Clients' rules of thumb


Clients' rules of thumb

A new financial year brings new expectations, so it would be a good idea to understand what is realistic and consider the dividing line between a sensible projection and the implausible marketing claim.

A recent research project by the Citizens Advice Bureau highlighted that new retirees have little idea of what to expect as a sustainable income and are often drawn to an implausible “guaranteed return”, like a moth to a flame. In a research experiment 88% of responders were drawn to “guaranteed” returns of 10-15%. The full report is here.

If you are looking for a guaranteed return on your cash, you may have noticed that most returns are in reality significantly lower than 2%. This Saturday, the Telegraph reported that the best instant access ISA account they could find was 1.4%, offered by the Skipton and Coventry Building Societies. Five years ago rates of 3.15% were not uncommon, so the reduction in recent years has been significant.

With a Bank of England Base Rate of 0.5%, higher rates are very unlikely, so any offering of 5% guaranteed needs to be investigated very carefully, as trickery is more likely than a bargain!

There are packaged accounts with banks that do offer higher returns, TSB, (5%) and Santander, (3%), are two examples, but these offerings have strings attached. Common requirements are monthly payments in of more than £500, some direct debits on the account and a cap on the level of deposit that will earn the enhanced level of interest. If you can meet the requirements, these can offer good value for guaranteed savings.

For investment funds, caution is also required as promises are cheap and once the money has left your hands you are relying on investment performance, which you cannot directly influence. Investment projections on pension plans were often quoted as Low 3%, Medium 5% and High 7%, but these are likely to overstate the position these days. Providers are now required to use a “suitable’ projection rate, rather than just a default rate, but new and volatile funds will always represent a challenge.

For pensioners or new retirees, for a fund in drawdown, expect a sustainable return of 4% and for a conventional annuity about 5% per annum at age 65.

For someone trying to build up a pension fund, a suitable target income in retirement would be about half pay; for the fund actually required, multiply the half pay by 20.

Research by LV= the pension provider, http://www.actuarialpost.co.uk/article/lv=-assesses-the-cost-of-a-happy-retirement-5753.htm, suggests that the rule of thumb above is a little pessimistic as their survey suggested that a more modest income, (around £10,000 after tax), would be enough for “happiness”, but by their own figures most households would be under provided by about £106,000.

So memorise these snippets and use them to evaluable any financial advertising you see:

1.    As Bank of England Base Rate is 0.5%, general bank deposits and business deposits will be about this amount.

2.    Retail deposit rates can be a bit higher; 1.4% for instant access is as good as it gets; 2% is suspicious; 3-5% will have strings; 10%+ is unbelievable!

3.    If you are taking an income from a fund that needs to last indefinitely, take no more than 4%

4.    If you are a retiree on an annuity, a standard annuity, (single life, 10 year guarantee, monthly in advance), will produce about 5%.

5.    As a target for a retirement income, work on half pay.

6.    As a target fund, work on 20 x half pay in today’s money

7.    Investment returns depend on investment sector, so it is hard to give an expectation, but a ‘Balanced Portfolio” ought to be producing about 5% averaged over 10 years. Some years will do better, some will do worse; betting your shirt on a specific outcome on a specific date is unwise!

If you would like to know more about how we can help you plan and realise your financial goals then contact us at info@martin-redmanpartners.co.uk or call us on 01223 792 196.

The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.