A T R U S T N E T D I R E C T P U B L I C AT I O N
ISSUE 12 JUNE 2014
ESCAPE THE PENSIONS LABYRINTH
WHAT SWEEPING BUDGET CHANGES REALLY MEAN FOR SAVERS
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CONTENTS EDITOR’S NOTE Are the classic investment clichés worth their salt?
FINDING YOUR WAY THROUGH THE PENSIONS LABYRINTH
INTRODUCING ‘MACRO & CHEESE’ Investazine’s Daniel Lanyon looks at the global events impacting your portfolio.
FATHER TIME An easy, how-to guide to picking stocks you can hold for the long term.
RED FLAGS Value traps and Cinderella stories that don’t pan out – what to avoid when buying equities.
FIVE STOCKS TO HOLD UNTIL YOU GET OLD
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Investazine editor Jenna Voigt tips five stocks that can stand the test of time and pay a steady income to boot.
THE VOICE OF TRUSTNET DIRECT
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Head of Trustnet Direct John Blowers reveals why he took responsibility for managing his pension into his own hands.
TWO HEADS ARE BETTER THAN ONE
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Most savers will need more than just their pension pot when they retire, which is where an ISA comes in. Joshua Ausden explains how to use a personal pension and an ISA together.
THE EARLY BIRD GETS THE WORM
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Starting early and saving diligently over the years is the only surefire way to build up a sizeable pension, but should today’s retirees help the next generation get their pension savings started?
TRUSTNET DIRECT’S FUND OF THE MONTH
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FE Research analyst reveals the fund he’s backing in the current market.
COUNT YOUR PENNIES
Lifestyle pensions – those that take less risk the closer savers get to retirement – can be an easy option for those who don’t want to manage their own cash, but are they really the best choice?
INVESTMENT TRUSTS ARE FOR PENSIONS
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PLAYING HOUSE
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DANGER ZONE
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THREE INVESTMENT TRUSTS FOR YOUR PENSION
Three buy-and-hold investment trusts to boost your pension savings.
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With property prices soaring and pension savings ripe for the taking, should parents’ use their cash to help their kids on the property ladder?
ROLLOVER JACKPOT
The Association of Investment Companies’ Ian Sayers explains why investment trusts are tailor-made for pension portfolios.
our Income Limited (22.8%) .7%)
Is there any place for an annuity now that the Government has unshackled pension savings, Holly Thomas asks.
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Do you have enough saved to get you through retirement? The answer is probably not. We reveal how much you’ll really need to retire.
SMOOTH SAILING?
END OF THE ROAD
Auto-enrolment into workplace pensions is coming, ready or not. What every investor needs to know about the new scheme.
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Managing your own pension can lead to better returns than the average workplace scheme, but there are hidden dangers, warns FE Head of Research Rob Gleeson.
MY HERO: IRVING KAHN Sam Shaw reveals what investors can learn from ‘The grandfather of value’ – 108-year-old Irving Kahn.
INVESTAZINE TAKES A SUMMER HOLIDAY
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We’ll be back in July with an issue that takes you around the world.
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6 March 2009 – 2 May 2014 © Powered by data from FE 2014
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JENNA VOIGT
Chancellor George Osborne really shook up the pension landscape when he announced sweeping changes to savings access in his annual Budget statement in March.
FE TRUSTNET INVESTAZINE Investazine is published by the team behind FE Trustnet in Soho, London. Website: www.trustnet.com Email: editorial@trustnet.com CONTACTS Editorial Jenna Voigt, Editor Direct line: 0207 534 7661 Alex Paget, Reporter Direct line: 0207 534 7696 Thomas McMahon, Reporter Direct line: 0207 534 7697 Daniel Lanyon, Reporter Direct line: 0207 534 7640 General Pascal Dowling, Head of publishing content Direct line: 0207 534 7657 Advertising Richard Fletcher, Head of publishing sales Richard Casemore, Account manager Direct line: 0207 534 7669 Jack Elia, Account manager Direct line: 0207 534 7698 Photos supplied by Thinkstock and Photoshot
These changes, which allow savers to take out some or all of their pension pot at retirement (though if you take out more than 25 per cent it will be taxed at a marginal rate), has reduced dependence on annuities. Sales of these tools, which pay out a set annual income to savers, have plummeted since. In this issue, we look at exactly what is changing for savers under the new pension rules and what you need to do to make the most of the added flexibility. However, drawing down your pension may not be for everyone so we ask whether annuities still have a role to play for pensioners. There are also a number of tools, such as a SIPP and ISA, which can be used together to boost your overall pot when it comes to living off your savings. Though it is often said, starting early will give you the best chance of building up a suitable pension pot, so we’ve outlined a few ways to help your kids get their pension rolling. Within this issue, you’ll find several stock, fund and investment trust picks to drive your long-term returns. Thanks for downloading this issue of Investazine. In today’s busy world, we know it isn’t easy to keep up with your investment research. To be sure you don’t miss an issue, subscribe today and your fresh copy of Investazine will be downloaded to your device of choice each month. Happy reading! Jenna
WHY MAKE HAY ONLY WHEN
THE SUN
SHINES?
YOU HAVE TO WORK HARD WHEN IT’S RAINING SO WHY SHOULDN’T YOUR MONEY? Unfortunately, no-one can predict the economic climate. So our investment professionals aim to cultivate dependable, long-term returns, come rain or shine. We do this by gaining a deep understanding of every investment we make, considering the potential risks and rewards before investing for over 24 million customer accounts worldwide. Remember, the value of investments can fall as well as rise and you may not get back the amount originally invested. To find out how our investment blueprints can work for you, simply ask your financial adviser for more details.
www.franklintempleton.co.uk/blueprint As at 31 December 2013. © 2014 Franklin Templeton Investments. Issued by Franklin Templeton Investment Management Limited, 1-11 John Adam Street, London WC2N 6HT. Authorised and regulated by the Financial Conduct Authority.
THE BIG PICTURE
MACRO & CHEESE
A look at what’s going on in the world and how it affects your investments DANIEL LANYON
Our story begins a little over 2,500 years ago in the ancient city state of Athens with the birthplace of democracy. Fast-forward to the present day but stay with the same continent, at least for now, and voting is still very much de rigueur and it is affecting your money. Perhaps you didn’t notice but the half billion citizens of the European Union have been voting and the outcome resulted in a massive upset to the political establishment across the 28 member states, with anti-EU parties taking a huge number of seats, including the UK’s own UKIP party. Whilst Greece is only one country it is also one of the most important as a bellwether for the strength of the European recovery following the sovereign debt crisis.
other parts of the developed world purely because companies look cheaper. Europe is behind the UK and US in terms of its recovery from the 2008 financial crisis but its businesses are as competitive, it is just a little unloved and, don’t you wish you bought the UK and US in 2009? Speaking of democracy, India – the world’s largest – has also gone to the polls of late. The country’s 1.2bn souls have voted for its first rags-to-riches prime minister and the markets love it. Narendra Modi, who began his life serving chai-tea at a roadside stall, surfed a wave of pro-business optimism and reform to win the premiership. The MSCI India index has responded accordingly by rising more than 12 per cent in the two weeks following the win. India has always been a tricky place to invest and a quick glance shows it to be one of the most volatile stock markets, making it a place for only the already-diversified investor willing to make a long-term play. However, for those that can stomach the volatility and years where markets will crash only to rebound further the next
The slim parliamentary majority of Greek Prime Minister Antonis Samaras further exemplifies the precarious nature of European political cohesion and its effect on financial markets. His coalition holds just 152 of 300 seats and with a likely defeat of some coaliton members following the EU elections, his mandate to govern is threatened. The situation is similar in Italy, another important country in the European recovery story. Analysts are both warning this as a perilous situation that could spell trouble for investors as well saying it presents an opportunity to buy into the recovery story following a market correction at cheaper levels. Would-be investors in Europe should remember that it is a dynamic and vibrant economy and more importantly it is overlooked by many. There may well be a market correction in 2014 as political uncertainty makes investors in the continent more bearish, but either way European equities look attractive relative to
year, a bet that one of the fastest growing economies on earth will see its stock market rise over 10 years, might be worth a small punt. Investors would be wise to do this through an experienced manager or perhaps cheaper index trackers or exchange-traded funds (ETFs) – which will rise, or fall, in line with the stock market performance. For investors who still have upwards of five or 10 years to go until their retirement, macro blips like elections can create a buying opportunity for those who can buy and hold through the market cycle.
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STOCKPICKING
FATHER TIME CHERRY REYNARD
A few years ago, at the height of gloom about the prospects for the global economy, investors didn’t have to worry too much about the characteristics of the company shares they were buying. Everything looked cheap and, by and large, went up, whether its prospects were good, bad or indifferent. However, with stock markets now 50 per cent higher, more discernment is needed. With that in mind, what are the key characteristics sought by the top professional stock-pickers for their long-term holdings?
Fundamentals Strong balance sheet There are some characteristics sought by the majority of fund managers. For example, few are willing to take on the risk of a company over-burdened with debt, with weak cash flows and a declining asset base. A strong balance sheet is vital. This leaves a company less vulnerable in a market downturn, or to the caprices of bond markets and banks. There are dif ferent ways to measure balance sheet strength, but a key metric is the ‘current ratio’ which divides current assets by current liabilities.
of fund managers, who are, above all, keen to avoid vanity acquisitions and creative accounting. Most managers admit this matters more for smaller companies than larger companies. Anthony Cross, manager of the Liontrust Special Situations fund, says: “With smaller entrepreneurial businesses, we like to see at least 3 per cent equity ownership among the directors as a minimum. For larger companies, management is less important as their assets or distribution networks will run themselves.” Buxton is more dogmatic on management. He says: “The difference between a really good company and a less good company is management. We place a good deal of importance on meeting management regularly and believe that proper incentives matter: I don’t mind management being paid properly as long as it is for targets that deliver long-term returns for shareholders. I don’t like soft incentives and I like to see big share ownership.”
Return on investment
Low debt
Barriers to entry and pricing power
Low debt is part and parcel of balance sheet strength. Mark Martin, manager of the Neptune UK Mid-Cap fund, says: “There have been several years of reasonable corporate strength. If a company is still raising significant amounts of debt, things are not as healthy as they should be.”
Cross likes companies with strong barriers to competition, believing this will be a driver of better-than-expected earnings in the long term: This draws him to companies with intellectual property and copyrighted products such as engineering groups Spectrus or Spirex Sarco. He also focuses on finding stocks with good physical distribution networks – companies such as Diageo, Unilever, Aggreko or Compass – but also those with strong electronic networks such as Rightmove. Alternatively, he will look for companies with high, contracted, reoccurring income.
Richard Buxton, head of equities at Old Mutual, makes it clear that debt brings additional risk and can rapidly derail a company if the climate moves against them. However, a strong balance sheet does not necessarily equal no debt. James Henderson, manager of the Lowland Investment Company, says: “Some debt can be a good discipline. A lot of the best companies will have a degree of financial tension. It stops them making bad acquisitions by imposing a degree of discipline on how they spend their cash.” Debt levels are usually measured by the cash-to-debt ratio or debt-to-equity ratio and investors would want to see they were in line with sector norms.
Reliable management Equally, reliable and trustworthy management are a prerequisite for the majority
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Growing sectors Martin pays closer attention to the macroeconomic situation in which a company operates, looking for companies benefiting from long-term economic shifts. He reasons that this type of company is pushing on an open door when it comes to generating earnings. Buxton also likes companies operating in strong and emerging sectors.
Buxton says: “The merits of companies like this are unlikely to go unrecognised by the market.” “It is the third criteria in our process. Lots of people start with valuation and we believe that is a mistake. A truly great business would expect it to be expensive, but then they are likely to deliver better-than-expected earnings. The market tends to under-price barriers to entry,” Cross adds. The perfect company does not exist, at least, not at a price that investors would necessarily want to pay. As Buxton concludes, it is all about balancing a company’s merits against the price. There are few bargains left in today’s markets, but that doesn’t mean there aren’t plenty of companies that can deliver growth over the long term.
Valuation If a company has a lot of good qualities – sound balance sheet, good management, low debt – it probably won’t be cheap. Occasionally the market prices in such a bleak outlook for a company that it is possible to pick up a bargain, but in a buoyant markets of 2014, this is increasingly rare.
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STOCKPICKING
RED FLAGS What to watch out for when buying a stock LOW PRICE TO EARNINGS Don’t be seduced by low price to earnings multiples, they can be manipulated.
ACQUISITIONS “We don’t like businesses that are highly acquisitive, that are trying to build scale overnight. It can give rise to accounting fiddles.” Anthony Cross Liontrust Asset Management
“Price to earnings is driven by softer things such as provisioning policy and it can vary considerably between companies.” James Henderson Henderson Global Investors
“I find the bigger the deal, the more likely they are not to grow value. Sizeable acquisitions are always a worry.” Richard Buxton Old Mutual Global Investors
CONCEPT STOCKS Companies with a big idea, but little or no revenues - prevalent in the technology bubble. This also applies to larger companies diversifying into ‘fashionable’ areas, outside their core expertise.
POOR CASH GENERATION “The growth of dividends over time tends to push companies in the right direction. Dividends are cash payments and therefore it forces an investor to look at cash generation. If a company isn’t cash generative, it often goes wrong.” James Henderson Henderson Global Investors
POOR FINANCIAL PRACTICE ‘Creative’ accounting can show up in a number of ways and most fund managers prefer to look at cash flow, which is less easily manipulated than revenues. “Poor cash conversion and low cash taxes are red flags for us...We also don’t like to see a lot of exceptional one-off items.” Mark Martin Neptune Investment Management
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We strive to discover more. Aberdeen’s Asian Investment Trusts ISA and Share Plan When you invest halfway around the world, it’s good to know someone is there aiming to locate what we believe to be the best investments for you. At Aberdeen, we make a point of meeting every company in whose shares we might look to invest. From Japan to Singapore, from China to Vietnam, we go wherever is required to get to know companies on-the-ground, face-to-face. To steer your portfolio in the right direction, be with the fund manager who aims to discover more in Asia. Please remember, the value of shares and the income from them can go down as well as up and you may get back less than the amount invested. Asian funds invest in emerging markets which may carry more risk than developed markets. No recommendation is made, positive or otherwise, regarding the ISA and Share Plan. The value of tax benefits depends on individual circumstances and the favourable tax treatment for ISAs may not be maintained. We recommend you seek financial advice prior to making an investment decision.
Request a brochure: 0500 00 40 00 invtrusts.co.uk/asia
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Please quote A TNM 01
STOCKPICKING
FIVE STOCKS TO HOLD UNTIL YOU GET OLD
JENNA VOIGT
Popular music is famously changeable. One month’s number one hit is often yesterday’s one hit wonder. Unfortunately, the same can be true when it comes to investing. Enron, BlackBerry and Boo.com were once the stock-du-jour and are now consigned to history. Fortunately, as in the music world, there are a number of heavy-hitting stocks that can stand the test of time alongside the Rolling Stones, Bruce Springsteen and Bob Dylan.
Though there’s no prescription for the stocks you can buy and hold for the long term, there are certain qualities that all of these companies have in common which can help investors determine their staying power. Buy-and-hold companies are often leaders in their field, keep little to no debt on the books and have long histories of rising dividends. Here’s five of the greats.
Diageo Johnnie Walker, Baileys and Guinness are but a few brands which fall under the umbrella of global drinks giant Diageo. The durability of its brand lies in the nature of its products. Investors can rest easy knowing that alcohol is not likely to dramatically change over the years and a massive company like Diageo is at the forefront of production. Being a global leader in scotch gives the drinks company an edge because other producers aren’t likely to come up with a new, globally popular brand in any sort of short timeframe. After all, the best scotch is aged. With a solid dividend yield, or income payout, of 2.8 per cent and a global client base, Diageo is not likely to lose its competitive edge anytime soon, making it a good stock to buy and hold.
British American Tobacco Like alcohol, tobacco products aren’t likely to disappear anytime soon, though there has been pressure on cigarette companies due to known health risks. However, from an investment perspective, companies like British American Tobacco (BAT) can stand the test of time due to its captive customer base. BAT has also been able to grow its dividend well ahead of inflation over the last five years. It’s currently paying out 4.3 per cent. This is expected to rise to 4.6 per cent in 2015.
Unilever Everyone needs loo roll. All jokes aside, Unilever’s impressive portfolio of consumer staples make it a strong stock to buy and hold as part of any savings strategy. The company rakes in more than £1bn in sales a year and distributes its products across 190 countries. Unilever holds such a strong position in its field that it’s not likely to be shaken by competitors or global events. It also has pricing power, which means that consumers will pay more for brands they recognise like cleaning products Cif and foods like Hellmann’s. Unilever is yielding 3.5 per cent, expected to rise to 3.7 per cent next year.
Rolls-Royce Rolls Royce is best known for starting a brand of luxury automobiles driven by the Queen and occasionally Jeremy Clarkson. However, the bulk of its business is in aerospace engineering. Rolls Royce is the world’s second-largest maker of aircraft engines. Production of these engines isn’t what makes Rolls Royce attractive, it’s the firm’s ability to retain a repeat client base through parts and service for its products. The sector as a
whole tends to operate on big contracts, which can be difficult to come by, but once landed they provide a level of stability that’s unusual in other sectors. Shares took a big hit earlier this year when Rolls Royce said its revenue and profit growth would “pause” in 2014, but analysts expect the company to soldier on as it has done in the past. It’s a quality company that should perform well for investors over the long term. Rolls Royce pays out a 2.3 per cent dividend yield. This is expected to grow to 2.5 per cent in 2015.
GlaxoSmithKline A number of leading fund managers say a key theme in their portfolio is changing demographics around the world. People are getting older and living longer, which means there’s increasing demand for drugs to improve the quality of this longer life. Blue-chip pharmaceutical company GlaxoSmithKline is well placed to take advantage of this trend, as well as a rising demand for quality healthcare in emerging markets. Though the company may not experience the same kind of growth it has in the past due to regulatory pressures and increasing competition from generic drugs companies, the pharma behemoth is not likely to disappear from the investment stage. This year Glaxo is yielding 5.1 per cent, expected to inch up to 5.2 per cent next year. 14
Witan wisdom
TM
“Money frees you from doing things you dislike. Since I dislike doing nearly everything, money is handy.”
Groucho Marx (1890-1977)
Make the most of your savings by investing in an ISA. The benefits of ISAs are fairly well-known but you may wonder why should you consider Witan for your stocks and shares ISA. Witan Investment Trust offers diversified exposure to global markets using a multimanager approach. Our global portfolio offers exposure to the world’s major equity markets thereby offering diversification by geographical region, industrial sector and individual stock. We are the only global equity multi-managed investment trust, which means in addition to striving to deliver added value we seek to smooth out the volatility normally associated with a single manager. Contact us to find out more about the Witan Wisdom ISA.
Witan Investment Trust is an equity investment. Please remember that past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise, as a result of currency and market fluctuations, and you may not get back the amount originally invested. For further information, simply scan or take a picture of the QR code using your Smartphone. It couldn’t be easier!
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VOICE OF TRUSTNET DIRECT
TIME TO TAKE CHARGE
JOHN BLOWERS HEAD OF TRUSTNET DIRECT
Pensions aren’t boring! There, I’ve said it. To be honest, I used to completely glaze over at the mention of pensions, retirement, annuities and all the other jargon I associated with shovelling money into a black hole. I had issues early on. I fell for the smooth patter of salesman who easily convinced me that starting a pension early on was a good thing. Long after the salesman and his firm had disappeared, I harboured a warm glow inside that I had done the right thing and would surely now be sitting on a sizeable nest-egg securing my financial twilight.
And I now have a plan. I’m still just about young enough to look for some risk in search of higher growth, but as my pension fund grows and I get older, I know that I’ll move slowly into a less aggressive, ‘wealth preservation’ phase as I edge closer to retirement. That’s where the fun used to stop. They took all of your money from you and gave you an income for life. No control, no flexibility, no nothing. Now you’ll be able to continue managing your money, keep it growing and take it as you need it.
On closer inspection, my retirement fund was worth significantly less than the money I had put in over the years and I pulled the plug.
You don’t need to be infatuated with the internet or investing – just a few minutes a week or month to ensure everything is running smoothly.
The good news is that the fee-ravaged cash I rescued out of my first attempt at a pension is now a part of my SIPP, a self-invested personal pension, where I have hauled together all my old ‘going-nowhere fast’ company pensions and found that it has produced a pretty decent pot now it’s in a low-charge, higher-growth environment (guess where?).
The fly in the ointment? The catch? There’s always a catch.
And I’m in charge. That’s why pensions aren’t boring any more. I’m having fun controlling my investments and enjoying researching and listening to the experts as to where the next growth opportunity is. The reality is, however, I’m a buy-and-hold guy. I love to watch my pension wax and wane, but generally improve. My mantra is that, over the last 50 years, the FTSE has averaged 9 per cent growth, so hold tight and enjoy the ride. It certainly beats an annual letter from a faceless pension fund manager with lacklustre growth not warranted by the charges imposed.
Well, depending on how much you’ve accrued for your pension by the time you do retire, you’ll have a sneaky idea of how old you’ll be when it runs out. The question is, will you still be alive and kicking when you’ve spent it all? And what then? Finally, there are three things I now understand: 1.
My employer can no longer afford to fund the pension I need.
2. In retirement, the government will give me just enough not to embarrass them by dying of cold or starvation and that’s it. 3.
The financial services industry is expensive and it’s cheaper to do it yourself.
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TRUSTNET DIRECT PORTFOLIO MANAGEMENT
Investazine talks to Whitechurch’s Ben Willis about why it’s important to spread your savings across more than one investment wrapper. JOSHUA AUSDEN
TWO HEADS ARE BETTER THAN ONE
How to use a SIPP and an ISA together
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For many so-called savers out there, contributing 3 or 4 per cent to their work-place pension scheme is as far as their investments go.
Performance of indices since Oct 1987 800% 700%
A – FTSE All Share (710.3%) B – Bank of England Base Rate (320.7%)
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600%
However, with life expectancy and living costs both on an upward trajectory, and cash still yielding next to nothing, taking on even greater investment risk has become a necessity rather than a choice. For many, there is a decision to be made between investing in a pension and an ISA – a tax-protected individual savings account. Both have significant tax advantages, but while pensions often benefit from company contributions, ISAs are much more flexible when it comes to redeeming your pot of cash. Ben Willis, head of research at Whitechurch Securities, says these two wrappers shouldn’t be viewed as being mutually exclusive. First things first, he says it’s vitally important to make sure your pension is invested in the right areas before you start thinking about putting your cash to work elsewhere. “Ultimately, you can’t touch your pension-pot until later on in life. The new [Budget] changes mean you can get access earlier, but for most people it’s still a very long-term investment,” he said. Ben Willis
“What you invest in should reflect that. If it’s 30 years until you even consider touching your pension, you’re likely to be prepared to take on a lot more risk.” “Equities are the most popular asset class to go for, and as long as you’ve got a 20 year or so horizon then it makes sense to be 100 per cent invested.” Willis points out that even during equity bear markets, investors have made good money from equities – as long as they’ve taken a long-term time horizon. Timing the market when you’re investing for something decades down the line becomes almost an irrelevance, he says. If you’d invested in the FTSE All Share on the eve of Black Monday in October 1987, when the FTSE All Share shed more than 30 per cent in six weeks, you’d be sitting on a return of over 700 per cent today. Cash, measured by the Bank of England Base Rate, has returned 320.73 per cent over the same period.
500% 400% B
300% 200% 100% 0% -100% Jan 88
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16 October 1987 – 9 May 2014 © Powered by data from FE 2014
Source: Trustnet Direct The period in question includes a number of vicious stock market crashes, including the 1997 Asian crisis, 2000 dotcom bubble sell-off and the global financial crisis in 2008. Willis explains that investors shouldn’t underestimate the power of compounding returns, particularly from dividends, which makes time in the market particularly important. That said, he says investors do need to be active with their holdings as they get older. He says active lifestyling, which consists of switching out of riskier assets like equities and into generally less volatile areas like bonds and property as you approach the last 10 years before retirement, is a good option. While the majority of investors are perfectly content with the list of funds their work-place pension provider offers them, for savvier investors Willis says a SIPP is a better option. “One of the big problems with pensions is that investors don’t know how flexible they can be,” he explained. “Maybe they don’t want to know.” “In general, investors are offered a cautious, balanced and aggressive portfolio from their provider and that’s the end of it. They are ignorant of the other opportunities out there.”
What is an ISA? An individual savings account (ISA) is a wrapper that allows investors to hold cash, shares and collective vehicles free of capital gains and income tax. As of July this year, investors can invest up to £15,000-a-year is an ISA under the ‘New ISA’ rules which come into play on July 1, 2014. From July 1, 2014, when any ISA will automatically become a NISA, money can be added to either a Cash or Stocks and Shares NISA up to the new £15,000 limit.
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“If you invest in a SIPP you get a far wider choice of investments to choose from. You’ve got to be comfortable in making the decision and you’ve got to be prepared to get things wrong.” “Your run-of-the-mill aggressive portfolio may serve you just fine, but generally only if you’re looking at it from an absolute point of view. When looking back and seeing a big profit a lot of people are going to be happy, without realising from a relative point of view they’ve done poorly.” Willis says that there are a number of very good onestop-shop funds out there for investors who don’t want to construct their own portfolio. He points to the Jupiter Merlin range, which comprises of funds with differing equity content and risk profiles, as very strong contenders. The Jupiter Merlin Conservative Portfolio or Jupiter Merlin Income funds are possible alternatives to a cautious portfolio recommended by your pension provider, while Jupiter Merlin Growth and Worldwide are more aggressive options. On-top of saving via a pension, Willis says that the tax advantages make an ISA a no-brainer. “ISAs are much more accessible in that you can redeem the money out whenever you want. For that reason, you probably want to be a little more short term,” he said. Willis says ISAs are rightly viewed as a goal-orientated investment; for example, a tool to help you save up for a house deposit or a wedding.
What is a SIPP? A self-invested personal pension (SIPP) is a type of pension plan that enables the individual to choose and manage their investments, with all the tax-incentives of a regular work-place plan.
When looking back and seeing a big profit a lot of people are going to be happy, without realising from a relative point of view they’ve done poorly. “For this reason the appetite for loss is far smaller,” he said. “You want to generate a decent return – certainly more than cash, but because you tend to have a goal in mind your mind is much more focused on the capacity for losing money.” Tim Cockerill investment director at Rowan Dartington, says that with the exception of risk profile/time horizon, nothing should differentiate the types of fund investors hold for their pension or ISA. “The process you go through when selecting a fund should be the same. It’s the quality of the manager and the process, and the objective that is important,” he said.
Tim Cockerill
He says that ISAs can come in particularly useful for investors even after they’ve started redeeming their pension pot. “It’s certainly worthwhile putting away some of your tax free lump sum back into an ISA wrapper. Twenty-five per cent of your pot can be taken as a lump sum, so if you have a £200,000 pension pot that’s £50,000,” he said. “Obviously you can’t put all of this away at once [due to the annual £15,000 limit], but it means you can benefit some immediate tax relief after already having tax relief from your pension.”
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TRUSTNET DIRECT PORTFOLIO MANAGEMENT
Daniel Lanyon explains why kick-starting your kids’ pension might be the best thing you can do for their financial future. DANIEL LANYON
THE EARLY BIRD GETS THE WORM
Sex, alcohol and pensions. I’ll give you a clue; only one of those things is on the mind of no more than 12 per cent of young adults in the UK. Millennials, the generation born in the 1980s, are hitting 30 years old and in reference to the above statistic, only about one in ten has started planning for their retirement by starting a pension. Politicians, financial experts and their baby-boomer parents all agree that something has to be done, and fast, but this generation – dubbed the Peter Pan generation – just doesn’t want to face reality. Projected increases in longevity and generally ageing demographics mean those born in the 1980s and 1990s can expect to qualify for a state pension at a much older age than previous generations and at less generous levels. In fact, Chancellor George Osborne has warned so-called ‘millennials’ are unlikely to receive a state pension until they are 70 and that it is likely to be a significantly lower amount adjusted for inflation. Research by investment manager Blackrock found that 25- to 34-year-olds have “entirely unrealistic expectations” about their retirement and the amount of monthly savings. The analysis found that for those in this age group to retire on an annual pension of £30,000 they would need to amass a pension pot of £600,000. However, for this sum to be reached a 25-year-old would have to save £400 every month until they reach the current retirement age of 65, assuming a 5 per cent annualised interest rate and that a 35-year-old would have to save £750 a month until they retire. Another study by the Savings and Investment Policy Project found that young people should expect a retirement characterised by debt and hardship unless a major cultural change was affected. They say there is a looming pension crisis that could reach tipping point by 2035 when those entering retirement will be increasingly less well off than earlier generations. As a result, people will face substantially reduced living standards for the remainder of their retired lives unless young people take more responsibility in kick starting their pensions. Most people further along in their careers would advise getting the ball rolling as soon as you start earning; however, with a fall in real incomes particularly felt among
young people, few have the money or incentives to get things started. For a generation that have entered the world of work with ever increasing student debt and the uncertainty and recession of the Financial Crisis, planning 40 years ahead has been put off as long-term financial expectations have worsened. True, with auto-enrolment in company pensions soon to be enshrined in British law this might change somewhat, but for a large chunk of young people retirement is not looking to be so easy. For baby-boomers, the generation born in the two decades after World War II, the situation is markedly different. As they enter retirement age they have seen a huge rise in house prices and living standards.
What can previous generations do to help? The stark differences between generations will be mitigated, for those that can afford it, by help from parents to their children with living costs, paying off debts or study costs but why not use the money to kick start a grown up child’s pension? Could an early nudge from parents toward starting pension be more beneficial in the long term, than say helping with a first deposit for a house? The benefits of compound interest would argue that to be true. Imagine a scenario involving person ‘A’ and person ‘B’. Person A’ begins adding £200 to their pension per month and Person B does the same but begins 10 years later, say the difference between 23 and 33 years of age. Assuming an interest rate paid of 5 per cent and a retirement age of 70 and a constant stream of payments. The difference in the overall lump sum obtained by person A would be £452,856.02 compared to person B which would be £256,100.28, almost double the amount!
The early bird gets the money
£452,856.02 £256,100.28
Starting pension at 33
Starting pension at 23
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The difference in income post-retirement and quality of life is astronomical. The earlier you start saving for retirement, the easier it is to accumulate enough wealth and if parents can afford to help their children save for retirement, this gives them a real head start in life and reduces the risk of a retirement living in poverty, according to Martin Bamford, a chartered financial planner at Informed Choice. However, parents should be wary of going gung-ho on boosting their kids’ pensions, or they could be slapped with a giant tax bill at retirement. “If big enough contributions are made from an early enough age, there is an outside risk that children will eventually face a lifetime allowance tax charge on the size of their pension fund, particularly if they become a high earner when they start their careers,” he said. The maximum amount a saver can put away tax free is £1.25m, having been cut from £1.5m earlier this year. Savers will have to pay tax on the excess amount depending on how they withdraw the funds. If it’s a lump sum, a hefty 55 per cent is levied on savings. A regular pension will incur a 25 per cent tax charge. Presumably, this caveat won’t affect a huge number of people and starting early gives people a much better chance of building up a healthy pot by the time they leave work.
Where should you invest? “If a parent is funding a pension for a child, we usually recommend investing solely in equities,” Bamford said. “This is the highest-risk option from an investment perspective and has the potential to deliver to the biggest long-term returns.” Martin Bamford
“[Young adults] have time on their side when it comes to retirement planning and can afford the short-term volatility, which comes with equity investing. As they get older and approach retirement, they can phase the pension fund into lower-risk investments.”
“The tax relief available on these pension contributions depends on the circumstances of the parents and children, but at the minimum 20 per cent, income tax relief will be added and the pension fund should be outside of the parent’s estate from an inheritance tax perspective.” However, Bamford advises investors seek advice to avoid unexpected tax charges.
Tim Cockerill
“This is of course a nice problem to have, but one that can be avoided with proper planning at an early stage,” he added. Another method would be to invest in funds, says Tim Cockerill, investment director of wealth manager Rowan Dartington. He recommends going above the usual risk spectrum given the long-term investment horizon of a twentysomething investing for retirement. He says this should be by using a mixture of funds investing in smaller companies and emerging markets as well as exposure to European and US equities. “This will allow would-be investors to take more risk than if they were investing in a shorter timeframe. You can expect volatility but you are setting yourself up for lots of growth, which are really two sides of the same coin.” “There is a tendency to go for funds that are fairly mainstream because of the long-term investment nature of a pension, but if you want to also enthuse someone who is new to managing their pension you want to go for funds that are a bit more interesting and these five do that.” “They carry the above average level of risk and so investors should be aware of this, but ultimately these are funds and are not going to lose all your money and 20 years from now, could work very nicely.” However, Cockerill says investors should be prepared that there will be times when they look at their portfolio and think the funds are not doing very well but those should be shorter term moments in a much longer upward trend.
Tax benefits There may also be a tax advantage for parents kickstarting a child’s pension fund due to inheritance tax rules, Bamford says. 22
COVER STORY
ESCAPE THE PENSIONS LABYRINTH From 2015, savers can access all of their savings, but what does this mean for you? Pﾃ．RAIG FLOYD
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Whether the recent Budget proves to be the revolution for pension saving some have claimed, it was undoubtedly radical, sweeping away decades of regulation. On the face of it, the Budget also marked a shift in government attitude towards consumers. Chancellor George Osborne said it was time government trusted people to look after their own financial affairs without the state nannying them.
The changes in the budget were quite simple. Though investors still have to wait until the minimum retirement age of 55 (57 from 2028), from April 2015 they will be able to take all of a defined contribution pension arrangement in cash if they so choose. Up to 25 per cent of the fund may be taken as a tax-free lump sum and from April, the rest may be taken as cash subject to your marginal tax rate rather than the punitive 55 per cent charge that used to be levied on withdrawals.
Though it will be considered by many that the Budget signed the death warrant for annuities, which provide a fixed annual income in exchange for savers’ pension pots, this is more rhetoric than reform. Compulsory purchase was removed in 2011 when the alternatives of capped and flexible drawdown were introduced. Pension pot: Both models imEntering posed restrictions retirement on income levels (age 55) and it is these that 25% tax free have been removed in lump sum the Budget.
Certain sections of society have been calling for greater investment freedom at retirement, particularly as circumstances – the financial crisis and the effect of quantitative easing in particular – have driven incomes from annuity products to historically low levels.
So what’s changed? Budget 2014 – pensions changes at a glance
• • •
• • •
All tax restrictions on pensioners’ access to their pensions to be removed. The taxable portion of pension funds taken as cash to be charged at normal income tax rate, down from 55 per cent. The minimum guaranteed income for flexible drawdown has been reduced to £12,000 (from £20,000) and those in capped drawdown may now draw up to 150 per cent (previously 120 per cent) of an equivalent annuity, based on government tables. The total pension savings that may be taken as a lump sum is increased to £30,000 (from £18,000). Up to three small pension pots of up to £10,000 (previously £2,000) may be converted to cash. A new pension bond, available to those over 65 years from January 2014, will pay “market-leading” rates of income, allowing those who may purchase an annuity to defer the decision. Up to £10,000 may be saved in each bond.
Full or gradual withdrawal: Take some or all of your pension pot – this will be taxed as incomeas income Annuity
Quick wins Osborne made some immediate revisions that increased the amount of pension that may be taken as a lump sum from £18,000 to £30,000.
The level of guaranteed income required to access Drawdown: flexible drawdown, where Enter drawdown – savers can withdraw as You keep your money much income as they like, invested but take an income whenever they like, was also reduced from £20,000 to £12,000 a year. The maximum from a capped drawdown, where limits are placed on the amount of income savers could draw from their pension, was increased from 120 per cent to 150 per cent of an equivalent annuity.
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Pension changes by the numbers Before 2015
Lump sum
Flexible drawdown eligibility Capped drawdown limits
After 2015
What does this mean for savers? As ever, with freedom comes responsibility and investors will face new challenges with greater access to their pensions.
£18,000 £30,000
Retirement planning has already had to accommodate changing lifestyles in recent years.
£20,000 £12,000 income income
“We now see stages in retirement – semi-retirement, full but active retirement, whereby expenditure is high, as people want to reward themselves by travelling and passive retirement, which is more like the traditional retirement model where expenditure decreases,” says Sarah Tory, independent financial adviser, Shepherd & Wedderburn.
120%
150%
Trivial commutation, the term applied to small – hence trivial – funds being converted to cash has been increased from £2,000 to £10,000. It is also now possible to withdraw three (previously two) small pots as a lump sum.
“By having access to pension funds this can help facilitate the changing requirements.” However, those who intend to access more of their savings earlier in their retirement must consider several key issues.
Investment Those who reject the security of an annuity must reassess their investment position. Pensions providers typically use a lifestyle fund as a default which gradually switches more volatile assets – equities – into what have been considered ‘safer‘ assets such as government bonds and cash as the investor approaches retirement. This may no longer be appropriate if savers do not intend to purchase an annuity as their savings will be in a low return portfolio that will find it hard to keep pace with inflation.
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Cash flow The asset class a pension pot is invested in will have a considerable influence on how much savers have to spend. Sitting in cash will provide easy access to funds, but won’t provide any investment return worth mentioning. As trends change, so the income a person needs in the different stages of retirement will change. Analysing cashflow in detail will help make the right decisions as to how much of a pension fund to take – and when.
Tax Most pensioners pay tax at the lower rate, but now larger sums may be withdrawn, the unwary may get a nasty surprise by way of a hefty tax bill. Investors are going to have to come to terms with these new freedoms and carefully assess the best option or face making a costly error, says Tory.
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Don’t leave it to the last minute... The government has promised all investors will get access to free and impartial guidance on the options available to them at retirement. How this is to be achieved is also yet to be determined, but it will be important for investors to find out just how much guidance they require. The more complex your affairs, the more likely you are to need a specialist to advise on those matters. But whether savers choose guidance or advice, more careful – and more regular – planning is required, says Tom McPhail, head of pensions research, Hargreaves Lansdown. “The critical thing is not to sleepwalk into retirement because what the chancellor has done gives you access to a bag full of money. You’ll need a longer run up to retirement, because you can’t plan things at 64 and a half and hope things will work out for the best.”
It’s not all good news Unfortunately, there isn’t much out there for savers ready to hit retirement aside from purchasing an annuity or living off hard won savings. The Budget changes were completely unexpected and financial institutions cannot produce new products overnight.
Though annuity purchases will lose ground to drawdown for those who want greater flexibility in accessing income, they still have a role to play for many individuals. “Annuities are not dead,” says Greg Thorley, a director of Life Academy. “People won’t be buying Maseratis and will be concerned about tax liabilities and taking their money in cash.” “When it comes to retirement, people want to know what they do with their time, how to make ends meat and keep the car on the road, not blow it all on cruises.” Increased longevity is a blessing, but it means our retirement funds have to support us for longer and many will choose the security of regular income over flexibility. In reality, those retiring in the near future will choose more or less as they would have done before the Budget. Those who can afford to wait will, while those who need income will annuitise or perhaps consider drawdown. It is those in their 40s who will have the greater flexibility, but also must take greater care as to how they make use of it.
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TRUSTNET DIRECT PORTFOLIO MANAGEMENT
TRUSTNET DIRECT FUND IN FOCUS FE Research analyst Charles Younes shares the fund he’s tipping for the current market conditions. CHARLES YOUNES
Baillie Gifford Japanese 5 YEARS PERFORMANCE
ONGOING CHARGES
+55.8%
0.66%
80% 70%
A – Baillie Gifford Japanese (55.8%) B – IMA Japan (28.2%) C – TSE Topix (23.9%)
60% A 50% 40% 30%
B C
20% 10%
Sarah Whitley
0% -10%
Matthew Brett Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
12 May 2009 – 12 May 2014 © Powered by data from FE 2014
Analysts and fund managers argue that in order for the equity rally to continue, companies need to show a rise in earnings. However, companies in Japan are the only companies to post rising earnings, contrary to companies in the US and UK, says FE Research analyst Charles Younes. Younes says quality companies in Japan will benefit from the next stage in economic recovery, which is why he thinks it’s key to pick a solid stockpicking fund. This is why he thinks investors with a five-year time horizon would be wise to pick up the five FE Crown rated Baillie Gifford Japanese fund.
“To me, in the Japanese market this is the best fund we have,” he said. He says the portfolio is well diversified between domestically focused companies and those that are driven by exports to other parts of the world. He adds the fund has a mid-cap focus, which should also help it carry through to the next stage of the recovery. Younes says the managers are moving away from cyclical growth companies, which tend to do well for a time before plateauing or falling, and buying more sustainable companies that can continue to growth even with headwinds like the pressure on Japan’s currency – the yen.
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SCOTTISH MORTGAGE INVESTMENT TRUST
SCOTTISH MORTGAGE WAS ORIGINALLY LAUNCHED TO PROVIDE LOANS TO RUBBER GROWERS IN MALAYSIA IN THE EARLY 20TH CENTURY.
While others stick to the indices, we are free to choose. Scottish Mortgage Investment Trust has its own way of doing things. So it’s hardly surprising that the Trust’s portfolio looks nothing like the index, after all, we are active rather than passive investors and we firmly believe that the index is an illustration of ‘past glories’ rather than future prospects. In fact, our abiding principle has always been to invest in tomorrow’s companies today. We give ourselves time to add value by being patient investors in an impatient world. But don’t just take our word for it, over the last five years Scottish Mortgage has delivered a total return of 225.7%* compared to 100.7%* for the index. And Scottish Mortgage is low-cost with an ongoing charges figure of just 0.50%†.
Standardised past performance to 31 March each year**: 2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 Scottish Mortgage
76.6%
24.2%
-2.9%
18.5%
28.9%
FTSE All-World Index
48.4%
8.4%
-0.2%
17.1%
6.8%
Past performance is not a guide to future performance. Scottish Mortgage Investment Trust is managed by Baillie Gifford and is available through our Share Plan and ISA. Please remember that changing stock market conditions and currency exchange rates will affect the value of your investment in the fund and any income from it. You may not get back the amount invested.
GLOBAL GROWTH Scottish Mortgage Investment Trust
For a free-thinking investment approach call 0800 917 2112 or visit www.scottishmortgageit.com
Baillie Gifford – long-term investment partners *Source: Morningstar, share price, total return as at 31.03.14. †Ongoing charges as at 31.03.14. **Source: Morningstar, share price, total return. Your call may be recorded for training or monitoring purposes. Baillie Gifford Savings Management Limited (BGSM) is the manager of the Baillie Gifford Investment Trust Share Plan and the Investment Trust ISA and is wholly owned by Baillie Gifford & Co, which is the manager and secretary of the Scottish Mortgage Investment Trust PLC. Your personal data is held and used by BGSM in accordance with data protection legislation. We may use your information to send you information about Baillie Gifford products, funds or special offers and to contact you for business research purposes. We will only disclose your information to other companies within the Baillie Gifford group and to agents appointed by us for these purposes. You can withdraw your consent to receiving further marketing communications from us and to being contacted for business research purposes at any time. You also have the right to review and amend your data at any time.
TRUSTNET DIRECT PORTFOLIO MANAGEMENT
COUNTING YOUR PENNIES How much money do you really need to retire?
Joshua Ausden looks at the options for investors who are only now thinking about their retirement planning. JOSHUA AUSDEN
The simple answer? A heap of a lot more than the average person in the UK thinks. An increasing number of high-profile financial experts are urging the public to think more about their savings in retirement, but many people are still turning a blind eye. The shocking 45 per cent of workers who plan to live off their state pension in retirement will be slapped in the face by reality when they hit retirement age. The most any individual can get from a state pension is currently £113.10 a week, which men are eligible to claim at 65 years old and women at 61. John Blowers, head of Trustnet Direct, says anyone under the illusion that this is enough to comfortably live off is at huge risk. “Let’s face it, the government has made the state pension enough to stop people dying of poverty, but that’s as far as it goes. Once you strip out everyday bills such as electricity and water, we calculate that you’d have £64.82-a-week – or £9.26 a day – to spend on food and general up-keep. Holidays? Forget it. Clothes? Ever wondered why there are so many charity shops?
By the time you are 65, the Trustnet Direct pensions calculator shows that you’d be sitting on a pension pot of just under £66,000. This assumes that your investment grows by 5 per cent a year, and your monthly contributions rise at the same rate as inflation. It also assumes an annual charge of 1 per cent from your pension provider. If in retirement you want to take out – known as drawdown – just £1,000-a-month (rising in line with 2.5 per cent inflation), your pension pot will have completely run out by the time you are 71-years-old, even before income tax is taken into account. This also assumes that your pension pot will continue to grow at 5 per cent after you’ve started withdrawing. Most retirees are unwilling to take on the risk associated with this kind of growth. Even if your investments grow at 8 per cent a year rather than 5 per cent, you’ll be relying on your state pension at just 76.
How long will your pension pot last? £120K £100K £80K £60K £40K £20K 0
Blowers says that auto-enrolment is a very good idea, but laments that for many investors it has already come too late. The new government proposals will mean that everyone will contribute at least 4 per cent of their salary to their pension from 2018, unless that individual actively opts out. Your employer will have to contribute 3 per cent of your salary, and the tax incentives add an extra 1 per cent.
John Blowers
Assuming that the default investment of choice delivers the recognised middle-rate of growth of 5 per cent, a huge proportion of the population who are yet to start their pension will find themselves relying on the state before they hit 75 – assuming you want to retire at 65.
Say, for example, you’re 40-years-old and earning £27,000-a-year – the national average – and about to start a workplace pension in line with the auto-enrolment contributions in 2018.
Upper Rate 8% Middle Rate 5% Lower Rate 2%
40
50
60
70
80
90
100
Source: Trustnet Direct “People should look at it like planning a holiday. You don’t book one without having money ready to spend,” said Blowers. “Yes you’ve booked your flight, but if you haven’t got a hotel booked or any spending money, it’s going to be a pretty shoddy holiday. This is no different.” “I think a lot of people have very unrealistic expectations.” Blowers says that a monthly income of £3,000 before tax will allow an investor to live comfortably, with the odd holiday thrown in, until the age of 85. This would require a pension pot of around £600,000 if it continues to grow at 5 per cent a year after withdrawals commence. To achieve a pension pot of this figure, the 40 year old who is only starting their workplace pension plan would have to put away just over £1,600 a month. If you strip out the contributions of his/her company and the extra 1 per cent tax incentive, this equates to more than 30 per cent of their monthly income after tax! And that’s assuming that their company would match this figure, which of course they 32
Yes you’ve booked your flight, but if you haven’t got a hotel booked or any spending money, it’s going to be a pretty shoddy holiday. [Retirement planning] is no different.” John Blowers Head of Trustnet Direct would not. Realistically, the figure would be much closer to two thirds of their wage. Even for those who are better off, Blowers believes that the amount of money needed to comfortably retire is underestimated – especially as life expectancy and living costs on an upward rise. Another 40-year-old earning £70,000-a-year with £100,000 already in their pension pot would need to sacrifice almost 11 per cent of their monthly wage to achieve a £600,000 pension pot. Again, this is assuming their company is generous enough to match their contribution. To get the contribution down to a more management 6 per cent a month, it would take a 40-year-old with £100,000 already saved earning £125,000-a-year to comfortably retire at 65. It’s safe to say the average Britain doesn’t fall into this category.
“People need to be saving like there’s no tomorrow. I think a lot of people will get to 65 years old and have nowhere near the kind of money they need. It’s not just the young people either, I think there’s a lot of older people – in their 40s and 50s – with their heads in the sand.” “There needs to be more reform, but it’s the lack of saving that is the real problem. Investors need to wake up and smell the coffee.”
How do I make my money work even harder? Apart from the obvious – earn more money, increase your contributions or delay your retirement – there are other ways to make your money go the extra mile. While the combination of a state pension and the money saved from auto-enrolment or a standard workplace pension plan ensure that investors aren’t left high and dry, a self-invested pension plan (SIPP) allows investors to get access to a better range of products, with greater potential for returns. Investors can also prop up their savings by taking advantage of the tax incentives in ISAs, which allow you to invest up to £15,000-a-year in cash or stocks & shares free of capital gains and income tax.
The solution? Unicorn FE Alpha Manager John McClure sums it up quite nicely. Trustnet Direct Portfolio Management in association with
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TRUSTNET DIRECT PORTFOLIO MANAGEMENT
SMOOTH SAILING?
Are lifestyle funds the simple solution to the pensions conundrum? THOMAS MCMAHON
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Investing can be worrying for many people, particularly as they approach retirement. The older you become the larger looms the day when your financial affairs will depend on your savings and investments, which brings home the importance of making the right decisions. One way of attacking this issue is to try and become an expert on investing. The challenge of mastering the markets is seductive to some. However, what many people want is someone to make the decisions for them and take the stress out of investing. Those who have seen stock picks or fund picks blow up in their faces are likely to be drawn to this view.
worked out from a number of factors including their own age, gender and habits and the rates on UK government bonds, called gilts. Given that this annuity was fixed at the point of retirement, ending your working life at the bottom of a stock market slump could leave you severely out of pocket for the rest of your life. This is what happened to many people who retired at the bottom of the 2008 stockmarket crash, compounded by the falls in the value of property.
IPD and FTSE All Share 1 Jan 2008 to 31 Dec 2008 5%
0%
-5% -10%
One way to do this is to purchase lifestyling funds within your pension. These are funds which automatically shift your money into different asset mixtures as you get older, aiming to be fully invested in low-risk investments – government bonds, typically – when you retire. When savers sign up for a lifestyle pension they are asked to give their expected retirement age, against which the asset allocation decisions are made. In essence this means moving your money from equities into bonds and government bonds bit by bit as you age. It is the strategy followed by many default options offered by pension providers, and works on the theory that you should be taking less risk as you approach retirement as there is less time for you to make back any money you have lost by investing in risky assets. Bonds provide less capital growth potential as well as less potential for capital losses. However, there are a number of reasons why investors might want to think again before plumping for these options.
Spread your wings First, there has been a massive injection of freedom into retirement planning which makes this strategy potentially irrelevant for hundreds of thousands of savers. In the past most savers have taken an annuity upon retirement without having much choice about it. This meant they were paid a regular sum for the remainder of their lives
-15% -20%
A
-25% -30%
B
-35% -40% -45% Jan 08
A – IPD UK All Property (-22.5%) B – FTSE All Share (-29.9%) Dec 1 January 2008 – 31 December 2008 © Powered by data from FE 2014
Source: Trustnet Direct Being forced to purchase an annuity at that particular point in time also meant their incomes ended up being tied to the record-low rates on gilts. This has led to a lot of poor press for pensions over the past few years and is one reason why the liberalisation of the rules by the present government has been welcomed by many. But these changes have also pulled the rug out from lifestyling. Investors will now be able to take out all of their pension at 55, or leave it invested and take it out bit by bit – called managed drawdown – and be left to manage their own money after retirement if they so choose. This means that the value of your pension pot at one particular point in time is no longer as important. No longer is it crucial to ensure that there is no sudden market fall just before you retire – your money can remain invested giving you the opportunity to make back those losses and more. The government’s own NEST programme, an automaticenrolment pension scheme set up to be a simple solution for employers who have to implement a pensions plan for their employees by law, is considering jettisoning the lifestyle strategy as a result of the changes. Beyond this there are other reasons to be sceptical about the strategy of lifestyling. 35
Wake up and smell the risk Last year was a wake up call for many about the risks inherent in bond investing. Many professional managers are using far fewer bonds for defensive strategies than they used to because of concerns about their over-valuation.
A rise in interest rates would contribute to this effect by raising the yields on US government bonds. The result of all this would be another strong force pushing bond prices down, a blow for investors hoping for them to provide a low-risk cushion in the years prior to their retirement. A possible foreshadowing of his was seen in the spring of last year 2013 when the US Federal Reserve first raised the possibility of winding down its QE programme. Both equity and bond markets fell together, with fixed interest failing to do its customary job of protecting investors when equities suffer.
Performance of bonds and equities in 2013 10% 8%
A – iBoxx Sterling Overall All Maturities (0.2%) B – FTSE All Share (7.1%)
B
6% 4% 2% A
0% -2% -4% -6% -8% -10%
Jan 14
May
1 January 2013 – 1 July 2013 © Powered by data from FE 2014
Source: Trustnet Direct For many years bonds have been in high demand as investors have worried about the safety of equities and bond prices have pushed to record highs. However, prices can only rise so far, and many professional investors fear that bonds are simply too expensive and their prices must come down in the next few years. In which case, investors who have been investing in bonds for their cautious properties could end up exposed to more risk than they believed. Compounding this fear is a concern about the impact of the withdrawal of the US Federal Reserve’s massive moneyprinting programme – quantitative easing (QE). This consists of the US central bank buying bonds from the Federal government and increasing demand for those, raising the price and lowering the income they pay. The effect is to make riskier bonds seem more attractive in comparison because they offer higher yields. However, as this money-printing programme is withdrawn the fear is that this process will go into reverse, and investors will rush to drop their relatively riskier bonds as the US government bond prices drop.
Many advisers were warning that lifestyling funds were a risky option before the recent changes to the annuity market for these reasons. It may be that Chancellor George Osborne has unintentionally dealt this strategy the fatal blow. However, for investors who want the heavy lifting done for them lifestyling has to remain a serious option. Lazard’s Alan Clifford, manager of the Lazard Multi-Cap Income fund says that there will still be a huge number of investors who want a product that is managed for them in their retirement. This will support the continuing existence of annuities, he says. For investors using these products, lifestyling will continue to be a decent option.
Trustnet Direct Portfolio Management in association with
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ANALYSIS
Investment trusts are for pensions IAN SAYERS DIRECTOR GENERAL ASSOCIATION OF INVESTMENT COMPANIES (AIC)
Investment companies have always been long-term products. They have a number of features which can make them more volatile in the short term, but offer the prospect of long-term outperformance. They can gear, or borrow money to make further investments to help generate additional returns for investors. This can bring greater risks in the short term, but in the better markets we have seen in the past few years, they have worked in investors’ favour. Also, being closed-ended, with shares which are traded on stock markets, the fund manager can stay fully invested and not have to hold cash to meet redemption requests from investors. These are not theoretical advantages. Recent research produced by Canaccord Genuity showed that investment companies outperformed comparable open-ended funds in 14 out of 16 sectors over 10 years. The longer the period of investment, the better investment companies tend to do, and the less concern short-term volatility is, so they make excellent investments for pensions where you are investing over decades. Pensions also lend themselves to regular or monthly saving, as most investors tend to drip money into them over time, which helps to smooth out any short-term volatility. Investment trusts also carry charges that can be a fraction of what it would cost to hold open-ended funds. Since fees can erode returns over time, this is one big advantage for investment trusts over open-ended funds. But for some investors, investment companies’ role in pensions has been about the accumulation phase, building up capital until retirement. At this point, many had to purchase an annuity in retirement to provide an income. This view of the different phases of retirement planning was shattered overnight by the Chancellor’s
announcement that there would no longer be any requirement for investors to purchase an annuity and that they would have complete control over how they use their pension pots. And this is where one other feature of investment companies comes into its own. Investment companies have the flexibility to tuck away some of the income they receive each year into reserves and save this for tougher times, whereas many open-ended funds are required to pay out all their income each year. Again, this is not a theoretical advantage. This feature has enabled many investment companies to increase their dividends to meet the needs of income investors right throughout the economic cycle, or even when unexpected events like the suspension of BP’s dividend occur. A quarter of conventional AIC Members with 10-year histories have been able to increase dividends for each of the last 10 years, an impressive record, particularly considering this period includes the credit crunch. There are also 15 investment companies who have increased their dividends for more than 30 years. The current record is 47 years of consecutive dividend increases. Also, being closed-ended, investment companies are particularly suitable for investing in assets that can be
difficult to sell at certain times in the market, such as property, unquoted debt or infrastructure. These types of asset class have a strong income bias, making them suitable for investors who need to live off a steady income in retirement. I think many investors will think long and hard about buying an annuity offering, say, a 6 per cent income when this has no prospect for income growth, and the capital dies with you, when they could invest this in a range of investment companies yielding 4 per cent, with the possibility of income and/or capital growth over the long term, and the ability to hand down assets on death. I believe that we are at the dawn of a whole new element of financial planning, namely income in retirement. Investors will need to understand that these new income portfolios will not offer the security of an annuity, and may well start with a lower initial income. For those for whom an immediate, higher level of secure income is essential, an annuity may still be the best option. But for investors who might be looking at retirement over a 20 or 30 year period, and want to keep access to their capital, these changes are revolutionary. Investment companies have always had a place in investors’ portfolios as they prepare for retirement. It now looks as if they will an even bigger role during it.
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ANALYSIS
THREE INVESTMENT TRUSTS FOR YOUR PENSION
Numis Securities’ Ewan Lovett-Turner highlights three investment trusts for every stage in your retirement savings plan.
ONE FOR THE LONG-TERM British Empire Securities & General Trust 90% 80%
A – British Empire Securities & General Trust (39.2%) B – IT Global (82.7%) C – MSCI World (82.1%)
B C
70% 60% 50% 40%
A
30% 20% 10%
John Pennink
0% -10%
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
Joe Bauernfreund
5 May 2009 – 5 May 2014 © Powered by data from FE 2014
5 YEAR PERFORMANCE
DISCOUNT -13.4%YIELD 2.1% +39.23% ONGOING CHARGES 0.71%
Numis Securities’ investment trust analyst Ewan LovettTurner says the British Empire Securities & General trust is perfect to pick up for the long term, especially because its value style has been out of favour of late. “It’s had a period where the value style is out of favour, but it tends to come in cycles. You’d hope to see the performance improve and you have the double whammy of the [assets appreciating] and the discount narrowing,” he said. The British Empire trust is currently trading on a wide discount of 13.4 per cent, which means investors can buy the trust for less than the value of the stocks it owns. If
that discount narrows – which happens if more investors are trying to buy in, creating demand – investors who own the trust will benefit because they will be able to sell shares for more than they bought them for. As Lovett-Turner highlights, investors can also benefit from improving stock performance within the underlying companies. The manager uses a strict value-based approach, which means he buys companies which look cheap relative to history or future earnings potential. Lovett-Turner expects this style to come back to the fore, as many companies in the UK have already seen such a strong surge in their share price. 40
GEARING UP FOR RETIREMENT TwentyFour Income Limited Trust 24% 22%
A
A – TwentyFour Income Limited (22.8%) B – IT Debt (2.7%)
20% 18% 16% 14% 12% 10% 8% 6% 4%
Aza Teeuwen
B
2%
Ben Hayward Rob Ford Douglas Charleston Eoin Walsh Gary Kirk
0% -2%
Jan 14
May
6 March 2009 – 2 May 2014 © Powered by data from FE 2014
5 YEAR PERFORMANCE
+22.80%
Whether central bankers and politicians like it or not, the chances interest rates will rise is increasing. This is good news for savers who will finally start to see better returns from their cash accounts, but it’s not great news if you’re nearing retirement and looking to reduce the risk in your portfolio. That’s why Lovett-Turner likes the TwentyFour Income Limited Trust, which invests in floating rate bonds,
PREMIUM
6.8%
YIELD
5.1%
or bonds which have a variable interest rate. Unlike corporate bond funds, which pay a fixed rate, these types of products have more flexibility to move as interest rates rise. According to Lovett-Turner, investors should see an element of protection as well as capital growth from investing in this type of trust.
41
KICK BACK AND RELAX International Public Partnership Trust 100% 90%
A – International Public Partnership (52.7%) B – IT Infrastructure (67.0%) C – FTSE All Share (94.6%)
C
80% 70%
B
60% A
50%
AMBER
Amber Infrastructure Group
40% 30% 20% 10% 0% -10%
Jan 10
Jan 11
Jan 12
Jan 13
Jan 14
5 May 2009 – 5 May 2014 © Powered by data from FE 2014
5 YEAR PERFORMANCE
+52.70% ONGOING CHARGES 1.26% PREMIUM 8.1% YIELD 4.8%
When the day finally comes that investors are ready to hang up their working shoes, income becomes the topic du jour. Now that the Government has unlocked pension savings from the grip of annuity providers, Lovett-Turner says savers have far more flexibility to make the most of their hardearned cash. However, reliability and consistency is still key. He likes the infrastructure sector and in particular, the International Public Partnership Trust, because the sector offers “annuity-type income streams”. “[Infrastucture funds] provide people with a steady, stable income and a stable revenue stream,” he said. Lovett-Turner says the trust has a similar cashflow to annuities and invests in firms with government-backed
revenues, which can add a layer of stability to the returns. However, he says the downside is that the entire sector is currently expensive. The International Public Partnerships trust is trading on the narrowest premium of any trust in the sector, which means it is cheaper than its peers, though investors are still buying the trust for more than the underlying shares are worth. Annuities, which previously provided savers with a fixed annual income in exchange for their retirement savings, can be replaced by full or gradual drawdown, where investors use their own pension savings to fund their retirement. There are more details on how the new pensions system will work elsewhere in this issue.
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1
ANALYSIS
END OF THE ROAD
Holly Thomas asks whether annuities still have any place for savers in the new pensions landscape. HOLLY THOMAS
A pensions miracle occurred in March when the Chancellor announced the shackles from around pension savers feet were being removed. Savers who place their earnings in a pension plan – and enjoy the generous tax breaks – no longer have to buy an annuity which guarantees income for life. George Osborne announced in his 2014 Budget that from April next year anyone who is aged 55 or over will be able to take their entire pension fund as cash – although only the first 25 per cent will be tax-free. The remaining 75 per cent of the fund would be taxed at the saver’s marginal rate, rather than the current 55 per cent charge for full withdrawal. Annuities have developed a bad reputation. The big problem centres around annuity rates which determine how much savers get as an annual income. They are half what they were 15 years ago when pensioners could bag rates of around 10 per cent a year. Thanks to falling interest rates and government gilt yields, annuity rates these days are closer to 5 per cent a year. Savers have seen the income generated from their live savings plummet in retirement. Are we ready to ditch annuities once and for all? Here we look at the options for those approaching – or already in – retirement.
Are there any benefits to having an annuity in the new pension world? Most experts expect the majority of people to still use an annuity to secure some or all of their retirement income despite the poor returns and new flexibility. Annuities guarantee an income and as such will still suit those people who need to fix their income in retirement. Given that the average pension pot is still around £20,000 most people would run out of money in no time, depending on how long they live. This of course is the burning question which no-one can answer. A common Patrick Connolly problem people make is underestimating their own longevity. At age 65 most people are not at ‘death’s door’ and many will have 30 or more years left to live. This means 30 or more year’s income will be required. Patrick Connolly at advice firm Chase de Vere says: “While
buying an annuity has been the default option for most people, many have begrudged locking in to the miserly rates we’ve seen since 2008. This lack of perceived value has stopped many people investing more into pensions.” “Many will be sorely tempted to take the money out of their pensions when faced with what they might see as a choice between a significant lump sum or an unattractive level of income through an annuity. However, even for those yet to take pension benefits an annuity might still be a sensible option.” Andrew Tully of MGM Advantage, an annuity provider, says: “While people will have much more flexibility from April 2015, many people will want at least some level of secure income for life – a hedge against living too long.” “Many retirees are naturally conservative so while increased flexibility may have some appeal, they will also want to make sure they have long-term guaranteed income coming in every month, to pay for essentials such as food and fuel bills. An overwhelming need for many retirees is that they still don’t want to run out of money or suffer a dramatic fall in their standard of living.” “Annuities will continue to play a part for many people – for some or all of their pot. We expect more people to use blended solutions, using some of their money to buy a guaranteed income, while having the flexibility to access some of their money if circumstances change.” The new rules don’t come in for a year so many people are deferring which has already hurt annuity companies that have been accused of previously creaming profits on annuity business of around 20 per cent, according to newspaper reports in 2013. Since the rule change was announced, many annuity companies have suffered a fall in share price, a significant drop in business volumes and some have already started making cutbacks such as redundancies. Annuity sales at Standard Life – one of Britain’s biggest insurers – have halved following the announcement in March.
What happens if you’ve got an annuity now? Is there anything you can do to change it? Once an annuity has been set up you cannot change or alter it. If you bought an annuity a while ago then it is set up and will continue to pay a guaranteed income for life as it was set up to do. Connolly says: “Those with existing annuities won’t 45
benefit from this increased flexibility and will have to retain their policies as they are.” Yet if you set up an annuity just before or just after the Budget some companies have extended the cancellation period, also known as the cooling off period, within which you can cancel your decision to set up an annuity. Remember, while annuity rates are currently at low levels, it should be remembered that in the current low interest rate environment it is difficult to generate a decent level of income without taking risk. And taking risk means that capital could be eroded, perhaps quickly.
If you’re deciding whether or not to buy an annuity, what factors do you need to consider? You need to decide how much income you will need in retirement, not just at the start, but throughout, taking into account rising price inflation. Work out how much income you need to cover your basic
Do I need an annuity in three questions: 1)
How much income do I need in retirement?
2)
Can my pension pot provide this income for long enough?
3)
If not, which annuity will provide the best rate for the longest period?
living needs, this is the level of income you cannot afford to go below. This should be secured with guaranteed income, either from annuity, or state pension, or a combination of the two. With your remaining pension pot you can afford to take if you would like to, and choose to remain invested in an income drawdown plan. It is vital to shop around to get the best deal if an annuity is used and to check if you are eligible for a higher, enhanced income, due to ill health or smoking habits. Tully says: “Savers need to consider the best ‘shape’ of annuity – whether it continues to family if they should die, or if it increases each year to counteract inflation. It’s also crucial to take health and lifestyle into account, as this can increase the income you receive significantly. There are also alternative options such as investment-linked annuities which give more flexibility to vary income year-to-year and are linked to the performance of investment funds, so hopefully increasing income through retirement.” Connolly says: “The increased flexibility that people will have in taking their pensions benefits could bring added complexity and more opportunity for people to make the wrong decisions.” “Many people for whom an annuity would be a sensible choice will end up taking riskier alternatives. There will undoubtedly be tales of woe from those who make their own decisions, get it wrong and lose out as a result. With the benefit of hindsight these people might just think back and wished they’d taken out a dull and boring annuity.”
46
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TRUSTNET DIRECT PORTFOLIO MANAGEMENT
PLAYING HOUSE Since the UK Government broke open the piggy bank of pensions, Alex Paget asks whether it’s a good idea to use your pot to help your kids onto the housing ladder. ALEX PAGET
48
Most of the time the “bank of Mum and Dad” only has to lend here and there, but with house prices across the country, particularly in London, soaring, it is also increasingly being called upon to help fund a first home.
EAST NORTH EAST
annual change
7.10% average price £184,980
annual change
3.30% average price £99,313
4.70% average price £179,066
As we mentioned in last month’s issue, there seems to be a genuine fear among first time buyers, especially in London, that if they can’t put a deposit down now, they’ll never be able to.
SOUTH WEST
Known as ‘generation rent’, recent figures suggest that the number of first-time buyers asking their parents, and by extension, grandparents, for help to get onto the ladder is on the up.
WEST MIDLANDS
annual change
3.70% average price £133,532
SOUTH WEST
annual change
6.10% average price £221,189
While some might be in the very enviable position of being able to help put the money down without having to raid their savings too much, some may be considering taking advantage of the new, more flexible, pension freedoms to help out their children. As of the new budgetary changes, people reaching retirement will soon be able to take out their pension pot in full at 55, rather than lock up their savings in an annuity which would have paid a set annual income until death. With that in mind, we ask the experts whether now is a good time for their kids to by their first property and whether they should fund part, or all, of the deposit with their hard-earned savings.
Will house prices go up? Obviously, the answer to that question will depend on where you are looking to buy. However, the signs seem to be looking good. According to the Land Registry House Price Index, average property prices have generally been on the rise over the last year. While London has been the primary driver of the positive numbers - the average property in the capital having increased by 12.4 per cent over the last year to £414,490 - prices have been up in most parts of the country. Property prices in the Midlands, North East, South West and South East have all increased by at least 3 per cent over the last year. The North West is slightly lower at 2.3 per cent and Wales is the only region where house prices have fallen. Even with prices across the country on the rise, it probably doesn’t come as a surprise that experts still think London’s the best place to be buying. It’s also the most difficult market for first time buyers to tap into given the bloated price tags and intense competition.
LONDON
NORTH EAST
annual change
annual change
12.40% average price £414,490
annual change
3.30% average price £99,313
YORKSHIRE & THE HUMBER
annual change
1.80% average price £116,993
EAST MIDLANDS
annual change
4.60% average price £127,384
NORTH WEST
annual change
2.30% average price £109,042
WALES
annual change
-1.60% average price £113,275
SCOTLAND
annual change
3.50% average price £153,352
EDINBURGH
annual change
5.10% average price £214,736
ABERDEEN
annual change
15.10% average price £205,365
According to more recent figures from the Office for National Statistics, house prices in London have soared by 17 per cent in a year, pumping up the average cost of a home in the city to a record £459,000 at the end of March. Prices in the capital jumped 17.8 per cent alone in February. Hugh Best, Investment Director at London Central Portfolio Ltd, says that if parents have the ability to help their children to buy a house in London now, they act sooner rather than later. “From our point of view, when it comes to the market place in central London, it is far more about time in the market that timing the market,” Best said.
49
“Statistics going back to the 1969 show that there has only ever been one year where prices have ended lower in December than they started in the January. There has been a lot of talk that London might be reaching bubble territory, but in our view it isn’t.” “Essentially, data from the Council of Mortgages Lenders shows that prices in central London have, on average, increased by 10 per cent per year and data from Land Registry shows that price in prime central London by 9 per cent since 1995.” “What that shows is that growth has always been very robust and that is primarily based on the fact that there is a shortage of stock. I can’t see a reason why prices won’t continue to inflate. While that won’t always be the case as there will be a point when central London will be too expensive, that isn’t the case now.”
Should you drawdown your pension to give the kids a leg up? Given that a saver now have a greater degree of flexibility with their pension pot and as the UK housing market seems to be witnessing some sort of recovery, should parents drawdown their pot to help out their kids? Under the new regulation which will come in next year, people will be able to drawdown their full pension pot at 55. However, only 25 per cent of their pension fund will be tax exempt. The rest will be taxed at the savers marginal rate. Mark Stone, head of pensions at Whitechurch, says that drawing down your pension to help your children get a foot onto the property ladder would be a good move. “You do have the ability to take up a lump sum of 25 per cent from your pension pot and, in my opinion, if you want to pass that onto your children to get onto the housing ladder then yes, I think it is a good idea,” he said. “The overriding proviso, of course, is that you have enough of an income stream or capital to make sure you can live through retirement comfortably.” He does warn, however, that if people take out more than 25 per cent threshold, they could be stung with much higher rate of tax than they would otherwise. Nexus IFA’s Kerry Nelson says that, because of that, parents need to make sure that they are not overstretching themselves in attempt to help out their children.
“Every parent wants to give their children financial support, but all depends on your coffers how much you have available, in many respects,” she said. “They will want to, and probably always have wanted, to help their children to the detriment of their own finances. But it is true that the older generation have been far more prudent and have a much more of a culture of saving than the our generation.” “It’s a toss-up, because that diligence should be rewarded but at the same time you want to help you children. Obviously, the pension system has changed but, if you were to help your children, you need to consider how it would affect your 25 per cent tax free cash.” “It all depends on the size of your pension pot, because if you were to drawdown any more of that, now or in the future, you will be taxed on it. While pensions are now more flexible, if you take out more than 25 per cent it may be taxed as earned income.” She also points out the risk that, given the recent changes to the mortgage system, even if a first-time buyer has enough to match the deposit, there is no guarantee they will get a mortgage. The Mortgage Market Review (MMR) has come into existence recently, but is almost becoming infamous among the press due to the huge, and often laughable, amount of scrutiny lenders are now putting potential home-owners under. For instance, betting habits, dry cleaning bills and even how often applicants go out for meal have all been called into question. The end result being, unfortunately, is that the amount of successful mortgage applications has fallen considerably since the new regulation was put in place a few months ago. Nelson therefore concludes that if parents can realistically afford to give their children a helping hand without using up too much of their 25 per cent of the tax free cash, then it is certainly an available option. If that isn’t the case, however, just leave them renting and enjoy your retirement. Trustnet Direct Portfolio Management in association with
50
ANALYSIS
ROLLOVER JACKPOT
Everyone’s seen the adverts – Alan Sugar and Karren Brady are in! But what does auto-enrolment really mean for savers? JENNA VOIGT 51
There is enormous risk going off-piste. No matter how good you are, there is often still a crevasse.” Henry Tapper Pensions Playpen
The responsibility of saving for retirement is increasingly in the hands of the individual. What may come as a surprise to the majority of workers who plan to live off their state pension in retirement, this is good news.
As Joshua Ausden explains earlier in this edition, the most pensioners will get from the state is £113.10 per week, which after factoring in everyday bills amounts to a pittance – less than £10 per day. But from July this year, most workers will be autoenrolled into a company pension scheme, if they haven’t already. This means that employees are responsible for contributing a minimum of 1 per cent of their salary to a company pension scheme. The employer is legally responsible to match this contribution, and many employers will be willing to match more. From October 2017, the minimum employee contribution increases to 3 per cent while employers will be required to contribute 2 per cent. In October 2018, this amount ramps up to 5 per cent for the employee and 3 per cent from the employer. Here’s how a pensions contribution will look for someone earning £2,000 per month.
Employee pays £80 + Employer pays £60 + £20 tax relief = Total paid into pension monthly: £160
Employees who are saving at the lowest rate will accumulate a pension pot of £65,768 over 20 years, assuming 5 per cent growth per annum. If the pot is invested in higher growth assets, like equities, savers could amass a pension of £83,350 over the period, assuming 7 per cent growth per annum. In order to build a pension pot of £100,000 to retire on,
investors would need to put away £243 per month over two decades at a growth rate of 5 per cent. This monthly savings drops to £192 per month at a growth rate of 7 per cent.
£192/month x 20 years = £100,000 Having this level of savings built up by the time savers hit retirement (age 65) can make a huge difference to quality of life and under the new pension rules outlined in this month’s cover story – can mean using pension savings more than ever, including leaving a bit behind for family members. Default pension schemes – the pension employees will automatically sign up for under autoenrolment – have come under much criticism from financial experts and the media, who have raised concerns investors will be bundled into a “rubbish” pension scheme unawares.
An investment in Neil Woodford’s Invesco Perpetual High Income fund 20 years ago would have more than doubled the returns of the FTSE All Share.
But Henry Tapper of Pension Playpen says in many cases the pension scheme will be the same savings plan many companies are already offering and argues companies, trustees and insurance providers will be forced to re-evaluate their current offering if it isn’t up to scratch. “I think by and large the system is working at the moment and people are going into default schemes that make reasonable sense,” he said. For workers who already have a company pension, they’ll be able to keep ticking along in their current scheme, unless the employer is changing the firm’s pension arrangements. Employees who don’t yet have a savings plan won’t have to do anything – they’ll simply be enrolled in their company’s chosen pension plan unless they actively opt-out. Tapper adds that while many savers will want a hand in managing their own retirement portfolio, those that don’t shouldn’t feel guilty and should feel comfortable investing in default savings plans as these will help build a sizeable pot for the later years, even if it isn’t comprised of the best possible funds. 52
“There is enormous risk going off-piste. No matter how good you are, there is often still a crevasse,” he said. But for investors who are willing to put in the time and effort to manage their own pension savings, there are massive gains to be had.
Henry Tapper
For example, if investors had put money away in star equity income manager Neil Woodford’s Invesco Perpetual High Income fund 20 years ago, the fund would have returned nearly 400 percentage points more than the average UK equity income portfolio and more than doubled the returns of the FTSE All Share. Performance of fund vs sector and index over 20 years* 800% 700%
A
A – Invesco Perpetual High Income (762.7%) B – IMA UK Equity Income (363.9%) C – FTSE All Share (332.9%)
600% 500% 400%
B C
300%
offer tax benefits with a wider range of investment options. These savings vehicles are explained in more detail in ‘How can I use a SIPP and an ISA together’. *Neil Woodford left Invesco Perpetual in March this year to set up his own investment business. The fund is now managed by FE Alpha Manager Mark Barnett.
What is an ISA? An individual savings account (ISA) is a wrapper that allows investors to hold cash, shares and collective vehicles free of capital gains and income tax. As of July this year, investors can invest up to £15,000-a-year is an ISA under the ‘New ISA’ rules which come into play on July 1, 2014. From July 1, 2014, when any ISA will automatically become a NISA, money can be added to either a Cash or Stocks and Shares NISA up to the new £15,000 limit.
200% 100% 0% -100%
Jan 95
Jan 97
Jan 99
Jan 01
Jan 03
Jan 05
Jan 07
Jan 09
Jan 11
Jan 13
6 March 1994 – 6 March 2014 © Powered by data from FE 2014
Source: Trustnet Direct Many corporate schemes only offer a limited number of funds, which are often not the best-performing funds in the market. For access to a wider range of savings vehicles, investors should consider a SIPP (self-invested personal pension) or ISA (individual savings account), both of which
What is a SIPP? A self-invested personal pension (SIPP) is a type of pension plan that enables the individual to choose and manage their investments, with all the tax-incentives of a regular work-place plan.
53
COMMENTARY
Danger zone The pitfalls of managing your own pension ROB GLEESON HEAD OF FE RESEARCH
Managing your own pension through a SIPP is an attractive proposition. By leaving the protective folds of a pension scheme it is possible to reduce charges, increase choice and access better investments and a wider range of strategies. There are some common pitfalls to avoid though if you want to be a successful pension portfolio manager.
Keep your objective in sight One of the most common mistakes for the newly empowered is to lose sight of the end objective. Even experienced investors with a trading account or ISA that they’ve managed for years, fail to understand the goal is to have enough money to retire on – not make as much money as possible. The difference is subtle. Few savers take the time to work out exactly how much they will need in retirement and can often be pursuing inappropriate strategies without realising.
Take the right level of risk Linked to this is the second most common problem, taking too much or too little risk. Once you know how much you’ll need, the aim is to maximise the chance of reaching that target. This might mean taking more risk if you are a long way below your goal, or much less if you don’t have far to go. Even investors with a high tolerance for risk, underestimate the impact failing to have enough to retire on might have. Even if the rollercoaster ride of AIM stocks is something you enjoy having in your ISA, being even 10 per cent under target on retirement might be completely unbearable.
Don’t get caught up in short-term trends Short termism is a constant threat to your pension portfolio and rears its head again when it comes to choosing investments. Selecting stocks, funds or trusts based on short-term trends is a mistake if your portfolio has a long-term horizon. Investments that are flavour of the month, or interesting sectors such as new technology might seem attractive, but may not be suited to achieving your desired pension pot. Property, IT, Biotech – all have been hot topics recently, but switching between sectors based on sentiment is unlikely to be a successful strategy.
Don’t forget about your pension Neglect is a common mistake and one of the biggest single reasons not to run your own pension. It’s a mistake I’ve made personally and can be extremely detrimental to a portfolio. I failed to check on my pension for over a year, and failed to notice that one of the funds I’d invested in had closed and my contributions had been going into cash. This meant a portion of my portfolio missed out on a market rally and probably knocked 2 per cent off my returns for the year.
A pension is a long-term investment and doesn’t need to be tinkered with on a regular basis; but therein lays the danger. It stays out of sight and frequently out of mind. Something that only needs to be looked at once every three to six months is easily forgotten. Running a SIPP is potentially a thirty-year commitment to reviewing and analysing your portfolio on a regular basis. Something you’re enthusiastic about now, might quickly lose its appeal in a few years’ time – this will dramatically reduce your chance of reaching your retirement goal.
Be careful what you pay The final pitfall is charges. While on the surface a SIPP often looks cheaper, many platforms have trading fees as well as annual charges. It’s difficult to estimate how many trades you might do in a year and thus it’s easy to underestimate the total charge you’re likely to pay. All these mistakes can accumulate and make running a SIPP a total disaster – avoid them however and a SIPP can be a great way to ensure your financial security and take control of your future.
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MY HERO
THE GRANDFATHER OF VALUE SAM SHAW
They say there’s no substitute for experience. And when it comes to value investing, there is no one alive with more experience than Irving Kahn, who, at 108 years old, is broadly acknowledged as the world’s oldest living investor. Still working on Wall Street today, having set up the Kahn Brothers Group in 1978 with sons Thomas and Alan, Irving Kahn’s long-term approach may well be inherent in his genes. Kahn, his brother Peter and sisters Helen and Lee were once the world’s oldest living quartet of siblings. Lee died in 2005, aged 101, elder sister Helen died in 2011 at 109 and younger brother Peter died earlier this year at 103. For more than a decade from the early 1990s, the siblings took part in the ‘Longevity Gene’ study of centenarians, conducted by gerontologist Nir Barzilai of the Albert Einstein College of Medicine, who undertook a study of 500 Ashkenazi Jews of eastern European descent who were living, actively and independently, in New York City. Staying active, and keeping a focus lies at the heart of his longevity, hence Kahn’s ongoing presence in the Kahn Brothers office and his passion for the ever-changing world of stocks and shares. “It’s such a changeable world, so it’s always interesting,” he said. With no plans to float the family business, the Kahn mentality is that they will only welcome clients who share their investment horizon of at least five years. Born in New York on 19 December, 1905 to Russian and Polish immigrant parents Esther and Saul, he has said of them: “[They] were willing to drop the language, religion, and friends of their own countries and come to America to look for a new life. My respect for their courage and determination prompted me to study very hard from a young age because I wanted to find a well-paid job one day to support them.” And he did just that. Landing on Wall Street aged 23 in 1928, flanked by the Great Depression, Kahn made his first trade – shorting a copper mining company – the following summer before the infamous crash in October 1929. “They all told me I’d lose my $300 but I didn’t, I doubled it. I don’t say that because I was smart, I wasn’t smart. But even a dumb young kid could see these guys were gambling and they were all borrowing money and
having a good time and being right for a few months. And after that, you know what happened.” He was educated at the City College of New York and held the coveted position as the second teaching assistant to the legendary Benjamin Graham at Columbia University – seen as something of a ‘mecca’ of value investing. Without skipping a beat, Kahn names Graham as his idol and it was alongside him his foray into value investing began. One of the first stage applicants to sit the Chartered Financial Analyst exams, he was a founding member of the New York Society of Security Analysts – which honoured him with a lifetime achievement award in 2007. Irving and his family lived a humble existence, for many years residing in a penthouse apartment in Knickerbocker Village on Manhattan’s Lower East Side, a public housing complex which had been inhabited by many Italian immigrants but underwent a regeneration in the early 1930s when it was targeted at up-and-coming Wall Street executives, who were able to pay the inflated rent of $12.50 a week. Frugal Kahn used to walk home for his lunch to save money, inadvertently giving his children the illusion their father led a more privileged existence. “My kids were brought up as if they had a wealthy father, which they didn’t.” His hard work and commitment to investing saw Kahn land directorships at several companies, including the Grand Union chain of supermarkets and sewing machine empire Willcox & Gibbs, before establishing Kahn Brothers, now responsible for more than $800m in assets under management for carefully selected private clients with $1m-plus to invest. Kahn still acts as chairman at the broker-dealer firm today; still goes into the office and takes meetings with companies. The company, founded on Benjamin Graham’s early model of finding stocks at a discount to net asset purchase, has evolved this to include a broader investable universe. “We now target many different companies including, in particular, businesses purchased at a discount to their private market, transactional or going-concern value.” Yet, true to Graham and his compeer David Dodd, the Kahn 57
investment philosophy is founded on a margin of safety and the alignment of interests with their clients is demonstrated in their commitment to ‘eating their own cooking’. Unlike Warren Buffett, another of Graham’s disciples, who favours large caps, Kahn prefers to invest in a concentrated portfolio of small- and mid-sized companies and will emphasise balance sheet data over income statement data.
Le Veau d’Or, on the Upper East Side, described by New York magazine as “a star in the late 1960s, the Craig Claiborne era; now its patrons – most closer to Social Security than not – value it for its timelessness...”. Following his wife’s death in 1996, Kahn nurtured his love affair with Wall Street: “I couldn’t find another person or occupation that had as much interest for me as economics.” With a portfolio including New York Times, Citigroup, Pfizer and BlackBerry, Kahn has survived Schloss, Ruane and other Graham value alumni, with only Warren Buffett likely to live to out-invest Kahn.
The investment criteria he looks at will include: well-underBut the grandfather of value gives us all a reason to be stood industries – favouring depressed economic sectors; cheerful: “Investors have no reason to feel bearish. True valcompany size – favouring small and mid caps and over-theue investors are glad the markets are down.” counter transactions rather than those requiring a broker (less well-researched companies are more likely to throw up hidden barThe Kahn Brothers’ investment philosophy: gain opportunities); companies with UNLOCKING VALUE manager/owners; strong balance sheets and financial performance “Kahn Brothers thinks of a portfolio as an showing weak short-term earnings orchard of fruit trees. One cannot expect (more likely to be underpriced). fruit every year from each species of Having rung the opening bell on Wall tree. Investments can and often do have Street on his 100th birthday, Kahn varied and unpredictable timetables is said to be a simple man, a man of to maturity. We believe a suitable good humour and unwavering entime horizon for investment fruit ergy. For many years he was a loyal to ripen for harvest can be three patron of the same French restaurant, to five years or longer. Indeed, a key factor in realizing outstanding performance is having the discipline and patience to maintain time-tested principles and not abandon the orchard before the fruit has ripened.”
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NEXT ISSUE
INVESTAZINE’S SUMMER SPECIAL
The glorious summer months are upon us and Investazine, like many of our readers, are taking a summer holiday of sorts – sharing the best investment tips from around the world. We’ll be taking a sneak peak at the best places to head off on holiday and what to do when you get there. Not to fear, Investazine won’t be lacking in insights on how to manage your portfolio and where to invest in the quiet months, but we’ll be having a bit of fun in the sun too. See you next time!
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