIRC, RMD’s exceed 4% at age 75 and get to 50% if you were to reach the rather unlikely age of 120
**do not think frozen bands is a thing in the states yet, but ..
***notwithstanding that an indexed annuity would start with a lower payout
@Al Cam (128)
Okay, I understand what you are getting at now – sorry for being slow!
Looking at an RMD table expressed in percentage terms, I note that the year-on -year increase in RMD does not reach 1% until age 99. Therefore, if a US taxpayer also has an inflation-linked annuity as well as a drawdown pot, I would expect that inflation rather than ageing would be the dominant factor in eating up the headroom to the next tax band, as you suggest. So a level annuity would indeed provide much more certainty in managing this aspect.
However, your *** footnote concedes that the inflation-linked annuity would have a lower initial payout. My own experience with my level annuity has shown that nearly six years on I am still in the money even after going through a period of quite high inflation.
If tax band thresholds do increase in the US with inflation, the inflation linking of annuities and social security in itself is not an issue. Then the remaining issue does become increasing RMD with age, but this seems to be very gradual.
@DavidV,
You were not slow – it was just a bad explanation that I gave.
Only thing I can think to add is the somewhat unknown performance of the Pot – but a year-on-year gain (even after RMD’s) of say 25%+ (for an all S&P500 Pot) does not seem that unlikely to my eyes. But, the uncertainty is sizeable too. Tricky stuff that I am glad we do not have to deal with.
@AlanS. I agree with your broad approach but would differ on the details. I want to hedge my forward inflation liability, not the spot liability. So if I’m looking to buy an annuity in m years, with a life expectancy of d (duration terms), I would want something with a d-year, m-year forward exposure. A spot (m+d) duration Gilt will leave me with exposure that I don’t want for the next m years.
I can approximate this by selling m year duration Gilts and buying (m+d)-year duration Gilt, cash for cash. Better (given shorting linkers is not that easy), is to tweak the yield of each Gilt in my ladder (as these are my pillars for hedging) to see how the forward liability changes. This gives me a set of partial durations for each Gilt in the ladder.
Given I’m not actually planning to buy an annuity any time soon (next 20-25 years say) this is somewhat academic. Nonetheless, I am still accumulating linkers. I intend to immunize the bulk of my basic cashflow needs in the next 30 years, on an amortizing basis to significantly reduce my path dependence.
I’m still leaving the rest of the portfolio in other diversified assets to provide the necessary longevity protection but also since I think UK CPI +1-1.5% is simply not good enough to maintain standards of living at the 1% or better level, globally, over a multi-decade period. The 80% or so I intend to transfer to my children in the next 10-20 years (early 20s-to early 30s for them) also does not need a large weighting of UK linkers.
@Al Cam (#126), @DavidV (#127)
Sorry a bit of a long post…
Re: Underlying investments for RPI annuities.
I am not an actuary, but I suspect that different insurers use different risk free rates (and/or costs and mortality tables) for calculation regardless of the underlying investments. For example, at https://www.williamburrows.com/calculators/annuity-tables/ payout rates on 12 December for a single life, RPI linked annuity taken at 65yo ranged from 4.64% to 4.42% (i.e., about 5% of the value). There is an interesting document at https://www.actuaries.org.uk/system/files/field/document/Treatment%20of%20Index%20Linked%20liabilities.pdf that discusses index-linked liabilities.
Re: Duration of annuities
I can think of two methods of estimating the duration. The first is to use linker yields and a mortality table – this is what I did for the paper I linked earlier (albeit for the US case) and hence the approximation that the duration was roughly half the life expectancy with an internal uncertainty of about plus/minus 2 units at 65yo (with modified duration these are not years, but close enough) depending on the yield. Additional uncertainties in the value of the duration arise from matching the mortality tables, fees, and discount rates used. For those with an academic interest in such things, there is a very nice tool for calculating actuarially fair payout rates (but not duration) for a single life annuity at https://lategenxer.streamlit.app/Annuity_Valuator (at 65, it currently gives payouts of 7.3% for level, and 5.1% for RPI compared to 7.2% and 4.6% at the William Burrows site).
The second method involves looking at how the annuity payout rate changes with assumed yield, since modified duration is (change in price) / (change in yield). I’ve not done systematic comparisons with actual data using this method, but a few test cases indicate some level of consistency between the values derived from the two methods.
@ZxSpectrum48k (#131)
That’s an interesting approach and only slightly different to the one I would use if not already retired – although since the trustees of my DB pension would have gradually been accruing linkers on my behalf in the run up to my retirement, effectively I did do something similar (albeit without any effort on my part). I think a single inflation linked gilt at m+d will hedge inflation risk as well as linkers are able to, but only partially hedge interest rate risk – the latter is reduced only in the case of parallel changes in yield (i.e., where the whole yield curve goes up or down by the same amount). At least two gilts are required to partially hedge non-parallel changes in yield (for those interested in the nuts and bolts of the analogous problem of covering the gap in TIPS maturities in a collapsing TIPS ladder, there’s a long discussion at https://www.bogleheads.org/forum/viewtopic.php?t=432366,).
In the event insurers actually constructed collapsing ladders of inflation linked gilts to cover their liabilities, there would be some interest rate risk associated with the gaps in maturities, particularly after about 2056 where there are gaps of between 3 and 5 years. Anyone looking at the ‘cash flow’ tab on the tool at https://lategenxer.streamlit.app/Gilt_Ladder will see long periods where in the absence of redemptions, only the coupons are guaranteed to be inflation linked (the majority of the income then comes from nominal cash). The fact that the UK offers linkers to nearly 50 years (compared to 30 years for the US) does mean that insurers (and DIY investors) can cover lifetimes to beyond 100yo for those retiring at 65 or earlier.
@Alan S (132)
I was interested to see how close the commercially obtainable rates for a level annuity are to the actuarily fair values calculated by the linked tool. This is in contrast to the RPI-linked annuity where it seems that either the insurers have to build in a large safety margin or the sales volume is so low there is no efficiency of scale.
@Alan S (#132)
Thanks for the additional details.
I cannot say that I have understood it all or even most of it, but it will give me something to do if I get bored over the festive season. Thanks not so secret Santa!
I have learnt from looking into DB schemes – the devil really is in the details. And, as unexpected things can (and do) happen it is always worth digging under the surface a bit. Having said that, it is clear that implementation details vary between providers (of different DB schemes and different annuities) and these often matter too. On that theme, my own DB inflation indexation is a bit of a mongrel* with multiple tranches of service, and whilst most of these (but not all of them) use RPI, there are also caps, collars, and even straight fixed indexation too – and not just for my GMP portion. The upshot of which is, surprise, surprise : I ‘like’ low inflation more than higher inflation; as in the former scenario I can win and in the latter I lose out!
FWIW, about a decade ago I did a comparison of my indexation mongrel vs LPI using RPI (0, 5%) and it did better (more accurately I should say: less badly) against UK RPI back to 1915; I should probably update that comparison at some point too, given recent history. But, I suspect the overall outcome will not be that different – but the year-to-year details might add a bit of variance.
*approx. tops out at 2%
My footnote at #134 should say:
“*approx. tops out at 2%”
Not sure what happened, but so be it
Re #134 & #135
Well it happened again. Perhaps this will work LPI(greater than 2%, less than 5%)
Curious indeed
@DavidV (#133)
Consistent with results we have seen in earlier chats on linked annuities!
@Al Cam — I think you’re using symbols that the comment editor is assuming is mark-up code for HTML.
@DavidV (#133) @AlCam (137)
I think that the difference between level and RPI is in the nature of the underlying investments. The actuarially fair calculator assumes gilt yields for the underlying investment in both cases. However, insurance companies use a variety of corporate bonds (and other instruments) for nominal annuities (and can offset against nominal insurance), so will have higher underlying yields all of which can be used to offset costs and generate a profit. There are few inflation linked corporate bonds (although floating-rate bonds might come close) , so the underlying yield will be closer to that of linkers and therefore costs and profit have to be taken out of the payout rate. That said, 4.6% for the single life annuity at 65yo is still better than a collapsing linker ladder of either 30 years (4.1%) or 35 years (3.7%) with the breakeven length of ladder of somewhere between 25 and 26 years (i.e., to about 90yo).
@TI (#138):
Thanks. Makes sense.
@Alan S (#139):
Thanks for the calcs and proposed explanation. IMO, it seems ever clearer that linkers are largely a proxy and that insurers are probably using other things* to “manufacture” their indexed Annuities. In some senses it has to be this way otherwise what is their business actually based upon, i.e. selling folks things they can buy themselves and taking a profit too is IMO not sustainable long term. Furthermore, my reading of the actuaries paper: a) does not explicitly preclude anything from being used; and b) does not rule out tracking vs nominals with assumed rates of inflation either.
P.S. the bogleheads link you provided at #132 is indeed “long”. To my eyes it reads more like a journal about a journey of discovery – which is not entirely clear from the outset. So if you do read it, the first set of apparent conclusions are far from the end of the story – bit like some sets of @Monevator comments too.
*over and above linkers with risk pooling/mortality credits – although break-even does seem to be beyond life expectancy, which IMO could be explained by profits/prudence/etc.
@Alan S (139) @Al Cam (140)
Given that the ONS Life Expectancy Calculator currently gives a 20-year median life expectancy for a 65-year-old male, the collapsing linker ladder at first sight seems to provide better value. However, when you include the the longevity protection from the RPI-linked annuity, this IMO seems a comparatively good deal.
@Valiant – thank you for sharing your story. It was really helpful especially with the examples you shared.
You mentioned about how you want to safeguard your wife and children incase anything happens to you. Can you please consider sharing what you have done on the IHT side?
Its amazing how that side is fully of jargon and complexity which for most of us is a wasted effort and worry. Different trusts and gifting when most of us are in very similar positions. Just as you and Larz have simplified investing to trackers can you consider sharing your thoughts on the IHT side?
Thank you very much.
I wanted to add a little of my experience that may be helpful for people considering Trading 212, Prosper, and InvestEngine as alternatives.
For T212, they no longer appear to provide contract notes for specific trades. Instead you get a more generic account statement that will cover all your accounts in one and you have to sift through to find the specific trade you want. For many that may be fine, but for anyone that likes having contract notes specific to individual trades it may be useful to note.
Prosper and IE seem to have hit and miss customer service. Prosper often will not action requests and require follow up communication to get things done, in a way I’ve not had with using Vanguard and HL, who generally do things first time if they can be done. IE seem to have trouble on the more niche elements of the service, their customer service have had difficulty answering questions on segregated accounts, where a clear question gets answers that don’t apply or get contradicted by other agents.
For the vast majority I’m sure all will be fine, and indeed for me they’ve all generally been good, I just thought it might be helpful if anyone was considering opening accounts.
@Hapshade – absolutely concur with you on InvestEngine even though some on here somehow do appear to like them. In my expereince can only be asking them questions such as “How do I open an account?” or more likely “What is your name?” methinks.
I’d looked at them – just for smaller amount <85K as pretty risky for larger amounts with no FSCS. Last time I looked they only had about 17 staff members which was quite a shock (which might amount to just one main office) and always made huge loss since starting some 9/10 years ago I believe. But when I asked questions a few times about various things on their online chat/messaging only service, their staff seem incompetent and answer a different question, answer it wrongly/inaccurately or just fob you off with a stock non-answer. For instance I asked questions about THEIR OWN service and got told by one of them to go and do my own due diligence?? Thought that's what I was doing in asking them about it – they should know what they do/provide but obviously didn't. They seem unprofessional/incapable/no attention and didn't feel I could trust them. I also did read reviews on them and wasn't happy at that time as others saying the same thing as well as getting money out was sometimes a problem and took weeks for some but I never invested so don't know on that score. However reviews seem to have improved since but still some have same customer support issues/fob off issues.
I've thought about T212/Prosper and read reviews on them but I don't have any direct experience of them although they both seem to have some issues and support very variable – in fact lets say they are very DIY and if you expect even the basic support of an iWeb or a pretty variable Vanguard support depending who you get and what you ask (with poor transfers/many long delays in/out with them I found) – you won't likely get any. Definitely not worth getting in over the FSCS with these as more likely to go t*ts up than the mainstream long established.
But there again even Fidelity who I thought would be decent and reliable customer service as classed as Tier 1 broker, told me just before Christmas, whenI rang to ask if they did partial ISA transfers in, a guy told me they did. Therefore over Christmas I opened an account which was done and started the online transfer. Filled in all details but the form had no box to put amount in or box to tick to say "partial transfer required" so couldn't complete. Today rang them only to be told -"We don't do partial transfers at all – in or out" and which was totally wrong with what I was told before I opened the bloody account – and which is now quite useless to me as don't want to transfer in full and in future may want a partial transfer out and that's not possible they said (except in the most exceptional of circumstances which must be agreed and signed off by the Directors' – so can't see that happening either). So their customer service seems shoddy at best – I mean shouldn't their staff know an answer to such a simple straight forward question without getting it wrong. Why does all customer service these days seem to become more enshittified? I thought these guys were specialists in their field and I wasn't exactly asking how far is it around the milky way and back was I? Clueless. Doesn't make you think your hard earned is safe with many of them does it?
‘Vanguard’s £48 minimum means the platform is now only worth considering once you’ve amassed at least £19,200 in an ISA / GIA or £13,700 in a SIPP.’ Sorry, what’s the calculation here?
@j p woods (145)
TA answered this question earlier, at least for the ISA/GIA, in #30.
@AS
I have also been told by Fidelity that they do not do partial transfers at all – in or out.
iWeb Share Dealing and Interactive Brokers also do not do partial transfers.
I’ll keep looking for brokers that would allow partial transfers, so that I can split my ISA into parts below £85k. Sigh…
@Vortexgently. Interactive Investor, HL and AJ Bell definitely do partial transfers if that’s any help
@Vortexgently
iWeb do allow partial transfers, but you can’t do them electronically, you have to specify them on the paper form they can send you. At least that’s what they’ve told me when discussing a partial transfer in from HL.
I have had no difficulty making partial transfers out of iWeb.
Vanguard are hopeless in any sort of transfer, apart from cash in or out, in my experience. At least they apologise.
Although iWeb is often criticised for clunkiness, I find their site more intuitive than C Stanley, Vanguard or x-o.