Average savings returns comparisons

Telegraph_Sam

jimjames wrote: »

Did you ask the insurance company what the rate of return you would get was? Did you check the charges if they weren't outlined?

There's a danger of flogging this topic past its natural death and my facing overuse charges by the MSE moderator as a result.

I am sure that with the benefit of hindsight, on Judgement Day, I will be accused of not exercising due diligence or whatever prior to agreeing to switch into this fund. Along with countless other sinners who have failed to extract TER's and the like from all the various fund and trust managers to whom they entrusted their diversified savings. Understandable failing of human nature in many cases but not of course for investment in hedge funds and the like.

Except that this is quite missing the fundamental point of my original query.

Insurance companies are not renowned for the openness of their charging structures. If I had made a big issue out of it I may have uncovered some of the costs and charges, but I doubt all. The rate of return was an unspecified variable but in the circs not (at first sight ..) a key variable so predictions were not a deciding factor. In the event I made the decision based on what data was evident in their literature backed up by conversations with their adviser. Now this is the key point: This was marketed as the most conservative fund in their range, the one which noddies and little old ladies with marginal understanding of and even less trust in financials would default to. If however in reality it was by definition inevitable that the fund would make a negative net nominal return at anything below market rates (however defined) of a given level, then this should have been spelled out as a government health warning in big red letters in their literature so that dim wits like me could have had no reason for not knowing what they were letting themselves in for. Nothing could have been further from the truth. The implication (!!) was that this was a safe haven for one's savings regardless of the time frame which would produce very little upside but in return for zero risk. To imply that this kind of policyholder should have indulged in some of the more advanced questioning and reasoning as outlined above is, sorry, unrealistic. And even if I had given the topic a lot more thought at the time, I may well have still ended up by default in the "least worst" deposit fund.

If this is typical of what insurance companies can offer in return for managing one's savings at the various stages of life leading up to retirement then I have little doubt that there are grounds for complaint. Complaints can of course be overruled (unfortunately)! And forum readers can (dis)agree ..

marathonic

Telegraph_Sam wrote: »

This was marketed as the most conservative fund in their range, the one which noddies and little old ladies with marginal understanding of and even less trust in financials would default to.

I wonder why it was marketed like this - possibly because that's exactly what it is.....

Thrugelmir

Your complaint should be addressed to Mark Carney perhaps. As it's BOE policy which is creating the current level of returns not the investment managers holding the funds. Savers are being squeezed, forced to take a high risk in order to achieve any return. Rarely have deposit rates matched or exceeded the rate of inflation other than during the credit boom years.

bowlhead99

This was marketed as the most conservative fund in their range, the one which noddies and little old ladies with marginal understanding of and even less trust in financials would default to. If however in reality it was by definition inevitable that the fund would make a negative net nominal return at anything below market rates (however defined) of a given level, then this should have been spelled out as a government health warning in big red letters in their literature so that dim wits like me could have had no reason for not knowing what they were letting themselves in for. Nothing could have been further from the truth. The implication (!!) was that this was a safe haven for one's savings regardless of the time frame which would produce very little upside but in return for zero risk.

But once you get your head around the fact that the nominal return, positive or negative, is an arbitrary construct, it is an irrelevance. There is minimal investment risk, there are just some running costs.

- In one year you get the risk-free rate dictated by the market of 10% less running costs of 2% or more.
- In another year you get the risk-free rate dictated by the market of 1%, less running costs of 2%.

In either situation, if the inflation rate is 5% higher than the risk free interest rate, you are not going to be able to buy as many baked beans at the end of your year in the product, as you could at the start. Whether the amount of pounds sterling at the end is higher or lower than it was at the start, is an irrelevance. The issue in terms of prepared-ness for retirement is how many baked beans can you buy and how many do you need for a satisfactory retirement.

So the health warning should not be *big red letters* "if the variable and uncontrollable market returns do not exceed the running costs, you will have a smaller number of pounds after a couple of years". The absolute number of pounds achieved or preserved means nothing without knowing a person's relevant inflation rate (RPI, CPI or something more tailored to the particular things they buy - perhaps baked beans and candles) and therefore how many pounds they need.

It should be *big red letters* "if the variable and uncontrollable market returns less charges do not exceed inflation, you will have less purchasing power after a couple of years".

This is a fundamentally different point, but it is the right one you should use when talking to an investment newbie and trying to explain what the fund does. Because you can then go on to say that investment options A, B and C have a much greater overall chance of exceeding inflation, in the long term, but unfortunately a lot more variability of returns which is more dangerous for you if you are only going to spin the dice once because you only have one year to retirement.

You have a choice to make between option A, B, C, with decreasing likelihood of beating inflation but lower 1-year loss potential. Or there is the 'cash' option D which will never be able to match inflation as you are not taking risk, but at least it has smaller 1-year loss potential.

Little old ladies are not renowned for understanding compound interest, yield curves etc and knowing what a LIBOR is. If you tell them a cash fund can 'lose money', they might do something stupid like think "well if it might lose money, I might as well go in the 100% equities fund which might also lose money but also I've heard it might make me a lot of money". A year or two from retirement that is a very dangerous situation for them, and they are perhaps pushed into it by you creating false worry by telling them they might 'lose money'. Instead, they are actually 'avoiding losing money' in that product by limiting their downside to the fees they pay.

The suitability as a home for retirement funds is nothing to do with whether a cash fund loses money or makes money on a nominal basis. It is everything to do with how it performs on a real basis. The little old lady simply needs to know that the "deposit option" gives an unpredictable return and has the most chance of lagging behind inflation, but is the least likely to lose 10% right before retirement. And vice versa for equities.

It is not in my view worth spelling out that the 'cash deposit fund' achieves rates lower than the high street savings rate. Because the insurance company isn't saying, hey, you have 5k in a high street savings account at 3% - please come and put it into this plan at negative 1%. to plan for your retirement, it will be really good for you to do this. That would be mis-selling.

What they are saying is, if you already have assets in our tax efficient plan and now want to be very cautious, instead of investing to keep up with inflation over the long term, there is a 'deposit fund' option where you can limit nominal losses to [our fees less whatever interest income we can get on the market].

Many years this would actually be a positive nominal result - and you were unfortunate to be in the product during all-time low interest yields - but on many more occasions than getting a negative nominal result, it gets a negative real-terms result. The latter is the only thing to be particularly concerned about, with nominal return being a red herring.

doughnutmachine

tbh i have some sympathy with the OP. i'd expect a nominal return from an investment with "deposit" in the title.

but i suppose the financial industry need their 2% a year so that the bosses can get their 10 million a year

i have to admit that maybe the yearly fees on cash should be lower than investments. after all it doesn't really take much work to put money in a bank and leave it there.