Have you been mislead by projection rates?
Dan Kiernan of Intelligent Partnership recently in an article for Professional Adviser explained the case for holding some directly held tangible assets in your portfolio. The debate as to how the public has been mislead on how well their pensions might perform continues in this article by Tony Hazel published yesterday.
Figures that are dangled in front of clients must both encourage a realistic level of saving and help set realistic goals.
Projections of potential investment growth have consistently been a source of misery for investors. They have raised expectations to unrealistic levels, led to poor financial planning and, eventually, disappointment. Tom McPhail, head of pensions research for Hargreaves Lansdown, hit the nail on the head when he said regulators have consistently been behind the curve on this issue. When I bought my first personal pension in 1988 I was told that a gross monthly contribution of £100 for 31 years would build a fund of up to £377,576. This was based on projection rates of 13 per cent.
But the real problem was not so much with the rate as that the firm did not once come back to warn me that the fund was growing more slowly than this. My experience was shared by millions of investors with pensions and endowments. So let us not just blame regulators here. Financial firms were equally culpable for failing to tell customers that their investments were not on track until they were forced to do so by the FSA. By then it was, for many, too late.
More than 20 years later investments are still being sold with wildly optimistic projection rates. We have suffered more than a decade of low returns so will some sanity finally be brought to the party? The new rates suggested by PriceWaterhouse are lower than those it suggested in its 2007 report and simply equity returns of 4 per cent to 5.5 per cent excluding inflation. Some would scrap projections altogether and merely show the charges on investments. I do not believe this would be a sensible way forward. Investors need to have some idea of what their efforts might achieve.
But figures that are dangled in front of their eyes must both encourage commitment to a realistic level of saving and help them set realistic goals. The vital thing is that advisers, insurers and all the rest must make sure that investors are aware of whether they are on target to meet their goals. And if they are off target they must be alerted to this as soon as possible so they can take remedial action. This is where some sectors of the financial industry have fallen down in the past and where they must strive to do better in the future.
Cash for swindlers
“A fraudster’s charter” is how Ian Gorham, Hargreaves Lansdown’s chief executive, describes proposed changes to the Financial Services Compensation Scheme. And it is difficult to disagree.
(Sorry loyal reader for quoting the same firm twice, but they have made two excellent points this week.)
The changes would allow crooks who have swindled their clients to claim compensation from the FSCS – and you honest practitioners would foot the bill. It is an outrageous proposal akin to allowing burglars to claim compensation from their victims. Oh, I forgot, that has already happened. But back to the point. Directors of failed firms would be allowed to claim compensation. The belief of the FSA is that this would result in compensation being paid more speedily to investors.
My belief is that it would result in the directors packing their bags more swiftly with wads of used tenners and legging it to the Costa del Sol, Paraguay or wherever else dodgy financial advisers end up these days. Directors of firms that have already collapsed could also be entitled to claim for compensation under these proposals. Consumer groups have condemned the plans warning they could lead to reckless behaviour in the boardroom.In fact the only people who seem to think this is a good idea work within the FSA. Let us hope the FSA sees sense before your hard-earned money is dished out to the next Peter Clowes.
State meddling
Governments have made a habit of interfering in pensions without thinking through the consequences. Margaret Thatcher inadvertently unleashed a mis-selling spree of personal pensions, Gordon Brown plundered tax credits (though he probably knew precisely what he was doing) and successive chancellors devalued the state earnings-related pension scheme and the state second pension. Now tens of thousands who built a decent pension pot and chose to take income drawdown are falling victim to the nanny state.
It is not enough that they made sacrifices to build their pension, the government decided it cannot be trusted to spend it and set lower caps on drawdown levels. Now the changes are beginning to bite. These people already faced cuts to their income because the annuity levels against which it is judged had fallen. But by setting the maximum at 100 per cent of the annuity income, rather than 120 per cent, the government has gone a step too far.By setting the maximum at 100 per cent of the annuity income rather than 120 per cent the government has gone a step too far. Some pensioners have seen their income cut by more than 50 per cent. Of course preservation of capital is vital. But surely those who have saved diligently can be trusted to make some decisions for themselves.
By Tony Hazell | Published Apr 19, 2012 | Regulation | FT ADVISOR