What caught my eye this week.
I answer comments on old posts every day on Monevator. A great many ask whether investors should still own bonds, given rates are “sure” to rise – and hence bond prices fall.
In the UK it’s still mostly an academic question. But US yields have been going up fairly swiftly. The Federal Reserve has been raising interest rates, and there are more signs of higher inflation in the US, too. Bond prices have fallen as a result.
My reply is usually some mix of the following:
- Your bonds are there to cushion big share price falls, not to provide a huge return in themselves.
- Bond prices don’t really crash like equities do.
- People have been predicting a bond bear market since 2009 (and in truth before that).
- There’s no denying a sudden surge in yields would hit bond prices hard.
- But inflation (and hence lower real returns) is what really kills you as a long-term bond investor.
- A moderate correction that sent bond prices lower and yields higher would be good for long-term investors.
That last point is the hardest for people to accept. We’re so conditioned to obsess over the level of the stock market, for example, it’s easy to miss the importance of reinvesting and compounding returns. The same is true with bonds.
This week Sellwood Consulting wrote a very clear post explaining why bond investors shouldn’t fear rising rates. It is about US bonds, but the same logic holds true in the UK.
If you own bonds and yields rise, the value of your bond holdings will indeed fall. But thereafter you can look forward to a higher yield, and over time reinvesting this in now cheaper bonds can be more valuable.
Don’t hold too much in bonds, though. Not because they are super-risky – but because they’re not!
If you’re a long-term investor, being overly cautious can see you miss out on much higher returns. Michael Batnick explains why in his Irrelevant Investor blog this week.
Happy reading!
From Monevator
Gold as an asset class – Monevator
From the archive-ator: What does mark-to-market mean? – Monevator
News
Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1
Pensions cold calling set to be banned by June [Search result] – FT
Coinbase is launching a crypto index fund. US investors only for now – Coinbase
MPs call for ISA simplification [Search result] – FT
Nimble schmimble: Most hedge fund money is held in giant funds – Bloomberg
Emerging market investors fail to reap benefits of GDP growth [Sorry, search result not working for this] – FT
Great chart of the history of the US 10-year bond yield, the global benchmark – via The Reformed Broker
Products and services
Monzo, Atom, Revolut, and Starling: A guide to digital banks – Telegraph
NS&I has cut rates on two of its popular products – Telegraph
Get the most out of the free pensions help sessions for the over-50s – ThisIsMoney
LendingCrowd’s P2P rates start at 5.6%; capital is at risk – LendingCrowd
Why it’s so hard to invest with a social conscious [US products but relevant] – NYT
Is this the beginning of the end for closet trackers? – Evidence-based Investor
As a rate rise looms, it’s time to fix mortgage repayments – Guardian
The key upcoming changes to the VCT and EIS regimes – Telegraph
Fitting a new flat? 🙂 Grab two Sonos One speakers for just £350 – Amazon
Comment and opinion
10 ways to safeguard your savings income [Search result] – FT
How extreme frugality enabled one couple to retire early – Guardian
Unpicking the pension allowance taper – 3652 Days
The winners write the history books – A Wealth of Common Sense
The five types of retirement – Get Rich Slowly
Misfits, outcasts, criminals, financial professionals – A Teachable Moment
Would Buffett’s index tracking bet have paid for deaccumulators? – I.I.
The case for selling shares in AstraZeneca – UK Value Investor
All growth stocks end up in the same place – Gannon on Investing
Why Oscar winner Get Out resonates with value investors – The Value Perspective
Fear and greed are undefeated – The Reformed Broker
Off our beat
Bitcoin is ridiculous. Blockchain is dangerous – Bloomberg Businessweek
Chuck Feeney: The billionaire who gave it all away – Irish Times
The Boring Talks: The Argos catalogue [Podcast] – BBC
Jerry and Marge go large [Lottery hacking] – Huffington Post
James Altucher talks to Jim Cramer [Podcast, naughty step] – James Altucher
And finally…
“The next bear market is sure to test the resolve of existing shareholders, but it will also – just as certainly – provide an opportunity for savvy trust connoisseurs to pick up bargains as trust discounts widen once more. For the forearmed investor, a crisis is an opportunity, not just a threat.”
– Jonathan Davis, Investment Trust Handbook 2018 (FREE on Kindle, saving £24.99!)
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The article on annual allowance taper rang a lot of bells with me. After many years of dodging this and the personal allowance clawback, the sods finally got me with maximum of both this tax year. My tax and NI bill has gone bad and I owe more tax for exceeding TAA and LTA.
As I’m 55 next week, I’ve knocked it all on the head and will be a basic rate tax payer from now on, so someone else can pay for the deficit!
Good to see a Chuck Feeney link there. Puts the moaning about the annual allowance into context!!
Thanks for that Huffington Post link about the lottery. A long read but worth the time.
@ Gadgetmind
The UK is now in the vulnerable and potentially disastrous situation where 15.5% of the population (say 1 in 6) pay 68% of total income tax! Or put another way, 84.5% of the population only contribute 32% of total income tax! In my view, this concentration of the bill for public services is completely unsustainable.
I found the Lottery Hacking article unbearably long-winded. I’d advise you not to read it.
The TLDR summary is – Jerry and Marge wait until a big rollover week when the they are most likely guaranteed to receive more money than they spend. They then buy lots of tickets and come out ahead. They repeat this, but some people don’t like it.
Just saved you about half an hour of your life.
Hi, did you know you were mentioned in the Metro free newspaper on Wednesday 7 March? – page 24 – “Novice’s guide to building a portfolio” – doesn’t seem to be online though. Referred to your online broker comparer.
@ Simon
Yes, it’s completely unbalanced and unsustainable. Many people are going to take my route of early retirement while others will simply clear off to other shores. The Laffer Curve is alive and well.
@Gadgetmind, @Simon
Like Gadgetmind I’m also caught by the annual allowance taper. Up until now I’ve been able to compensate a little with carry forward however that will be extinguished at the end of this financial year. After that it’s yet more tax for me.
To then bring Simon’s point into the discussion. Since 2013 my gross earnings have disappeared as follows:
– 50% saved and subsequently invested;
– 40% tax and NI (which admittedly also includes tax on investments); and
– 10% RIT family spend
I’m definitely one of the 1 in 6.
No worries for me though. I’ll FIRE and move to the Med in just a few months so won’t have to worry. Unfortunately for UK PLC I believe my vacated job will then be moved to another country. So a bit more spending to be added to the National Debt it is then…
@Gadgetmind, was posting while you were typing so missed your Comment 7.
“Many people are going to take my route of early retirement while others will simply clear off to other shores.” I’ll be doing both of those. Retire at 45. Then need to be well established in the Med before Brexit date.
@ Simon
Bang on the money. As it happens, both my kids fall in the 1% who pay 31% of the total income tax bill and, guess what, both are aware of that imbalance in broad terms and both are currently interviewing to move their jobs to less unfair tax regimes. Once you get into the kind of concentration risk we currently have, it does not take very many people to say no to the system and the whole thing/the public finances collapse.
It was always a mistake to take people completely out of income tax, just as it was always a mistake to offer a completely “free” health service. Once large numbers of people lose any connection between public spending and their own wallet, you are immediately on a collision course with a large and immoveable iceberg.
I’ve often wondered about the scale at which “others will simply clear off to other shores” would happen. Recently a youngster in our extended family said “You know, Uncle dearieme, that my politics are well to the left of yours.” Oh dear, what’s she going to say next? “But you are right about tax; we are considering moving abroad and we’ll certainly move abroad if Jeremy Corbyn wins the next election.”
My views about tax are really rather mundane – the State tries to do far too much and does much of that badly. So it should shed burdens and reduce tax. A thorough-going, rational, patient revision of the tax system would also be a good idea. There is an equally slim chance of that happening.
Wow, that ISA article wasn’t what I expected. Hell I’d vote for anyone who was seriously behind a £1m lifetime allowance.
@TheInvestor: thanks again for some thought provoking perspectives and great articles, I loved the Chuck Feeny one.
Taxes don’t pay for public expenditure. Monetary economics is rather counter-intuitive. We have a fiat currency in the UK, so government spending essentially creates money and taxes drain excess liquidity from the economy.
The level of public expenditure and the choice of who has to pay tax is inherently redistributive from a monetary economic perspective. This means that the decision of what public expenditures to spend depends how much income the country as a whole generates, rather than the level of tax. The UK’s GDP pretty high by international standards.
Usually discussions of reducing the overall level of tax boil down to making the tax system flatter across the population, and leaving people to fend for themselves.
Perhaps people should try to think why the tax bill is lop sided. That the majority of the population earn so little and that a small amount of tax is dissproportiatley a huge portion of their already tiny or non existent disposable income…? I dint think uk tax system is particularly aggressive vs rest of world
@ Steve
“Once large numbers of people lose any connection between public spending and their own wallet, you are immediately on a collision course with a large and immoveable iceberg.”
Well said. And it is a huge problem for our future. There is a swathe of the population which actively demands more public spending but do not seem to think for a nanosecond about where the funding is going to come from. And you have the cause of that disconnect in thought process right there. They don’t pay much if any income tax; ergo they do not think its an issue. That disconnect will not end well.
What this discussion hasn’t touched on is that the super rich owners of capital could also pay more tax. It doesn’t have to come down only to whether £100k+ plus earning bankers and consultants should be paying a much higher rate than middle income just about managings or the low paid.
I’m not arguing for high earners to pay more tax. I’m arguing that the disconnect and inequality that’s grown in last 20 years between the highest, lowest and average earners is the reason for this percoeved tax burden on the highest. If salarys were not so skewed and majority not living paycheck to paycheck then they could pay more tax out of a higher salary….obvioisly.
However this would require high earners or more accurately the companies they work for not to exploit their workforce…
The problem ,as always, is not those who are the most vulnerable and with least power who always get blamed and denigrated because they are the easy weak target but lies with those with the power and influence to change the situation.
You want someone who earns £15k a yr and has no savings or assetts to pay more tax? Okay well they’ll just go bankrupt quicker and continue sliding into poverty with no hope or aspirations and ultimately cost the state a hell of a lot more.
I’ve been working since 1998, earned six figures plus since 2000, and paid many millions in tax but I don’t see this as unreasonable. We’re in a post-scarcity environment for human labour; pay continues to bifurcate, with the majority paid less and a minority paid more. Luck, as much as skill or hard-work, often defines which side of that you land on. So the tax system needs to be redistributive. I do have issues with the wide differential between income tax and other forms of tax (CGT, CT). Work is taxed more heavily than capital, favouring the retired, wealthy and corporations. Pension tax relief, now at over £40bn/annum (comparable to the defence budget) benefits mainly the higher paid.
@ Noodle – good point, well articulated. A govt. interested in reviving an economy on life support would seriously slash small business taxes for a start – far from just reducing the tax intake as a whole, it’d build the backbone of the economy up again. Family-owned small businesses drive German power, families employ their vulnerable members who’d be unemployable elsewhere, thus keeping them socialised & off govt. benefits, leading to a happier nation too.
The emphasis would be on the long-term as they’d want to hand over viable businesses to the next generation, vs ripping off customers & trying to contribute as little tax as possible. This would help eliminate the unfair advantage huge the corporates currently have over small & medium-sized businesses & keep profits in the country to help balance the books on a national level. Just that one simple move would salvage so much of the damage inflicited in the last 2-3 decades; it’s not rocket science, just about subtler corruption & general ineptitude…..
Excellent article from Sellwood Consulting on why we shouldn’t be fearing rising rates.
I’m reasonably new to bonds. I’m now 80/20 equities/bonds in my SIPP after being 100% equities for years.
Mrs IanT and I will have a Defined Benefit income ‘floor’ of about £2k/month when we are both retired in 3 years(ish) time. We will be mid-50s. It was always my thinking that our ‘floor’ should mean we can be more aggressive with the SIPP funds, but I’ve been reading the excellent Monevator site for about 12 months now and decided to have a modest amount in bonds.
My biggest fear was that I was buying them at the ‘wrong time’ but that article has re-assured me that I needn’t worry, and I will continue to have a 20% allocation as the SIPP builds up, and then probably even after retirement as we plan to keep invested and use drawdown.
Thanks to Monevator for the invaluable ongoing advice…
That article by Sellwood Consulting has put a lot of my concerns at ease since Warren Buffet’s letter called into question the very premise that bonds are risk free assets going forward. Several multi asset managers like 7im are also toe-ing this line and add alternatives to their portfolios to substitute bonds to some extent. Having discovered all that in the last few week, the thought of being stuck in a static bond allocation with vanguard lifestrategy seemed foolish so glad to know that a contrarian view exists.
@Sara — I didn’t see that, thanks for the heads up! 🙂
The poor are disproportionately taxed in ways other than income tax. e.g. VAT, petrol, etc. Frankly I find it quite distasteful to see posts suggesting the less wealthy live in some kind of “disconnect”. It’s those who think like that who are disconnected. Ah yes our libertarian friends once again…
” e.g. VAT, petrol, etc” You may be wrong about VAT: the exemptions and low rates are specifically intended to protect the poor. Petrol, booze and tobacco I’ll grant you. And the TV licence of course. It really ought to be scrapped.
However, benefits and tax credits mean that many people actually have net negative taxation in that they get more back in money (not even considering services) than they are taxed.
However, we won’t be able to address the tax gap until we tackle the income gap, and we can’t do that until we address the (frankly massive) skills gap.
The Frugalwoods article in the Guardian, hilarious amount of hate in the comments. Probably 90% negative. Some rightly down to the perceived smugness of the author, and overegging of DIY jobs that would have saved trivial amounts in relation to how their net worth was generated.
But a lot of extreme bitterness and jealousy from the precariat, Just About Managing, and social justice warriors towards anyone who achieves FIRE, or anything like it.
Its got me thinking how the shape of your FIRE strategies will determine how resistant you are to the Corbyn government that the commenters could vote in.
How extreme could socialism become?
@ SemiPassive
Very true about FIRE strategies being threatened by Corbyn & Co. I’ve long thought that the days of ever expanding ISA allowances must be numbered, especially when you have brokers like HL boasting about its ISA millionaires when that is blatantly not what the vehicle was intended for. The last time we had a proper socialist government in the 1970s it was all about taxing ‘unearned income’ at rates of over 90%. We’re now in the perverse situation where the highest overall tax rate is paid by middle earning PAYE workers, with higher earners able to pay less due to a combination of pension tax relief and 2% NI, rentiers with large ISA and pension balances paying very little indeed, and international capital-rich 1%ers paying essentially nothing at all.
As with Brexit and Trump, if enough ordinary voters become fed up with the status quo, then it becomes unsustainable and something has to change.
@SemiPassive
The response to that guardian article really shocked me. I agree the word retiring wasn’t the best choice, but the envy and vitriol in a lot of the comments was scary. And this wasn’t even the Daily Fail…
It’s a hard question where the line between bootstraper and victim occurs…..as a society we seem to be moving toward to victim mentality, encouraged by rather the socialist parties.
As FI becomes harder to achieve, what with ever-more insecure work, which is ever-less well paid, (except highly skilled) & asset-inflation from money printing which exacerbates injustice, envy will become toxic. It’ll be harder for the have-nots to accept it can be done with hard work, so they’ll assume the ‘winners’ they see must had an unfair advantage.
My strategy is already to move as quietly as a mouse beneath the radar, not standing out in any way and by necessity it’s easy to look modest since that’s a condition of being FI at the lowest level. I assume most people will be hostile, (this has indeed largely been my experience to date) so tell them what they want to hear until I know they well enough to take the risk that they can handle the truth. Otherwise, it’s easy to pass in today’s flexible world as a consultant working irregular hours at home in something vague, it’s not worth the hassle, especially if they’re not even your nearest and dearest.
@ FI Warrior
The first rule of FI Club is… You do not talk about FI Club!
@ David, haha, yes agreed; I had thought it safe here 🙂
@IanT We’re both in a similar position. Depending on when I choose to retire, we’ll have ca. 82-85% as a minimum income floor with the balance to come from returns on two Vanguard ISAs. Those currently have VLS60 as their core but I’d like to aim at a portfolio with a 70/30 equity/bond split with reduced UK bias over the next two years. The equity bit is easy, but I’m finding it more difficult to make a decision on an appropriate bond fund(s).
Just to add about the marginal tax rate point for high earners above. The situation is worse for us “young’uns”. You effectively have to add an additional 9% to whatever rate the “golden oldies” pay (no offence meant) paid to the incredibly incompetent Student Loans Company.
Not to mention, we have an NHS-crisis, a legal system in desperate need of rescuing, we’re going through Brexit chaos and have successive governments that are continually chipping away at our future state pension (if there will even be one…)
That’s all very moany I know, but I’ve walked the talk and packed in work (for an employer) very early. When the Labour manifesto came out last year, high earners (not the highest earners) were in line for a 75% marginal tax rate. For me the cost of additional labour far outweighs the benefit.
Our Defined Benefit pensions will provide exactly 0% of our income floor, which is why I work hard to avoid excessive taxation eating into our retirement funds, and why it roasts my nuts a little when this isn’t possible. Providing for our own retirement is hard enough without it also feeling like we’re paying for a whole load of others too!
@Gadgetmind Your taxes will pay exactly 0% of our DB pension income floor!
@FIW – I think that its safe to say, by observing those that have, thats its best not to put your head too far above the parapet in terms of espousing your intentions to retire early.
Anyone wishing to promote themselves in the media as such probably needs their head examining unless there is some very clear and considerable payback from the act of doing so.
I agree its not too tricky to tread a grey-area where pretty much no-one knows what you’re getting up to. The working from home approach is possibly the very best as it attracts a very neutral response, i.e. its totally normal.
You *could* claim to be unemployed – you may attract a sympathetic response. But I have a suspicion that could backfire.
Certainly, to my mind, there is everything to lose and little to gain by proclaiming your joyous financial independence?
@2012er Yes, I too had difficulty in deciding on which bond funds to use.
I’ve settled on 5% (of the total SIPP) L&G Global Inflation Linked Bond Index, 5% Vanguard Global Short-term Bond Index, and 10% Vanguard UK Govt Bond Index.
I’ve little idea whether that’s a sensible mix, but they all charge <0.2% and it 'feels' right to have taken a bit of risk out of the overall picture.
@SemiPassive
“How extreme could socialism become?”
Very, I think. I think of socialism as in essence people saying “I want to take more of your stuff”. It is often dressed up in a more kindly way for public consumption, but there it is in terms of the basic proposition. Then there’s another group of people who say “Hang on. Nice as I am da, da, da, there is a limit to how much of my stuff you can have”. And the comments above suggest that not a few of those people are thinking we have gone over that limit and need to start “regressing”. The point I was trying to make about our present income tax spread (or lack of it) is that it actually encourages the “hand over your stuff” mentality. If so many folk do not pay much income tax, then we can expect more of the same attitude than if things had been better spread.
A clear sign, for me, that things may get worse is the preoccupation with capital as the next target for tax. Not content with spending pretty much what we earn in income, here the idea is to raid what we managed to put aside over the years so “we” get to spend even more. Of course, spending capital to meet running expenditure seems dumb in terms of the end result, but hey, who cares … because “I want to take more of your stuff”. When does that all stop? Not I suspect through Westminster politics but through market mechanisms. There probably has to be an almighty implosion around our government debt, then someone comes in and resets the board.
@ The Rhino, the general population are even more hostile to the unemployed, so I reckon you’re right that it’d be worse to have that ‘look’ at any time.
Also, at a sovereign level, the UK is heavily indebted and the annual deficit running is inevitably adding to the cumulative national debt. Given these facts and that the drivers of them (we don’t sell enough to afford what we want that others produce) don’t look like they’ll change any time soon, we must have a hefty correction in the near future. When that happens, anyone with any visible wealth, who can’t sit it out far away until it blows over, is going to be a target. Look to those experienced at surfing these situations for tips, the 1%, why do you think the land registry isn’t clear and transparent about who owns all the land in the UK, to consider just one asset class.
@dearieme (24) “….. the TV licence ….. really ought to be scrapped.”
FWIW it actually has been for those such as me who are three score years and fifteen or over, and thereby entitled to the free “Over 75 TV Licence” [sic], so keep calm, carry on taking the tablets 🙂 and apply in the year following your 74th birthday, when you only have to pay for a short-term licence covering the actual balance of time between the date of your application and the date when you are due to turn 75. The free licence is not provided automatically, you must apply for it.
“Not to mention, we have an NHS-crisis, …”: don’t worry, there’s always an NHS crisis and has been ever since it was formed. No sooner had the government established free everything than it reversed course and started charging for specs and teeth. There always will be a crisis, not least because doctors and others reckon that screaming “crisis” is the best way to get a pay rise or influence the result of an election.
“a legal system in desperate need of rescuing …”: when we came to live in England we were struck by how unbusinesslike English solicitors were. Then we saw the CPS – which I suppose was an attempt to mimic the prosecution system in Scotland – established, and and pretty soon it appeared to be rather useless. This would seem, therefore, to be the only good point you make.
“we’re going through Brexit chaos …”: oh now you’re just being hysterical. Whether there will be chaos remains to be seen.
“… and have successive governments that are continually chipping away at our future state pension …”: breathtakingly wrongheaded. The new State Pension – the so-called Single Tier – pays out a much bigger basic pension than the old one did. It has much better protection against inflation than the old one used to have. And it takes only 35 years of NICs to get the full pension compared to the 44 required (for males) during most of my working life. There’s an interesting question raised by this: how on earth did you persuade yourself of the nonsense you wrote on this point? Don’t you know any grown-ups who could have corrected you?
As globalization and automation mean that certain rare skills are valued more and more, we need progressive taxation to claw back the money. As salary is the interface between business and those skills, that’s why salary taxes need to ramp. Treating other income and wealth the same way may not be so reasonable, as one person’s 500k could a lifetime’s savings, but another’s annual windfall.
If you want flatter taxes, you need a flatter income and wealth distribution, and anyone earning 5x average wage should ask themselves if they are really worth it.
“nhs crisis” I suspect the “crisis”, if there is one, is of our own making; charge everyone who goes to a GP or A&E £1 per time, and thus everyone who needs to be seen gets seen, those who do not need to be seen may think twice about going, and we are probably back in balance. Worth trialling for a couple of years.
Income tax: I would like to see the next Budget bring everyone, including benefit recipients, into income tax, even if again it is for entirely nominal amounts. This might help towards curing an unethical situation where people feel that they can vote for more public sector spending when they don’t get to pay towards it.
Hi all — Generally reasonable comment here, even if we’re straying off-topic into politics. (Understandable given the crossover.)
However anything else in this vein will see the entire comment immediately deleted:
Plenty of other places on the Internet to talk to people like that.
Slightly off-topic but I was making a purchase via selftrade recently and just before the purchase goes through they now have a link to a breakdown of charges (as well as the links to the kiid docs and that stuff). I’ve never seen that before and it was very useful. It highlighted an exorbitant FX fee and also that they’ve introduced a .25% fee on shares/etfs/ITs. I was wondering if this was down to some new regulation or whether selftrade are just being particularly transparent. Either way a very welcome development..
Meant to add – was there any way of purchasing VWRL, VHYL or the like *without* being exposed to an FX transaction?
sorry to keep adding – the link to the breakdown of charges wasn’t just a link to the normal generic charges section of the site, it was a specific breakdown of the charges in % of the purchase amount and £ and pence for the specific transaction I was about to do. It was super clear as to what was being chopped of in terms of various fees..
Thank you for the comment TI – I will ignore the insults thrown at me.
I think there are some very important points about the state pension that I should be raised to avoid mis-information.
Firstly, since 2002, the government has changed the state pension regime FIVE times. First SERPS was scrapped to be replaced with S2P with the idea it would be more generous to lower earners. That lasted only 8 years before the accrual rates for medium workers were slashed. That then lasted only 4 years before they changed to flat rate accrual. They also stopped contracting out. That regime lasted only 4 years before they scrapped it altogether for the single-tier state pension. In doing so, they left individuals close to retirement who contracted out, a very short space of time to get the NI years needed to get the full pension. In 14 years, the system was changed 5 times; its end point completely unrecognisable from its starting point.
There’s also a clue in the name of why the single-tier basic state pension pays out more than under the old system. It’s single-tier – you no longer get any ability to use contracting out or to build up a second state pension through hard-work and earning more. Those options have value. I highly doubt it would be popular for the government to scrap a pension regime only to replace it with one that pays people less!
On to qualifying years. Firstly, the 44 years you quote is for men born before 1945 (i.e. over 73). There is a very simple reason the number of years is much higher – the system was massively overhauled in the 70s from a flat rate to a percentage rate. Your 44 years are incomparable – the rules are different. The two facts for those working NOW are: you’ve got to get more NI years to get the full state pension, and the cost of doing so is at the highest rates ever.
You mention the inflation protection as a good thing, but the “triple lock” is disastrous for middle-aged workers. The cost of pension provision has ballooned. We have our pensions minister explicitly saying it is unsustainable and needs to be scrapped. It’s been great for those who’ve received the benefit of higher payments, but for the rest of us it has left us with a burgeoning deficit and the strong likelihood that such generous increases will be scrapped and never seen again.
None of this even touches on the increases in state pension age; the morally dubious WASPI issue; or the increases in age to accessing private pensions. All of which make the state pension even less attractive to current workers.
But the overall point is this. The government has continually changed the rules on pensions. It is near impossible to plan for something 20/30/40/50 years away when the rules are changed every year. We know that the current pensions regime is unsustainable. We know our country has a huge deficit it is struggling to bring down (even though it wants to). We know our politicians will raid any piggy banks they can get their hands on (Brown and private pensions, Osborne with his LISA tax receipts grab). I honestly do not think there will be a state pension in a format we recognise today by the time I would be entitled to. I say that as a Chartered Accountant and a Member of the Institute of Securities and Investments.
Very true. It doesn’t help much. Its hard enough planning anything for the long-term as it is.
@YoungFiGuy, your views and analyses on this crucial topic are very interesting, I would really appreciate your thoughts on what the best we can do with this situation would be?
What’ll your strategy be, to end up with a decent pension given the cards we’ve been dealt?
(I’m just an amateur in this field, trying to learn as much as possible here, so it’s useful to interact with someone with access to different knowledge)
@ The Rhino, regarding VWRL and VHYL because the prices are quoted in sterling I had assumed the purchase would be in sterling and would not involve fx charges. Thanks for flagging this.
For VWRL purchases, who is it the levies this fx fee? Broker or Vanguard? I know dividends are paid out in dollars and broker applies fx fee for those, but I too assumed purchases/sales were in GBP. Otherwise what’s the difference between VWRL and it’s dollar-denominated equivalent VWRD?
If you look at VWRL at HL, they do a neat little breakdown over 5 years, which has no Fx fees, only custody and dealing costs.
The issue with taxing low income workers is you end up handing it back in benefits. True it may make them think twice about demanding tax rises, until they see their basic standard of living is assured. Why do you always hear about these people working 16 hours and topping up with tax credits (only anecdotal). You need to get peoples income to provide that basic level of living, either through decrease in the cost of living (housing?) or through boasting their salary outside of benefits. For example, increase the minimum wage but offer companies tax cuts to come out neutral but remove the benefits and bring people back into taxation.
@FIWarrior – thanks for the kind words. I’ve made a post on my blog with some thoughts.
[To The Investor – please delete my comment if you’d rather me not “shilling” for my blog in the comments 🙂 ]
@YoungFiGuy — Once is okay cheers, especially as you’ve contributed plenty of thoughtful comment here first. Will take a look at your post myself. 🙂
& IanT
Reference that Sellwood Consulting article: I cannot see any reference to inflation. Unless I have missed it, doesn’t their ‘flat return over 10 years’ scenario actually mean a loss of 10 x annual inflation compounded?
If they are talaking about ‘real return’, the yields they mention are rather high in todays environment. A real yield of 3.1% implies an actual yield somewhere north of 6% in the UK…..
VWRL vs VWRD – there is no practical difference. The £ denominated version is pure labelling smarts. Fund providers know that investors are more comfortable holding funds that show prices in home currency. You are going to pay FX charges somewhere along the line – to the broker, to the fund manager, to some agent operating on their behalf – anytime you invest in something that holds foreign securities.
@ Rhino – I think Selftrade is being surprisingly transparent there. I’ve heard before they are reasonable on FX charges, not sure if that’s still true. Still, I’m intrigued. Think I’ll do some digging with brokers and fund providers to see if we can find out where the FX charges are levied depending on the scenario. I expect we’ll find it’s all over the shop. It usually is.
@ Kraggash – I got the impression they were conveniently skipping the inflation issue. They didn’t mention it which is suspect. Still, even with inflation the bond apocalypse is a day at the beach in comparison to equities. As long as we’re not talking 70’s style inflation with kipper ties on.
@ YoungFIGuy – re: pensions points
Very interesting summation of the various pension fiddlings. I’ve got 2 main points in response:
1. The changes seem to be made at least partly with a view to ensuring the State Pension survives into the future despite increases in life expectancy and the demographic bulge putting the system under pressure. As I understand it, raising the minimum age is reasonably effective. Obvs they should ditch the triple-lock vote-grabber but hopefully inflation protection stays. That should be a given for pensioners.
2. Planning for anything 20 – 50 years ahead must account for a large degree of uncertainty. You can no more assume the same State Pension as you can the same tax system as you can world order, and we can ramp up the alarmism from there. Long-term plans must build in a degree of flexibility / reasonable sense of the limitations of contingency planning / acceptance that some things are beyond control. Hey, maybe I won’t even be here to worry about it 😉 Someone will always say, “Yeah, what you gonna do in the event of some Argentine style pension theft?” Well, what I’m gonna do is be wiped out. I can’t afford a bolthole in New Zealand, so Plan A is to hope it never happens. I’m being flippant but you could, for example, plan for the State Pension to be accessible at age 70 and worth 75% of current value. Or 50%. Or 0%. Whatever lets you sleep at night.
On the point about private pension age increases – to the best of my knowledge that change has not been put into law, therefore not currently an issue. Do you understand differently? I understand your underlying point is it’s something that could happen / may well happen – which I agree with.
@The Accumulator – without doing a full analysis (obs!) I would imagine it changes their ‘high chance of some gain with a small chance of flat return’ conclusion to ‘high chance of loss, with small chance of gain’ over 10 years. Which is not an apocalypse, but not great, with 10 years of oportunity cost as well.
@Accumulator. It would be better to have Vanguard charge the fx charge than your broker. I would bet that Vanguard would be cheaper.
@TA – when I say ‘exorbitant’ I mean 1%. Realistically thats probably very similar to other brokers, but I’m aware if you shop around you can get charged significantly less in this area.
I’m pretty sure the implication was that it was selftrade applying the charge as opposed to vanguard.
I agree with you that the denomination quoted against the ETF has no bearing on whether the underlying currency is, i.e. $ in this instance so I think there will be an FX charge involved.
But I would be very happy to be proven otherwise on this..
It will be both on the way in and the way out though I bet, so 2%, thats prob more than you’d pay an estate agent to sell your house, so I think my ‘exorbitant’ (to my mind) is justified..
I think this issue with the ‘inflation issue’ is that it applies to all assets. So your stocks will also do 3% less (or whatever) in real terms, too. As long as you’re comparing real with real or nominal with nominal, I think you’re good.
This is not to say I don’t think inflation is a bond killer… it’s *the* bond killer as far as I’m concerned.
But “inflation will kill your bonds” is IMHO a different argument to “base rates going up 2% will kill your bonds”.
I’d argue they were addressing the latter here (even though the two factors are obviously somewhat interconnected). 🙂
Hmmm which bond funds to hold?
My bond fund holdings are in UK gilt funds. Their only purpose is to provide ballast if there is a huge equity crash. I’m not looking for growth or income from them. In the GFC corporate bonds fell along with equities but gilts went up. Logically gilts (government backed) should be inversely correlated to equities (children of the free market). But I suppose we’ll find out what happens next time…