Low interest rates on savings

[Numbers]

I'm with stdP re: mortgage, getting that paid off is our priority.

I'm lucky with my company pension, they contribute 12% of my salary, I don't currently add to this but I should as looking at the rate of return from 05 Apr 2020 to 05 Apr 2021 it's +30.15%, the pension is split across a Diversified Growth Fund (M1 risk) + a Global Sustainable Growth Fund (M2 risk). I make no choices with this, just let the investment company (Fidelity) and my employer manage it.

Between us we have 4 other pensions from previous companies which to be honest we don't pay attention to and it's only the yearly report we look at, but lately we've been thinking of transferring them in, to something (Vanguard perhaps), just don't know what exactly yet.

Our current savings accounts have shite returns as does the Bank of Mattress obvs.

 

[teuchter]

Then I’d say the value of an IFA depends on how much you’re happy to do your own research. That includes research into what products are available as well as what kind of investment is appropriate for you. IFAs are licensed as well — I am not professionally allowed to give individual advice, for example, because it is a specialist skill.

What I remember from last time was that they told you that using them didn't cost you anything because they earned their fees on a kind of commission basis from the funds they invested in, and that these fees were basically only available to them (ie you couldn't somehow circumvent them by going directly). Or something like that. I'm not sure to what extent that was entirely the truth. But I can imagine it's the sort of thing that might have changed in the intervening time; basically because the internet seems to have allowed the middle-man to be cut out of a lot of processes where it was previously necessary. For example most people now book things like flights directly rather than via a travel agent as was once the case.

I suppose there is always the argument that an IFA can save you much more money than the fees they earn, by helping you make the right decisions, but does that apply to "most people" or just those who don't feel like putting the time into some research that doesn't actually require a lot of specialist knowledge.

 

[teuchter]

On the various arguments about prioritising paying off mortgages

you're paying off debt on something that's literally safe as houses.

If you have a £1million mortgage and also £1million in the bank... then is it not the case that really, the £1million in the bank is also safe as houses?

Because, even with runaway inflation where your £1million becomes worth a loaf of bread, you only owe the mortgage bank a loaf of bread. And you still have a house.

Obviously it's different with investments that have a risk, but it seems to me that as long as you can find a regular savings account that matches or beats the interest rate on the mortgage, there is no good reason to pay off the mortgage.

 

[kabbes]

I know that commission rules changed some years ago because of concerns about conflicts of interest but I'm not sure if that affected IFAs. It may be that you can still get your advice for "free", but it may be that you now have to pay an explicit fee. Not sure on that one.

I resent paying for things that I feel I can do a good job on myself, and I'm arrogant enough to think that I can find my own investments as well as an IFA. I don't know if that's true or not, because I don't have the alternative to review against! I can't help feeling, though, that unless you have specialist needs (which some people definitely do), it isn't rocket science and the IFA is really just helping you choose between asset types that you can find out about yourself.

I use www.ii.co.uk as my investment platform and that includes as much data and research tools as you could ever hope for, really. You can filter their database of options by type of investment vehicle (e.g. trust), type of investment (eg equity, bonds, property, mixed), style (active or passive), location (eg UK), specific characteristics or words (e.g. ESG or "sustainable") and analyst rating (e.g. at least 4 stars by Morningstar). You can list them or investigate them by return over 1, 3, 5 or 10 years. When you find something you're interested in, you can click through to really detailed investor information about it (like its return history, its investment aims, its asset mix and its top ten investments). If you want a really general fund, you can find it in about 30 seconds and if you want something specific (e.g. an index of biotech firms) you can find that in 30 seconds too. I'm happy to spend some hours pootling through that and making decisions -- I don't feel I need somebody else to do that for me. But it's easy to take your knowledge for granted -- I live in a world of financial terms and data, so it feels easy to me. It might not feel easy if you aren't familiar, I don't know.

 

[kabbes]

On the various arguments about prioritising paying off mortgages



If you have a £1million mortgage and also £1million in the bank... then is it not the case that really, the £1million in the bank is also safe as houses?

Because, even with runaway inflation where your £1million becomes worth a loaf of bread, you only owe the mortgage bank a loaf of bread. And you still have a house.

Obviously it's different with investments that have a risk, but it seems to me that as long as you can find a regular savings account that matches or beats the interest rate on the mortgage, there is no good reason to pay off the mortgage.

This is financially true but I can't blame people for not trusting that it will work in practice. (Also, there is a very small risk that your money in the bank is lost to a credit failure, but your debt remains).

The major risk is that interest rates explode, which will theoretically depress the asset value of your non-cash investments, whilst simultaneously making your mortgage more expensive to service. It's still how I currently operate, though, because I don't think interest rates are about to explode..

 

[Teaboy]

Obviously it's different with investments that have a risk, but it seems to me that as long as you can find a regular savings account that matches or beats the interest rate on the mortgage, there is no good reason to pay off the mortgage.

For me it's just how I work. I find it a lot easier to pay all my bills and see what I'm left with after that. Generally speaking what I'm left with gets spent on fun stuff rather than boring savings. Also when I want to do other fun stuff my savings are too sweet a a thing to resist raiding.

A mortgage just gets lumped into all the other bills with the exception that it still has an ongoing value unlike council tax and utilities.

Clearly there are much more savvy ways for me to use my money but this works best for me plus I still get to enjoy myself and live in a nice place, in the area I want to live and hopefully will have something to show for it all.

 

[teuchter]

This is financially true but I can't blame people for not trusting that it will work in practice. (Also, there is a very small risk that your money in the bank is lost to a credit failure, but your debt remains).

The major risk is that interest rates explode, which will theoretically depress the asset value of your non-cash investments, whilst simultaneously making your mortgage more expensive to service. It's still how I currently operate, though, because I don't think interest rates are about to explode..

I think this is (sort of?) covered by the £85,000 limit per bank which is guaranteed by government, and if you have >85k you can spread it between banks.

 

[kabbes]

I think this is (sort of?) covered by the £85,000 limit per bank which is guaranteed by government, and if you have >85k you can spread it between banks.

You're going to need 12 banks each paying more than the mortgage rate on savings to cover your £1m, and even then you're going to need another bank to move all the interest to. Each of those represents a reinvestment and timing risk, since you are relying on their income balancing the mortgage payments. From a practical perspective, there are diminishing returns to this approach.

 

[stdP]

If you have a £1million mortgage and also £1million in the bank... then is it not the case that really, the £1million in the bank is also safe as houses?

Because, even with runaway inflation where your £1million becomes worth a loaf of bread, you only owe the mortgage bank a loaf of bread. And you still have a house.

Obviously it's different with investments that have a risk, but it seems to me that as long as you can find a regular savings account that matches or beats the interest rate on the mortgage, there is no good reason to pay off the mortgage.

I dare say if I had money in the bank matching my outstanding mortgage I'd have a long hard think about paying it off entirely TBH Especially since your money in the bank is only guaranteed up to £85k or whatever it is by the government, and times of spiralling interest where people are paying off their houses with loaves of bread that the banks'd be failing and taking your £1m with them in any case - so your loaf might only become a slice and you're still on the hook for another 23 slices. And I'm reasonably certain that anyone on a variable rate would find their interest rate shooting up to hyperinflation levels in any case.

That's all hypothetical though, in my situation at least there are no risk-free savings accounts that come near matching the interest rate on my mortgage so overpaying it is the best option for me currently.

 

[Winot]

I’ve had an IFA since 1999 too (the same one). I pay him to look after my financial stuff because I don’t have sufficient interest to do that myself.

The main rule change is about being transparent on fees (although he always was). He charges either by taking a percentage or can charge fixed fees. Either way using an IFA does of course cost you, and quite right too.

 

[Elpenor]

I've chucked my money in 3 hopefully safe trackers, will see what happens. Boring growth of 3-5% sounds fine to me.

 

[Idaho]

I've chucked my money in 3 hopefully safe trackers, will see what happens. Boring growth of 3-5% sounds fine to me.

You'll probably get that, but as a 10 year CAGR - an averaged annual increase when you look back over 10 year's. The actual year on year growth will show a lot more variance.

 

[Elpenor]

I will see what happens in a year or so then.

 

[Puddy_Tat]

I think this is (sort of?) covered by the £85,000 limit per bank which is guaranteed by government, and if you have >85k you can spread it between banks.

that's pretty much my understanding (not that i'm in the position of having to think about it) - although i am fairly sure that if one bank has multiple trading names (like nat west and royal bank of scotland) then the 85K limit applies to how much you've got in that group, not each one.

and there is a temporary higher limit if you've got a larger amount of money having just sold a house and haven't yet bought a new one. (not sure how temporary and what the limit is)

this is the official page about it all.

i'm not sure if it applies to stocks + shares based things, and any bank based outside the UK may not be part of the scheme.

i don't think mortgages are part of this - if you have X amount outstanding on a mortgage and that lender goes pop, the mortgage will get passed to AN Other (like when northern rock went pop) - you don't suddenly have to pay it all back immediately, but you're not suddenly in the clear.

 

[kabbes]

If you own shares then you own shares. If the platform holder through which you own those shares goes bust, that doesn’t prevent you still owning those shares. If it’s within a fund then you still own a proportion of that fund regardless of what happens to the operator of the fund. It might all cause your assets to be frozen whilst they sort out the mess though.

 

[nick]

This thread has prompted me that I need a review of my finances. (ISAs, pensions, Will - all in place but probably not correctly risked)

What is considered to be a reasonable investment management fee?

I've just been quoted 0.75% by an independent (he got my mother through 2008 relatively unscathed FWIW).

 

[kabbes]

This thread has prompted me that I need a review of my finances. (ISAs, pensions, Will - all in place but probably not correctly risked)

What is considered to be a reasonable investment management fee?

I've just been quoted 0.75% by an independent (he got my mother through 2008 relatively unscathed FWIW).

Depends what you mean, Nick, because there are multiple layers of fee. If you’re talking investments, there are generally two: the fee that the platform provider charges you for the service of giving you access to investing and the fee that the investment fund managers charge for doing their stock picking. (A third potential fee is that of the independent advisor, but I’ll leave that aside).

The fee that the platform holder charges is variable and depends on the nature of the platform. If it’s a pension platform then I’d say 0.75% sounds like a lot. You want to be aiming below 0.5%

If it’s an ISA then it’s hard to compare without more specifics because some platforms charge fixed amounts rather than % of funds, which makes them better value for higher investment amounts and worse value for lower investment amounts. Then some ISA providers throw in free trades for their fee whilst others charge you.

If it’s not a pension or an ISA then, well, why isn’t it either of those things?

Aside from what the platform holder charged you as an admin fee, the investment funds you buy will also charge an investment fee. That could be <0.1% for a passive fund all the way up to >2% for a really niche specialist active fund. There are books written on whether paying more gets you more. Consensus is no, but rightly or wrongly, I’m still reluctant to wholly trust my investments only to passive funds. My personal rule is never pay more than 1%,

 

[Edie]

Depends what you mean, Nick, because there are multiple layers of fee. If you’re talking investments, there are generally two: the fee that the platform provider charges you for the service of giving you access to investing and the fee that the investment fund managers charge for doing their stock picking. (A third potential fee is that of the independent advisor, but I’ll leave that aside).

The fee that the platform holder charges is variable and depends on the nature of the platform. If it’s a pension platform then I’d say 0.75% sounds like a lot. You want to be aiming below 0.5%

If it’s an ISA then it’s hard to compare without more specifics because some platforms charge fixed amounts rather than % of funds, which makes them better value for higher investment amounts and worse value for lower investment amounts. Then some ISA providers throw in free trades for their fee whilst others charge you.

If it’s not a pension or an ISA then, well, why isn’t it either of those things?

Aside from what the platform holder charged you as an admin fee, the investment funds you buy will also charge an investment fee. That could be <0.1% for a passive fund all the way up to >2% for a really niche specialist active fund. There are books written on whether paying more gets you more. Consensus is no, but rightly or wrongly, I’m still reluctant to wholly trust my investments only to passive funds. My personal rule is never pay more than 1%,

I wholly go with passive tracker funds. Medium to high risk. Long term strategy (decades).

My thinking (as a moneysavingexpert absolute amateur type girl, so know f all) is that managed funds whilst they may have higher returns (at a cost tho), may just as well not. So it’s essentially just another layer of risk you pay for. Am I wrong?

 

[Edie]

Also wtf @ self That is probably the most middle aged/class post ever

 

[kabbes]

I wholly go with passive tracker funds. Medium to high risk. Long term strategy (decades).

My thinking (as a moneysavingexpert absolute amateur type girl, so know f all) is that managed funds whilst they may have higher returns (at a cost tho), may just as well not. So it’s essentially just another layer of risk you pay for. Am I wrong?

Statistically, you’re not wrong. I just worry that when the shit hits the fan (like recently), passive funds can do nothing except wait it out whereas active funds have the chance to take advantage of short term positions. I would always suggest to other people that they take the passive route, though, unless they want to spend a lot of time worrying about it.

Also, like I said before, the thing that makes passive funds work is that they are in the minority. If too many people switch to passive, they’ll fall over.

 

[Edie]

Statistically, you’re not wrong. I just worry that when the shit hits the fan (like recently), passive funds can do nothing except wait it out whereas active funds have the chance to take advantage of short term positions. I would always suggest to other people that they take the passive route, though, unless they want to spend a lot of time worrying about it.

Also, like I said before, the thing that makes passive funds work is that they are in the minority. If too many people switch to passive, they’ll fall over.

I don’t have the time or knowledge

 

[nick]

Depends what you mean, Nick, because there are multiple layers of fee. If you’re talking investments, there are generally two: the fee that the platform provider charges you for the service of giving you access to investing and the fee that the investment fund managers charge for doing their stock picking. (A third potential fee is that of the independent advisor, but I’ll leave that aside).

The fee that the platform holder charges is variable and depends on the nature of the platform. If it’s a pension platform then I’d say 0.75% sounds like a lot. You want to be aiming below 0.5%

If it’s an ISA then it’s hard to compare without more specifics because some platforms charge fixed amounts rather than % of funds, which makes them better value for higher investment amounts and worse value for lower investment amounts. Then some ISA providers throw in free trades for their fee whilst others charge you.

If it’s not a pension or an ISA then, well, why isn’t it either of those things?

Aside from what the platform holder charged you as an admin fee, the investment funds you buy will also charge an investment fee. That could be <0.1% for a passive fund all the way up to >2% for a really niche specialist active fund. There are books written on whether paying more gets you more. Consensus is no, but rightly or wrongly, I’m still reluctant to wholly trust my investments only to passive funds. My personal rule is never pay more than 1%,

Thanks Kabbes

I'm already paying platform fees to HL for my SIPPs and equity ISAs, with no advice or monitoring ( I believe 0.45% for the first 250k, then reducing). I think that HL get reduced fund fees - so lets be charitable and say that takes net fees down 10 bp to 0.35% for facilitating investment and tax wrappers, but with no advice: it's all my own guesswork

I'm viewing this 0.75% as the fee for transferring out of HL et al to this IFA's platform + cost of their management / balancing etc, so I think that would be a price for the equivalent of HL platform + advice. (they smugly point out that they got their clients out of Woodford a year before his denouement: whereas I took a bath in that one)

The wrinkle is that I have an egregious amount of ISA contributions doing very nicely in Fundsmith - so no platform fees. If I move it to within this IFA's organisation as I diversify, then I am going to take a big fee hit in order for them to re-purpose it in light of Terry's oncoming retirement (but I guess cost is small in comparison to taking a swan dive if Fundsmith tanks instead of making the current 25% pa, or whatever it is)

Anyway I'll have a chat with them if nothing else. I've also put my details into something called unbiased.co.uk - which doubtless means I am about to be plagued by a flock of vultures

As feared, direct comparison is hard (and I'm a fucking accountant). Is there some sort of online league table that ranks this kind of thing?

 

[nick]

U75 isn't what it used to be is it?

 

[kabbes]

It sounds to me like it’s really a case, then, of deciding if you think the extra cost of this IFA is worth the additional fees you are paying for them to decide between fund managers. I think only you can answer that!

Personally, where I move away from the funds who invest in vanilla ways focused on big companies, I only do so in amounts that I accept might get wiped out. As a result, I don’t value the idea of paying somebody else to decide on my behalf to go risky with some of my funds. But if you want to put a lot into things like the Woodford Equity Income Fund then I guess it could be valuable to have somebody keeping an eye on things, ready to pull you out. Do you need to commit everything to this IFA though?

 

[Mattym]

I’ve had an IFA since 1999 too (the same one). I pay him to look after my financial stuff because I don’t have sufficient interest to do that myself.

I always consider doing this and recommend it to other people but is it worth it? I suppose it depends on the individual's situation/circumstances etc.... Genuinely interested.

 

[hash tag]

Like Winot many years ago, I specifically chose and ethical (as opposed to environmental) fund for and old work pension many years ago. I haven't looked at it until recently and think it grew by about 10% last year. It was invested at a time when ethical and environmental funds were sneered on and I think it's done ok. In fact, at the time, many people couldn't differentiate between ethical and environmental. The funds I used at the time were Friends Provident Stewardship which have long since been swallowed up by other companies.
By coincidence, I recently caught a clip on the radio saying that this might not be the way forward for maximum returns as returns have increased greatly in other sectors and are likely to continue to do so.
I am happy to stick with ethical investments until I need the funds.

 

[Winot]

I always consider doing this and recommend it to other people but is it worth it? I suppose it depends on the individual's situation/circumstances etc.... Genuinely interested.

Well I haven’t got any way of knowing what would’ve happened had I managed the money myself of course, but that was never going to happen.

In my case it was a fairly low risk decision to go with this IFA because he had been advising the partners in the firm I joined for a number of years so I was able to got a deal on fees riding off their coat tails.

 

[strung out]

This thread has prompted me that I need a review of my finances. (ISAs, pensions, Will - all in place but probably not correctly risked)

What is considered to be a reasonable investment management fee?

I've just been quoted 0.75% by an independent (he got my mother through 2008 relatively unscathed FWIW).

The thing about paying an independent advisor to manage everything is that you can end up paying an awful amount of money for them to do something you're probably able to do yourself if you're ok with doing a bit of research.

I'm guessing that 0.75% will be on top of any fees for platforms and funds they use on your behalf (even though they're doing it for you, they'll still be using some kind of platform that has a fee attached, as well as investing in funds that have their own fees). That 0.75% might feel like a tiny amount at the start - if you're putting £500 a month in, then that's £3.75 a month. However the magic of compounding will mean you're paying much more than that by the time you retire.

Some figures below, assuming annualised growth over 20 years of 5% or 7%, with outcomes with and without the 0.75% charge.

Monthly investment	5% annual growth	4.25% annual growth (advisor charge of 0.75%)	7% annual growth	6.25% annual growth (advisor charge of 0.75%)
£100	£41,000	£38,000	£52,000	£48,000
£250	£103,000	£94,000	£130,000	£119,000
£500	£205,000	£189,000	£260,000	£238,000
£1000	£411,000	£377,000	£521,000	£476,000

The figures you end up paying an advisor are even more stark if you're investing for more than 20 years - if it's more like £500 a month for 30 years, you'll have given them £53,000 from a potential pot of £416,000 (conservative estimate of 5% growth).

Now obviously if you really don't want to do the research or be personally responsible for the risk, you might see that £50,000 as being money well spent, but I do think it's worth thinking about how much money you're committing to handing over when you agree to use an advisor, and whether you'd normally be willing to pay someone £50,000 to do something you can probably do yourself. The numbers above are all perfectly achievable without any specialist knowledge of the stock market, just by using passive trackers.

 

[teuchter]

The thing about paying an independent advisor to manage everything is that you can end up paying an awful amount of money for them to do something you're probably able to do yourself if you're ok with doing a bit of research.

I'm guessing that 0.75% will be on top of any fees for platforms and funds they use on your behalf (even though they're doing it for you, they'll still be using some kind of platform that has a fee attached, as well as investing in funds that have their own fees). That 0.75% might feel like a tiny amount at the start - if you're putting £500 a month in, then that's £3.75 a month. However the magic of compounding will mean you're paying much more than that by the time you retire.

Some figures below, assuming annualised growth over 20 years of 5% or 7%, with outcomes with and without the 0.75% charge.

Monthly investment	5% annual growth	4.25% annual growth (advisor charge of 0.75%)	7% annual growth	6.25% annual growth (advisor charge of 0.75%)
£100	£41,000	£38,000	£52,000	£48,000
£250	£103,000	£94,000	£130,000	£119,000
£500	£205,000	£189,000	£260,000	£238,000
£1000	£411,000	£377,000	£521,000	£476,000

The figures you end up paying an advisor are even more stark if you're investing for more than 20 years - if it's more like £500 a month for 30 years, you'll have given them £53,000 from a potential pot of £416,000 (conservative estimate of 5% growth).

Now obviously if you really don't want to do the research or be personally responsible for the risk, you might see that £50,000 as being money well spent, but I do think it's worth thinking about how much money you're committing to handing over when you agree to use an advisor, and whether you'd normally be willing to pay someone £50,000 to do something you can probably do yourself. The numbers above are all perfectly achievable without any specialist knowledge of the stock market, just by using passive trackers.

That all assumes they are not able to get a better return than you can yourself though. Which is the unknown, so these figures don't really tell us anything all that meaningful.

 

[Winot]

Yeah my IFA manages my stuff actively. Has got a better return than a passive tracker. I haven’t done the maths as to whether I could - in theory - have done better myself.