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Pension pot decision query
Comments
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Amen. VCTs or P2P are not low risk for people who are not knowledgeable about financial services.
They have their place but to 'market' them for a saver with £21k is crazy.
True.
To extend the discussion further, and apologies to the OP, this is a wider problem in terms of education and perception and understanding of risk.
As I said above, Jamesds approach would be considered unusual and high risk by many, but is considered and justified to a large extent.
How many people are currently in bond funds, on the basis that this is a low risk and safe form of investment? There have obviously been some falls and a correction already, but there's no doubt more to come. I certainly don't want to be in safe bonds currently as that is an almost guaranteed capital loss in the making, but these are certainly still viewed as safer than equity investments, or more exotic smaller company investments like vct and eis.
Is the sale or recommendation of bond funds to uneducated investors, many of whom are savers who are just looking for a little extra 'interest' the next o misselling scandal in the making?0 -
Is the sale or recommendation of bond funds to uneducated investors, many of whom are savers who are just looking for a little extra 'interest' the next o misselling scandal in the making?
No. The main reason is that gain potential is not considered in risk assessment. Loss potential is. When bonds "crash" its still typically no more than 10%. And with the income yield, that would be recovered relatively quickly. A stockmarket crash is more like 25%
Plus, when you build a portfolio, you build a balanced portfolio of asset classes. So, leaving an asset class out because you think it is in a bubble is risky. After all, people have been calling bonds out to crash for the best part of the last 7 years. They have been wrong. They will be right sooner or later as any stopped clock is right twice a day.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
Thanks for all the opinions.
This is just one decision among many for the way forward but good to have others views on this specific issue.0 -
Which VCT? Which P2P?Amen. VCTs or P2P are not low risk for people who are not knowledgeable about financial services.
There's a huge range of risk levels within each but the lending based forms of either do not have a realistic potential of the routine 20% to 40% drops seen on the UK stock market that's used ubiquitously, nor the one way 30% capital drop that can be expected for mid to long duration bonds and gilts.
Depends on the specific investments used and the tax and income needs of the individual as well as the rest of their financial situation. It's rather unlikely that I would mention equity P2P a something of interest but secured lending? Completely different risk profile for those investments.They have their place but to 'market' them for a saver with £21k is crazy.
It's easy to claim that all VCT or P2P investments are high risk but it's not true. The specific investments need to be considered, not just saying that everything in a particular class is high or low risk.
I hope you don't currently consider corporate bonds bonds and gilts to be low risk? Secured P2P has lower volatility and no real prospect of a one way 30% capital value loss.0 -
Yes.Is the sale or recommendation of bond funds to uneducated investors, many of whom are savers who are just looking for a little extra 'interest' the next o misselling scandal in the making?
Advisers are supposed to consider the whole environment and that includes knowing that there is a significant prospect of a one way capital loss. In a few years I expect to be suggesting to people that they make mis-selling complaints against pension firms over lifestyle funds that switched them into high risk of loss but low volatility bond and gilt funds and advisers who did the same. There's more to risk than volatility and no professional adviser should be unaware by now of the issues after the very widespread press about the capital risk of bonds and gilts.
There's also the widely discussed liquidity risk of bond markets. Putting those close to retirement who are expected to buy an annuity into bonds subject to a significant liquidity threat might not be very clever either. Particularly not after the FCA has mentioned it to money managers as a concern.
An adviser or pension firm that ignores the current circumstances is not treating their customers properly.
This one way loss aspect is also one reasons why I'm relatively favourable towards secured P2P at the moment, because that is usually held to maturity and not subject to the capital risks of a fund of bonds. The higher yields available are a welcome additional benefit.
I'm not sure whether this or selling annuities instead of state pension deferral will be the biggest earner for claims firms but I expect them to make a lot of money from well justified claims in the medium term.0 -
Familiarity may be part of the issue, since many people just don't know what's available and lump everything together as it it was all uniformly high risk. One key thing I'm doing is just looking at the properties of the individual investments and mentioning some of the ones that I think may be interesting because of their properties.As I said above, Jamesds approach would be considered unusual and high risk by many, but is considered and justified to a large extent.
Want lower risk (both volatility and one way loss risk) than bonds and higher returns than long term UK equities? P2P can deliver that, today. Just takes making the relevant choices from the range available. Same for some VCTs.
What P2P has is somewhat different risks. For example, there's no FSCS fraud protection for P2P and some platforms are quite new, including some of those offering good return and risk properties for the investments. The FCA requirement for takeover of a loan book is what provides the protection for the second of those, the first simply is, it's a risk.
So what I'll do is continue to mention the things that look interesting within the particular areas that I happen to be familiar with, so that others can compare what they offer to the more well-established and far more broadly used options. Options that I also use extensively, because they have their own interesting properties.
One thing we do know is that the FCA and government do not consider P2P as a whole to be inappropriate for a mass retail investor market, with the government even going so far as creating a new class of Innovative Finance ISA to encourage adoption and growth of the field. But this doesn't mean that I'd say that all P2P is appropriate for mass retail investor use, far from it - there's a way risky seed equity or nearly pure speculation end of equity P2P.
Did you know that using P2P you can diversify into an area that makes more money during a recession, using secured lending at 50% LTV? And get paid 1% a month on your money? You can with the relatively new P2P firm MoneyThing, which packages up loans already made by pawn shops and offers them to investors. Very liquid because of the short loan durations, so there's no interest rate related capital loss risk at all, unlike bond funds. I wouldn't suggest putting 100% of anyone's money into this but it's an interesting part of a well diversified mixture of investments. And unlike gold, pawned gold pays interest.
Simply look at what's around, put appropriate amounts of money into things appropriate for you and diversify widely, among all types of investment, including the well established ones.0 -
Advisers are supposed to consider the whole environment and that includes knowing that there is a significant prospect of a one way capital loss.
No they are not.In a few years I expect to be suggesting to people that they make mis-selling complaints against pension firms over lifestyle funds that switched them into high risk of loss but low volatility bond and gilt funds and advisers who did the same. There's more to risk than volatility and no professional adviser should be unaware by now of the issues after the very widespread press about the capital risk of bonds and gilts.
The FOS has already said they will not consider retrospective complaints. Plus, loss on bonds would be lower than loss on the stockmarkets. So, its bad complaint reason to begin with.An adviser or pension firm that ignores the current circumstances is not treating their customers properly.
An adviser trying to time the market is not treating their customer fairly.
State pension deferral and annuities only covers a very small window and it will not be something for CMCs to look at.I'm not sure whether this or selling annuities instead of state pension deferral will be the biggest earner for claims firms but I expect them to make a lot of money from well justified claims in the medium term.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
So do you think that the FOS will not act in the face of widespread informed comment about one way risk, explicit notice by the BoE that rates are going to rise in the reasonably near future - with the inevitable effect of that on bond prices - and concerns expressed by the FCA?No they are not.
Isn't the central bank telling you that your clients are soon going to lose money on the investment, because of things they intend to do, good enough reason to avoid the relevant investment?
Clients who badly need the help of an adviser aren't likely to realise what's happened until after the loss happens. So I'm somewhat puzzled by what aspect you consider retrospective? Just that the clients won't initially recognise the problem because they needed the help of the adviser?The FOS has already said they will not consider retrospective complaints. Plus, loss on bonds would be lower than loss on the stockmarkets. So, its bad complaint reason to begin with.
Medium to long bonds don't do not have lower risk than say the FTSE All Share Index at present. They do have lower volatility but that's a different thing. The FTSE might suffer say a 40% drop but can be expected to recover from it. The bonds face a 30% drop that requires a return to historic low rates to undo it.
There's a difference between timing markets and observing that prices are at highs in the few hundred year range and expected to drop as interest rates rise, with the central bank saying it's soon going to raise rates. Bonds aren't the only way to reduce volatility and it's a risk that the customer doesn't have to take, unless the adviser just doesn't use the alternatives that are available.An adviser trying to time the market is not treating their customer fairly.
Why would the CMCs not look at it? There are a a fair number of people in the relevant age range and being sold the products.State pension deferral and annuities only covers a very small window and it will not be something for CMCs to look at.
Of course I prefer to avoid that situation by trying to tell people about the issues. Beats dealing with it after the capital or income loss has happened.0 -
Which VCT? Which P2P?
All of them. If you don't understand something, you shouldn't invest in it. Number one rule of investing.
You don't learn to swim by jumping in the shark tank.It's easy to claim that all VCT or P2P investments are high risk but it's not true. The specific investments need to be considered, not just saying that everything in a particular class is high or low risk.
And if you don't understand about finances, you can't consider whether the one you're looking at is a safer or a riskier investment.0 -
All of them. If you don't understand something, you shouldn't invest in it. Number one rule of investing.
You don't learn to swim by jumping in the shark tank.
And if you don't understand about finances, you can't consider whether the one you're looking at is a safer or a riskier investment.
That's quite an odd response.
Just looked at vcts on trustnet and the range of fe risk scores is huge, from single digits up to high hundreds, that's obviously only one view but it does show the range of perceived risk that is encompassed.
Even associating p2p and vcts is slightly odd, they are very different animals.
This is interesting debate though moving away from the OPs original question.
Diversification is generally a good thing, and using vcts on smaller pots is potentially inappropriate but many people are moving into p2p particularly due to poor savings returns, bypassing the banks.
To me that issue with bonds is still a massive elephant in the room, there's just no positive view that I can see at this moment in time.0
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