Tag Archives: finance

Book review – Red Notice

I’ve said it before, but one of the good things about being in the West Surrey Book Club is that I get to read titles I would never have chosen myself.

I turned the last page of Red Notice by Bill Browder this morning, and am looking forward to discussing it with the gang this evening.

Bill Browder’s grandfather, Earl, was a labour union organiser in the USA and ran for President under the Communist flag in 1936 and 1940. The Browder dynasty were all high-achievers in various fields, and it was no surprise that the fiercely ambitious and intelligent Bill didn’t follow any traditional route after gaining his MBA from Stanford Business School in 1989.

He looked eastwards, at the same time as the Berlin Wall and any semblance of Communist principles were collapsing throughout Europe. He founded Hermitage Capital Management and moved to Russia in 1996, making millions for himself and for his investors by piggy-backing on cheap state asset deals being gobbled up so opportunistically by the oligarchs.

But 10 years later, Browder was expelled from Russia and everything fell apart. To try and summarise here the extent of the underlying greed, corruption and violence visited on Browder and all his associates by high-ranking politicians, security forces and police would be challenging, and certainly hard to believe.

One of his legal team, Sergei Magnitsky, stayed in Russia to fight trumped-up charges. He was beaten, tortured and ultimately murdered in police custody, after which Browder and his team fought relentlessly to try and bring some sort of justice for the young lawyer and his family.

Image courtesy of The Prisma

Red Notice is well written and reads like a pacy thriller. It really is hard to believe that this is all cold, hard well-researched and proven fact, rather than the latest Jack Reacher novel.

Image courtesy of Publishers Weekly

I suspect Bill Browder is a hard person to deal with, but it is to his credit that his business activities seem to have taken a back seat whilst trying to find a way, as a political activist, to preserve the memory of Sergei Magnitsky.

I’ve always wanted to visit Russia. I’m not so sure now….

Crowdfunding – shark-infested waters?

I wrote a couple of months ago about my own first tentative steps into crowdfunded investments.

There is some real momentum behind this relatively new alternative finance phenomenon, technology and awareness giving entrepreneurs access to a large pool of potential individual investors.

Crowdcube is the largest platform, providing a bridge between the entrepreneur and investors. As of today, it has 283k investors on its books, and £165m has been pumped into 406 successful fund raises. It may be an unfair comparison, but Crowdcube could be considered the Tescos of equity crowdfunding, piling the deals high and selling them off cheap.

But at what price to investors…?

The Solar Cloth Company used the Crowdcube platform to raise £967k from 400 individual investors just 17 months ago. The Directors projected the business would be valued at £100m in just 3 years after the funds had been raised.

The Times has reported today that the Solar Cloth Company has just gone into administration, blaming a downturn in the solar power industry, and cuts in government subsidies.

Another significant failure with Crowdcube’s name all over the fund raising was Rebus. A claims management company, it raised £816k from 100 investors just months before it collapsed in February 2016. Investors through Crowdcube were not aware that Rebus had previously engaged a restructuring expert to advise them how to plug a cash flow chasm.

Crowdcube – and other equity crowdfunding (“ECF”) platforms – must start performing proper due diligence before listing investment opportunities. Otherwise the FCA should step in to ensure there is sufficient investor protection. The current “hurdle” – someone signing up to an ECF platform has to self-certify that they are either already a sophisticated investor, or a high net worth individual – is about as low as a limbo-dancing snake in a BHS store.

Crowdcube should also be much more transparent on their site about previous fund raises. I’d like to see a detailed summary of all businesses that have successfully completed ECF rounds, showing the timing, amount raised, key commercial milestones relative to business plan projections, any subsequent capital raising efforts….and all very clearly linkable from the Crowdcube home page.

And its failures should be even more transparent, giving investors a much louder warning that their hard-earned cash is at significant risk.

ECF is growing fast, and has the potential to be an even greater weapon in the fund raising armoury for start-up and early stage businesses. It would be a real shame if the platforms blew that opportunity.

Crowdfunding – risky business

I wrote back in November 2015 about my first tentative foray into investing through crowdfunding platform Crowdcube.

I’ve now made several small punts on the following businesses, all of whom raised funding through the Crowdcube platform:

  1. Alexi – a curated book app
  2. Vulpine – cycling apparel brand
  3. Chilango – Mexican fast food
  4. Cauli Rice – healthy food
  5. One Rebel – funky gyms
  6. Five Point Nine – coffee subscription
  7. Simply Cook – recipe kits

And one through the Syndicate Room platform:

  1. Lobster – digital photo marketplace

These are all equity crowdfunded investments. Separately, I’ve also put small amounts into a couple of crowdfunded mini-bonds, debt funding for businesses a little further along the growth curve:

  1. The Bondi Bond – a chain of Aussie style cafés (11% interest rate)
  2. Brewdog – craft beer (6.5% interest rate)

I’ve also been to investor events at Crowdcube and Syndicate Room, to meet the management teams and to network (ugh!) with other investors and some of the entrepreneurs pitching their businesses and investment opportunities.

I’m under no illusions about how risky this brave new world of crowdfunding is, as I noted in my November article. But you’d expect Crowdcube – and all the other crowdfunding platforms – to carry out a minimum level of due diligence before putting opportunities in front of investors. Especially as they’re regulated by the FCA.

But stumbling on this blog from Rob Murray Brown – fantasy equity crowdfunding – reveals some serious concerns about this brave new world of crowdfunding. It’s not surprising that he shines the brightest light on Crowdcube – the oldest and largest UK platform – which as of today claims to have raised £148.5m for 378 completed campaigns, from 267,169 investors currently registered with them.

If some of RMB’s accusations have merit, crowdfunding could be the next financial services disaster in the UK. So far, I’ve only invested small amounts that I’m prepared to lose. I hope one or two successes exceed the inevitable losses on most, and I have a bit of fun along the way, but – if I take off my rose-tinted glasses – that’s probably unlikely.

With the current levels of publicity and momentum behind crowdfunding – and historically low interest rates on traditional savings vehicles – there’s a real risk that naive investors might lose a significant proportion of their wealth.

I’m thinking about starting a separate blog myself to dig deeper into this burgeoning world, so that I can understand it better and to try and help others along the way.

What do you think? Potentially interesting and useful….or will everyone just continue to follow the crowd?

Movie review – The Big Short

Another trip to the Guildford Odeon for a lucky-dip Screen Unseen movie. As Forrest Gump would say….you don’t always know what you’re gonna get.

After a couple of recent suboptimal experiences, The Big Short has renewed our Screen Unseen enthusiasm. Out on general release in the UK from this Friday, 22nd January, the film is a sparkling effort to tell the story of the 2008 financial crash in an understandable and entertaining way.

As Michael Lewis, the scourge of Wall Street since Liar’s Poker was published, and author of the original book The Big Short says: Who’d make a movie about credit-default swaps?

Who indeed would think that the movie-going public could be entertained by a complex tale of sub-prime mortgage loans, credit-default swaps and collateralised debt obligations. And, by the architect of the final descent into financial madness, synthetic CDOs.

Enter Adam McKay as director of The Big Short. Known as a comedian and a director of hugely successful comic movies, he has used off-the-wall cinematic techniques and ploys to highlight the frankly unbelievable and absurd unravelling of the banking system.

Adam McKay Picture

The stellar cast – Steve Carell, Christian Bale, Brad Pitt, Ryan Gosling and Peter Epstein – play along as the Wall Street outsiders, non-conformist geniuses, idealists and chancers who bet against inherent Wall Street greed and corruption.

This is a seat-of-the-pants, can-this-really-be-happening, will-they-win-big-or-lose-everything story, told and acted in a totally compelling way.

Hard to believe it all really did happen.

 

Peer Pressure

The Bank of England base rate has been fixed at its historical low of 0.5% since March 2009.

Just last week the Financial Conduct Authority, the body that regulates our financial services industry, announced plans to force traditional banks and building societies to tell savings customers when they reduce rates on accounts. Often, these dinosaur institutions attract new customers through headline-grabbing rates, but then quietly lower the rate without the same fanfare.

The FCA are calling their initiative sunlight data. Never mind the euphemism, how about fining the opportunistic banks?

Shoddy treatment indeed, with some so-called savings accounts earning as little as 0.01%.

Ever since the financial crisis of 2008, savers have been punished by governments and the traditional financial institutions looking to shore up the mess created by benign lending conditions and over-extended borrowers, in a lax regulatory environment.

So it’s no wonder that there’s an ever increasing number of Peer to Peer (“P2P”) platforms, leveraging advances in technology and leaner overhead structures to match borrowers with lenders at much better rates than being offered in the conventional markets.

Ratesetter was one of the first movers in this space, and is now reckoned to be a Unicorn, the beguiling name being given to tech start ups exceeding a valuation of $1 billion. Nice.

P2P platforms are proliferating. But if something goes wrong, you do not get protection from the FSCS, in the same way as you would if your old-fashioned High Street bank fails. Yet.

Ratesetter have benefited from their clever early differentiator, the Provision Fund, though. Anticipating lender/investor caution, they established a ring-fenced fund – currently standing at £16.48m – in the event of borrower defaults. To date a total of almost £935m has been lent through their platform, and not a single penny has been lost. That’s no guarantee you might not lose some of your money in the future, but it sure does give a measure of comfort.

My parents, both now in their 80s, are quite financially savvy but also naturally cautious and – understandably – reluctant to invest in the longer term equity market.

A few years ago, they became fed up with the risible return being earned on their life savings from the banks and building societies they had been faithful to for decades. They drip fed some of their hard-earned savings into Ratesetter, and also Zopa.  They have become increasingly comfortable with Ratesetter, and have gradually invested more in an effort to eke out a better return.

You can currently achieve 3.3% lending for 1 month through Ratesetter; 4.1% for 1 year; 4.5% for 3 years; and up to 6.1% if you’re willing to lend over 5 years. Pretty attractive rates given the base rate outlook and the curmudgeonly rates offered by banks and building societies, still beefing up their balance sheets and annual bonuses.

ArchOver is another interesting P2P option. It’s a crowdlender, lending investor funds (min. £1,000 individual investment) to established businesses (min. £100,000 borrowing), rather than individuals. Their comfort blanket to investors is multi-layered….any loan is secured by assets (the accounts receivable book of the business, for example); it’s insured; and the credit rating of the borrower must be A+ (ArchOver’s own rating system).

You can currently earn 5.5% to 9% lending through ArchOver, depending on borrowing terms and other usual variable factors.

But with all these interesting newcomers to the P2P party, how can anyone accurately assess their potential rewards relative to  the risk in using these Johnny-come-lately platforms? And how do you know who your money is actually being lent to, and what it’s being used for?

Enter my old colleague from The Motley Fool days, Neil Faulkner.

Neil Faulkner, co-founder and MD

He has set up 4thWay, a comparison and risk-ratings service, allowing you to compare rates being offered by all the main P2P platforms and – more importantly – to see an objective ratings score for each platform.

It’s more complex than I’ve just summarised, but check out the website and you’ll find the full story.

I think you’ll be hearing a lot more about 4thWay, given the emergence of P2P platforms as a viable long-term alternative finance provider for savers and investors fed up with interest rates as low as a snake’s belly.

 

The English Mouse Squeaks

The dust has just about settled on the Great British General Election of 2015.

Ed is in Ibiza, reading up on his Marxist tracts, wondering where it all went so wrong. And avoiding gloating calls from his brother.

Nigel resigned as leader of UKIP,  ostensibly honouring his promise, but is now back – Lazarus-like – at the helm.

Nick resigned as leader of the Lib Dems after his party got a real kicking for “doing the right thing for the country” during the 5 year coalition.

Nicola rules the new UK political landscape from Scotland, with 56 out of 650 Westminster MPs.

David rolled up his sleeves, carried on with business and is already attacking the key challenge of Europe.

So the pollsters got it all wrong. Up until that bombshell Exit Poll at 10 pm on 7th May, they were all predicting that the Conservatives and Labour were neck and neck, a hung parliament a certainty and a coalition or alliance of Lefties cobbled together to form a majority the likely outcome.

The reality was oh so different. But was it really that surprising?

Alex Salmond – the ex SNP leader after the Scots voted NO in their independence vote, but now bizarrely a Westminster MP – claimed rightly that the Scottish lion has roared today.

But what happened south of the border was the English mouse squeaking. Very loudly. “Middle England” is usually a pejorative term, but millions of hard-working English voters came out in favour of a free market economy, lower taxes, a smaller state, saving more than you spend…and possibly the desire to vote separately for the UK’s position in Europe.

The left will call this the middle class mouse, but that’s where Ed and his Labour cronies were mistaken. The country is no longer defined by lower, middle and upper classes.

Ed used lazy, outdated rhetoric and repetitive sound bites from a bygone age: posh Tories; bankers’ bonuses; I’m here for working families. But people voted against the risk of a Labour-led government repeating the economic mistakes they made under Gordon Brown. And more importantly, perhaps they rejected the socialist ideology of a larger state machine, funded by higher taxes and supporting a bloated welfare state. Just look at France under Monsieur Hollande…….

I wrote here back in April, in an article on the new pension freedoms:

In broader terms, this is a metaphor for capitalism v socialism. The political right want to decrease taxation – personal, to maximise the disposable income in your pocket each month, so that you can decide where best to spend it; corporate, to encourage businesses to invest in people and physical assets. And yes, to make a profit, which should NOT be a dirty word.

The political left believe in increasing taxation to maximise taxes because they want to spend more on public services. Because they know better than us what we need. The Nanny State.

I know which philosophy I prefer. Capitalism – with a social conscience, of course. Socialism doesn’t work, in economic terms. It scares away the wealth creators, discourages inward investment and inevitably causes a downward economic spiral.

The English mouse squeaked in favour of working hard, saving for your family, creating personal wealth, starting up companies, paying sensible taxes and, yes, balancing the books. And being incentivised to go out and work, rather than sit at home on the sofa enjoying a benefits lifestyle.

This new Conservative government now has a real opportunity to do the right thing for the long-term: encourage enterprise, stimulate further employment and economic growth and – more importantly – rebalance public services and the welfare state so that taxes are used to help those that need it most, rather than those who choose not to help themselves when they are able.

The Beveridge Report of 1942 formed the basis of the modern welfare system. It was designed to address the 5 “Giant Evils” of society at that time: squalor, ignorance, want, idleness, and disease.  Our welfare system of the 21st century should reinforce those principles, rather than the broader, more lax ones it has come to stand for in the intervening 70 years, abused by many undeserving of its worthy intent.

If the current government can deliver, we just might end up with a group of politicians who are conservatives with a social conscience, no longer the Nasty Party, and who create a country for the many rather than for the perceived elite few.

Sort out the marauding Scots and our EU position too, and there will be no surprises at the next General Election.

But mess it up, and David, George, Theresa or Boris might also be off on holiday to Ibiza in May 2020.

I wonder if Ed will still be on the sun lounger….

BrewDog – so do you feel lucky, Punk?

BrewDog only started up in 2007, north o’ the border in Fraserburgh, as a small ground-breaking craft beer brewer. Their inspiration was to be everything that the global brewing behemoths weren’t.

And blow me, they’re making amazing progress.

I’ve heard of them over the last year or so, and may even have subliminally seen some of their beers on sale somewhere, but now I’ve actually invested in their latest Punk Equity round.

Why?

For a start, the current equity raising round of up to £25m is being crowdfunded, raised by themselves rather than through a generic crowdfunding platform. And certainly not via the traditional  investment banking establishment. As a result their total costs will be only £200k, compared with a possible £1m+ if they were using the banking community. I love this way of leveraging the power of the interweb thingy.

But more importantly, from an investment appraisal perspective:

  1. they’re already profitable, with an operating profit of £3.9m and post-tax profit of £2.7m in 2014, with healthy gross & net margins
  2. the top line is growing strongly, from £18m in 2013 to £29.6m in 2014, with massive growth potential in this country and overseas
  3. the senior management team includes the founders, who are clearly passionate about the BrewDog philosophy, brand and product. They’re also heavily aligned with shareholders’ interests to succeed
  4. their beers – and increasing number of own-branded bars – sound very cool, popular and positioned to succeed where traditional pubs are failing (younger, hip nephews who have been to one of their bars agree)
  5. the prioritised list of what they’ll spend the newly raised funds on is exciting and compelling
  6. I love their energy and innovation. They feel like an early-days Virgin, or pre-corporate Ben & Jerry, genuinely wanting to stay true to their values but not afraid to chase aggressive growth. Although only time will tell, of course….

Take a look at their Prospectus. I love it. It’s persuaded me to buy 10 shares for a total investment of £475. Yes, it’s at an aggressive valuation of the business based on a heady multiple of current profitability but, what the hell, this is fun and I’m happy to just go along for the ride.

They may appear edgy and anti-establishment, but they also look very professionally managed. From their track record, from the Prospectus and within seconds of investing, I had access to my shareholder page, with great discounts on beers ordered online and in their bars, and a huge range of other mouth-watering fun benefits.

BrewDog are not quoted on any public exchange yet, but they have an annual internal market  if you ever want to exit. And there’s always the chance of an IPO, or trade sale. I’m guessing that the founders will want to keep control for a while yet though.

I’d love to have got in on an earlier round and a lower valuation, but I can see these guys conquering the world with their great products, service, brand, innovation and management.

And even if they don’t, as a shareholder I’ll get a free beer every birthday.

And who else has the chutzpah to raise money via Equity for Punks?

As with any other equity investment, there are clearly risks involved. These are listed succinctly in the Prospectus. The minimum investment in Equity for Punks IV is 2 shares @ £47.50 = £95.

Cheers, BrewDog.

 

Pension Freedom Day – and the politics of choice

Today is Pension Freedom Day. Hooray.

For decades the options for those with Defined Contribution personal pension schemes (compared with those lucky people with Defined Benefit aka Final Salary schemes) has been limited.

You could cash in your pension pot, after a lifetime of working, and buy an annuity for the rest of your natural days. You would then have a secure, fixed income. That income would be less if you wanted it to increase each year in line with inflation, or if you wanted your surviving spouse to receive a continuing proportion, for example.

There are other nuances but essentially the downsides of an annuity are that the insurance company benefits if you snuff it before the actuarial tables say you will, and the taxation implications were always punitive. Not attractive, as I wrote in an earlier article.

But from today, you have much greater choice and flexibility over your pension fund (after reaching 55).

So I give a rousing three cheers to George Osborne and this Conservative government. And I’m not ashamed to shout it from the rafters.

It’s my money. I’ve worked damned hard – well, ok, those 6 years in Bermuda weren’t all that demanding – all my working life, and I deserve the right to make my own choices about what to do with it.

Retire Sign Shows Finish Work And Message Stock Photo

In broader terms, this is a metaphor for capitalism v socialism. The political right want to decrease taxation – personal, to maximise the disposable income in your pocket each month, so that you can decide where best to spend it; corporate, to encourage businesses to invest in people and physical assets. And yes, to make a profit, which should NOT be a dirty word.

The political left believe in increasing taxation to maximise taxes because they want to spend more on public services. Because they know better than us what we need. The Nanny State.

I know which philosophy I prefer. Capitalism – with a social conscience, of course. Socialism doesn’t work, in economic terms. It scares away the wealth creators, discourages inward investment and inevitably causes a downward economic spiral.

I know how I’m voting on May 7th. But if Messrs Miliband and Balls win – with or without the help of a rainbow coalition – at least I’ll be able to buy a car with my meagre pension pot, and drive off to another country. Before they change the rules again.

 

 

 

Pensions…a momentous day @ Just Retiring

I wrote on this site recently about our pension quandary.

3d Character With Question Mark Stock Photo

Image courtesy of FreeDigitalPhotos.net

Well, today is a momentous day in the Just Retiring household….I’ve sent off an income drawdown application pack to Hargreaves Lansdown, requesting payment of the maximum 25% tax-free lump sum from my pension pot, with the rest going into income drawdown.

Why go this route?

Well, I’ve stayed clear of annuities for the reasons I spelled out in the earlier article. And I like the flexibility of income drawdown, under current rules and the new ones proposed with effect from April 2015. Despite the remaining funds in drawdown staying fully invested so the return from that pot is not guaranteed, as it would be from the annuity route.

I’ll have to adjust my investment philosophy a little to rebalance my risk outlook, and also try not to get too emotionally involved with daily market fluctuations. Which is not easy when you’re worried that you’ll run out of money before you shuffle off your mortal coil…..

But the main short-term benefit is taking the 25% tax-free lump sum from my hard-earned pension pot. Come next May, who knows what a political football that could become…it’s potentially an easy target for certain political parties.

Retire Sign Shows Finish Work And Message Stock Photo

Image courtesy of FreeDigitalPhotos.net

Gill and I don’t know yet whether we’ll be working again after our current sabbaticals. We’ll see how long we can survive on the tax-free lump sum I’m about to get from my pension fund, and pray that UK politics and global economics don’t start nibbling – or worse, gobbling – away at the shiny new income drawdown pot.

Retirement is like a long vacation in Las Vegas. The goal is to enjoy it the fullest, but not so fully that you run out of money. Jonathan Clements

Cartoon Businessman Step On Stack Of Coin Stock Photo

 

Pensions….how much is enough?

So here’s the deal….

I’m 57. Gill’s 52. We’re on a break. No, not on a Ross & Rachel Friends break. A work break. Early retirement. A hiatus. A mature gap year.

And that’s the thing…we’re not really sure ourselves yet how long this intermission might last.

How come?

Pensions. How the *&^% do we know if we’ve got enough to get us through however long we need to get through, in the lifestyle and financial comfort that we’d like to get through it in?

We’ve been lucky – and sensible – enough to stash away some savings in a tax-efficient SIPP for the last 15 years, alongside paying off the mortgage. Largely thanks to what I earned and learned working for The Motley Fool and lovemoney.com, Gill’s hard work building up South Minster Kitchens, and using Hargreaves Lansdown’s excellent guidance and online platform to manage our pension savings. And not having children made a huge financial difference. And being teetotal and never going out, obviously.

Until fairly recently, your pension choices were limited, but clearer. Work until 65 for men, 60 for women. Start collecting your state pension from the Post Office every week (along with those really nice mint humbugs), and additionally – if you were lucky – get a monthly, fixed pension from where you worked for 40 years. And oh yes, it probably increased every year automatically, in line with inflation. And that occupational pension scheme income would probably have been a function of your final salary before retirement, rather than a measure of  how much your actual contributions ( personal and employer) had grown to. Not that I’m bitter, or anything.

Ah, how simple things were. Like having only 3 or 4 TV channels to choose from. Or deciding whether to go for a bottle of Liebfraumilch, or that exciting new slightly fizzy Lambrusco wine.

The recent changes to pensions have added flexibility and complexity to that simple – but outdated – view of pensions in retirement. And the further changes proposed by the current government to take effect in April 2015 will provide even more flexibility.

But here’s the quandary Gill and I have to wrestle with now…

  • we’ve got a defined contribution (aka money purchase) pension pot
  • we just missed out on the defined benefit (aka final salary) pension scheme era, giving a decent fixed inflation-linked income for life and certainty over your financial future in retirement
  • I won’t start collecting my state pension until 2023, when I’m 66. Gill will have to wait even longer, until 2029, when she’s 67.  And there’s every chance the dates will be pushed back even further before we get there. If we get there…
  • I’m over 55 so I can take 25% out of my own pension pot now, free of tax. Very nice, but without a current income for either of us that one-off lump sum will have to put food on the table, pay the council tax, and finance any of the fun stuff that we’d like to do while we decide what to do with the rest of our ageing lives
  • we could take an annuity from our current private pension pots. But because of  the prevailing global financial position and interest rate environment, annuity rates have been running at, or near, historic lows
  • for £100,000 saved in a defined contribution pension pot, I’d get roughly £400 a month or £4,800 a year, if I were to swap the remainder of my pension pot for an annuity now – ie an annual return of 4.8%, before tax. And that’s NOT inflation proofed and Gill would get NOTHING after I’ve popped my slightly older clogs
  • it gets worse. I’d only get an annuity income of around £200 a month or £2,400 a year now for £100,000 of pension savings – ie 2.4% return before tax, if I want to protect against the risk of inflation eroding my income and ensure Gill gets 50% of that meagre annuity income once I’ve snuffed it
  • so simplistically that would mean I would have to stick around a long time to make sure I got my money back from the annuity provider to whom I “sold” the pension pot

The only advantage of an annuity that I can see at these levels of return is certainty. You’ll know exactly what your income is for as long as you stay above ground.

Fortunately there is now an alternative. It’s called income drawdown. How does it work?

  • you leave your defined contribution/money purchase pension funds invested, without buying a fixed income annuity
  • you can take out a flexible income, based on what you need and subject at the moment to certain statutory limits (to make sure you don’t spend it all too quickly on fripperies and throw yourself on the mercy of the state too soon…but these restrictions could be lifted next April, and you would then be able to spend the lot on fripperies  and throw yourself on the mercy of the state)
  • the main risk of going into income drawdown is that your pension pot remains invested, so it is subject to market fluctuations – depending how you decide to leave it invested – and your income is not guaranteed

The other great unknown for an income drawdown pension is life expectancy. How long have you got left? The current risk adjusted life expectancy for me is 84, so let’s say another 27 years…..possibly more if I stay really fit and cut out that regular Friday night curry. And let’s say Gill lives to 86, that’s another 34 years for her…maybe closer to 40 if she’s anything like her Nan.

Can we really eke out our current pension pots for that long?

Despite the risks, I think I still find the income drawdown route more attractive than taking out an annuity. It puts quite a burden on you to make the right investment decisions, and not spend beyond your pensioned means, but at least it’s flexible and largely in your control. It is your hard-earned money, after all, and the current government’s attempts to recognise that are to be applauded.

I’ve highlighted some of the decision-making quandaries above, but I’ve still only really scratched the surface of things to think about in making such an important decision.

Why not take a mixture of guaranteed annuity and flexible drawdown income? What are all the other tax considerations, based on current legislation and also after the proposed changes due in April 2015? And what happens to our remaining pension pots, once we’ve both shuffled off our mortal coils, in any of these very different scenarios?

And there’s much, much more to ponder…but the greatest unknown remains the question of life expectancy. How galling would it be for us both to kick the bucket in 5 years time – tragically both crashing on the rocks during a cliff diving competition in Mexico – having taken out an annuity, so that the insurance company enjoys the fruits of our long labours more than we have?

Or if we go the income drawdown route and, thanks to healthy Madonna-like macrobiotic diets and staying fitter than a bunch of butchers’ dogs, both get telegrams from King William….but have run out of pension pot dosh at some time in our energetic 90s?

And there’s the rub. There are just too many variables to be able to make an absolutely correct decision NOW. Unless of course, you know that you’re definitely going to fall off your perch at 9 o’clock on Saturday night, just after Strictly, on 24th October 2026. Then you can really plan ahead, and cut your pension cloth accordingly.

I’ll write again on this mystical subject of pensions and let you know which options we follow, but for now I hope this article has at least highlighted some of the considerations we – and others – face approaching those allegedly golden years of retirement….

“You can always alter and adapt your plan….provided you have one.”
Manoj Arora, From the Rat Race to Financial Freedom