Weekend reading: Caveat emptor needs to make a comeback

Weekend reading: Caveat emptor needs to make a comeback post image

What caught my eye this week.

I mentioned the other day that I’m getting increasingly grumpy about the supposed victims of financial misdeeds seeking redress for shooting themselves in the foot.

Not a popular stance for a personal finance blogger to take, but the truth.

Paul Lewis for instance on Radio 4’s MoneyBox reliably turns me to the Dark Side like a neophyte Sith Lord as he rails against – oh, I don’t know – Tesco having the temerity to sell apples at ‘rip-off’ prices of more than what it paid for them.

And a more serious example came this week in the Financial Times [Search result] in an article about interest-only mortgages.

The FT is not the first publication to warn of a looming crisis from interest-only mortgages. The charge is that borrowers have not saved up enough money to repay the capital at the end of the term.

And to be fair, the FT didn’t quite headline the mis-selling angle in this piece, though it did raise the juicy prospect.

But a victim narrative was certainly foreshadowed in the angle it took and the quotes it used.

The article led by painting a picture of a son being denied the inheritance of the family home because of his mother’s decision to take out an interest-only mortgage:

Linda needs to have a difficult conversation with her son. The expectation was that one day, he would inherit the family home in London where she still lives. But her decision to take out an interest-only mortgage of £182,000 nearly a decade ago has effectively cost him his inheritance.

Well, no.

I don’t know Linda’s circumstances, obviously, but from as much as we can tell here it was her decision not to save up to repay “a penny of the underlying debt” that has cost him his inheritance.

Alternatively. if she would never have been able to find the money to pay for what she bought, then she shouldn’t expect to own it.

That’s not a scandal. That’s shopping.

Later on we have Gary, who claims “we didn’t have things explained to us”. This might point a way forward to the sort of compensation windfall enjoyed by the PPI-paying masses, except that Gary immediately adds “Anyway, our hands were kind of tied at the time — it was more or less our only option.”

I don’t mean to dismiss the issues faced by these people, or make fun of them; I’m sure they have their worries. But they are in the victim role as portrayed by the FT, and it’s a role that needs to be challenged.

Why not a piece saying that the rest of the banks’ customers or shareholders – or the State – will need to bail out these kinds of individuals if they’re not to be turfed from their homes entirely because of their own decisions? Somebody always pays.

As for mis-selling, happily this kind of mortgage’s purpose is made pretty clear slap bang in the name itself.

We’re not talking about a Property Financing Multi-Year Upkeep and Retention Vehicle, or some other financial nonsense.

It is an Interest-Only mortgage. As in – slowly now – you only pay the interest.

Enough already.

From Monevator

The FCA is avoiding the elephant in the room – Monevator

Global tracker discussion sprang to life this week [Note: “Next Comments”]Monevator

From the archive-ator: Know your own risk tolerance – Monevator


Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1

UK state pension age rise brought forward by one year – BBC

Global shift into alternative assets gathers pace [Search result]FT

House price growth continues to slow, especially in London – Telegraph

US tech sector passes its dotcom era peak [Search result]FT

Online fund platforms surge in popularity [Search result]FT

Products and services

Atom Bank’s 5-year fixed rate mortgage charges just 1.59%; remortgages only – ThisIsMoney

Fixed-rate savings bonds’ interest rates rise 36% since January – Telegraph

Nationwide pulls insurance for cyclists who won’t wear helmets abroad – Telegraph

All charges for paying by debit and credit cards to be banned – Guardian

Comment and opinion

Why index funds are one of the 50 things that made the modern economy [Podcast]BBC

Costs are a key part of the investing equation, but so is time frame – The Value Perspective

What’s your track record? – A Wealth of Common Sense

You probably don’t have what it takes to beat the market – MarketWatch

What does an investment portfolio need? – Oblivious Investor

Betting on things that never change – Morgan Housel

Finding the active in low-cost passive investing – Barry Ritholz

A recipe for disastrous stock picking returns – Investing Caffeine

Why Josh Brown bought his first Bitcoin – The Reformed Broker

Thoughts on 20 years in work […in finance, but universal]Principles and Interest

Retirement dread is replacing the American dream – Bloomberg

The real value of a financial advisor [US but relevant]The Backcourt Report

Todd Wenning on competitive advantages and moats – Compounding Snowballs

Given the reviews, I’m glad we turned down the How To Retire at 40 people’s overtures – Early Retirement Guy and SexHealthMoneyDeath

Off our beat

The battle for the moon begins – Bloomberg

Boring Elon Musk update – Bloomberg

And finally…

“The conventional investor is in awe of those who have a deep understanding of ‘what the market thinks’. He should be: he is typically paying enough for the privilege.”
– John Kay, The Long and the Short of It

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  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.

from Monevator http://monevator.com/weekend-reading-caveat-emptor-needs-to-make-a-comeback/

The FCA is avoiding the elephant in the room

The FCA is avoiding the elephant in the room post image

The Financial Conduct Authority’s recent report into the asset management industry didn’t go far enough for one frustrated fund manager. Requesting anonymity (but known to us at Monevator) they share their thoughts below…

The report by the Financial Conduct Authority (FCA) into the asset management industry is, in the view of this writer, a lost opportunity.

Nowhere in its 144 pages does it mention the words beta or alpha. Yet the heart of the problem with fund managers is not costs, as the report focusses on, but miss-selling.

Active managers claim to deliver better returns than the average – i.e. to offer alpha – but the reality is that in aggregate active management fails to even deliver beta – i.e. the market return – because of the higher risks and costs associated with trying to achieve alpha.

As regular Monevator readers will know, the evidence is overwhelming. Over meaningful time periods, most active fund managers underperform.

Should not the fact that most private investors fail to understand or take this into account when buying funds be a key concern?

Cut out the middlemen

In its defence the FCA says it didn’t want to use the terms alpha and beta because they are too technical for investors to understand.

This is the second mistake the report makes. It consistently refers to ‘the investor’ yet the reality is that most funds are bought by intermediaries – that is, IFAs and wealth managers.

They are not the principals in the transaction but the agents. That gives then a very different incentive from the owners. As agents they are far less worried about the costs of ownership and returns, and more worried about the risk to their reputations and businesses.

As a consequence they would rather recommend a fund that appears safer than one that is cheaper. It is the old “no one ever got fired for buying IBM” argument.

There is a secondary element to this issue of who makes the purchasing decisions relative to who is the ultimate beneficiary, too. The agent has a vested interest in making his role look more complex and demanding to his customer than it really is.

If the end investor realised that it was not actually that difficult to buy beta then he would do it himself and cut out the middleman – and about 1% in charges.

After all, that is essentially what budget airlines have done by cutting out the travel agent and marketing direct to the consumer. It is the same with many products and services now sold over the Internet.

Massive cost savings are available by bypassing the distribution chain and going direct to the consumer. The consequences can be seen in high streets and shopping centres up and down the land as shops are closed and boarded up.

Truly disrupting the financial services industry

This brings us to the real failure of the report. It is still difficult for asset managers to present hard data, such as turnover rates, information ratio, beta or even compound interest directly to the public for fear of giving advice. Instead the FCA seems to prefer them to use intermediaries, who have a different agenda. This is what is preventing real competition from shaking up the industry, reducing costs and bringing in new ideas.

The FCA says fund management is too complex for the average investor to comprehend. In this writer’s opinion, that argument is fallacious. Mobile phones, computers, cars and TVs are far more complex than the average fund but that does not stop the population buying them and, by and large, making decisions in their best interests.

Why should that logic not apply to asset management?

The reason is of course that there are lot of well paid, and highly intelligent, people who have a vested interest in preventing the public from buying beta, the market return, very cheaply.

Instead, they want to sell alpha, the goal of outperforming everyone else, for a much higher price.

The illogicality of that argument is not lost on them but they respond by saying that while it might be true that, like the children of Lake Wobegon they all claim to be above average, they can always find some element of complexity – often related to tax wrappers – to persuade the investor he should be guided by an expert.

Expecting the public to effectively separate signal from very noisy data, and then factor in risk and costs is deemed far too onerous. Intermediaries get around that problem simply by using past performance, despite all its flaws.

A beta solution

As Upton Sinclair famously said: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

There will always be a need for intermediaries for more complex financial situations. However, the reality is that the average investor can satisfy much of his basic investment requirements by purchasing beta cheaply and simply through a passive fund without using an intermediary at all. The FCA report makes this no more likely now than before it was written.

If we really want transparency in this industry we need to use simple clear language to explain directly to investors what they are being sold. The FCA’s reluctance to use technical but clear labels like beta and alpha does not help the process.

Transparency is also aided when goods and services are sold directly by the provider to the consumer. Making it difficult to do this – and encouraging the use of intermediaries – makes transparency more difficult because the agenda of the agent is different from the principal.

Further reading

  • The issue of intermediaries is set to be explored in the FCA’s follow-up platform market study, which launched on July 17th.

from Monevator http://monevator.com/the-fca-is-avoiding-the-elephant-in-the-room/

Weekend reading: ETFs are on the right side of history

Weekend reading: ETFs are on the right side of history post image

What caught my eye this week.

Ben Carlson has no truck with the gathering notion that ETFs will destabilize the markets, swindle active managers out of their dues, damage the economy, and cause kittens and puppies to be sad.

Writing in Bloomberg, Carlson notes:

Those who are concerned that indexing is causing a market bubble don’t realize that active investors have had no trouble doing so in the past when index funds didn’t exist.

There were no index funds during the Roaring 20s that led to the Great Depression nor in the go-go years in the 1960s that led to the Nifty Fifty blow-up.

These funds had nothing to do with the brutal 1973-74 bear market because they weren’t even invented until 1976.

I entirely agree. Most of you don’t watch much financial news. You don’t regularly hear pundits saying when the market has fallen 0.5% in a day that it’s down to “all the algos and robots and passive dumb money mindlessly driving volatility in the market”.

Markets have always gone up and down. Prices of assets with uncertain future returns will always be volatile.

The only threat we can yet be sure of from ETFs and other index funds is to the financial industry’s bottom line.

From Monevator

Low-cost index trackers that will save you money – Monevator

What to do with old pension plans – Monevator

From the archive-ator: Investing for 100-year olds – Monevator


Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1

FCA says ‘intervention’ may be needed after pension freedoms [Search result]FT

Government goes ahead with pension tax relief cut for over-55s – Telegraph

RICS: House price growth slowing, mostly in London – ThisIsMoney

Santander rights issue: Tips for estimated 1.4m UK shareholders – Telegraph

Couple use bargain-minded strategy to live debt-free and retire at 40 – LAD Bible

Wealth inequality may be worse than previously thought – The Economist

Yale’s 367-year old water bond still pays interest – Yale News

Global Map showing global valuation ratios by CAPE

Global stock market valuation ratios at June end [CAPE above, blue is ‘cheaper’]Star Capital

Products and services

Should you invest in Britain’s ideas factory? [Search result, on VCTs]FT

Lloyds shakes up overdraft fees, but still charges some borrowers 52% – Telegraph

Skipton offers 0.99% two-year fixed mortgage, but there’s a £1,995 fee – ThisIsMoney

New Best Buy savings bonds pay just 0.01% more than rivals – Telegraph

Ford Money and RCI lead the way for easy-access savings accounts – ThisIsMoney

Comment and opinion

An interview with passive investing champion William Bernstein [Podcast]Meb Faber

Fund management’s future? Milking cows – Bloomberg

Go where nobody else will – Mullooly Asset Management

Wanna get rich? Think fractally – Of Dollars and Data

It’s the little things that can colour an investor’s outlook – Jason Zweig

Risk, return, and skill in the portfolios of the wealthy [Research]VoxEU

There will always be some market-beating funds. That’s not the point – T.E.B.I.

An expert’s guide to calling the market top [Chortle]Bloomberg

How equities took over asset allocation – Ben Carlson

This review of How to Retire at 40 is unfavourable, like the others I’ve seen. Was the premise too wacky for mainstream TV? – Telegraph

Buffett has his own hedge fund managers working at a discount – Motley Fool US

Think like a supermodel if you want to win from the gig economy [Search result]FT

House prices outside London are fair value – The Value Perspective

It’s a wonderful loaf [Poem about the market]Wonderful Loaf

Was Woodford right to sell GlaxoSmithKline and hold AstraZeneca? [PDF]John Kingham

Get rich with perspective (part two) – The Escape Artist

Off our beat

Dating secrets of a hot hedge fund manager [Forwarded by an ex…]Tatler

Man outwits student loans company by staying poor forever – The Daily Mash


Britain finally concedes in writing it will have to pay an EU exit billBloomberg

Your country needs you: Britain’s patriotic Brexit act [Search result]FT

The OBR makes the point I’ve been trying to make for a year – that the economic hit from Brexit isn’t an upfront catastrophe, it’s the potential slow bleed that (to me, anyway) seems inevitable from less efficient trading: “More important are the implications of whatever agreements are reached with the EU and other trading partners for the long-term growth of the UK economy, which we do not attempt to predict here. If GDP and receipts grew just 0.1 percentage points more slowly than projected over the next 50 years, but spending growth was unchanged, the debt-to-GDP would end up around 50 percentage points higher.”ThisIsMoney

Shoppers “in the dark” about Brexit affect – BBC

Latest reminder of the logic that’s mostly behind our self-inflicted exit [via 3652 Days]:

And finally…

“Near the front of this book there was a copyright notice. It tells you that while this book belongs to you, the words in the book belong to me. What does that even mean? It’s the result of a meta-invention, an invention about inventions – a concept called ‘intellectual property’. Intellectual property has profoundly shaped who makes money in the modern world.”
– Tim Hartford, Fifty Things That Made The Modern Economy

Like these links? Subscribe to get them every Friday!

  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.

from Monevator http://monevator.com/weekend-reading-etfs-are-on-the-right-side-of-history/

What to do with old private pension plans

Photo of Mark Meldon, IFA

The following guest post is by Mark Meldon, an independent financial advisor who has come on-board to explain some of the more obscure or technical corners of personal finance.

I began my career in financial services back in 1988, working at the head office of a long-gone life insurer in Surrey. I then joined an independent financial advisory practice in 1990 with a specific remit to advise members of occupational schemes about things like insurance policies and additional pension contributions.

Mainly, though, I was involved in arranging the new kid on the block – personal pension plans.

Private Pension Plans

In a certain guise, personal, or private, pension plans have been available in the UK continuously since the Finance Act of 19561 when what are known as ‘retirement annuity policies’ or ‘Section 226 policies’ were introduced under legislation. They were often marketed specifically at the self-employed.

Then, in 1988, personal pensions were launched to great fanfare. These remain available today, but much has changed over the last 30 years as far as charges, retirement options, and who offers them are concerned.

It isn’t my purpose to deal with too much history here (fascinating as it might be to me), but there are a few things that need to be understood regarding old policies that are gathering dust in the traditional box under the bed.

Sometimes – quite often in fact – gems can be found among those dusty piles of paperwork accumulated after years of neglect.

In order to keep things reasonably clear, let’s just call these ‘private pension plans’. Although there were distinctions between ‘S226’ and ‘PPP’ policies (the latter, for example allowed millions to ‘contract-out’ of the then state pension top-up scheme, SERPS), most of these have now vanished as legislation has changed over the decades.

What has not changed, with one very important exception, are the contract terms and conditions applicable to whatever plan(s) you might have2. This is the potentially very interesting bit!

Insured or SIPP?

Up until very recently, the vast majority of private pension plans were sold by life insurance companies. SIPPs (Self-Invested Personal Pensions), incidentally, are subject to exactly the same rules as those ‘insured’ schemes – they just have more investment choices and have become increasingly popular as administration and investment charges have been driven down by technological advances.

There are, however, millions of insured arrangements in the UK and, anecdotally, the majority of these are not currently receiving contributions. I think that there has never been a better time to look at these ancient policies to see how well they meet your needs.

Crucially, some might have very favourable guarantees that give certainty of payment throughout retirement, at a level that current investment conditions are unlikely to match.

That said some consideration should perhaps be given to rounding them up into a shiny new arrangement that can offer all of the flexibility permitted under the pension freedoms introduced in 2015.

If you think about it, a personal pension requires two basic things to make it work: administration and investment management. An insured plan bundles these two things together and can offer additional features such as life insurance and disability benefits (this is called a ‘waiver of contribution benefit’). Whereas, briefly, a SIPP separates these basic elements. You pay an administrator and you choose the investments.

I think the general perception that all insured private pensions are markedly inferior to a SIPP simply isn’t true, and I’ll try to explain why in a moment.

But first we need to look at who sold them.

Disruptive technology and administration costs

Looking at administration first, I remember filling in huge data input sheets in the new business department of that long-gone life office. These sheets were then sent off to a computer department that occupied a whole floor of a large building for an overnight run.

Whilst that makes me sounds ancient, those computers were state of the art then, albeit vastly inferior to today’s smart phones that we all take so much for granted. Such disruptive technology quickly overtook many life offices and made many of their products uncompetitive as far as administration costs were concerned. (Who would have thought of the impact of the likes of Hargreaves Lansdown and others back then, with the operating efficiencies their business model later introduced?)

Most private pensions were not sold through IFAs. Rather, in those days many life offices had huge direct sales forces. Indeed the number of  such advisers has shrunk by as much as eighty percent.3

Back in the early 1990s there were over 100 hundred companies selling private pensions. Today there are just a half-dozen serious players left in the market! Running from Abbey Life, Allied Dunbar, London & Manchester, NPI, Royal Life, Sun Life to Zurich Life, these so-called ‘zombie’ life offices have often been bought up by consolidators such as Phoenix Life and ReAssure. The consolidators now run hundreds of legacy books of business – and pretty well in my opinion, in the main.

These consolidators are subject to strict rules and conduct of business but are, of course, commercial organisations and need to make a profit. They do this from the multitude of plan charges and investment charges that came with these old policies.

Up until the abolition of commission at the end of 2012, the typical private pension might have the following charging structure:

  • A 5% bid/offer spread as an initial charge on every contribution paid.
  • A policy fee of £3 per month.
  • Contributions paid within an initial period defined in the policy conditions were often allocated to ‘capital’ or ‘initial’ units, which suffered an annual management charge of, typically, between 3% and 9%. Regular contributions paid after the initial period and single contributions were usually allocated to ‘ordinary’ or ‘accumulation’ units, which suffer an annual management charge of, typically, between 0.5% and 1.5%.
  • Providers used initial/capital units to recoup their expenses associated with setting up regular contribution pension policies and the cost of commission payments, which were substantially higher for regular premiums than for single premiums.
  • Alternatively, rather less than you paid was actually invested into ordinary units for a period of time – known as front-end loading – with the quid pro quo being that there were few, if any, early termination charges.

As far as the commission paid in those far-off days is concerned, let us consider someone deciding to pay a not unreasonable £250 per month into a private insured pension for 30 years. Based on the commission scales from the mid-1990s, the direct salesman would expect to be paid something like £2,900 in up-front commission, whereas an IFA rather less at something like £1,900 – the differential being explained by the fact that the direct salesman gives 100% of his business to the life office.

Now you can see why the charges were so high!

Had our investor paid a £3,000 single contribution, by the way, the commission would have been £240 for the direct salesman and £150 for the IFA. Hmm!

Investment management for insured pensions

The choices here fell broadly into two basic options: ‘with-profits’ and ‘unit-linked’, with the latter far more prevalent than the former thanks to the likes of disruptive innovators such as Abbey Life and Hambro Life (later called Allied Dunbar, now Zurich Assurance).

With-profits funds were, and are, substantial pools of money managed internally by the life office. Unit-linked funds came in various flavours such as a Managed Fund, UK Equity Fund, Property Fund and others.

The most commonly perceived difference between with-profits and unit-linked investment is that the value of unit-linked policies is more volatile. This is because the policy value is obtained by multiplying the number of units held by the prevailing published bid price, which fluctuates directly in line with the market value of the assets held in the fund.

The return achieved, therefore, directly follows market conditions and volatility can clearly be seen though variations in the bid price of units. I have always found this a rather more transparent approach to investment.

By contrast, the value of a with-profits policy is largely determined by the insurance company and is not directly related to the value of the underlying assets of the with-profits fund. Instead, insurers allocate a return through the mechanism of bonus declarations, which aims to smooth out the volatility in the value of the underlying assets. This conservative approach was favoured by many IFAs back in the 1980s and 1990s but is rarely available today.

Traps for the unwary

You might think that all old insured private pension plans are terrible, but that isn’t always so. For example, many policies have valuable features that are just not available today.

Indeed, some are extraordinarily attractive.

For instance, up until the mid-1990s, many life offices offered a ‘guaranteed annuity rate’ on their policies. Simply put, you can take a fixed secure income for life from the policy when you reach retirement age. Sometimes this so-called GAR isn’t actually much use in the real world, as it might only be available as a pension paid annually in arrears with no options like a spouse’s pension. However, many do offer flexible options – you really need to check.

A couple of years or so ago, I advised a client to exercise a GAR which gave him a return of 16% on his fund! From an after tax-free cash fund of £85,000 or so, he has already been paid gross income of £27,200, and he is only 67 – amazingly, that is around 3.5x what he could buy today from a pension annuity on the open market today. Bearing in mind that he only paid in around £12,000 in net contributions to the plan back in the 1980s, I can only say “kerching!”

Many old policies I look at also offer insurance benefits like life cover and ‘waiver of contribution benefit’ – the former is often rather expensive but the latter means that the insurance company will effectively pay your pension contributions on your behalf if you suffer from long-term ill-health. I had experience of a lady who became ill and her pension payments continued for 12 years under this provision.

Marketing gimmicks were common, too – loyalty bonuses, charge rebates and the like. I have a handful of clients who set up private pensions with what was the Sun Life in 1992 and these policies were all set up to finish at age 55. Two of these clients have long gone past that age but have kept the policies up and they now benefit from ‘Extra Fund Injection’ (remember all those ‘EFI’ badges on the back of cars in the early 90s?) which effectively wipes most of the policy charges and makes their contracts very attractive even in comparison with today’s low-cost options.

However, I have looked at hundreds of old private pensions over the last 15 odd years and most, unfortunately, are pretty poor value, exhibiting high cost, mediocre investment returns and no special features.

I’d say that my advice has been to ‘hold’ about a quarter of the plans I have investigated in detail and to ‘fold’ three-quarters into a better value contract offering access to all currently permitted options on retirement. About half of these funds are now in a SIPP wrapper and the other half (generally the smaller funds) in insured policies.

Good news and what to do

The good news is that it is now much easier to fold an old pension into a new arrangement as the FCA (Financial Conduct Authority) introduced a 1% maximum exit charge rule in April. That is now the most a life office can charge on exit. (That said, at least half of the plans I have looked at didn’t have exit charges anyway.)

To undertake what I call an audit of old pension policies is rather complex and time-consuming. But you could do it yourself and here is what you need to do.

1. Obtain a projection of benefits from your existing private pension plan provider. This will effectively confirm the charges on your contract, the current fund, and transfer values, but you will need the life office to firm up details (see below).

2. Undertake an initial assessment of the charges, paying particular attention to the ‘reduction in yield’ (RIY) and transfer value figures. Also refer to fund charge information and with-profits guides.

3. Alternative illustrations should then be sourced from potential alternative providers using today’s different charging regimes. It’s certainly worth asking the current provider for a so-called ‘existing business illustration’ if the firm is still accepting additional contributions – many will not take increases where high guarantees feature in the policy.

4. You then need to do a detailed product charge analysis. Most IFAs will have some groovy (and quite expensive) software to do this, but you might need to set up spreadsheets.

5. For with-profit investments you need to:

  • Analyse independent fund ratings, and financial strength of the provider;
  • Consider the provider’s bonus track record;
  • Analyse the asset mix of the fund. Does it still meet you requirements, does the annual management charge represent good value for that asset mix?

6. Then you need to factor in any special features mentioned above as objectively as you can in the light of your circumstances now.

7. Eventually, you can make some kind of reasoned decision about what to do.

Alternatively, you could hire an IFA to do all of this heavy work for you. They are likely to have access to industry tools that you can’t get hold of and will have plenty of subjective experience on which to draw.

Whether to Hold or Fold an old pension plan is ultimately your choice, but I do think the decision needs to be carefully thought through. There are a multiplicity of factors you need to take into account, as I hope I have demonstrated.

Please note: The article above ONLY concerns ‘defined contribution’ or ‘money purchase’ pension plans. These can be personal pensions, company-sponsored schemes, AVC’s, FSAVC’s, Executive Pensions, and stakeholder plans. It does NOT concern defined benefit or final salary pensions – that’s a much more complicated area.

Mark Meldon is an Independent Financial Advisor based in Cheddar, Somerset. You can find out more from his company website. You can also read his other articles here on Monevator. Let us know if there’s something you think Mark could cover in the comments below.

  1. Source: Personal Pensions Handbook & Unit-Linked Survey 1994/95.
  2. The exception is it is now much less onerous to fold an old pension into a new arrangement, thanks to a 1% maximum exit charge rule that was brought in by the Financial Conduct Authority in April. Previously charges could be 20% or more!
  3. Source: Personal Finance Society 2016.

from Monevator http://monevator.com/old-private-pension-plans/

Low cost index trackers that will save you money

This is our latest update on the best low cost index trackers now on the market. It replaces any previous versions. Note: We don’t include platform exclusive funds – they’re generally not a good deal overall. 

Low costs – that’s the name of the game for passive investors. Performance is unpredictable and elusive, but costs are nailed on. They nibble away at your returns like a satanic mouse – harmless enough at first, until you realise all your cheese has gone.

As Morningstar puts it:

If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision.

That’s why I try to leave no penny un-pinched when searching for cheap funds.

I presented my then top, low cost picks in the lazy portfolio post. But it’s nice to have a choice.

So, for your ascetic delight and entertainment, I bring you: Britain’s cheapest index trackers and their next best alternatives.

High cost funds gobble returns

As an avowed passive investor, I’m concentrating purely on index funds and Exchange Traded Funds (ETFs). That’s because they are the simplest cut-price vehicles available.

I’m also sticking to the broad market categories recommended in the lazy portfolios. They offer ample diversification at a low cost. I’m not into kinky stuff like short Brazilians.

My picks are based purely on price as measured by the Ongoing Charge Figure (OCF), and any other upfront fund fees that may apply. There are other factors to consider when buying a fund (like tracking error, liquidity, and size) so it’s always worth reading any documentation to make sure it fits your bill.

Identifying tickers or ISIN codes are given in brackets. If there are any other wrinkles worth mentioning, I’ll throw them in along the way.

Finally, if you’re looking for the cheapest place to buy and hold these funds then take a butcher’s at our online broker comparison table.

The UK’s best low cost index trackers

Right, let’s grab some bargains!

Note: Anything not labelled ETF or ETC will be an index fund. Codes are given for accumulation funds variants where available.

Domestic large cap equity


  • iShares UK Equity Index Fund D (GB00B7C44X99) OCF 0.06%

Next best

  • HSBC FTSE All Share Index C (GB00B80QFX11) OCF 0.07%
  • Vanguard FTSE UK All Share Index Trust (GB00B3X7QG63) OCF 0.08%
  • Fidelity Index UK Fund W (GB00BLT1YM08) OCF 0.08%

Domestic mid cap equity


  • Vanguard FTSE 250 ETF (VMID) OCF 0.1%

Next best

  • L&G UK MID Cap Index Fund I (GB00BQ1JYX87) OCF 0.14%
  • db X-trackers FTSE 250 ETF (LU0292097317) OCF 0.15%

Domestic small cap equity

There are no good tracker options in the UK small cap asset class for DIY investors. Of the funds listed below, the iShares ETF is more of an expensive FTSE 250 tracker, and the rest are active funds.


  • Schroder Institutional UK Smaller Companies (GB0007893984) OCF 0.52%

Next best

  • Baillie Gifford British Smaller Companies B (GB0005931356) OCF 0.67%

Domestic value equity

Most UK tracker options are only an approximation of this asset class:


  • 7IM UK Equity Value Fund C (GB00BWBSHV64) OCF 0.35%

Next best

  • Vanguard FTSE UK Equity Income Index (GB00B59G4H82) OCF 0.22%
  • WisdomTree UK Equity Income ETF (WUKD) OCF 0.29%
  • PowerShares FTSE UK High Dividend Low Volatility ETF (UKHD) OCF 0.39%

Note: The 7IM fund takes the top spot because it’s the one UK tracker that explicitly follows a value methodology. The remainder are high-yielding funds, not true value funds. A high-yielding fund is a distant cousin of value and not always a pretty one at that. Pure value funds are available in the UK through Dimensional Fund Advisors, but only via an associated IFA who will charge you fees.

World equity


  • L&G Global 100 Index Trust I (GB00B0CNH056) OCF 0.14%

Next best

  • Fidelity Index World Fund I (GB00B7LWFW05) OCF 0.15%
  • HSBC MSCI World ETF (HMWO) OCF 0.15%
  • HSBC FTSE All-World Index Fund C (GB00BMJJJG09) OCF 0.21%

The HSBC index fund contains an emerging market component. The rest cover the developed world only.

World value equity


  • Vanguard Global Value Factor ETF (VVAL) OCF 0.22%

Next best

  • db x-trackers MSCI World Value Factor ETF (XDEV) OCF 0.25%
  • iShares Edge MSCI World Value Factor ETF (IWVL) OCF 0.3%
  • Lyxor SG Global Value Beta ETF (SGVL) OCF 0.4%

World small cap equity


  • Vanguard Global Small-Cap Index Fund (VIGSCA) OCF 0.38%

Next best

  • SPDR MSCI World Small Cap ETF (WOSC) OCF 0.45%

International ex-UK equity


  • L&G International Index Trust I (GB00B2Q6HW61) OCF 0.13%

Next best

  • Vanguard FTSE Dev World ex-UK Equity Index (GB00B59G4Q73) OCF 0.15%
  • Aviva Investors International Index Tracking SC2 (GB00B2NRNX53) OCF 0.31%
  • db x-trackers FTSE All-World ex-UK (XWXU) OCF 0.4%

You can also pick ‘n’ mix using individual US, Europe ex-UK, Japan, and Pacific ex-Japan trackers.

Emerging markets equity


  • db X-trackers MSCI Emerging Markets Index ETF (XMME) OCF 0.20%
  • Amundi ETF MSCI Emerging Markets ETF (AUEM) OCF 0.20%

Domiciled in France – subject to withholding tax.

Next best

  • Fidelity Index Emerging Markets Fund W (GB00BLT1YT76) OCF 0.23%
  • iShares Emerging Markets Equity Index Fund D (GB00B84DY642) OCF 0.24%

Socially responsible investing


  • UBS (Irl) ETF – MSCI United Kingdom IMI Socially Responsible ETF (UKSR) OCF 0.28%

Next best

  • L&G Ethical Trust I (GB00B0CNH940) OCF 0.31%
  • Vanguard SRI Global Stock Fund (IE00B76VTN11) OCF 0.35%
  • iShares Sustainable MSCI Emerging Markets SRI ETF (SUSM) OCF 0.35%



  • Amundi ETF Global Equity Multi Smart Allocation Scientific Beta ETF (SMRU) OCF 0.4%

Next best

  • Lyxor JP Morgan Multi-Factor World Index ETF (LYXW) OCF 0.4%
  • Source Goldman Sachs Equity Factor Index World UCITS ETF (EFIW) OCF 0.65%

Property – UK


  • iShares FTSE EPRA/NAREIT UK Property ETF (IUKP) OCF 0.4%
  • iShares MSCI Target UK Real Estate ETF (UKRE) OCF 0.4%

Next best

  • No index fund alternative

Property – global


  • L&G Global Real Estate Dividend Index I (GB00BYW7CN38) OCF 0.2

Next best

  • iShares Global Property Securities Equity Index Fund D (GB00B5BFJG71) OCF 0.22
  • Amundi ETF FTSE EPRA/NAREIT Global ETF (EPRA) OCF 0.24%
  • SPDR Dow Jones Global Real Estate ETF (GBRE) OCF 0.4%

Includes emerging markets exposure.



  • Source Bloomberg Commodity ETF (CMOP) OCF 0.19%

Next best

  • ETFS Longer Dated All Commodities Go ETF (CMFP) OCF 0.3%
  • Lyxor Commodities Thomson Reuters/CoreCommodity CRB TR ETF (CRBL) OCF 0.35%



  • iShares Physical Gold ETC (SGLN) OCF 0.25%

Next best

  • Source Physical Gold ETC (SGLD) OCF 0.29%
  • db Physical Gold ETC (XGLD) OCF 0.29%

Gold trackers are Exchange Traded Commodities (ETCs).

UK Government bonds – intermediate duration


  • Lyxor FTSE Actuaries UK Gilts (GILS) OCF 0.07

Next best

  • Vanguard UK Government Bond ETF (VGOV) OCF 0.12%
  • SPDR Barclays Capital UK Gilt ETF (IE00B3W74078) OCF 0.15%
  • Vanguard UK Gov Bond Index (IE00B1S75374) OCF 0.15%
  • L&G All Stocks Gilt Index Trust I (GB00B8344798) OCF 0.15%

UK Government bonds – long


  • SPDR Barclays Capital 15+ Year Gilt ETF (IE00B6YX5L24) OCF 0.15
  • Vanguard UK Long-Duration Gilt Index fund (GB00B4M89245) OCF 0.15%

UK Government bonds – short


  • Lyxor FTSE Actuaries UK Gilts 0-5Y ETF (GIL5) OCF 0.07

Next best

  • SPDR Barclays Capital 1-5 Year Gilt ETF (IE00B6YX5K17) OCF 0.15
  • iShares UK Gilts 0-5 ETF (IGLS) OCF 0.2%

UK Government bonds – index-linked


  • Lyxor FTSE Actuaries UK Gilts Inflation-Linked (GILI) OCF 0.07

Next best

  • Vanguard UK Inflation Linked Gilt Index fund (GB00B45Q9038) OCF 0.15%
  • L&G All Stocks Index Linked Gilt Index Trust I (GB00B84QXT94)  OCF 0.15%
  • iShares Index Linked Gilt Index Fund D (GB00B83RVT96) OCF 0.16%

International government bonds


  • iShares Overseas Government Bond Index Fund D (GB00B849C803) OCF 0.17%

Next best

  • iShares Global Government Bond ETF (IGLO) OCF 0.2%
  • iShares Global AAA-AA Government Bond ETF (SAAA) OCF 0.2%
  • db X-trackers Global Government Bond ETF (XG7S) OCF 0.2% 

International bonds hedged to £ (government and corporate)


  • Vanguard Global Bond Index (IE00B50W2R13) OCF 0.15% 

Hedged back to Sterling.

Next best

  • Vanguard Global Short Term Bond Index (IE00BH65QG55) OCF 0.15%

Hedged back to Sterling.

  • db X-trackers Global Government Bond ETF (XGSG) OCF 0.25%

Hedged back to Sterling.

International inflation-linked bonds hedged to £


  • db X-trackers Global Inflation Linked ETF (XGIG) OCF 0.25% 

Hedged back to Sterling.

Next best

  • L&G Global Inflation Linked Bond Index I (GB00BBHXNN27) OCF 0.27%

Hedged back to Sterling.

UK Corporate bonds


  • L&G Sterling Corporate Bond Index Fund I (GB00B4M01C47) OCF 0.14%

Next best

  • L&G Short Dated Sterling Corporate Bond Index Fund I (GB00BKGR3H21) OCF 0.14%
  • Vanguard UK Investment Grade Bond Index (IE00B1S74Q32) OCF 0.15%
  • iShares £ Ultrashort Bond ETF (ERNS) OCF 0.09%

Note: The iShares ETF doesn’t take top spot because it’s a specialist ultrashort bond tracker with a duration of a third of a year. Not for general use but could be handy for deaccumulators.

Concluding thoughts on low cost trackers

If you’re new to passive investing then it might seem like you now have a lot of decisions to make after reading that lot.

This piece on designing your own asset allocation will help you construct your own portfolio. If you want a quick short-cut then you can do a lot worse than picking a fund-of-funds instant portfolio solution.

We only update this post periodically. Please bear in mind the quoted OCFs may date as fund groups fight their turf wars by undercutting each other (hurrah). But this list should still prove an excellent starting point for your research.

And if anyone comes across any better index tracker options I’d love to hear about them in the comments below.

Take it steady,

The Accumulator

Note: Some comments below may refer to an older collection of low cost index trackers. Scroll down for the latest thoughts.

from Monevator http://monevator.com/low-cost-index-trackers/

Weekend reading: Skip The Krypton Factor

Weekend reading: Skip The Krypton Factor post image

What caught my eye this week.

According to the reliably provocative Cullen Roche at Pragmatic Capital, factor picking is the new sector picking for flighty trader types.

And the problem with that, Roche writes, is:

“Predicting factors isn’t just identifying known sectors of the market. Factors are moving targets that require an even greater degree of asset forecasting than sectoral picking.”

Roche includes a new chart from Northern Trust [PDF], showing how factor returns have been all over the place from year to year:

Clearly active investors are going to have to be channeling Mystic Meg to successfully switch from factor to factor in advance, given that chart. The vast majority will surely fail.

What about passive investors?

My co-blogger has made the case for adding a factor tilt to your portfolio (he prefers the term return premiums) whereas Monevator contributor Lars Kroijer is skeptical, and suggests you stick to simple market-cap weighted indices.

Your choice. But if you do decide to add a factor tilt to your index portfolio, then I’d suggest it’s best to commit to your strategy for the long-term and rebalance as required.

Clearly some years are going to be bad years, even if overall the allocation pays off.

From Monevator

The Slow and Steady passive portfolio update: Q2 2017 – Monevator

Why I don’t use the FIRE acronym for financial freedom [Good comments, too]Monevator

From the archive-ator: You don’t have to go nuclear on working for a living – Monevator


Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1

UK faces tightest squeeze on household finances in five years – Guardian

£1,000 cash in a savings account in 2007 now worth £878 in real terms – Guardian

Some Shard apartments are still empty, five years on – Guardian

10 ways HMRC can tell if you’re a tax cheat [Search result]FT

Mel B has “wiped out” her estimated £50m Spice Girls fortune, LA court told – Telegraph

If you hold AIM shares and noticed weird quotes this week, here’s why [Forum]Stockopedia

NIMBYs told Tory building plans could boost the value of their homes – Telegraph

What happened to the BTL tax backlash? It’s getting cheaper to rent! – Telegraph

Family of four needs “at least £40,800” a year, says think tank – Guardian

Graduates in England face decades repaying £60,000 of student debt – Bloomberg

Products, taxes, and services

Tesco revamps Clubcard scheme, adds Uber to list of reward partners – ThisIsMoney

Are you taxed on a divorce settlement? No, but beware wrinkles – Telegraph

Would you gamble on HSBC’s new 0.99% tracker mortgage? – ThisIsMoney

Virgin’s Manchester United bond triples 1% return if it does double – Professional Advisor

Funeral plans could be “the latest mis-selling con” – ThisIsMoney

HSBC and Investec have joined the ranks of the robo-advisors – ThisIsMoney

Charity opt-out service launched to crack down on donation requests – Guardian

Amazon is promising its usual raft of offers for its made-up festival, Prime Day – Amazon

Comment and opinion

What I learned from my ‘faux-tirement’ – Morningstar

The awesomeness of not being important – Think Save Retire

Why consumer goods giants will pay Clooney-Tunes prices for rivals – Value Perspective

How to save for retirement with a lumpy income – Liberate Life

Preview of the upcoming How to Retire at 40 broadcast on 10 July – ThisIsMoney

The case for selling out of Morrisons shares – UK Value Investor

The broadest markets offer the best likelihood of expected returns – Fortune Financial

Good decisions can have bad outcomes (and vice versa) – Oblivious Investor

Excess indexing? The stock market has entered Bizarro World – Bloomberg

In real estate – rent luxury, buy utility [US data but interesting]Financial Samurai

“Drunk with internet riches, hall-of-fame investor Stanley Druckenmiller plowed an additional $6 billion into tech stocks in March 2000. The bubble burst just days later and he lost $3 billion. When asked what he learned from that experience, Druckenmiller replied, “I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basket case and couldn’t help myself.”Bloomberg

Off our beat

Seems young men are skipping work for superior video games – New York Times

More from Tim Hartford: Fantasy gaming can be better than a job [Search result]FT

Alain de Botton Tweets ironically about banks leaving UK. Brexiteer misses joke – Twitter

Economist Milton Friedman predicted the failure of the bloody War on Drugs – AE Ideas

And finally…

A part of all I earn is mine to keep.’ Say it in the morning when you first arise. Say it at noon. Say it at night. Say it each hour of every day. Say it to yourself until the words stand out like letters of fire across the sky.”
– George S. Clason’s classic The Richest Man In Babylon is just 99p on Kindle

Like these links? Subscribe to get them every Friday!

  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.

from Monevator http://monevator.com/weekend-reading-skip-the-krypton-factor/

Why I don’t use the FIRE acronym for financial freedom

Why I don’t use the FIRE acronym for financial freedom post image

I don’t remember anyone talking about FIRE when I started Monevator in 2007.

Of course there were personal finance writers, and books and blogs about growing your pension or leaving the rat race.

But FIRE wasn’t a word. Or rather it wasn’t something you wanted to jump into:

  • a process in which substances combine chemically with oxygen from the air and typically give out bright light, heat, and smoke; combustion or burning.

At some point though, I looked up from counting my pennies and heard the youngsters using FIRE in a new context.

Rather than something you’d shout in a cinema in a parable about crowds and exits, FIRE now meant:

Financial Independence Retiring Early

Some even named their blogs after it: FIRE v London and The FIREStarter.

As acronyms go, we could do worse. FIRE has connotations of danger and emergency, which is how some people see their working life (or their bank balance).

But for me yoking the concept of financial independence together with retiring early is not ideal. I just don’t see them as uniquely wedded at the hip.

Also, I suspect it causes confusion about goals, and even cultivates outrage from those dreaded ‘retirement police’ who get angry if a FIRE-ee earns a few bob on the side.

Fighting FIRE with FIDO

Not working is just one more option that comes with being financially free – such as taking three months out to learn Japanese or going for ice cream in the park on a Monday or telling your boss to shove it thanks but no thanks, or seeking a new career in a different industry.

We might have acronyms for these other options, too:

FIBS – Financial Independence Blatant Salary

FITS – Financial Independence Taking Sabbatical

FISH – Financial Independence Semi Halfhearted

FIDO – Financial Independence Doing Overtime

FIZZ – Financial Independence Zig Zagging

FIGS – Financial Independence Great Sex

FIVE! – Financial Independence Very Exciting!

FIEF – Financial Independence Extreme Freedom

I could go on, and so could you because financial independence gives you more freedom to do what you want to do, not what an acronym implies you should.

You can go your own way

My beef with the FIRE terminology isn’t mere pedantry. I suspect it encourages tunnel thinking, perhaps to some users’ own detriment.

I often read blogs and comments from people saying they can’t stand their work at the office, for instance. They must escape it at all costs!

But actually, the cost as they see it is working 10-15 years or more in a job they hate, saving 60% of their salary, and becoming D.I.Y. Buddhists in order to be happy on the leftovers.

Perhaps that’s fine for you. I’m no big spender and I think many of the best things enjoyed by billionaires are within our reach, too.

But I do wonder if there’s not be a better solution than both being in the rat race and actively hating it for two decades?

A new career? Or a different way of working?

Similarly, I read articles by early retirees that urge others to do it – because, they argue, working at a modern office is soul-destroying.

I feel that way, too. But as I’ve written many times, you don’t have to give up work to avoid the office.

You do have to take risks in working for yourself. But if you’re self-motivated and vaguely smart you can probably get the same income with many of the benefits you’d seek in being retired early.

Your time is far more under your own control, for instance, you can create a work environment that’s right for you, you can go to the cinema when it’s empty, and you can spend your days in your underwear if that’s your thing (though probably best to skip the cinema).

Early retirement can bring its own problems, so it’s worth questioning whether it’s really the best solution to your current ones.

Then there are the people who love their jobs and even the office, but who are encouraged, perhaps subconsciously, to think they shouldn’t by the term FIRE – as well as by its camp followers.

Happy workers may want financial freedom for its own intrinsic rewards. But they find themselves on websites frequented by a subset of readers who harangue them and say they’re actually 9-5 Stepford Wives who are deluding themselves by thinking they enjoy work.

Finally, plenty of people who retire early do so because they’re ill or incapacitated, or because they were fired the old-fashioned way. Living on benefits isn’t what whoever coined the term FIRE had in mind.

I’m not disparaging early retirement as a goal, if it’s what you want. I can see the appeal!

I’m just saying it’s but one of many things you could aim for – yet it’s embedded in the FIRE mentality.

There’s always one more year

This all came to a head when UK personal finance blogger and friend of the Monevator website Retirement Investing Today (RIT) declared that he was going to spend that dreaded extra year at work.

This despite RIT having already hit his purported freedom number a year ago, and now being well over target.

“Foul!” cried his critics. “We want our metaphorical money back!”

I can see both sides.

The ‘one more year’ problem is well-known. My father kept adding years to his tally – despite being fed-up and ready to go – in pursuit of extra security. In the end he was only healthy in retirement for a couple of years, and dead in much less than a decade.

So yes, I get it.

RIT also said very publicly he was aiming to retire after hitting his magic number. This probably made him more accountable, and may have aided his motivation. So I can see why some may feel letdown by their hero.

It’s true too that there will always be reasons to delay – that’s why One More Year is a thing. RIT points to Brexit uncertainty, and I don’t blame him. But perhaps next year there will be a stock market crash or a run on the pound? And Brexit won’t be done with, anyway.

Set against that there’s this (lightly edited) response from RIT in the comments:

For me the bit I missed was the difference FI would make to my/family emotions/well-being.

Like a project I naively thought I’d make it to the FI line physically exhausted/relieved/etc and then chase RE (a new project) to decompress.

What I didn’t bank on was the euphoria that came from FI meaning I have a spring in my step making the next step not so much of a rush.

RIT goes on to explain how with financial independence achieved, work is more relaxed. He feels able to ignore emails out of hours, to delegate to his team, and so on.

I believe RIT has discovered that the Sword of Damocles hanging over your neck as an employee isn’t very threatening if it’s in a museum, and only over your neck because you’re taking a selfie.

FIRE in the whole

RIT says he’ll still be retiring in a year. I’ve no reason to doubt that or to wish him anything other than good luck.

Similarly, if the FIRE acronym describes your plans then by all means use it.

But let’s remember there are dozens of permutations of financial freedom. If you’ve clocked into an office every day and never thought about them, then in your desperation you might not know what you’re missing.

I’m pretty much financially independent these days, by my own terms. I once wanted to retire early. But I tried doing no work and discovered it wasn’t for me – or at least not yet.

My expectation now is I’ll earn at least some money for the next 30 years. I won’t state I’ve retired early and then find myself explaining why continuing to work is not the contradiction it clearly is. Rather, if the subject comes up I’ll focus on the financial independence part.

To me, independence is the bit that matters most. Retire early if you want to – absolutely. Keep working if you want to. Start a business if you want to, despite the risks.

Financial independence doesn’t solve all life’s problems – I’ve been stuck in a motivational rut for a year, for example – but it does make it easier to take a bird’s eye view of them.

Financial independence ultimately means the freedom to potentially do more of what you want to do – and to change your mind. When you get there you’ll probably find it’s intoxicating, at least for a while.

So good luck with your own journey to FIRE, FIDO, FIBS, or FIEF… or wherever else you’re headed!

from Monevator http://monevator.com/fire-financial-freedom/