Thursday, 27 March 2014

A new beginning

We have launched a new website which replaces this blog -

The sole purpose of “Shining Lights” is to provide varied sources of quality information and analysis on the subjects of managing finances and investing money.

It is inspired by a simple idea but an idea which can create profound change.

“Being the difference you wish to see.”

It has not been created to sell a product and it's not going to promote a service. Indeed we can assure you it's not for profit.

Thank you for your support and please like us on Facebook or follow us on twitter. 

Tuesday, 25 March 2014

Annuities vs drawdown vs cash

In my second blog on the budget announcement I want to explore further the idea of annuities being dead…..

The table below compares drawdown income to an annuity:

Drawdown Income
Annuity Income
Pension Fund
Tax free cash
Total income

Note: based on a male age 65, single life annuity with no increase, no guarantee and no spouses pension. Tax free cash is assumed to be held on deposit at a rate of 3% p.a.

The alternative option is to take the whole fund as cash. After tax this would be around £81,000, assuming this was held on deposit at a rate of 3% this would give an income of £2,430 p.a.


Journalists have welcomed the idea that pensioners have the flexibility to take their entire pension fund as cash. However to achieve an equivalent drawdown income they would need to generate returns of just over 9% a year to deliver the same income. Annuity income is slightly less at 6.5%.

Taking the cash creates a number of challenges, firstly how to achieve a return of 9%. There are potentially two options – property or equities. A recent survey indicated that an individual could buy a property in Blackpool for £75,943 and achieve a monthly income of £494. However, ignoring tax there will be letting agent fees, insurance, maintenance costs and periods when the property is empty which means the actual income is less.

Assuming around £100 is set aside to cover costs this means the yearly income is £4,728 p.a.

An alternative is investing, the Telegraph recently suggested that 10% should be placed in short term government bonds and 90% in the FTSE 100. Assuming a 5% return on the FTSE 100 over the past ten years, and 1.77% on Government Bonds this will deliver a yearly income of approximately £3,600 p.a.

Other potential challenges include inheritance tax planning, flexibility around income and life expectancy.

With the tax upfront and limited investment options cash seems a high risk option for a cautious investor, but may appeal to the more speculative investor or those with other sources of income.

Drawdown vs annuity

Drawdown provides people retiring with greater flexibility because of the level of income they can take, the ability for the pension fund to be passed down to their spouse and for it to remain outside of their estate for inheritance tax planning.

However, there is a risk. Assuming the maximum income of £6,637 is taken then the return needed is just under 9%. This means that the individual will need to carefully manage their money to ensure that the fund doesn’t run out. Assuming no growth the fund would disappear within 11 years. With an average life expectancy of 20 years, this means nine years of no income.

In reality most people don’t take the maximum income for this reason.

With an annuity the individual will know what they will get each year until they die, this is guaranteed whatever happens. However, to add increases each year, spouse’s pension and a guarantee means the income will reduce. The provider of the annuity takes on the risk. Roughly on £75,000, they are assuming a life expectancy of 16.5 years. If an individual lives less than 16.5 years then the provider wins, if they live longer then they win.

Flexibility or complexity?

Journalists assumed that the budget meant an end to annuities however the examples show that although there is flexibility individuals may still prefer the security of annuities to drawdown (or cash) especially where this is the only source of income.

There is greater flexibility now but it is no more complex than it was before. What these changes do is provide individuals with greater choice and as with all financial planning the right choice will depend on the individual’s needs. The idea of having all the cash up front is appealing but when it needs to be managed for an unknown period this perhaps brings too much risk for many.

Monday, 24 March 2014

Are annuities dead?

According to most financial papers, the answer is yes……

This means that companies like Just Retirement and Partnership Assurance are dead because this is the majority of their business.

But perhaps the journalists and markets are overreacting.

More choice

The retirement market needed a radical overhaul.

Within the last twenty years guaranteed pension schemes have declined significantly, with only 13% of final-salary schemes open to new joiners and very few FTSE 100 companies offering schemes to new members.

This means a new generation of savers have to adapt to an uncertain retirement in terms of income also life expectancy.

Mixed in with increased life expectancy, lower gilt yields mean annuities have reduced significantly over the past decade.

Pension drawdown was introduced to provide flexibility in retirement. However, the fear was that individuals would use all the money to “rinse” their fund. Therefore protection was put in place.

In the last five years these factors have come to a head, and until now no government has been bold enough to tackle this head on.

Are annuities dead?

The assumption is that individuals will be happy to take control of the management of their pension fund in retirement. There are a number of elements to this, firstly how much income is needed, how the remaining fund is invested and how long it is expected to last.

When the dust has settled the outcome will be that some individuals will be happy to do this, some will outsource to financial planners and some will opt for annuities.

What we may see are new product ranges but effectively there will be no change other than individuals will have more choice and flexibility.

Is this good news

Yes, individuals have been asking for some time to have more choice in retirement and these changes respond to this.

However, there are some obvious dangers.

  1. If an individual takes the entire pension fund out, then it will be taxed as income. This means a pension fund of £100,000 will actually be worth around £81,000 after tax
  2. Individuals going into retirement homes could find that their pension is assessed as eligible to pay the fees. Where before there was a restriction on the income from the pension, there is now no restriction. This means potentially the pension could reduce a lot quicker leaving nothing for the spouse or dependents
  3.  Security – annuities provide security, assuming life expectancy is twenty plus years then individuals opting for annuities know they will get a guaranteed income until they die. For some this will remain an attractive option. If individuals believe this is wrong then drawdown or taking all their pension fund as cash opens up a greater degree of risk because the responsibility for ensuring the income lasts rests with the individuals
  4. Financial education – there is an assumption that financial education is strong, however a number of reports indicate that this is not the case and that our schools are failing our children. If the financial education is not there then this opens up potential dangers where money is wasted and squandered

Where now

This is great news but needs to be handled carefully. One of the greatest fears about drawdown was that individuals would “rinse” their pension fund and then the state would have to provide for them, protection was put in place to stop that. That protection has now gone but those fears remain.

Individuals reaching retirement now have access to “free” advice and will need to make a choice. Annuities although appearing to offer poor value for money do offer security whereas drawdown requires careful management to ensure the same level of security; ultimately this will depend on the individual.

The markets (and analysts) have priced in armageddon for Just Retirement and Partnership Assurance on the assumption that annuities will never be written again. They could be right but in reality one of greatest fears in retirement is uncertainty and hence the use of cash, will individuals want to give up the security of annuities?      

Friday, 7 March 2014

Hidden gems are not found on the surface......

We spend a lot of our time researching the market, and searching out investment ideas. The argument we hear a lot is whether investors should choose passive or active funds. This led us to test our portfolios against passive funds. The argument being that if we couldn’t significantly outperform a portfolio of passive funds then why not use them. The portfolios were launched in 2009, and only in 2011 did we underperform the passive funds. Since launch we have added nearly 100% extra performance compared to passives.

When we look at performance of funds we now compare against the benchmark. We accept over a short period the fund may underperform but it is long term trends we are looking at.

I recently listened to the fund manager of the Rathbone Income Fund; we did all the due diligence on the fund and it came up on our potential buy list. The Rathbone Income Fund uses the FTSE All Share Index as their benchmark but for an Income Fund we feel the iShares UK Dividend ETF is a better benchmark.

This showed since 2009 only in two years did it significantly outperform the passive fund and in other years it either matched the performance or significantly underperformed. Over five years it did outperform the tracker by about 10%.

Neil Woodford is held up as the guru of income investing and so we ran the figures since 2009. In three years he significantly underperformed the passive fund, two years he significantly outperformed and the rest remained flat. Over five years the tracker significantly outperformed.

There are income funds that have consistently and significantly outperformed the passive option but the danger is that often investors go towards the funds they are guided to without considering the options.

If we unpick the option further the ETF pays 4.5% yield compared to 3.5% for the other funds. The ETF picks the top 50 dividend yield stocks in the UK so there will be a significant crossover in holdings. Where the likes of Neil Woodford have added value are at times of negative sentiment – 2007, 2008 and 2011 were the periods where he was able to demonstrate the power of active management.

In summary there is no right or wrong route to investing. However, investors need to take care in identifying what they are looking for and understanding the investments they are using to achieve that. Sometimes the hidden gems are not always those that are on the surface!   


The analysis – an overview  

We have considered two propositions (Hargreaves Lansdown and Interactive Investor), the third proposition is one that is newer but gaining traction in the market. Launched in 2013 ‘Charles Stanley’ is an interesting operation and includes some of the team from Hargreaves Lansdown. They are a listed company and are one of the leading stockbroking and investment management companies in the UK.

Our research shows the position they occupy is somewhere between Hargreaves Lansdown and Interactive Investor. Where Interactive Investor feels a little like a kit car, this feels more pre-packaged and tries to provide investors with the same user experience as Hargreaves.

Recent research shows 44% of people look to invest via a well-known and trustworthy brand. Hargreaves has successfully used PR as a means to promote their proposition. Interactive Investment doesn’t but Charles Stanley is becoming active in the media, possible due to the connection with some of the team to Hargreaves Lansdown.

Bundled v unbundled – what does this mean?

A bundled fund has one annual charge, say 1.5% p.a. It is collected by a fund manager but then this is split so part of the payment goes Charles Stanley and part is retained by the investment house.

Charles Stanley had an advantage as a late entrant to the party which meant they came in with clean funds. They have never offered bundled funds to investors under the direct proposition, so investors can see exactly what they are paying when they select a fund.

If we compare to Hargreaves Lansdown and Interactive Investor the picture, is a little more complex. Hargreaves Lansdown clients can switch across to the clean funds but can retain the old bundled funds and have the rebates paid back to their account. With Interactive Investor they only offer bundled funds but fully rebate back the payment to the client.

Having a clean share class is a lot easier for the client going forward.

What are the charges?  

The charges are very clear and sit somewhere between the levels charged by Hargreaves Lansdown and Interactive Investor. We will cover the pension wrapper separately.  

The charges are 0.25% on the first £500,000 of funds across all accounts and 0.15% per annum on balance of funds in excess of £500,000. If we take the average Hargreaves Lansdown investor with £40,000 the charge would be £180 p.a., with Interactive Investor £80 p.a. and with Charles Stanley £100 p.a.

On paper Interactive Investor seems cheaper but as we have indicated, this depends on client activity so if they trade more, Interactive Investor may end up more expensive. There are also additional points that need to be considered with Charles Stanley.

  1. Hargreaves Lansdown charges per account, per client; Interactive Investor combines the charge for spouses and accounts and Charles Stanley charges across all accounts (but not spouses). For example, with Charles Stanley if a husband and wife have £300,000 each they would not qualify for a charges discount on balances over £500,000
  2. If investors are paying regular contributions into investment trusts or shares there is a trading charge of £10 per trade; therefore this platform may not be the best place to go. To compare, both Hargreaves Lansdown and Interactive Investor charge £1.50 for regular trades into shares and investment trusts
  3. 0.25% p.a. is charged on funds, and shares (which include investment trusts), however there is a minimum charge of £20 and maximum charge of £150. If a client has less than £8,000 in shares or investment trusts then the £20 charge equals a higher percentage than 0.25%. The breakeven point is around £8,000. However, if the client makes more than six transactions a year the annual charge on all share holdings is waived
  4. Where Hargreaves Lansdown has a maximum charge of £200 for pension and £45 for ISA per account for holding shares, Charles Stanley charges £150 for all accounts held by an individual. As an example, if a client had £300,000 spread £100,000 in an ISA and £200,000 in a Pension Hargreaves Lansdown would charge £245, whereas Charles Stanley will charge £150
  5. In addition there is a charge of £10 per trade on investment trusts and shares. This is similar to Hargreaves Lansdown and Interactive Investor.

This is best described as follows:

  1. Husband and wife have an ISA of £10,000 each and pay regular contributions of £100.00 per month into four funds each
  2.  The total charge is £50 p.a. There are no charges for the trades into the funds
  3.  As a comparison Interactive Investor would cost £152 a year and Hargreaves Lansdown £90

For a straight forward investment fund ISA Charles Stanley have a very cheap pricing structure. If the clients had 50% of the money in shares but still paid into funds the charge would be £65 p.a. It remains cheaper but investors need to be aware that the cost goes up when they use more complex types of investments.

Is there anything else you should know?

If the clients set up a pension with Charles Stanley in addition they charge £120 p.a. (including VAT) per client. 

To compare Interactive Investor charge is £144 (including VAT) and Hargreaves Lansdown charge 0.45% p.a.  

Using the same example, with all the investments in funds, and each client holding £20,000 and making regular premiums the charge for Charles Stanley would be £420 p.a. 

Interactive Investor would charge £432 p.a. and Hargreaves Lansdown £180 p.a. 

For lower values Hargreaves Lansdown have a cost advantage over Charles Stanley. 


It is unclear how charges are taken but the assumption is that these are taken from the cash account and therefore the client will need to ensure there is sufficient cash to cover the charges. There is no indication that clients will be charged if there is insufficient cash. 

Can you move?

Yes but if an investor wants to keep their existing holdings (an in-specie transfer) Charles Stanley charge £10 per line of stock irrespective of the type of account. Hargreaves Lansdown charge £25 and Interactive Investor £15 so certainly this comes in slightly cheaper.

There is also a charge of £150 (including VAT) to move the pension away. Interactive Investor charge £120 and Hargreaves Lansdown has no charge. 

Does Charles Stanley offer good value?

For ISA and Investment Accounts with regular contributions the 0.25% charge makes it an attractive proposition especially against the Hargreaves charge of 0.45%. Interactive Investor is more difficult to judge because of the trading charges on funds.

Charles Stanley’s SIPP Charge does make it considerably more expensive at £120 plus 0.25%. At around £60,000 the charge is around 0.45% which is equivalent to Hargreaves Lansdown and then starts to get cheaper. So below this value it is expensive compared to Hargreaves Lansdown. 

Against Interactive Investor and assuming no regular contributions they would be cheaper at values below £10,000 but above that they are expensive. Interactive Investor comes in cheaper for a single investor with a value around £30,000 to £35,000 when compared to Hargreaves Lansdown.

The Charles Stanley basic package is good value, care needs to be taken where investors are considering adding a pension or even making regular investments into shares or investment trusts. Also care is needed when a spouses fund is also set up as this changes cost significantly for the investors.

So where now 

An advantage this platform has over its rivals is youth. This is a new proposition, whereas with mature platforms they can have significant issues reconciling old technologies and charging structures.

Although we can highlight different prices, there are so many factors that investors need to consider. The focus on price is not necessarily the only part of the equation. The question is what do you want from a platform, how can it be achieved and who has the tools to deliver it.

Looked at in this way, Charles Stanley is a cheaper option in places and they provide a number of tools to help investors, investors just need to make sure they are the ones they value!