Don't invest unless you're prepared to lose all the money you invest. This is a high-risk investment and you are unlikely to be protected if something goes wrong.
Take 2 mins to learn more
Risk Summary

Estimated reading time: 2 min

Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.

What are the key risks?

  • You could lose all the money you invest
  • Most investments are shares in start-up businesses or bonds issued by them. Investors in these shares or bonds often lose 100% of the money they invested, as most start-up businesses fail.
  • Checks on the businesses you are investing in, such as how well they are expected to perform, may not have been carried out by the platform you are investing through. You should do your own research before investing.

You won't get your money back quickly

  • Even if the business you invest in is successful, it will likely take several years to get your money back.
  • The most likely way to get your money back is if the business is bought by another business or lists its shares on an exchange such as the London Stock Exchange. These events are not common.
  • Start-up businesses very rarely pay you back through dividends. You should not expect to get your money back this way.
  • Some platforms may give you the opportunity to sell your investment early through a 'secondary market' or 'bulletin board', but there is no guarantee you will find a buyer at the price you are willing to sell.

Don't put all your eggs in one basket

  • Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well. A good rule of thumb is not to invest more than 10% of your money in high-risk investments. Learn more here.

The value of your investment can be reduced

  • If your investment is shares, the percentage of the business that you own will decrease if the business issues more shares. This could mean that the value of your investment reduces, depending on how much the business grows. Most start-up businesses issue multiple rounds of shares.
  • These new shares could have additional rights that your shares don't have, such as the right to receive a fixed dividend, which could further reduce your chances of getting a return on your investment.

You are unlikely to be protected if something goes wrong

  • Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker.
  • Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated platform, FOS may be able to consider it. Learn more about FOS protection here.

If you are interested in learning more about how to protect yourself, visit the FCA's website here.

For further information about investment-based crowdfunding, visit the crowdfunding section of the FCA's website here.
Insights
Industry Insights
Michael Johnson
· 6 min read
· Updated on

Making sense of pensions and the day Jean Chatzky caused a Twitter uproar

I am by no means a social media expert; I often find it difficult to predict what output will capture attention and what won’t. Fortunately, I work with some really smart people who understand social media much better than I do.

But I don’t believe that even they could fail to be surprised by the contrast between the interest shown in two adjacent tweets issued by US financial journalist Jean Chatzky.

snippet

To be clear, I’d be delighted if I reach a position where one of my tweets achieves 17 comments, 30 retweets and 82 likes. But the intense interest in Chatzky’s subsequent post underlines just how powerful social media can be: 1,600 comments, 1,200 retweets, and 4,100 likes (and counting).

I read a selection of the comments and on balance these comments were critical and sometimes dismissive. To paraphrase, ‘how could anyone hope to achieve these salary multiples on top of all other living costs?’ was a common refrain. These comments were perhaps symptomatic of a wider, long-running issue around intergenerational wealth inequality.

Whilst no social media pioneer, I like to think I’m fairly handy with a spreadsheet. Combined with the good fortune of an employer who thought this would be interesting to look at more closely, I set about modelling the financial implications of Chatzky’s targets for UK residents earning average salaries.

As with all financial modelling, this required a bunch of assumptions. These are listed at the end of this blog post; all are designed to be realistic, but like all assumptions are nonetheless contestable.

UK tax and pensions

The principle of the UK government encouraging citizens to plan for retirement through a contributory pension is almost one hundred years old.

Individual tax relief on contributions was first introduced in the 1921 Finance Act. The intention of the tax incentive is to encourage citizens to defer cash whilst in work to fund a more comfortable retirement. This is part of a ‘life-cycle’ approach to financial planning, which recognises that individual demand for and supply of cash are not coterminous over the life course.

Tax relief on contributions is capped for all UK residents in two ways.

1. The first is a life limit, which is £1million for everyone. This is immaterial to someone who retires after 45 years of work on a median salary: 10x the final median salary (the final ‘Chatzky milestone’) would be significantly less than £1million.

2. The second is an annual limit that is £40,000 for all except additional-rate taxpayers, for whom it reduces on a graduated scale until it reaches £10,000. For a more detailed exposition of the UK pension framework, download our free Guide to Tax Efficient Investing.

The model demonstrated in this blog post recognises that tax relief will be available on pension contributions. Tax relief is available at the marginal rate of tax that would be paid on the pound.

Median earners did not enter the higher-rate income tax band at all between 1999/2000 and 2014/15 and are assumed to pay standard-rate income tax throughout the model.

Growth in investment value

Investments offer the potential to grow in value, as well as deliver income through dividend payments. The longer the time horizon over which these investments are held, the greater the opportunity to deliver growth.

Pensions are perhaps the longest-term investment any of us will make. Beginning to make pension contributions at an early stage of the working life is hugely advantageous in this respect, particularly if the value of the pension investments increases rapidly.

The model varies the rate of return delivered by pension investments to demonstrate just what a significant impact this can have.

Putting the model to the test

The figures below identify the contributions that are required to hit the ‘Chatzky milestones’. These should be interpreted as follows:

  • The yellow line refers to the annual percentage of income that needs to be contributed to meet the next - and cumulatively every - milestone; this should be read against the right-hand y-axis. The highest and lowest annual percentages are highlighted on each chart.

  • The stacked bars comprise the three separate sources of pension contribution: return on investment (orange), personal income (blue), and tax relief (grey). A fourth (green) bar signifies any return on investment that exceeds the required annual contribution. These correspond with the left-hand y-axis.

  • Three scenarios have been developed. The only variable that has been altered is the annual growth in the value of the investment. The profile of contributions is identical across the three scenarios, but the source of the contributions varies noticeably.
  1. Scenario A assumes an annual growth of 1.0% over 45 years.
  2. Scenario B assumes an annual growth of 4.0% over 45 years.
  3. Scenario C assumes an annual growth of 7.0% over 45 years.

Although the notion that the rate of growth would be constant over 45 years is improbable, the rates of growth represent realistic averages.

Scenario A: Annual investment return of 1.0%

In scenario A, the value of the pension investments increases by just 1.0 per year.

Contributions as a percentage of annual earnings are maximal at 26.5% (aged 41) and minimal at 9.4% (aged 60). This contribution profile demonstrates that achieving the milestones is possible, even with a low rate of investment return.

However, achieving this would require financial discipline, particularly during when aged 31-40, when contributions hover around 25% of earnings.

1.0

Scenario B: Annual investment return of 4.0%

In scenario B, the value of the pension investments increases by 4.0 per year. Contributions as a percentage of annual earnings peak at 19.4% (aged 41) and – because of the higher return on investment – fall to zero from age 51.

Because the return on investment exceeds the requirement from this point, the final pension pot is worth £33,500 more than the model requires.

4.0

Scenario C: Annual investment return of 7.0%

In scenario C, the value of the pension investments increases by a generous 7.0 per year.

Contributions as a percentage of annual earnings are maximal at 16.4% (aged 41) and – because of the higher return on investment – fall to zero from age 49.

Because the return on investment exceeds the requirement from this point, the final pension pot is worth fully £153,000 more than the model requires.

7.0

Are the ‘Chatzky milestones’ realistic?

The thresholds generated by the milestones determine that contributions as a proportion of income are higher at the start of a new life decade and gradually reduce over the subsequent nine years.

The reality for many people is that financial decisions are slightly more reactive and often based on disposable income, rather than earnings. Disposable income may not follow the same life-course profile as earnings.

If this favours greater disposable income in the younger years, this might enable people to exceed the milestone at 30 years of age, to reduce the contributions required at a later date; this enables them to benefit from growth in investment value.

If, however, they fall behind the early milestones, they may seek to retrieve this in later life. This may be possible if they have greater disposable income (e.g. once children become financially independent), but their smaller investment pot will benefit less from increases in investment value.

Moreover, whilst a pension remains a very good long-term investment product, it should not automatically take precedence over competing, more immediate demands upon cash.

For example, a parent may consider moving house to fall within the catchment area for a better school for their children. How would the outcomes that using their cash in this way compare against pension contributions? That’s tough to say with any authority, but it would be hasty to automatically advise against doing so purely to achieve the milestones.

The challenge presented by the ‘Chatzky milestones’ is also their virtue. Meeting the targets at the end of each ten-year period provides a requirement that enables the pension pot to benefit from growth in value over a long period. However, this also provides inflexibility that might make the targets difficult to adhere to.

Final thoughts

This is really all about personal financial planning. The fundamental principles of Chatzky’s original claim are that (a) planning for retirement is in each individual’s best interests; and (b) that the earlier in the working life this is addressed, the better.

The model demonstrates that this is broadly correct, but that the return on investment that pension contributions achieve can be hugely influential: the lower the return on investment, the more burdensome the contribution on current earnings, particularly for people striving to hit milestones at age 40 and age 50.

Two thoughts on which to close:

  1. Pensions are not unique in offering income tax relief. VCTs, EIS and SEIS all offer income tax relief on investments at rates that exceed the current standard rate of income tax. SEIS investments even offer income tax relief at a rate (50%) that exceeds the current additional rate of income tax. Although these investment schemes have qualification criteria, they nonetheless give the opportunity to access capital before retirement without incurring a direct penalty.
  2. Pensions are not homogenous; this post has focussed on the contributions that someone earning an average salary would be required to make to achieve the milestones originally set out by Jean Chatzky. If you’re a business owner, you may instead want to consider more hands-on pension products, such as Small Self Administered Schemes (SSASs). SSASs offer a range of benefits to you and your business; find out more about SSASs by watching our on-demand webinar with Terry Dunbar, CEO of SSASCo.

A guide to tax efficient investing - download your copy

[Model assumptions]

  • A 45-year working life. Some people will work for fewer years, some people will work for more, but this as good an estimate as any.
  • That growth in absolute median earnings followed the trend observed in the UK between 1999/2000 and 2014/15. This trend has been extended to cover a 45-year working life.
  • That the proportion of overall median earnings earned by different age groups (in five-year bands) in 2014/15 can be applied consistently through the model. Inevitably, some age groups exceed the overall median (e.g. 40-44, by 23%) and some fall below it (e.g. 20-24, by 29%).
  • That people contribute to their next ‘Chatzky milestone’ proportionate to their salary. If their next ten-year target was £19,200 and they earned 8.6% of their period earnings in year one, they would contribute of £1,646.
Driving Growth.
Creating Value.
Delivering Impact.

Backed by

Growth Capital Ventures (GCV) is backed by funds managed by Maven Capital Partners, one of the UK’s leading private equity and alternative asset managers.