I did another of those Portfolio Therapy questions for the Times over the weekend.
Alaska and Gloriana below Hurley Lock
The lock-keeper at Hurley jumped me on Saturday morning – brandishing his copy of the thunderer!
See what you think!
Where can I invest my £1.2m savings?
Julie Petersen, 62, originally from Wales, has spent the past 26 years living in Hong Kong and Singapore, where she works as a researcher for several broadcasters.
In 2021, aged 64, she plans to retire and move back to the UK. Julie, who is single, is wondering how to finance her retirement back in Britain. She does not have a conventional pension, but she does have £1.2 million sitting in a deposit account, which she wants to invest.
Julie, who has a sister and a nephew in Britain, will use about £600,000 of her pot to buy a property, although she has not decided where, and wants help with ideas for the remaining sum.
“I have been away for such a long time and I have never had a financial adviser, so I do not know whether I would be better keeping it in cash, or investing it,” she says. “I am at a loss to know how to go about this. Should I wait until 2021 to evaluate the outcome of Brexit, or go ahead now? I’ve heard it’s a really bad time to buy an annuity.”
Julie says she does not want to invest in the stock market.
THE EXPERTS
Tom Selby, senior analyst at AJ Bell, the wealth manager
“Holding large sums of money in a deposit account might seem like a safe option, but Julie risks seeing her spending power eroded by inflation.
“NS&I bonds, which are backed by the Treasury and 100 per cent guaranteed, could be worth considering. They have a range of products paying 0.8 per cent to 1.95 per cent, although each has slightly different terms and conditions you’ll need to consider.
“Julie could also get about 2 per cent interest on two-year deposits from a number of banks and building societies. To maximise her level of protection she should spread her funds across multiple banks to make sure she is fully protected by the Financial Services Compensation Scheme, which applies to the first £85,000 of savings at any bank.
“Given she doesn’t want to take any investment risk, buying a purchased life annuity would be a sensible option. These provide a guaranteed income for life, although they are treated slightly differently for tax purposes, with a portion of the fund [the deemed return of capital] tax-free and the rest subject to tax. The amount that is tax-free will depend on Julie’s life expectancy.
“Purchased life annuities are not simple products, so Julie should speak to an adviser. It’s vital she tells her insurer about any health conditions or lifestyle choices she has which could affect her life expectancy.
“If you’re a smoker, for example, the insurer should pay you a higher income because it thinks you’ll live less long. Consider getting inflation protection so spending power is preserved over retirement.”
Henry Tapper, chief executive of Age Wage, a pensions rating system
“Julie will have to wait until she is 66 for her state pension. She can use thegovernment’s website to check how much her pension has been reduced while she was working abroad.
“Julie is healthy and has only herself to look after, so she’s best buying a purchased life annuity from an insurer through an independent financial adviser. This gives her a guaranteed wage for life, but she should consider delaying this until rates get better. In the meantime, she should put the money in a high interest savings account.
“If Julie did want to invest now, spending £500,000 on an annuity and leaving £100,000 in a savings account, the best rates on a purchased life annuity from Aviva would earn Julie a gross annual income of £25,700 from age 64, £27,600 from age 67, or £30,100 from age 70. She could also choose to buy what is known as an “escalation” purchased life annuity, which pays less at the start, but the income increases each year. Using the previous example, Julie would earn £16,169, £18,135 and £20,460 respectively, with her income rising by 3 per cent annually.
Dennis Hall, chief executive, Yellowtail financial planning
“With retirement lasting perhaps 30 years or more, Julie’s biggest risk is inflation, and an antidote to inflation is to invest in equities.
“I would encourage Julie to look at her reasons for avoiding the stock market. Approached the right way it offers a solution to her retirement predicament.
“If not, buy-to-let may be an option, although it too comes with risks. Capital is tied up with no easy access, and she has to consider rental voids, costs for repairs and maintenance, and fees, which will all reduce her income.
Henry says I had more fun thinking about Julie’s problem than I thought I would. I think that solutions like buy-to rent and equity release do not give elderly people the security that they crave.
Julie is in the fortunate position of being able to retire debt -free. She can live in a decent house without a mortgage and have a reasonable income and cash in the bank. Money won’t make her happy – that’s down to Julie- who by the smile on her face – looks more than capable of looking after herself
For those querying my preference for an annuity solution, I’d add
- Julie wants security – she is low risk and she’s looking after herself.
- Purchase Life Annuities are largely untaxed, being deemed mostly a return of capital
- If she’s taking a bet on her living long – she should opt for escalation
- If she’s prepared to take the risk of inflation taking off, she should go level
- Purchased life annuities are taxed preferentially (because they’re bought with taxed money and not from a pension) – details here.
Most importantly of all, an annuity is a wage for life, it takes away the difficult decisions of keeping money back, the worry of markets going up and down and it doesn’t need a financial adviser to manage.
Sure there is an opportunity cost for not being invested in equites- it’s called the equity risk premium, but that’s a cost that Julie seems prepared to pay.
Surely it is part of the pension freedoms, that people can choose the solution that’s right for them, not the one in the advisory handbook?
The alternative view from the financial community
Below, a selection of the comments I got for suggesting an annuity.
Financial ingénue seeks expert help, but knows enough to know that an annuity is a spectacularly bad deal at the moment.
Guess what advice she gets?
This is why I manage my own money. pic.twitter.com/UqrOffpZgj
— Franz (@franzvonloewe) August 11, 2019
A significant part of advice is helping people to understand when their preconceptions, when aligned with their objectives, are false.
— Alistair Cunningham (@Cunningham_UK) August 11, 2019
It’s not a price, it’s a cost of flat out ignorance. God help any adviser or talking head who condones that.
— Nick Lincoln (@HatTipNick) August 11, 2019
I would recommend 75% stocks in a drawdown portfolio.
If you can’t beat 2.25% pa you shouldn’t be giving advice.
— 7 Circles (@the7circles) August 11, 2019
How could she preserve her capital, if at this moment she is cash? It is imposible to preserve capital without taking risk.
Why would someone earning 1% per annum, not buy a house and pay a 4% rental yield?
She needs to buy one, the only challenge is how expensive?
— Eugen Neagu (@BespokeFS) August 11, 2019
OK, I know and like these people, they are great advisers, but I have one question to their solutions, which is this,
“what makes Julie wrong to feel the way she does?”
I note that all the tweets I had on this were from men, a number were considerably more abusive but most carried an implicit threat that I was out of my depth and should be leaving this to others.
Julie had decided to put her position on paper – newspaper indeed. She made it clear that “she does not want to invest in the stock market”.
Solutions that involve investing in the stock market are wrong for Julie, not financially, but emotionally – and we are talking about a person’s happiness and financial wellbeing.
Eugen sees this seemingly well-balanced woman as a victim of her inability to see an IFA when living abroad
Recommending the ‘nominal’ certainty?
62 years old is not late to invest, but some education would be needed. She pays the price of not speaking with a good financial advisor earlier!
— Eugen Neagu (@BespokeFS) August 11, 2019
And Eugen continues
I think we are drawing conclusions too early. Once she understands the utility of investing, she could reach conclusions!
Can an annuity ever be the right choice?
Julie’s case is an example of where an annuity can be the right choice – for Julie.
I suspect that if Julie went to a financial adviser, she would get education but not an annuity.
When I was doing my research I could not find an annuity broker who could help Julie with a purchased life annuity, the quotes came from Aviva – from a reputable annuity broker but that broker would not transact the business.
So to buy a purchased life annuity, Julie would either have to battle with the market or seek the help of an IFA; if she did the latter – she would be facing “education”.
I don’t envy Julie’s lot; I think a purchased life annuity is probably right for her, but whether she will ever find a way of buying one – is another thing!
Even if an annuity is the right choice, it looks like you are facing an uphill battle to prove it!
This is a good example of how a complaint evolves.
It is a requirement that a risk assessment and full fact find are obtained without them you cannot even start to advise let alone jump to a conclusion.
From the limited information given we don’t know if we are dealing with a retail customer or not what is her health like?
What are her outgoings? Does she own a home or will she rent? What currency is the deposit account in? Is wealth preservation a concern?
If that’s the law John, then the law’s the ass!
The Times spoke to a journalist, a blogger and an IFA. It got three different answers – we get 150 words!
Are we to have no discussion – because we are frightened about complaints?
These are indeed the regulations which advisers have to contend with. Whether you are right or wrong with your suggested solution Henry, you have no need to worry about being complained against and sued, whereas a regulated adviser has no backstop on the potential for being sued about his or her advice many years into the future. It is not the law that is an ass it is the regulator and the system which makes it a very high risk strategy for a regulated adviser to even consider engaging with a client in this manner.
Henry, I’m with you 100% but why is it so difficult to buy a life annuity?
Just to be clear, in the UK you don’t have an annuity exchange like Cannex where the pricing is transparent?
(https://www.cannex.com/index.php/services/canada/annuity-products/income-annuities)
We don’t – we have some good annuity brokers but they focus on “pension annuities”. It’s very hard to get information on pension annuities.
It’s behind an advisory paywall and advisors get cut out of the action when an annuity comes into payment. So it’s very hard to set up an annuity through an IFA and almost impossible to set one up without one!
Plus , if you dare suggest people consider buying life annuities , you are accused of offering financial advice which in this country is a sin (unless you are a regulated adviser)