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Vanguard readying its Personal Pension SIPP

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Given how often we’ve been labelled a front for Vanguard – in reality it’s never paid us a penny to directly1 , more’s the pity – I was reluctant to post a lightweight update on its Vanguard Personal Pension service.

But so many of you alerted me to the latest smoke signals, how could I not?

It’s clear that a pension with the low-cost juggernaut is something many Monevator readers are waiting for.

“Whadayoogonnadoaboutit?” I shrug, like a New York mobster in a mid-70s movie.

The missing link

A pension product was conspicuously absent at the launch of Vanguard’s Personal Investor service in the UK last year.

However it seems Vanguard has been beavering away since then.

The latest:

  • Vanguard has obtained necessary permissions from its regulator, the FCA.
  • The Vanguard Personal Pension is registered with HMRC.
  • The product will be structured as a low-cost SIPP2.
  • There’s still no launch date. We can expect an announcement in 2019.
  • The service will handle lump sum additions, regular contributions, and pension transfers.
  • De-accumulators will have the option of flexi-access drawdown from launch.
  • All Vanguard UK’s active and passive funds and ETFs will be available. (I’d expect people to be nudged towards its Target Retirement Funds.)
  • Vanguard says its pension will be low-cost and easy to use.
  • A dedicated pensions team has been recruited.

Pension perils

Vanguard admits it has taken longer than it hoped to get its pension up-and-running, though it hasn’t explained why.

I’m no expert on launching financial products. I’d guess though it comes down to the regulatory environment and a fear of mis-selling.

[Update: It may be due to software development delays. See comments.]

Because Vanguard will only be offering its own funds through its platform, some critics might argue that savers aren’t being given sufficient choice.

I don’t agree with that – at least not if they’re investing in broad-based tracker funds – but I do have sympathy with the view that putting all your eggs in one basket is sub-optimal in terms of total risk management.

And clearly that’s what will happen with a pension provider that only offers its own funds (a situation that won’t be unique to Vanguard, anyway).

The chances of Vanguard getting into trouble to the extent that your pension is threatened (remember, trouble might include fraud or technical disasters) seems to me infinitesimal.

But the impact on an individual from such a tiny probability event could be huge.

For me, that equation always suggests diversifying between at least two providers.

Of course it’s not a fatal issue. You’re allowed to have more than one pension provider, so such diversification is easily achieved. And as I say this risk is certainly not unique to Vanguard.

Even a major ‘open’ pension platform like Hargreaves Lansdown’s could equally (that is very, very unlikely) suffer some sort of permanent compromise. Brokers have failed. And in the opaque world of pensions there are already plenty of people banking their hassle-free retirement on the health of one company – not least with final salary pensions.

There are of course safeguards against pension failure, too. My point is after a lifetime of saving and with no time to make good any setbacks, you can’t afford to take chances. I’d therefore reduce the potential for catastrophic risks where possible.

A cheap platform is only half the battle

For a clue to the sort of thinking that Vanguard may have been grappling with, see this article from The Telegraph.

A 60-year old with a £420,000 pension pot says he has been advised to split it between two Vanguard funds – a Vanguard LifeStrategy 80 fund and a Lifestrategy 40 fund.

For this advice he’s charged £4,500 – to the apparent consternation of the experts the newspaper contacted.

To summarize, the experts want the money spread across 20-30 funds, including active funds and absolute return funds and “maybe gold”.

They say they’d charge much less than £4,500 for the upfront advice – but they’d charge 0.4% to 0.75% for ongoing advice.

True, £4,500 seems a lot to say “plonk it all in a couple of tracker funds”.3

We’ve often said much the same, for free!

But the average person hasn’t got the inclination to read Monevator for a year to learn why such apparently simple advice is probably the best way forward.

And for that reason, I’m not so sure that paying an extra £2,500 upfront to get the money into these super low-cost Vanguard funds is such a terrible deal.

I’m reminded of an old joke about a plumber who bangs a boiler once with a hammer to fix it and then writes an invoice for £250. When confronted that this was poor value for money, the plumber replies that the charge is for knowing where to hit.

Indeed I’d be prepared to bet, Warren Buffett-style, that a portfolio of the two LifeStrategy funds would beat most handpicked hodgepodges of expensive active funds that amounted to a similar risk profile – not least thanks to lower costs.

But sadly, the IFA who recommended the LifeStrategy funds seems to snatch defeat from the jaws of victory – at least as best I can tell from the article.

He or she will charge an ongoing 1% a year, the article implies, for presumably telling the client not to touch anything. (The LifeStrategy funds automatically re-balance).

If so that’s a travesty, which will undo all the good work of the initial selection!

Anyway, this is the quagmire that Vanguard is tiptoeing towards.

I have no doubt the firm will produce a simple and low-cost solution. But tools are only part of the picture. Education is all-important – and one of the hardest lessons for investors is there is no perfect strategy. Everything comes with compromises.

We’ll keep doing our bit, but I suspect it will be many years before self-directed pension provision is a solved problem in the UK.

  • Have a play with Vanguard’s simple Pension Calculator to see if you’re saving enough.
  1. It may have bought Google display ads at some point, not sure. []
  2. Self-invested personal pension []
  3. The LifeStrategy funds are actually funds of funds, albeit all Vanguard funds. []

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{ 68 comments… add one }
  • 1 Bill Horton December 18, 2018, 2:28 pm
  • 2 The Investor December 18, 2018, 3:12 pm

    @Bill — Good spot, thanks for that. For those who don’t want to click through:

    Vanguard has been developing a pension wrapper using underlying FNZ technology, but this pension product has been delayed. New Model Adviser® understands this delay has been because FNZ has not yet been able to produce a product exactly how Vanguard wanted.

    FNZ is a tech/software/white label systems provider to the financial services industry. More here:

    https://www.fnz.com/about

  • 3 Snowman December 18, 2018, 3:23 pm

    It says in the cost and charges section of ‘how we worked this out’ in the pensions calculator

    “We’ve built in the platform charge of 0.15%pa and the average investment fund charge of 0.2%pa, so these are deducted from your estimated pension pot.”

    Is that a clue that the platform charge is going to be 0.15%pa for the SIPP, or more likely is that wishful thinking on my part and have they just defaulted to the ISA/trading account platform charge for the time being?

  • 4 John Tickner December 18, 2018, 5:39 pm

    A concern/query for me is that FAD will be available immediately with no mention of UFPLS.

    UFPLS is what I want to see to avoid going into income drawdown.

  • 5 dearieme December 18, 2018, 5:55 pm

    Would any of the mainstream SIPP providers let me deal in Australian shares? Or any SIPP provider at all?

    If I can’t find that sort of specialist opportunity maybe I should just opt for a Vanguard fund on a Vanguard platform. I don’t really care about beating or not beating the market. A low cost way, however, of diversifying widely could be pretty attractive.

    I do hope that Vanguard offer some sort of cash back for transfers in.

  • 6 Tim December 18, 2018, 6:42 pm

    @dearieme I’d be very surprised if Vanguard ever offered cashbacks on transfers in. The likes of HL can afford to do them because those platforms charge a lot and they’ll expect to make the cashback payment (and then some more) back in a few years. Vanguard don’t gouge their members like that so far as I can tell, so there’s less incentive to need to lure them in.

    In fact until quite recently Vanguard used to charge a very small dilution levy on transfers in… that was sort of the opposite of a cashback for purchasers… it was a small fee you had to pay on Vanguard funds which was distributed to the other existing fund holders, so kind of a cashback for them!. Vanguard got rid of it because noone understood it and everyone thought it was just an oldschool initial charge.

  • 7 Ben December 18, 2018, 7:01 pm

    “Given how often we’ve been labelled a front for Vanguard.”

    Peoples front of Vanguard or Vanguard People’s front?

  • 8 Gaz December 18, 2018, 8:22 pm

    I’ve got an ISA with Vanguard invested in some Lifestrategy funds. What would be the advantages/disadvantages of opening a SIPP when they become available?

  • 9 Neverland December 18, 2018, 10:23 pm

    If it charges a % of funds under management and thats not capped how is it cheap?

    0.15% of 500k = £750 p.a. platform charges

    Iweb are £180 p.a. platform charges and have a whole range including Vanguard, so nearly £50 per month cheaper…

  • 10 Chris December 19, 2018, 12:16 am

    Same comment as the above. Alliance Trust has charged me about £250 inc VAT to manage this sort of level of SIPP investment in Vanguard Lifestrategy funds over the last year. Vanguard would have to charge 0.05% to be competitive.

  • 11 John M December 19, 2018, 7:41 am

    Vanguard have only ever been a cheap platform for small to medium size portfolios.

    Once you get over around £80k, maybe even less, fixed-fee brokers are the way forward. Monevator’s cheap broker page are pretty clear about this.

    However, Vanguard have historically only charged a fee on the first £250k of investments (so a maximum fee of £375) – not amazingly competitive for a large portfolio but not a disaster either.

  • 12 William December 19, 2018, 7:54 am

    @Chris
    Vanguard could charge the 0.15% platform fee across all their accounts (ISA, SIPP, General Account) capped at £375 per annum. That would be competitive.

  • 13 Vanguardfan December 19, 2018, 10:03 am

    Clearly, Vanguard’s offer is not going to be attractive to people with large portfolios who are best suited to flat fee brokers (which conversely are very expensive for small portfolios).
    For someone starting out, however, Vanguard are most definitely competitive, indeed compelling, at only 0.15%, when market leaders are charging more than double that. And really, beginners are the place where there is need and potential growth – given the dismal numbers of people investing in either ISAs or personal pensions in the UK.
    So, not for me, I can find cheaper elsewhere, but that doesn’t make it a bad offer. They need to get the SIPP sorted though! I wonder if they will also offer to employers in due course?

  • 14 Dazzle December 19, 2018, 10:34 am

    Interesting assumption built into the Vanguard calculator.
    They assume you’ll take 25% as tax free cash and the remainder as pension income at 4% but no indication of what you’ll do with the 25%.
    I was planning to use the 25% as part of my funding

  • 15 Mark Meldon December 19, 2018, 11:52 am

    Whilst I welcome another entrant into the pensions area, this Vanguard offering isn’t really a ‘SIPP’, as it only offers ‘internal’ funds. That’s not really anything different – setting aside charges for a moment – that the likes of Aviva, AEGON, Royal London, et.al offer. Indeed, I’d say that these product providers have superior offerings in many ways as you can access a much wider range of investment options through their standard ‘wrapper’, albeit not as cheaply as Vanguard.

    But, what will investors do when they have to tackle the ‘nastiest, most difficult, problem in all of personal finance’ – flexi-access drawdown? Unless you hire someone like me, you are on your own and, with the best will in the world, it’s really very hard to arrive at the right retirement income decisions on your own.

    There are no ‘safe withdrawal rates’, period, market volatility can be a killer on the cusp of using your ‘money purchase’ pension. For instance, a ‘proper deposit-only SIPP’ – holding pension cash accounts and NS&I products – would only cost about £250 (+VAT) to own per annum, and holding these things in the run-up to retirement is generally accepted to be fairly sensible (well, I think so, at least).

    And what about annuities? Here you do need qualified help, I think, as the annuity market is quite nuanced in many ways and an experienced IFA can be an invaluable guide.

    Good luck to Vanguard, but we shall see how they get on.

  • 16 dearieme December 19, 2018, 1:34 pm

    “There are no ‘safe withdrawal rates’, period”: well now, Mr Meldon, I have read widely on this topic on the internet, and reflected on what I have read. Accordingly I’d say you are dead right.

    The trouble with equity investing is that (i) long term it is usually wise to partake, but (ii) it is plagued by radical uncertainty, while (iii) anyone whose intuitions have been formed during a period of loose money may well prove to be hopelessly optimistic about what he can reasonably expect in terms of average returns and volatility under different circumstances , though (iv) he’ll only learn that in retrospect.

  • 17 Mark Meldon December 19, 2018, 1:46 pm

    @ dearieme

    Agreed! And then, why are 97% of annuities bought fixed in payment? Because % escalation or RPI-linking is very expensive, that’s why. Most people will live longer than they think (that’s almost always true) and the old chap in the motability scooter you pass every morning was just like you a few short years ago.

    As I have said before, a ‘blend’ of guaranteed and drawdown income in retirement can be a sensible compromise, but I genuinely fear that the UK will have it’s own ‘yellow jacket’ moment when citizens realise that they face poverty in retirement as ‘final salary’ schemes disappear and markets ‘let them down’.

    Best,

  • 18 Mark Meldon December 19, 2018, 1:54 pm

    People do the strangest things with their ‘SIPPs’, you know! I met a chap back in the heatwave who thought he was ‘fully diversified’ in his (entirely self-managed) SIPP because all of it, absolutely all of it, was in a FT-SE 250 index fund. At the time, the index was standing at around 21,110 compared to around 17,500 today.

    When I pointed out the complete lack of diversification in his pension fund, he just kind of blinked at me – ‘I have 250 shares in my fund, so I’m fully diversified’ sort of comment. He’s about to ‘retire’ too and wants a drawdown of around 9.25% to meet his income ‘wants’ (‘needs’ are an entirely different thing) – a profound disaster in the making.

    Now, if only the 1980s Thatcher government hadn’t introduced ‘payment holiday’s’ for defined benefit schemes, we might not be in the pension mess we are in!

  • 19 The Rhino December 19, 2018, 2:15 pm

    @MarkMeldon – have you considered piecing your posts/comments/associated knowledge into a book outlining sensible retirement strategies, and a bonus chapter on how to find a (really) reputable IFA?

    I have a feeling it would be pretty good?

  • 20 Mark Meldon December 19, 2018, 2:53 pm

    @The Rhino.

    You are very kind, but I’m not really in a position to write a book (mind you, I do know a few authors/writers – that’s a thought). I don’t claim (much) originality when I comment here, as I rely on various sources when doing so, which we all do, I suppose.

    However, I’m really worried about a ‘flexi-access drawdown meltdown’. This is happening today and is likely to be a serious problem for thousands of people in the not-too-distant future. Why do I say that?

    Well, I regularly meet people who have been conditioned to think annuities are a ‘rip-off’ via antagonistic media articles and someone’s ‘professional’ opining, perhaps.

    I trust, annuities are pretty good value for money, on a risk-adjusted basis, compared with drawdown. In addition, who wants to be worried about the stock and bond markets in their dotage?

    Sadly, I think one very real reason that annuities have lost popularity (although sales are rising) is to do with IFA’s ‘human nature’! What I mean is, say Mr Rhino had £150,000 in a DC pension and wanted to use it to produce a tax-free lump-sum and an income. He can take the 25% PCLS – that’s £37,500, of course – a plonk it in Premium Bonds or the suchlike. The remaining £112,500 could be used to purchase a guaranteed income for life in the form of a conventional annuity.

    Or, he could use ‘drawdown’ – but he really shouldn’t on such a small fund. Let’s set aside, for now, the merits of either approach.

    If Mr Rhino wanted me to research the open market option for annuities and to make a formal recommendation, I need to charge about £1,125-1,650, depending on the amount of time involved and whether or not he qualifies for any kind of health/lifestyle enhancement – underwritten annuities, for which about 40% of us might qualify, take up a lot more time to sort out. So that’s something like 1%-1.45% of the fund.

    But, if I were so persuaded (which I think unlikely), I could instead recommend some fiendishly complicated drawdown ‘strategy’ using a SIPP or ‘insured’ personal pension. This is much more involved and take a great deal more time.

    So, my fee is likely to be double that of arranging an annuity – say £2,000-3,000 – and there are ongoing costs to ‘manage’ (as if I could do that!) the fund. that’s going to cost, oh, I don’t know, about £500 a year on top of the product/fund fees.

    If I sell you an (excellent) annuity, I make, say, £1,200. If I sell you a super-duper drawdown plan. and you live 10 years, I make £2,500 up-front + £5,000 = £7,500.

    Surely there is a big conflict here? What will Vanguard do? Tell the truth or refer to an IFA?

    Don’t get me wrong, I have about 25 clients in drawdown at the moment, nearly all with investment trust-based SIPPs, but they have funds of between £350,000 and £1,000,000, AND PLENTY OF OTHER GUARANTEED INCOME. Sure, they pay me, on average about £800 a year in fees (depending on whether anything needs to be done), but that’s OK on big funds, I think.

    But annuities are a fee ‘one hit wonder’, so can you see my point about ‘human nature’?

  • 21 The Rhino December 19, 2018, 3:15 pm

    Yes for sure, I think its very time consuming and possibly not hugely attractive to most potential authors.

    I hope I have taken on board the general point of not dismissing annuities out of hand.

    I often wondered why, rather than seemingly disappearing altogether, DB pensions didn’t just get a fair bit less generous but otherwise carry on as being the defacto pension of choice. They’re still a really good idea, they just weren’t priced correctly.

  • 22 The Rhino December 19, 2018, 3:55 pm

    PS and yes I definitely take your point re: IFA incentivisation

  • 23 Jonathan December 19, 2018, 5:30 pm

    Please do keep us updated on the likely launch date of the Vanguard SIPP (assuming you get alerted): it is something of immediate personal interest to me at least.

    My wife handed in her notice today to take early retirement at the end of March, so that she can start drawing down her DC pension with a new tax year’s personal allowance. The plan is to take out as much as possible free of tax up to the point where the first of her various bits of DB pension from previous jobs kick in. Since whatever SIPP provider we use, we are likely to choose LifeStrategy or similar funds for investments we would be very interested to see if Vanguard’s own offer was advantageous.

    Incidentally investment ideas for someone drawing down a SIPP which starts 100% cash might be a future column idea. I get the impression that a lot of employers with DC pension schemes do not have their own draw down options, which means they have to be transferred out as a cash sum. What is the best investment mix when you know planned withdrawals mean investment periods range from extremely short to long enough for equity volatility to be less of a concern?

  • 24 ianh December 19, 2018, 7:39 pm

    @Rhino @Mark Meldon
    Interesting to see discussions of annuities cropping up on monevator quite a lot recently. I went to the length of reading Moshe Milevsky’s book Life Annuities: An Optimal Product for Retirement Income a few years ago. Surprisingly good read – though it soon becomes harder going as it advances through the subject. Just noted it is 99p on kindle at the mo.

    I’ve not have retained much since I read it – the main theme I recall is when looked at carefully a plain vanilla annuity is always best value as you pay through the nose for any features like index linking, though it seems people are willing to pay for the additional comfort.

  • 25 dearieme December 19, 2018, 9:11 pm

    I follow the MSE forum on pensions. It’s swarming with people who want to transfer out of DB pensions because, amongst other reasons, they want to leave money in personal pensions for the children to inherit. What will they say when Mr Corbyn – or some Conservative – decides that the IHT exemption for pensions will be scrapped? Indeed, the income tax exemption for pensions held by someone who dies before age 75 will surely be scrapped too, I’d think.

    The other reasons all too often include their confidence that they “should” earn (let us say) 6% – 7% above inflation on their investments. Who will they blame when a stock market crash halves – or worse – their capital? Bankers, IFAs, Donald Trump, Vladimir Putin, Brexit, the Jews, the Chinese, and sundry other bogeymen of their fevered imaginations. Anyone but themselves.

  • 26 ZXSpectrum48k December 19, 2018, 9:29 pm

    I’m still trying to work out why Mark Meldon thinks flexi-access drawdown is the ‘nastiest, most difficult, problem in all of personal finance’? That seems a pretty definitive statement. Moreover, if it’s so fiendishly difficult, how will an IFA improve the situation?

    I agree with him though on Vanguard. I can’t see why you’d want to tie yourself to a single provider of funds, especially when it isn’t even that cheap.

  • 27 Grislybear December 19, 2018, 10:02 pm

    @Mark Meldon, more real life situations from your work shared on here. Excellent stuff keep them coming. I agree with you on annuties especially the rpi linked type, IMO they offer good value for older individuals when they need the security.

  • 28 Mark Meldon December 19, 2018, 10:30 pm

    I describe ‘FAD’ as ‘the nastiest, most difficult problem in all of personal finance’ because, in truth, it is! Most ‘other stuff’ to do with personal finance is pretty straightforward in comparison.

    You have dependents? Then buy life insurance.
    You won’t get paid if you are seriously unwell for long? Then buy income protection insurance.
    You might need financial help if you suffered a devastating illness? Then buy critical illness insurance.
    Have a lot of cash to invest? Then buy some investments – ISAs, pension plans, mutual funds, investment bonds.
    Need a home? Then buy a house, probably with a mortgage.

    Buy when you are of mature years, and especially when you have no ‘final salary’ pension apart from the ‘just about keeping alive’ basic state pension, but have either a ‘money purchase’ employer-sponsored pension scheme or private pension? Then you are at the mercy of ‘Mr Market’. If Mr Market is in a bad mood when you retire, and he sure is grumpy today, you will complain about ‘unfairness’ when looking at your best friend with his index-linked guaranteed income for life. Yes, you will!

    What do you do? You read about ‘systematic withdrawal risks’, have to delve into arcane charging structures, assemble an asset allocation strategy, assess your attitude to risk and capacity for loss, chose a product wrapper, and end up completely compromising your security in later years if you get it wrong or Mr Market really throws his toys out of the pram!

    Or, you could bail out of all of these uncertainties an opt, in full or in part, for an annuity.

    Or, a mixture of the two, if you have enough money in your ‘pension’ plan(s).

    Which you probably wont, because you had your kids in your 30s, still have a mortgage, two cars to run, a child or two at Uni, food to buy, etc.

    Then suddenly you look in the mirror and ask, as we all do, ‘where did those years go?’ and panic when you see that you only have two hundred grand in your pension and realise, with utter disbelief and horror, that it won’t last long at ‘4% safe withdrawal rate’ if Mr Market goes looking for bears in the wood for ten years and your fund falls by 50%. Sure, you will likely survive, but it won’t be much fun – I know that this is true.

    Or you can hire an experienced IFA who can help you shoulder this burden – but he or she can’t give you a guarantee of success (unless you annuitise).

    When your mate down the pub moans about paying higher rates of tax in retirement, you could hit him, you really could! He doesn’t have to worry about money, unlike you, because he worked for ‘The Firm’ who are now paying him 2/3 of his ‘final salary’, entirely a problem for the pension scheme trustees, and not for him.

    You? You are still worried about the Fed raising interest rates, the oil price, guessing about the future rates of inflation, rebalancing your fund, paying fees to product providers and your IFA. What is the point of that when you are 80?

    Or you could annuitise, in full or in part.

    The inheritance thing? A sideshow for the rich, because you’ll need every penny yourself and then be looking at equity release with a weary eye.

    Can you see what I mean when I say it’s a tricky thing, flexi-access drawdown?

  • 29 The Rhino December 19, 2018, 10:31 pm

    Isn’t it just a famous (pithy) quote about decumulation in general? William Sharpe?

  • 30 Pinch December 19, 2018, 10:39 pm

    @Jonathan #23
    You can keep yourself very easily updated on the progress of Vanguard’s SIPP.

    Go to https://www.vanguardinvestor.co.uk/investing-explained/investment-account-types

    Enter your name and email address on the website above, around halfway down, and they will email you when there are changes/updates.

  • 31 The Rhino December 19, 2018, 10:41 pm

    Haha, yes I can.

    (But remember most people around here are rich as hell and as sharp as tacks )

  • 32 The Investor December 19, 2018, 11:52 pm

    Also, as Mark knows well and alludes to but doesn’t baldly state: You don’t know when you’ll die.

    These Yale fund college endowment fund guys have it *easy*… 😉

    (Mark — Sounds like we have the makings of another great MM article here if you’re game? 🙂 )

  • 33 The Borderer December 20, 2018, 1:35 am

    Annuities may have a place when you get older or start to lose you’re marbles, as Mark says, do you need the hassle when your 80?

    But I’m getting the impression that the general thrust of Mark’s argument seems to be that an annuity is a good idea because the alternatives are too hard. I can’t buy into that for most Monevator readers, including myself.

    That said, I’ve recently found myself walking up stairs and suddenly thinking “now what was I going up here for?”

    Mmm, maybe I need to re-think annuities…?

  • 34 Neverland December 20, 2018, 8:16 am

    The idea that an annuity or a defined benefit pension is an immutable guarantee just isn’t true

    Plenty of big defined benefit schemes have ended up in the PPF

    One change on this page from an act of parliament and your insurance company annuity isn’t fully covered any more: https://www.fscs.org.uk/what-we-cover/

    IFAs provide a fig leaf of perceived uncertainty in the nudist camp of real life

  • 35 Mark Meldon December 20, 2018, 10:11 am

    To be clear, I never said annuities are the be all and end all, but they are too often just dismissed out of hand by ‘those who know better’. Sure, FAD can be a very successful thing (if you have enough money) but is, undeniably, a much more complicated thing. Plus we have more and more DC accumulators being affected by the Lifetime Allowance as the way this is worked is skewed in favour of DB (20x pension, etc.).

    The PPF gets a bad rap, but I have two clients (Carillion) who are getting ‘compensation’ of 90% of something, rather than 100% of nothing. OK, the ‘compensation’ is generally fixed and less attractive than the former ‘pension promise’, but will do.

    I do believe that, ideally, people should have a mixture of secure income and non-guaranteed investments to draw from in retirement, but my clients who have ended up with big DB pensions are a happy bunch. That’s because they were in a DB scheme for, say, 20 years, then the scheme(s) were closed and they then had a DC scheme. A good mixture.

    The death benefit thing can be resolved, if people really want this, by using a whole of life assurance (they never cough up though!).

  • 36 Jonathan December 20, 2018, 11:49 am

    Thanks Pinch #30, now done that. This blog is such a useful community.

  • 37 The Details Man December 20, 2018, 2:49 pm

    I’m sorry to be one of those – but “what Mark Meldon said”. Thank you for sharing!

    Now, I have a suspicion there might be something on the PPF on this site very soon…

    For what it’s worth, I think people dramatically underestimate the power of DB pension increases.

  • 38 Mark Meldon December 20, 2018, 3:26 pm

    @The Details Man.

    You are right about increases to pensions in payment.

    I have just helped a chap with his DB/DC pensions and, for all sorts of reasons, drawdown was not suitable for him. One of his two DB pensions (there is one to come next year) has just started and he is paid £20,196 a year from the Scheme, increasing each year by RPI, capped at a maximum increase of 5%. He was offered a transfer value from the Scheme in 2017 of £574,816. But he wasn’t tempted.

    From the same employer, he had a DC pot of £288,629, from which he took tax-free cash of £72,157. We looked at an RPI-linked annuity and he was offered £5,994 per annum, including a 50% spouse’s pension. He chose the alternative level pension of £10,851 instead, as he felt he’d rather have ‘more money up-front’ than an income which maintained it’s purchasing power roughly in line with the cost of living.

    Next April, a further £22,619 DB pension is due, and this will mostly increase by RPI, capped at 5%, too.

    Then there is the ‘triple lock’ state pension of about £8,000 a year.

    He will end up with income of about £62,000 a year gross (a 40% taxpayer), £51,000 of which is ‘inflation proofed’ I could certainly manage on that.

    If he wanted a similar RPI-linked income from a DC pot (ignoring state pension) he’d need to have a fund of about £1,840,000, substantially over the Lifetime Allowance of £1,030,000, meaning a 25% additional tax charge on almost half his income (i.e. 65% tax rate).

    It’s not fair that DB pensioners (where the Lifetime Allowance is calculated by multiplying the pension by 20) pay less tax in retirement than DC accumulators. In this case, about £40,000 in excess LTA will be triggered, resulting in a significantly lower tax charge.

    The details are necessarily sketchy to protect client confidentiality, but you can likely see my point about the unfairness of the LTA charge.

    Sure, if you had £1.8m in a DC fund you would be very fortunate and you may have chosen ‘protection’ from HMRC, but many missed doing so (the 2016 protection remains available https://www.gov.uk/guidance/pension-schemes-protect-your-lifetime-allowance ), but there is an inherent problem here for higher-earners.

  • 39 dearieme December 20, 2018, 4:16 pm

    @Mark Meldon: a burst of 1970s-style inflation (i.e. far above 5% p.a. for a few years) would damage your client’s real income pretty badly. In his shoes I therefore might have eschewed the annuity and instead bought a mixture of TIPS and ILGs. I’d then leave that invested in the pension as insurance, you might say, along with a heap of gold sovs held outside the pension.

    I infer from your remarks that he’s not the sort of client who thinks in such terms.

    So saith this amateur who inclines to the view that inflations are usually not Acts of God but acts of governments trying either to default softly on their debts, or to inflate their way out of a recession/depression. I consequently assume that someone retiring in their sixties has a pretty fair risk of being subjected to at least one burst of inflation in their remaining years (and even more so for someone planning to FIRE in their forties).

    I may be biased because my wife is from a long-lived family; I’d hate to think of her after my death with her income ravaged by inflation.

  • 40 Mark Meldon December 20, 2018, 4:28 pm

    @dearieme

    RPI-linked annuities are not ‘capped’ like DB schemes (unless you choose to incorporate this) and most (but not all) will not decrease in payment, even if the RPI turns negative.

    I don’t ‘get’ gold and, in my book, ‘the purpose of making an investment is the purchase of an income’. Gold yields zero and is thus, in my book, a speculation (and I know you could sell bits off, but that’s capital and assumes that anyone actually wants it). Plus physical gold has to be kept somewhere, too!

  • 41 Boltt December 20, 2018, 7:18 pm

    @Mark

    Isn’t the tax rate in excess of the lifetime allowance 55% (not 65%)? Lump sums are taxed at 55% and income has an extra 25%, I took this to be 40% tax rate on the remaining 75% – so 55% total tax as per the lump sum.

    Great comments as always.

    B

  • 42 dearieme December 21, 2018, 1:55 am

    @Mark: “RPI-linked annuities are not ‘capped’ like DB schemes … and most … will not decrease in payment, even if the RPI turns negative.” Can one buy such annuities as Purchased Life Annuities?

  • 43 Mark Meldon December 21, 2018, 10:19 am

    @Boltt

    The Lifetime Allowance tax charge applies when a benefit crystallisation event takes place and the crystallised value is more than the individual’s available lifetime allowance.

    The amount above the individual’s available lifetime allowance at the point (known as the chargeable amount) is subject to the charge (unless the individual has enhanced protection).

    The rate of tax depends on the type of benefit provided by the chargeable amount.

    If it’s paid as a lump sum (known as a lifetime allowance excess lump sum), this is subject to an immediate lifetime allowance tax charge of 55% before it’s paid out.

    It’s only possible to pay a lifetime allowance excess lump sum before age 75. Even if the individual is under age 75, it’s not a given that a particular scheme will allow this option.

    If it’s used to provide a pension, an immediate lifetime allowance tax charge of 25% applies. The pension will also be subject to income tax at the individual’s appropriate rate. The combined effect of a 25% lifetime allowance tax charge and income tax at 40% on the pension is an overall tax charge of 55%, though of course, this could be lower or higher if the income gets taxed at 20% or 45%.

    Broadly speaking, the lifetime allowance tax charge is intended to negate the tax reliefs that the excess funds will have attracted over time – both on the contributions and any fund growth.

    The scheme normally collects the tax charge and pays it to HMRC at source, like PAYE.

    With acknowledgement to Standard Life!

  • 44 Mark Meldon December 21, 2018, 10:22 am

    @dearieme

    No, I’m afraid not. Only Aviva & Canada Life still offer PLA’s and neither offer RPI-linking. Both offer fixed % escalation as an alternative.

    The last provider of RPI-linked PLAs withdrew from the market about 18 months ago after on selling about 45 of them in a 5-year period, so I’m given to understand.

  • 45 dearieme December 21, 2018, 11:42 am

    Thank you, MM. “Both offer fixed % escalation as an alternative”: not much of an alternative for my purposes. Back to considering TIPS and ILGs for me and, eventually, once the slide-and-crash-and-slide looks mature, back to equities at a modest percentage.

  • 46 Whettam December 21, 2018, 1:28 pm

    Absolutely fascinating conversation again.

    @Mark Meldon you make a great case for annuities, just as you did in your guest article on this site before. But its funny I read what you say and think yes very sensible for ‘other’ people, but then I consider my own plans and look at annuity rates and I think probably not for me straight away. But I do think they may have a role one day.

    I think one of the issues is that a lot of your examples are based on older retirees with DB pensions, I know buying a guaranteed income from a DC pension to get an annuity is similar, but it’s not the same. Unfortunately I have no DB pension (i wish 🙁 ) or any other guaranteed income stream (apart from state pension, assuming its still around when I get there). Our entire retirement provision is in personal DC pensions and ISA’s, we also want to retire early, I’m almost fifty now.

    The reality is for me, I do not think annuity rates do not look great value for 55 year olds, according the HL best buy table, 2% for a single life linked to RPI or 2.3% for one escalating by 3% with a 50% spouses payment (and I’d want my wife to have more than 50%). Compare this with a non guaranteed drawdown of maybe 3.25 – 3.5%, which I understand to be relatively ‘conservative’, especially if you were prepared to reduce the amount of drawdown when state pension kicks in. Ignoring LTA (maybe pension is across a couple and with ISA’s too) with your £1.8million example, is would only buy them approx. £36k p.a. of an annuity at 55, using a drawdown of say 3% they would get £54k, this is a significant difference.

    Yes if MrMarket is cruel they will have to reign in their spending as they get older, but they will have already had the benefit of the extra income when they are younger and if MrMarket was kind, they might be able to pay above inflation increases and / or not reduce their drawdown so much when the full state pension kicks in.

    I’d personally love a guaranteed DB income stream or to be able to buy an annuity at a rate of 3.5% as in your example (e.g. 20k / £575k) but I think I’m unlikely to get that rate at 55. So I’m likely to have to continue to put us at the whims of MrMarket and wait until I buy an annuity, so I’m not saying never but probably unlikely until I’m at least 65. The alternative is to work for another 10 + years and retire at a more traditional age, but a lot of readers on this site want early retirement and this is the risk they are facing to get it.

    Looking forward to your article / book on how to solve the nastiest problem in personal finance 😉

  • 47 Mark Meldon December 21, 2018, 1:45 pm

    I don’t think I have ever arranged a pension annuity (structured settlements for the injured are different) for anyone under 60, and most have been state pension age or higher, so I’d agree with you.

    We have just experienced a pretty horrible year for most ‘at risk’ financial assets and I do wonder how those who took transfers from good DB schemes will feel when they get their annual investment statements? Sure, 2019 might see a huge recovery, but most people are feeling rather gloomy on this, St Lucy’s Day, the shortest of the year.

    There is no ideal solution to this – life is full of compromises and guesses.

  • 48 ZXSpectrum48k December 21, 2018, 2:52 pm

    @MarkMeldon. Thanks for your answer re: FAD complexity. I would argue it’s a fairly standard LDI problem. You have a set of forward liabilities that you need to replicate (hedge) with your asset portfolio. You have to make some sort of assumptions of what size these liabilities are, growth rates, timing and duration, and volatility. You then need to find an asset mix that replicates these liabilities with minimal tracking error.

    You’re arguing for more use of annuities and in an ideal world I would agree. Personally, I see a typical 70/30 portfolio is a terrible hedge for many of my forward liabilities; annuities hedge parts of this much better. The problem is that most of my forward liabilities don’t really grow at CPI, but at CPI+2-4%. Annuities can create the floor but you need some level of growth to generate the spread. I’d also say preservation of wealth for my children is “the” issue for me which makes annuities unattractive.

    Either way as I’m only in my mid 40s, annuities aren’t an option. My own solution has been just to silo each forward liability stream and hedge each with the most appropriate asset mix I can find. It ends up having fixed-income aspects which are annuity-like, some more like a conventional equity portfolio and parts which are about low-correlation, absolute return (CPI+spread). Unsurprisingly, it ends up looking remarkably like a university endowment portfolio!

  • 49 Mark Meldon December 21, 2018, 3:32 pm

    Why are annuities unattractive from an inheritance point of view? If you are truly serious about leaving millions to your kids – unlike Bill Gates – why not just buy a whole of life policy and spend your pensions on you? If your pension is big enough, you can afford the premiums.

    I really think that the ‘inheritability’ of DC pensions is distorting people’s view of what a pension plan is for – to pay you a pension!

    As a thought, will your pensions cover care costs in 30-40 year’s time? Sure, you might not need care (because you die), but if you have ‘earmarked’ your pension for the next generation, that plan might be destroyed by chance. We live on a knife-edge – my step-dad just had a physically disabling stoke and he has been in hospital for 8 weeks with little sign of being able to return home anytime soon, and he’s only 70. His world – and my mother’s – has been turned upside down.

    You will soon spend your FAD pot on care fees should disaster strike at around £1,000 per week or so.

    Enough of the miserable stuff!

  • 50 The Details Man December 21, 2018, 4:12 pm

    A few thoughts:
    – We would be wise to remember that Monevator readers are a financial savvy lot. But most people are not. Ask most people what “LDI” is and they’d probably venture that it’s some terrible venereal disease.
    – When I speak to people about their retirement options I’m often confronted by: “I don’t want an annuity.” On further questioning, most people don’t even really understand what an annuity is. The message “annuities are bad” has been drummed in. I think it’s important for individuals to be open to all their potential retirement options and work from there. Individual circumstances vary. I worry that people mentally close off potentially good retirement plans.
    – Speaking of tax, I say it till I’m blue in the face: Paying tax is only bad if the net benefit isn’t “worth it”. I’ve talked to people who were wanting to give up employer pension contributions (for no benefit in kind) because of Annual Allowance charges. Literally throwing money to avoid paying tax.
    – Whilst freedoms have changed the IHT landscape somewhat, it was previously possible to pass pensions down to dependants IHT-free. The key change is that now it’s possible to pass down through nominees and into successors. But I think Mark is right to point out: What is the purpose of a pension? Is it not to provide an income in retirement in life to you and your dependents? I’d say for most people, that should be the primary focus with a pension plan. I would caution against jeopardising that goal for tax reasons.

  • 51 Factor December 21, 2018, 6:03 pm

    Seasons greetings to you all.

    In the same way that annuities have a “bad name”, so seemingly does equity release, whereas ER, used prudently, is a useful weapon.

    For example, having organised mine via a reputable household name and their intermediary, and gone through the very thorough fact finding and explicit caveats procedures, I borrowed £20K as a lifetime mortgage, acknowledging that this debt will increase over time with the applicable interest charges. As I told them it would when I applied to them for the loan, the money is now sitting in a an interest earning savings account as my emergency cash reserve, to be drawn from only if I am in absolutely dire straits and have an urgent need for liquidity, and Mr Market happens to be feeling particularly grumpy; a savings account which I shall top up from income to counter both the impoverished interest it earns and inflation.

    I think of the interest charges as being like my annual AA membership fee, I’m happy to pay them for the peace of mind they purchase but hopeful never to have to “call for help on a cold winter’s night”.

  • 52 Hariseldon December 22, 2018, 12:59 am

    Advantage of a SIPP you get tax relief on the money going into the SIPP providing an uplift.
    Disadvantage you can’t take it out until you are 55 and when you do so, 25% can be withdrawn free of tax , after that you will be taxed in withdrawals. The tax rules might change in the future….( that applies to an ISA too of course)

    An ISA provides tax free growth of the funds as in a SIPP but no restrictions on withdrawals and they are tax free.

    Lots of wrinkles of course and lots of great articles explaining all this blearily on Monevator.

    Personally I’d do both…

  • 53 Hariseldon December 22, 2018, 1:15 am

    The tricky part of FAD is that most people have too little money…

    They have have no capacity to bear risk and an annuity can make sense if it provides certainty and peace of mind.

    As mentioned if you only have £200k and take an equity route with nothing but a state pension, it could end badly but if you start with £2,000,000 your probably going to do ok whatever happens.

  • 54 John B December 22, 2018, 10:39 am

    Its a matter of risk profile and timing. Anyone who’d taken out an annuity 5 years ago just after the rates had plummeted would have done very badly compared with someone who’d stayed in the market, and the reverse could be true for 6 months ago. But that’s combination of risk premium of equity and safety costs of annuities. Its just the downside of an annuity, together with an IFAs fees, could knock a 1/3 off your returns, while the upside is much less.

    With all deaccumulation strategies, starting with just enough is difficult. If you start with 10% more, from that mythical “One More Year”, you can be less cautious, and your chances of failure are less, and your changes of excesses much greater. The problem for FIRE is if it become One More Decade and you merely retire with the rest.

  • 55 SemiPassive December 22, 2018, 4:30 pm

    Someone beat me to the reason Vanguard is taking so long. They’re using FNZ, so don’t hold your breath. Maybe by 2020.
    The complexity of platform software (and to be fair to FNZ it is more complex than many people realise) is one major barrier to entry. The investment required is significant, and only the big players will be charging enough in fees to ever cover the implementation costs, let alone the ongoing costs on top.

    But at least Vanguard doesn’t have to deal with IFA networks for their direct offerings.
    The flip side is the software has to be bullet proof and user friendly for Joe Public to use it with confidence.

  • 56 dearieme December 23, 2018, 4:08 am

    I’ve just found this.

    “Finally, this paper is also unusual in calling into question the fitness of the performance metric favored by Ibbotson and Siegel, and many others: total return, especially when computed over periods of a century or more. Total return measured on the century scale presumes an investor who never needs to spend the dividends or interest received. No real investor, individual or institution, has that luxury. And there is one class of individual investor, now of growing importance within the financial planning literature as the Baby Boom generation ages, for whom the total return metric is particularly malaprop: retirees. Once portfolio accumulation ceases with retirement, portfolio income must be spent to live. Under those circumstances real price return, over short periods lasting two or three decades, becomes an important metric. By that measure, an investment in stocks has been dicey indeed.”

  • 57 John B December 23, 2018, 10:00 am

    I don’t understand that criticism of total return, as its alternative, the raw index, is so much worse, but in more common use. It answers the question “If I invested X then, and didn’t spend any of it, how much would I have now”. Obviously, if I did spend some of my investment, the answer would be different, and very personal.

  • 58 dearieme December 23, 2018, 2:15 pm
  • 59 John B December 23, 2018, 2:40 pm

    I tried reading the article, but having all the graphics at the end made it hard work, and without a definition of what “price return” was, I really wasn’t much wiser.

  • 60 dearieme December 23, 2018, 10:11 pm

    @John B, I found that the answer is to open the paper in two widows so that you can have the figures in the left window while you read the text in the right.

    “Price return” means the share price return, with or without inflation-correction, depending on what he’s discussing. So he ignores dividends, taxes, fees, … His point is that this “price return” is probably more relevant to the retiree than the total return since he’s likely to draw and spend his dividends.

  • 61 John B December 23, 2018, 11:06 pm

    I think I will ignore the article, as dividends do most of the heavy lifting in building a portfolio, and allow its value to be maintained in the early stages of drawdown. I don’t think a sensible conversation can be had ignoring 3% annual returns.

  • 62 SBS December 25, 2018, 12:00 am

    How I Learned to Stop Worrying and Love Annuities.
    My opinion has been moving it this direction. Good comments from Mark and others in this thread. It may be a difficult one to convince most people on, though. (But passive investing is pretty unintuitive, too!)

  • 63 Tony January 3, 2019, 4:12 pm

    On my procrastination to do list is switching my DC investments held with a well known pension provider direct to a SIPP mainly to cut the overall charges but also to have a direct market access and choice of funds. I’ve got Snowman’s comparison spreadsheet and that works well for me for ISAs and dealing accounts. But pensions has that added layer of charges at the end. Currently for me all dealing is free as are future withdrawals. I pay an advertised total 0.5% AMC. But assume I can beat that AMC with a SIPP (including any fund charges), isn’t it the case most platforms have additional fees for future withdrawals/drawdown. Any general pointers how to truly compare overall SIPP costs? Or do some people build up their pension investments with one provider and then for those not wanting to go down the annuity route, then switch it to another platform once they wish to start withdrawing, if the costs make that sensible? In other words, do people keep costs down with provider 1 then switch to whoever’s cheapest at the drawdown stage? If you get my gist.

  • 64 Peter B February 2, 2019, 1:12 pm

    I’m also waiting on the Vanguard SIPP offering with a little impatience, eager to transfer from a more expensive route I was obliged to make to beat a deadline for income earned in one year that I did not need to spend.

    btw, rather than the old plumber joke I prefer the old TV repair man joke – not that we have them anymore. “Why is the TV repair man able to charge so much?” It is for all the knobs he does not twiddle! I suppose the same could now be said about laptop repair, with suitable non-gender reference.

    But to get back to topic, any news/update of the launch date?

  • 65 Pinch February 3, 2019, 8:15 pm

    @Peter B #64
    No, no update yet – the accounts page still says:
    “Sign up to be the first to hear when we add this new account in 2019.” So I suggest you do just that.

    Go to https://www.vanguardinvestor.co.uk/investing-explained/investment-account-types

    Enter your name and email address on the website above, around halfway down, and they will email you when there are changes/updates.

  • 66 Dave Rees February 14, 2019, 8:30 pm

    My wife and I have yet to start SIPPs , but are keen to get things moving before the end of this tax year. I was hanging out for Vangaurd, but as this isn’t likely to happen any time soon, I was planning on kicking off with Interactive Investor (as a platform to access the Vanguard LS Funds) and maybe swapping over to Vanguard if it’s more beneficial to do so later on. Is this a sensible plan? Also, I’m struggling to work out how much we can lob in as a lump sum, taking into account the 3 year “carry over” allowance. Is this something it would be worth paying an IFA to work out for me?

  • 67 Vanguardfan February 14, 2019, 10:18 pm

    A tax accountant could advise about carry forward, rather than an IFA.

  • 68 Pinch February 15, 2019, 1:29 pm

    @Dave Rees #66
    You can work this out yourself if you want – both HMRC and the Pension Advisory Service seem to have good guidance on their websites.

    You will have to use up the allowance for the current tax year before you can use any leftover allowance from previous years. Due to this I can only say “seem” as I have not used up my current allowance and therefore not used either notes to determine any carry over allowances I may have left.

    https://www.gov.uk/guidance/check-if-you-have-unused-annual-allowances-on-your-pension-savings#carry-forward-your-unused-annual-allowance

    https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/carry-forward

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