Financial Unicorns Part One

Financial myths that are told for the benefit of someone but not necessarily yours.

One.

Hold shares for a minimum of 5 years

A long time to wait to find you are long and wrong.

Two.

Buy an Annuity

Single life annuity at age 65, each £100,000 in your pension pot will give you a guaranteed annual income of around £4,968 a year, according to the Hargreaves Lansdown online annuity quote tool.
That is a “level” income and will not rise in line with price inflation. If you want your annuity income to rise by 3 percent a year, your starting income in the first year will fall to just £3,282.
Oct 2021

A huge gamble with your life long savings, at least Dick Turpin had the decency to wear a mask.

Buy an annuity.

Three.

Government bonds are a safe investment. Lifestyling

The Telegraph

A global rout in bond markets has unleashed chaos on British savers pension pots, forcing thousands to choose between delaying retirement or crystallising huge losses in their lifetime savings.

The value of American and British government bonds has been caught in a downward spiral this year, following a strong run of economic data and signs from the American central bank that it will keep interest rates higher for longer.

Bond prices typically fall when interest rates rise, because investors begin to ask for much higher yields to compete with a higher risk free rate. When prices fall, yields rise.

This has proved disastrous for millions of British pension savers who have been lifestyled toward a bond heavy portfolio.

Defined contribution pensions, which invest in stock and bond markets, change the way your savings are invested as you approach retirement if you are in the default funds.

Lifestyling typically involves moving money from stocks to bonds, as they are perceived as lower risk. However, for the past two years this has failed to protect savers pension pots as they approach retirement, following major sell-offs in bond markets.

He said: Pension providers created this method because people used to buy an annuity when they reached retirement, which are priced according to gilts.

But for most of the past decade annuity rates have been really poor. They have become much more popular in recent months, but still the majority of people just go straight into drawdown.

A pension enters into a drawdown when savers keep their money invested in the stock and bond markets, but begin to take an income from their pot.

Mr Cook said: Most workplace pension schemes follow the default option of moving their older savings to bonds and this has had a catastrophic effect because of the sell off.

Some clients have either had to piecemeal move their money back into the market, because they had been lifestyled out without realising. Others have had to delay their retirement or accept a much lower income.

For example, the pension provider Aegon automatically switches some of its savers in its default pension into its Scottish Equitable Retirement plan when they are one year away from their target retirement date.

The plan, which is invested heavily in gilts and cash, has lost savers 7pc in the past year alone. In the past three years, it has dropped by 41pc.

Retirees who manage their own money in self-­invested personal pensions or a Sipps have also been caught out.

For example, the Vanguard LifeStrategy 20pc Equity fund, which has 80pc invested in bonds, has delivered the worst return across the range over the past two years, at a loss of 13pc. The LifeStrategy 80pc Equity fund, which only has 20pc bonds, is flat.

Doug Brodie, of the financial adviser Chancery Lane, argued the 60/40 strategy, which encourages investors to invest two-fifths of their portfolio in bonds, was in urgent need of reform.

The blind following of this mantra has come home to roost, he said. Since the beginning of the pandemic, US Treasury bonds over 10 years have collapsed by 46pc. To give some perspective, in the dot com crash stocks fell by 49pc.

The core difference is that equities simply jumped back up. You are not going to see that with bonds, it’s going to be a long and slow recovery.

The reason pension providers have invested so much in bonds is because they are usually less volatile, and because they are legally obliged to pay an income. With shares in companies, the dividends are discretionary.

Overall only around 10pc of our money is in fixed income. We are very cautious about funds that invest in bonds because unless they are hugely diversified we do not think it is worth the risk, and by that point you may as well just sit in cash anyway because at least you know you will not be clobbered by higher interest rates.

But this will offer little comfort to workers who are holding on for the right time to retire, especially those in Britain whose savings are more concentrated in the gilt market. It could take more than a decade for gilts to recover from this properly, Mr Cook said. We just do not know.

2023