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Sometimes as an investor we come face to face with a stark reality.  Today, that is the case with the bonds held in portfolios. By and large, most long-term investors own bonds because they do not have the emotional or financial capacity to suffer material falls in the value of their portfolio. By and large, high quality bonds have done the job asked of them delivering protection from the large equity market falls in 2000-2003, 2007-2009 and Q1 2020.  The return penalty of giving up equities to own bonds has been softened to some extent by positive returns in the past.

In December 1981 the yield on 5 year UK gilts stood at 15.5%.  What would investors give today for such yields! The next 40 years proved to be good for bond holders as governments around the world got a grip on inflation and yields fell, delivering capital gains (bond prices rise as yields fall and vice versa) on top of the income delivered in the form of bond coupons (interest payments). Gilt yields fell from these lofty heights to a low of -0.06% in December 2020. Today, 5 year gilts yields have risen to around 1% (before inflation), which has resulted in small capital losses.

With current levels of inflation being well above the Bank of England’s target rate of 2%, bond (and bank deposit) holders face the real risk of the erosion of their purchasing power.  In the presence of low yields well below inflation, and with the risk of rising yields – although no-one knows where yields will go from here – bonds seem unattractive from a return perspective going forwards.

So what’s to be done?
Investors have to ask themselves a tough question: ‘If I cannot cope emotionally or financially with suffering large equity market falls, what could I own instead if I abandon my high quality bonds’. Some investors have chased bonds with higher yields such as those issued by weak companies (high yield bonds) or those of emerging economies (including Russia), but this simply adds equity-like risk into the portfolio and dramatically reduces the defensive qualities of owning bonds.  During the equity market falls of the Credit Crisis of 2007-2009 global high yield bonds fell by around 20% and during the Covid-induced fall in Q1 2020 they fell by around 15%[1].

High cost, opaque and highly complex, absolute return strategies, relying on manager skill alone, have hardly lived up to their name.  Their sector average return during the equity market fall of Q1 2020 was down 8% or so[2].

The stark reality is that there are no easy answers, but there are a few useful points to remember:

• The return give-up of owning high quality bonds over equities should be thought of as an insurance premium. Today that premium is high. That is how the market is pricing it.  Pay the premium or surrender the policy.
• Own bonds in your portfolio to a level that satisfies your emotional and financial ability to suffer equity market falls and no more. This is something that your adviser can talk you through. How much insurance cover do you need?
• High-quality bonds still have the ability to provide down-side protection and portfolio liquidity; two qualities not to be sniffed at.
• Accept slim pickings from bonds given such low yields and in the face of inflation. There is nothing you can do about it.
• Accept that there are no easy alternatives. All carry material trade-offs and risks.
• Think of your investment pot in its entirety and avoid the trap of focusing in on one line on your portfolio valuation and pointing an accusing finger at your bonds.
• Don’t get caught up with trying to second guess whether high quality, short-dated bonds or cash are likely to be the better option over the short or longer term. No-one knows and, when compared to the high volatility that equity markets exhibit, the two are pretty similar.

Figure 1: Compared to equities, high quality short-dated bonds and cash are quite similar

Data source: IA Standard Money Market sector average – IA, iShares Core MSCI World UCITS ETF Acc. GBP in GB, iShares UK Gilts 0-5yr UCITS ETF 0 5 GBP TR in GB – iShares.

It is never comfortable confronting a tough reality but understanding that reality and recognising that the alternatives are limited, can help you to deal with it in a rational way.

If you have any questions, thoughts or actions relating to the content of this article please get in touch with us by calling us on 028 9099 6948 or by emailing info@pacem-advisory.com

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

[1] IA Global High Yield Bond sector average

[2] IA Targeted Absolute Return sector average.

Pacem is delighted to continue its support of an initiative entitled ‘Spare Room to Stellar‘, alongside Belfast City Council and Danske Bank. Spare room to stellar is designed to inspire and equip Belfast entrepreneurs to start and grow a business. It does this by firstly sharing the stories and lessons of businesses that started in a spare room in Belfast and have gone on to compete, and win, on a global scale.

The first film released in the 2022 series is that of David Johnston and OutsideIn.

David Johnston of OutsideIn says: “I started off with nothing but a vision and a passion to help those less fortunate. OutsideIn is now a one of the UK’s fastest growing streetwear brands and through our ‘wear one share one’ model, every time a customer purchases an item, an additional item is given to someone experiencing homelessness.

“If sharing my story inspires others to give their business idea a go, I’ll be delighted. Taking a small idea and growing it is what the Spare Room to Stellar resource is all about. After all, I started my business in my mum’s spare room too!  There’s fantastic support available for people starting out on their own in business – and we want to see more people getting out there and giving it a shot.”

In the coming weeks, people will also hear how Lynsey Bennett, co-founder of Lusso tan started her ever-expanding, revolutionary tanning brand providing inspiration and tips for early-stage businesses and entrepreneurs alike.

Watch the highs, lows, habits and how-tos of starting/growing a business from humble beginnings. Sit back, enjoy and then act on your idea or early venture by booking a signposting consultation over at www.spareroomtostellar.com 

You can watch the OutsideIn story here:

Today, it certainly feels like the world is in a very uncertain place.  Authoritarian states are flexing their muscles, with Russia violating Ukraine’s sovereignty and China’s ongoing subjugation of Hong Kong with the new National Security Law alongside its apparent support for Russia, being cases in point.

The West continues to struggle with what is hopefully the back-end of the Covid crisis as populations gather immunity through vaccination and infection, and as new drugs and treatments come online almost daily.  Economically, the greatest challenge is soaring inflation, hitting levels not seen for several decades.  As a consequence, interest rates and yields on bonds have started to rise and global equity markets have started the year down.  That can all feel both gloomy and unsettling.

It is always easy to feel that the present is more uncertain than the past.  We have all but forgotten the Armageddon scenarios of events such as the Y2K software bug issues of 2000 (planes expected to fall out of the sky, nuclear power stations potentially out of control etc.), the emotional and geopolitical impact of 9/11, or the fear many felt in 2008 when Lehman Brothers failed and the meltdown of the financial system was a real risk.

The chart below illustrates that over the mid- to longer-term the markets absorb the consequences of such events and power forwards as capitalism drives the relentless pursuit of profit opportunities.

Figure 1:  Material global event are ever present

Data source: Vanguard Global Stock Index ACC, 4/8/1998 to 14/2/2022 in GBP used as proxy for the performance of global equities. Its use in this chart does not constitute any form of recommendation and is provided for educational purposes only.

Being shaken out of markets based on today’s news is about the worst mistake any long-term investor can make.

What is to be done about the Ukraine situation?
The short answer is ‘not much’. As ever, all the news that we see and worry about – including the invasion of Ukraine by Russia – is already reflected in market prices. New news, as it develops, will have an influence on those prices, but by its very definition this is a random process that is hard to benefit from unless you own a crystal ball. It is likely that markets will be volatile as events develop. The US market actually rose on the day Russia invaded.

In terms of direct portfolio exposure it is worth noting that Russia represents around 0.35% of global equity markets, and that is before this is diluted down in any portfolio by bond holdings. To put this in perspective, the global market weight of Apple is over 4%! In fact, Apple’s cash reserves alone are of a broadly similar magnitude to Russia’s entire market capitalisation.

No-one has any real idea as to the wider impact of a Russian invasion, but even if markets fall, you need to ask yourself the following questions:

• Do you understand that equity markets can go down – sometimes materially – as part of their journey to delivering positive longer-term returns after inflation? If this is a surprise to you, then you need to speak with (or possibly fire!) your adviser.
• Have your financial and personal circumstances changed recently to such an extent that you need immediate liquidity from your equity positions? That is most unlikely. Feeling uncertain about markets is not a valid reason for seeking to get out of markets.
• Do you remember that your high-quality bonds provide several valuable attributes?
  They provide more stable values, supporting a portfolio against equity market falls; liquidity to meet any liabilities without having to sell equities when they are down; and the dry powder to rebalance the portfolio and buy more equities when they have fallen to get the portfolio back up to the right level of risk.

One piece of advice would be to try not to look at the news too much. It can feel unsettling and is increasingly full of sensationalist speculation and hyperbole. Instead, perhaps take a look at a news site that tries to balance out the regular news with positive news stories which tend to be underreported www.goodnewsnetwork.org/category/news/

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Inflation measures the general increase in the price of goods and services. Left unchecked, it can be a dangerous foe to the long-term investor, eroding the purchasing power of one’s hard-earned cash over time. Since the COVID-19 pandemic began, inflation numbers have frequented the headlines. Financial stimulus around the globe has meant that more money circulating in the economy is chasing a similar (or fewer) number of goods and services, resulting in price increases.

The table below shows the latest annual inflation figures from around the globe, measured using the consumer price indexes (CPI)[1]. Most countries have not seen numbers this high since the early 90’s[2]. Using the rule of 72, one can get a sense of how quickly purchasing power halves at these higher-than-average rates[3].

Table 1: Annual inflation rates by region (2021)

Source: Koyfin © All rights reserved. Inflation measured using Consumer Price Index of each country.

Contrary to its negative implications, the consensus of economists has shifted over the years, the modern position being that a small amount of annual inflation is, in fact, desirable[4]. The Bank of England, for example, targets an annual inflation rate of 2%[5]. Primarily, this is to avoid an alternative scenario where prices are falling each year and consumers are encouraged not to spend at all, but to wait until prices fall further. The danger with a deflationary environment is that it is very hard cycle to get out of, price falls tend to lead to further price falls – just ask Japan!

Although the inflation rate is generally thought of as a single number, the consumer price index in the UK is measured using around 180,000 different prices across 720 different goods and services each month[6]. What is more, the ‘shopping basket’ is weighted using estimates of the average UK consumer, which is updated each year depending on spending patterns. This is a valid criticism of CPI indexes, as they do not account for substitutions of expensive products for less expensive ones[7]. The chart below shows a breakdown of the December 2021 inflation figure and the contribution of each basket of goods or services to the overall number. Around half of the 5.4% came from increases in transport and energy prices, whereas healthcare and communication services had negligible impact.

Figure 1: UK inflation contribution by division (2021)

Data source: ONS (2022)

The reality of the chart above is that, whilst it provides a reasonable estimate for the average consumer, everyone is subject to their own unique inflation rate. For example, individuals living in older houses that are poorly insulated are likely to be feeling the effects of higher energy costs more than those living in new-builds with modern insulation and renewable energy sources. Similarly, those that are frequent flyers (not that there are many people in this bracket at present!) have experienced hefty price hikes, whereas other transport services were far less impacted.

Table 2: UK price increase by transport type (2021)

Data source: ONS (2022)

Despite inflation being more nuanced than just the headline figure, it is true that a general rise in prices can be uncomfortable for investors, reducing the ‘real’ (after inflation) returns earned over a given period. That being said, the systematic investment philosophy adopted in your portfolio was built to weather such storms. Equity markets offer the opportunity to participate in the future earnings of global corporations, whose prospects rely on the goods and services they provide. Exposure to smaller and value companies – those that appear cheap relative to a fundamental measure such as book-value – offer the opportunity of diversification and higher expected returns.

Whilst no perfect inflation hedge exists – gold and commodities, for example, are no silver bullet – it is sensible to expect a well-diversified, low-cost portfolio consisting of equities and high-quality bonds to deliver above inflation returns over the medium to long term (in other words 10-years or more).

If you have any questions, thoughts or actions relating to the content of this article please get in touch with us by calling us on 028 9099 6948 or by emailing info@pacem-advisory.com

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

[1] CPI is a widely accepted inflation measure in most developed economies.

[2] ONS (2022) UK CPI. March 1992 – 7.1%, December 2021 – 5.4%.

[3] For example: 72 ÷ 5.4 ≈ 13-years to half purchasing power (i.e., £1 of goods now costs £2 in the future).

[4] Marketplace (2019) Why is inflation necessary? https://www.marketplace.org/

[5] Bank of England (2022) Inflation and the 2% target. https://www.bankofengland.co.uk/

[6] ONS (2020) Consumer price inflation basket of goods and services: 2020

[7] Rational Reminder (2021) Episode 178: Are inflation concerns inflated?

It feels at the moment that the markets have gone a little mad.  Almost everything you hear on the news or read about investing suggests that everything is going up.  The US market is up by around 44% in the past year[1] in dollar terms, Tesla’s share price has risen by 124% over the same period, and Lucid Motors, who have just started production on its electric car in Q3, for which it has (a mere) 13,000 orders, floated on the NYSE and already has a market capitalisation greater than that of Ford, after its share price doubled in a month!

In the US, call options on individual company shares, which provide investors the right to buy a stock at given date in the future at a predetermined price in return for a premium payment, currently exceed the value of actual shares traded by value by almost a half.  Options are a way of leveraging exposure to a stock without having to come up with the face value of buying the stock directly.  They are a sure sign of speculation, not least by retail investors.

There is no doubt that when markets become frothy, investors are prone to a fear of missing out (FOMO) that makes them wish that they were invested in something that has done well (mostly identified with hindsight) and tempting some to lose discipline and plunge in, hoping that the magic (luck) will continue.  When things do not go as hoped, there is a temptation to cut losses and run.

Let’s take a quick look at the ARK Innovation ETF that has hit the investment news headlines as one of the best performing funds in 2020, gaining over 150% in US$ terms, and more importantly how investors in the fund have fared.  It is a very concentrated portfolio of technology and healthcare innovators.  It holds more than 10% in Tesla and the top 10 of 45 or so stocks make up more than 50% of the portfolio. The firm also owns more than 10% of the shares of a number of portfolio stocks, which raises liquidity risks (remember Woodford?).

In the case of ARK Innovation, it had a stellar run from April 2020, out of the bottom of the Covid-induced sell-off until December 2020 but has struggled since then, falling almost 35% at one point in the first few months of 2021.

Figure 1: Fund flows often follow performance

It is worth noting that the fund had inflows of just US$25 million in Q4 2019 but these peaked at almost US$ 7.8 billion in Q4 2020.  You do not have to be a mathematician to work out that the investor money that went into the fund at the back end of 2020 will have not captured the bulk of the positive returns of 2020 and suffered the subsequent downswing. A rough calculation using monthly performance and fund flow data suggests that from the start October 2019 to the end of October 2021 the fund delivered an annualized return of 66% p.a., whereas the average investor return was around 25% p.a. i.e. a 40% p.a. difference.[1] Over this same period a well-known US index fund delivered 26% p.a.!¹

ARK Innovation relies on manager skill (or luck) in picking a mere 45 or so companies out of the many thousands of companies around the world.  The risks are very high. The fund management world is littered with the corpses of such ‘stellar’ funds.  In the UK for example, over the past twenty years or so, around half of all investment trusts launched have failed to survive[2] in their original form.

It is hard not to suffer FOMO at times like these, but it is worth remembering that investing is a not a sprint but a marathon.  When markets rise substantially, as they have done recently, regular rebalancing results in the sale of assets that have performed well and banks the excess proceeds.  Seemingly irrational markets can persist for a long time and as the old saying goes, no-one rings the bell at the top of the market.  Stay invested, remain diversified and be thankful that your financial well-being does not lie in the hands of any one fund manager owning just 45 stocks.  Remember that it is the tortoise who wins the race.

Risk warnings
This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

[1]     Albion Strategic Consulting used an XIRR calculation with monthly fund size, flows and performance data and assuming fund flow occurred at the start of the month.  It provides a rough estimate and order of magnitude insight.  Daily data unavailable.

[2]     Numis, as quoted in: Investors Chronicle. Surviving the investment trust shake-up August 6, 2020, By Dave Baxter

[1]      Vanguard Total Stock Market Index Fund in US$ Admiral share class www.vanguard.com

We associate the term ‘bond’ with mutual connection, whether the subject is chemistry (between atoms, ions, or molecules), personal relationships (between human beings), or finance (between borrowers and lenders). The latter is often thought to be difficult to understand and shrouded in complex mathematics. Actually, bonds can be quite a straightforward concept.

In their simplest sense, bonds are IOUs set up between borrowers and lenders. At the outset, the borrower will determine how much and for how long they would like to borrow, and what they are willing to pay the lender – typically once or twice per year – as appropriate compensation for borrowing their money.

Bonds are also known as fixed income securities. The simple example of a bond setup below illustrates why bonds carry this other name. The future cash flows a lender receives are fixed and predictable. At the outset, a sum is lent. Each year, an amount is paid to the lender (the coupon) and at the end of the term the original sum is returned.

Figure 1: Simple illustration of a 3-year bond with an annual coupon

Borrowers, also known as bond issuers, are prominently composed of governments and companies around the world. A significant difference between bonds and more traditional loans is that bonds are marketable. In other words, the lender in the IOU agreement can sell the right to receive the cash flows to someone else. This is why the lender will more commonly be referred to as the bondholder.

The relationship between risk and return does not come unstuck for fixed income. If the borrower is a large, developed government it is highly likely that bondholders will be repaid and so the government can offer lower coupons. The USA, for example, has never defaulted on its national debt. By contrast, a company on the brink of financial collapse would have to offer much higher compensation to encourage lenders. This is the point where fixed income often becomes less ‘fixed’.

Analysing the ability for companies or governments to pay back lenders is a complex and comprehensive process for investors. Thankfully rating agencies do much of the heavy lifting. S&P, a rating agency, demonstrates[1] on average between 1981 and 2020 bonds with the lowest rating of CCC/C had a 28% chance of defaulting over the next 12-month period, whereas for those rated highest at AAA that chance was zero.

Figure 2: Cumulative average default rate % of global corporate bonds 1981-2020

Data source: S&P (2021). “Default, Transition, and Recovery: 2020 Annual Global Corporate Default and Rating Transition Study”. Rating refers to rating at outset of respective period.

The reader will notice that owners of investment grade bonds are considerably more likely to receive back the capital lent to the borrower compared with high yield bonds (formerly ‘junk’ bonds!). It is for this reason we allocate the fixed income element of your portfolio to these such bonds through the use of investment funds that diversify across many different highly rated bonds. We may often refer to this part of the portfolio as the ‘defensive assets’.

The key takeaways

• A bond is an IOU between a borrower, such as a government or company, and a lender. The ownership of this IOU can be traded between lenders (bondholders), and with it the right to receive the cash flows from the borrower.
• The main features of a bond are the maturity (i.e., term of the loan) and credit quality. The latter is determined by rating agencies and gives an insight into a borrower’s credit worthiness.
• Investment grade bonds provide more certainty of future payments to lenders compared with high yield bonds. A shorter lending term also generally corresponds to higher certainty of repayment. For this reason, when investing in bonds we typically allocate to shorter term, higher credit quality securities.

If you have any questions, thoughts or actions relating to the content of this article please get in touch with us by calling us on 028 9099 6948 or by emailing info@pacem-advisory.com

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

[1] S&P (2021). “Default, Transition, and Recovery: 2020 Annual Global Corporate Default and Rating Transition Study”

For those readers interested in financial news (some might call it noise), the unfolding story of Chinese property developer Evergrande (a name which is ironic given its dire financial position) has spooked global equity markets.

The short version of the story is that the company is very highly leveraged i.e. it has borrowed US$300 billion from banks to fund its property developments and has hit material cash flow problems, leaving suppliers and debt repayments at risk.  Property prices have risen dramatically in urban China over the past few years and the Chinese Communist Party (CCP) is now clamping down on bank lending to slow the boom, which is part of Evergrande’s problem.  To add to the drama, Evergrande has also sold high risk retail products to its wealth management arm’s clients, which it appears to have misrepresented as low risk investments.  Some of these investors’ funds have been diverted to shore up the company’s own working capital and some has allegedly been used to pay off other investors, which is the hallmark of a Ponzi scheme.   More acutely, the company needs to meet an interest payment of US$84 billion this week and the markets are waiting with bated breath to see if they manage to do so.  Its bonds are trading at 25 cents on the dollar and its equity has fallen by 85% in value in 2021.  Not pretty.

IF Evergrande default – some have suggested this could be the equivalent of Lehman Brothers collapse that set off the market falls leading into the Global Financial Crisis – AND if this then leads to the collapse of the company with repercussions for lending banks (most of which are Chinese), AND if there is a resultant fire-sale of properties, AND suppliers go unpaid AND this all precipitates a collapse of other development firms, THEN this could cause a major challenge for the CCP (not least that 1.4 million buyers who have put down deposits on unfinished properties) AND impact on Chinese growth on which the world depends.  Could it THEN cause a contagion in global markets resulting in a major decline in stock markets around the world?

BUT, hold on a minute, what started as a potential corporate default has grown – in this story – into a major decline in world growth and a stock market crash!  BUT in this case, much of the debt is in local currency and lent by banks that are mostly owned by the CCP, which can force them to roll or forgive debt and provide unlimited liquidity to the banking system.  It does not mean that things will be easily resolved, BUT it does not mean that the conflated IF, AND, THEN story of conditional probabilities is likely to occur.

It is important to remember that many material world events occur on a regular basis, but do not always end up in negative market outcomes.  Even COVID, which put a dent in equity market valuations in early 2020, has failed to turn into a prolonged downturn.  Global markets are now well above their highs before the COVID-induced falls.  Certainly it is true that on occasion a single event precipitates a market fall, but the problem is that we, as investors, have absolutely no chance of knowing which event this might be and position portfolios ahead of any anticipated fall.  If this were possible, the market would already have fallen! In this particular case, it is important to note that Evergrande’s market cap is under USD6 billion – or put another way, Apple is over 400 times larger – so any portfolio holding would be miniscule at worst.  The company represents around 0.01% of global equities and China is only 4% of the global equity markets. Our suggestion: don’t pay too much attention to the financial ‘news’!

If you have any questions, thoughts or actions relating to the content of this article please get in touch with us by calling us on 028 9099 6948 or by emailing info@pacem-advisory.com

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Don’t run out of money

Of all the financial challenges and concerns that we face over our lifetimes, avoiding running out of money in retirement probably sits at the top of the list.  No-one wants to end up relying on meagre state benefits and eating own-brand baked beans every day.  Retirement Rule 1 is crucial but not guaranteed.  As Warren Buffett might say, Retirement Rule 2 is not to forget Retirement Rule 1!

In the good old days, retirees could rely on defined benefit pensions and/or annuities to provide lifelong retirement income. Today, many retirees rely, to a varying degree, on taking money from accumulated pension pots for their retirement income.  That makes outcomes less certain and decisions far tougher.

From time-to-time scary data surface about the state of retirement planning in the UK. Recently, LV – the insurance company – published the results of a survey of 4,000 people relating to how they intend or are handling their pension arrangements[1].  LV estimate that there are around 30 million pension holders in the UK.  The results are a little startling, to say the least. Take a look at the chart below.

As one third (or effectively 10 million people) do not know how to make their retirement pot last, it implies that two thirds apparently do know.  Perhaps these are the two thirds who plan on taking advice!  Not running out of money is a complex problem that taxes even the best financial brains.  It would seem that many people may be overconfident in their assessment of how much they truly know about retirement planning.

The figure below provides an overview of just how tricky this process is and how it must be an ongoing, dynamic process, not a one-off decision at retirement. Knowing what you cannot control and understanding what you can, provides some insight into the complexity of – and solutions to – retirement planning.

Retirement is meant to be a time of financial freedom allowing you to do the things you want to do, when you want to do them and who you want to do them with.  It is a great shame that many people in the UK will fail to achieve even a modicum of financial freedom and lifestyle choice.  As a broad rule of thumb, today, £1 million will buy an inflation-linked annuity income of around £27,500 a year[1].  Yet the median UK pension pot is around £91,000[2] (for those 55-64 years old), which on the same basis will deliver only £2,500 a year.

Taking an income from an investment portfolio may allow a withdrawal rate that is potentially a little higher but needs a lot of care and attention to reduce the risk of running out of money.  Making sure that you optimise the decisions that need to be made – and control all the things you can control – will allow you to maximise the stability, level and longevity of retirement income you need.

That is what a good adviser will help their clients do and where they earn their fees.  The best way to achieve Retirement Rule 1 is to take proper financial planning advice.

If you have any questions, thoughts or actions relating to the content of this article please get in touch with us by calling us on 028 9099 6948 or by emailing info@pacem-advisory.com

[1] https://www.scottishwidows.co.uk/retirement/retirement-explained/taking/pension-options/guaranteed-income/index-linked-annuity/

[2]     Office for National Statistics. https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/datasets/pensionwealthwealthingreatbritain

[1] 10m pensioners risk running out of money, FT.com 26^th August 2021