A Petition to Stop IHT on Pensions!

When change is forced upon us — such as the proposed inclusion of unspent pension funds within the scope of inheritance tax (IHT) — it’s easy to feel powerless and frustrated. It can seem as though the outcome is inevitable and beyond our control.

But perhaps it isn’t.

Pensions specialist Nathan Bridgeman has launched a petition urging the government to keep pensions outside the inheritance tax net. If you agree, you can make your voice heard by signing via the link at the bottom of this page — and consider sharing it with friends and family who may feel the same.

Bridgeman, who is the director of SeaBridge Ssas, had his petition accepted by the House of Commons yesterday (August 7) and currently has 137 signatures (it is now over 3,000).

The petition, titled ‘Stop the double tax of pension funds and death benefits’, outlines that the tax on pension funds and death benefits is a disincentive for most people to funding a pension. It highlighted how when a person dies, the new rules would result in a “disproportionate and unfair” double taxation — IHT and income tax — on beneficiaries.

“We think this double taxation — income tax and inheritance tax means a lot of beneficiaries may have to pay 67 per cent tax,” the petition said.

Bridgeman told FT Adviser his firm hears a lot about the family farm tax and winter fuel allowance, but this reform would also affect “hard working savers”.

“It feels morally wrong to move the goalposts especially for elderly people who don’t have time on their side to change their long-term tax and financial planning. Not all pensions are liquid.

“Our Ssas schemes own the family farm, factory, office or shop and it doesn’t just affect the business owner, it affects the company and employment as well as the pension fund that owns the property,” he added.

The petition needs 10,000 signatures for government to respond and 100,000 for it to be debated in parliament.

Bridgeman said his firm will continue to keep this topic on the agenda and hold the government to account.

“This tax grab is a disincentive to save into a pension and has huge and disastrous consequences given the pension ticking time bomb we face in the UK.

“We need stability in pensions, not for it to be used as a political football,” he said.

Bridgeman said he had already received 634 emails and messages from IFAs and pension savers thanking him for starting the petition and stating their intention to sign it.

You can sign the petition here.

As always, if you have any questions—about this topic or any other aspect of your financial planning—don’t hesitate to contact me. And if you know someone else who may find this information useful, feel free to pass it on.

Yours sincerely,

Graham Ponting CFP Chartered MCSI

Managing Partner

It’s the Climb!

I know I have rather inundated you with ‘Round Robin’ emails this month, but I thought the following was too important a message not to share.

The FTSE 100 and the S&P 500 in the States have delivered double-digit returns this year.

And while that’s great news for investors, it does have a drawback:

The over-use of the phrase “All-Time High”.

There are two problems with it.

First, the phrase itself (and it’s abbreviation “ATH”). It’s just a bit… American… isn’t it? No self-respecting, bowler-hat wearing, umbrella toting British investment index should be boasting so crassly*…

Surely the more appropriate response is something like this?

Source: Monty Python

Secondly, there’s the attention and emotion the phrase creates.

Because an “all-time high” sounds important. It feels like you should do something, right?

And often, we hear from clients in these moments, wondering if they should sell as “the market is near its peak” or something to that effect.

But markets aren’t mountains! It’s not a case of reaching the top, then having nowhere else to go! We’ve written about this before, but we think it’s worth repeating.

Stock markets should keep reaching higher levels as time goes on – that’s what investing is all about!

In fact, a new high point is usually a stepping stone, rather than a ceiling. A comparison of the UK and US markets makes it clear.

After the dot-com bubble burst in 2000, it took the FTSE 100 until February 2015 to climb back to its previous high point.

In the ten years since then, it’s reached a new high point 84 times (the orange vertical lines – some of them are really close together). That’s an increase of about 33%…

Source: 7IM/Factset. Past performance is not a guide to future returns.

… and here’s the same chart for the US market. 315 new highs since February 2015; for a return of nearly 200%.

Source: 7IM/Factset, Past Performance is not a guide to future returns

Its not just that new highs are normal. It’s that you NEED them for growth.

So, if we’re going to come over all American about it, might as well go full Miley Cyrus:

Ain't about how fast I get there…

Ain't about what's waiting on the other side…

Source: Miley Cyrus

As always, if you have any questions—about this topic or any other aspect of your financial planning—don’t hesitate to contact me. And if you know someone else who may find this information useful, feel free to pass it on.

Yours sincerely,

Graham Ponting CFP Chartered MCSI

Managing Partner

IHT on Pensions: Why Now Could Be the Right Time to Consolidate

The recent publication of draft legislation on Inheritance Tax (IHT) and pension death benefits, due to take effect from April 2027, brings greater clarity—but also increased complexity—for families dealing with bereavement and estate administration.

Under the new proposals, pension death benefits will be brought within the scope of IHT for individuals who die from 6 April 2027 onward, with the responsibility for reporting and paying the tax shifting from pension providers to personal representatives (PRs). This change has significant implications—especially for those with multiple, fragmented pensions.

What’s Changing?

The new rules introduce a 4-stage process:

1. Scheme Valuation
Pension scheme administrators will have 4 weeks from the date of death to provide PRs with a formal valuation. If the scheme has discretion over beneficiary payments, it must also confirm how much is going to exempt (e.g. spouse) and non-exempt beneficiaries.

2. PRs Value the Estate
PRs must collect valuations from all pension providers, add them to the value of other assets, and assess whether an IHT account is required.

3. IHT Account Submission
Where tax is due, the PRs must apportion the liability across all pensions, notify HMRC, and inform both beneficiaries and pension schemes of the tax amounts attributable.

4. Payment of Death Benefits

• If no IHT is due (e.g. spouse exemption or value below the nil-rate band), benefits can be paid immediately—without waiting for probate.

• If IHT is payable, the burden falls on both the PRs and the beneficiaries, who are jointly and severally liable for their share of the tax.

Beneficiaries' Options (If IHT is Due)

1. Request that the scheme pays the IHT directly to HMRC.

2. Take the death benefits and pay the IHT themselves (note: if the member died after age 75, this will also trigger income tax—but HMRC will reduce the chargeable amount by the IHT paid).

Where the pension and estate beneficiaries differ, PRs have the legal right to reclaim the IHT paid on pension benefits from the pension beneficiaries, ensuring fairness across all recipients.

Why Consolidation Matters

This all may sound straightforward, but let me assure you: it will not be.

In our experience—and Adam and I have decades of it—pension providers are notoriously slow, inefficient, and error-prone when it comes to even the simplest of administrative tasks. And unfortunately, when families are grieving and vulnerable, this kind of avoidable chaos only makes things harder.

In my “Round Robin” of 22nd July, I noted:

“This complex process will cause bereaved families confusion and stress at a difficult time and doesn’t fit well with the support firms may want to provide people who are likely to be vulnerable following the death of a loved one.”

One simple but powerful step you can take to reduce future stress for your loved ones is to consolidate any fragmented pensions into a single, well-managed scheme. It will mean fewer valuations, less complexity, and more efficient communication between your representatives and the provider—just when clarity and simplicity are needed most.

What You Can Do Now

If you’d like to review your existing pension arrangements and explore the benefits of consolidation, please get in touch. We can talk through the options and assess whether consolidation is suitable for your personal circumstances.

As always, if you have any questions—about this topic or any other aspect of your financial planning—don’t hesitate to contact me. And if you know someone else who may find this information useful, feel free to pass it on.

Yours sincerely,

Graham Ponting CFP Chartered MCSI

Managing Partner

Poor savings rates and inflation wipe 11p off every £1!

Any financial planner worth their salt will tell you that holding large cash balances as part of your long-term investment strategy is almost always a poor choice. Historically, cash has been a weak hedge against inflation—while your balance may grow slightly with interest, its real value (or purchasing power) typically erodes over time. To make matters worse, many people with substantial cash holdings fail to seek out competitive interest rates, which only compounds the negative impact.

 With the above in mind, I was drawn to the article below by George Nixon in yesterday’s Sunday Times Money Section.

 “Pitiful interest rates and high inflation have wiped an average of 11p off the value of every £1 left in a savings accounts over the past five years.

The financial data firm Moneyfacts said that its calculations suggest that the average savings pot has lost 11 per cent of its value, and it called for the Bank of England to keep its base rate at 2 percentage points above the rate of inflation to stop savers’ money being eroded by inflation.

Moneyfacts said that since 2020 the average annual consumer prices index (CPI) measure of inflation has ranged from a low of 0.9 per cent in 2020 to 9.1 per cent in 2022, while average savings rates ranged from as little as 0.5 per cent in 2021 to 3.86 per cent last year. It said that £1 saved in 2020 that earned the average savings rate would now be worth 89p in real terms after inflation.

It comes as the chancellor, Rachel Reeves, is considering a shake-up of cash Isas to encourage savers to invest their cash instead.

Moneyfacts argued that the Bank of England’s base rate, which affects mortgage and savings rates, should be set at about 2 percentage points above the CPI measure of inflation, which the Bank aims to keep at 2 per cent.

Adam French from Moneyfacts said: “The Bank of England must play its part in setting sustainable rates that reward savers and ensure a steady supply of deposits which can be used to fund mortgages, loans and other consumer credit products.”

Bank rate was at historic lows from 2009 for more than a decade — bad news for savers but great for anyone with a mortgage. It then rose rapidly from its all-time low of 0.1 per cent in December 2021 to a 15-year high of 5.25 per cent in August 2023 as the Bank tried to tackle inflation, which peaked at 11.1 per cent in October 2022. Bank rate has been cut four times to 4.25 per cent over the past year, and is forecast to gradually fall to about 3.5 per cent by next year. CPI inflation for the past year was 3.6 per cent.

All this has meant that there have not been many times in the past decade when savings rates have not beaten inflation.CPI averaged 9.1 per cent in 2022 but savings rates were 1.48 per cent on average, Moneyfacts said. Savings of £10,000 would be worth £10,148 after a year at a rate of 1.48 per cent, but if inflation was 9.1 per cent, that money would be worth £9,302 in real terms.

French said that during the 12 years between 1995 and 2007 savers enjoyed returns at an average of 2.06 percentage points above the rate of inflation.

Economists and campaign groups disagreed with Moneyfacts’ call to keep Bank rate at 2 percentage points above CPI. They said the Bank had a responsibility to set rates based on the needs of the wider economy.

Julian Jessop from the Institute of Economic Affairs, a free-market think tank, said: “The appropriate ‘neutral’ interest rate should not just depend on what is best for households. A common rule of thumb is that the real interest rate should be set equal to the potential growth rate of the economy, which would point to a rate below 2 per cent.

“What’s more, the Bank’s main job is to control inflation. If this means that interest rates have to be significantly higher than the neutral level for a prolonged period, or significantly lower, then so be it.”

Simon Youel from Positive Money, which campaigns for a more democratic financial system said high street banks, rather than the Bank of England, deserved more of the blame for savers’ poor returns.

He said: “Bank rate was more than 2 percentage points above inflation for much of 2024, but this didn’t mean a better deal for savers — the problem is that profiteering banks resisted passing on higher rates to customers.”

The big high street banks — Barclays, HSBC, Lloyds and NatWest — were repeatedly criticised by campaign groups and MPs for failing to pass on higher interest rates to savers and paying 2 per cent or less on easy-access savings accounts when Bank rate was at its peak.

Barclays now pays 1.16 per cent, HSBC 1.3 per cent, Lloyds 1.05 per cent and NatWest 1.15 per cent on their easy-access accounts. In May last year the Bank of England said the passing on of its higher base rate to easy-access rates had been “partial and slow overall” and that savings rates were about 2.5 percentage points below Bank rate.

Youel said: “High interest rates are a form of economic rent and should be kept as low as possible.

“The Bank of England targeting interest rates of 2 percentage points above inflation would mean households and businesses paying huge rents to banks, and would probably stifle investment and employment.”

For now savers should try to make sure that their money earns as much as possible. The app-based bank Chase is paying up to 5 per cent on an easy-access account, if you already have a current account. GB Bank has a one-year fixed rate of 4.53 per cent.

Anna Bowes from the financial advice firm The Private Office said: “Even though inflation is stubbornly sticky, the good news for cash savers is that there are plenty of savings accounts that are paying more than 3.6 per cent for those prepared to shop around.

“It’s a shame that so many people leave their cash festering in a low-paying account with a high street bank.”

Interest rates are on a downward trajectory, meaning today’s attractive rates may not be around for much longer. If you're currently holding a large cash balance, now could be an ideal time to reassess whether that strategy still makes sense. I’d be happy to advise on alternative approaches—ones that aim to outpace inflation, the silent killer of long-term wealth.

That said, it's important to note that everyone should maintain a reasonable cash reserve for short-term emergencies or known upcoming expenses. It's not about eliminating cash entirely, but about being strategic with the excess.

Please feel free to pass this to anyone who might find it interesting. 

As always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.

Yours sincerely,

Graham Ponting CFP Chartered MCSI

Managing Partner

The results are in, and it’s not good news!

As you know, we have been awaiting the result of the government's consultation on whether to apply Inheritance Tax (IHT) to unspent pensions; well, we don’t have to wait anymore.  

The following is an article by Alina Khan in today’s FT Adviser:

“Published yesterday (July 21), the government put out its draft legislation to apply IHT on unused pensions funds and death benefits.

Although the proposals remain largely unchanged from when Rachel Reeves announced them in the Autumn Budget, the government has made a few revisions to what it had previously announced.

Between October 2024 and January 2025, the government consulted on the process for reporting and paying IHT on unused pension funds and death benefits.

It proposed that pension scheme administrators would be liable for reporting and paying any IHT on the pension element of an individual’s estate.

Following the consultation, the government has announced personal representatives rather than pension scheme administrators, will be liable for reporting and paying any IHT due on unused pension funds and death benefits from April 6, 2027.

It also confirmed death in service benefits payable from a registered pension scheme will remain out of scope of IHT.

Government has ‘blown its opportunity’

Roddy Munro, pension specialist at Quilter, was thankful government had listened to some responses but was concerned without further amendments, how the policy was actually enacted risked “turning a targeted tax reform into an administrative minefield.”

“What we could end up seeing is a massive transfer of private wealth back to the state. What’s more, while only a small fraction of estates will pay more tax, a far greater number will face needless complexity, delays, and stress — often at the worst possible time,” he said.

HMRC has blown its opportunity to bin the original proposals, stubbornly sticking with a system that will create confusion, complexity and additional costs for bereaved families.

Rachel Vahey, AJ Bell

Andrew Tully, technical services director at Nucleus Financial was disappointed to see the government had not listened to “very strong views” that using IHT was not the best option to boost Treasury coffers.

“Including pensions within the IHT environment will deliver poor outcomes for customers, beneficiaries, personal representatives, the industry, and HMRC.

“This complex process will cause bereaved families confusion and stress at a difficult time and doesn’t fit well with the support firms may want to provide people who are likely to be vulnerable following the death of a loved one.”

A report released this month by The Investing and Saving Alliance, found alternative policies could raise the same level of tax revenues as bringing IHT into the scope of pensions.

Rachel Vahey, head of public policy at AJ Bell said: “HMRC has blown its opportunity to bin the original proposals, stubbornly sticking with a system that will create confusion, complexity and additional costs for bereaved families.

“Options were put forward by the industry which would have been far more straightforward than bringing unspent pensions into IHT, while still raising the same amount of tax.

“Although most savers will be unaffected and should not need to change their financial plans, some now face difficult choices about how best to arrange their finances. Many have saved and invested in good faith and now face the possibility of punitive rates of taxation when passing pension money to their loved ones.

“Bereaved families also face a huge administrative burden, with the government insisting they settle the IHT bill within six months. Many people have complex financial affairs, especially those who die unexpectedly, meaning settling the bill quickly may not be straightforward.”

Despite this disappointing outcome, it is important to remember that nothing will change until after 6th April 2027 (pension funds remain outside of one’s estate until then), and so making a knee-jerk reaction to this news will almost certainly be counterproductive.

Rest assured, I will be in touch again with my planning suggestions once the dust has settled on this news.

Please feel free to pass this to anyone who might find it interesting. 

As always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.

Yours sincerely,

Graham Ponting CFP Chartered MCSI

Managing Partner

Financial Advice improves clients' finances – it’s official!

I hope I'm preaching to the choir here, but I hope you'll find the following from sonia.rach@ft.com interesting and/or reassuring.

“Almost two in five (37 per cent) of advised Brits have said they are £40,000 or more better off thanks to professional financial support.

Research from Standard Life’s Retirement Voice report indicated that three in four (77 per cent) people who receive financial advice believe their adviser has made them financially better off.

One in eight (13 per cent) of respondents estimated their financial adviser has helped to grow the total value of their pension, savings and investments by £30,000 to £40,000.

Some 14 per cent think advice has increased their finances by £20,000 to £30,000.

Warren Bright, head of intermediary advised distribution at Standard Life, said: “In today’s tough economic climate saving for day-to-day expenses, never mind the future, can be difficult.

“Professional advice helps to deliver tangible benefits for those speaking to an adviser — not only in monetary terms, but also in levels of confidence and financial wellbeing.

Standard Life’s research also found that ongoing advice delivers several benefits compared to taking advice on a less regular basis.

Among those who have an ongoing relationship with an adviser, 82 per cent said advice had improved their finances, compared to 72 per cent of those who said they only spoke to an adviser on an ad-hoc basis.

Furthermore, those who have frequent contact with an adviser were more likely to consider they are delivering value for money than those who took advice as and when they needed it (84 per cent vs. 79 per cent).

According to Standard Life, they were also more inclined to believe that their standard of living was better because of their adviser’s services (74 per cent vs. 65 per cent).

The research revealed that ongoing advice can also help to improve people’s financial wellbeing, with 77 per cent indicating feeling confident they know their options for using their pension savings.

Among retirees, those who take ad hoc advice are twice as likely to worry that they’re making bad decisions with their retirement finances than those who are still in regular contact with their adviser (21 per cent vs. 10 per cent).

Bright said: “We know that those who have an ongoing relationship with an adviser are more likely to enjoy these benefits than those who take advice on an ad-hoc basis, or not at all.

“With significant structural changes to the advice framework pending, the introduction of targeted support and anticipated moves to address adequacy, the role of professional advisers in helping build the financial security and confidence of more UK savers has never been more important.

“Professional, personalised advice will continue to play an important role in helping people make smart financial decisions, feel more secure about their financial position and achieve their long-term goals.”

sonia.rach@ft.com

Please feel free to pass this to anyone who might find it interesting. 

As always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.

Yours sincerely,

Graham Ponting CFP Chartered MCSI

Managing Partner

‘IHT on Pensions does not work at all’

An interesting headline, but just because someone doesn’t think it will work doesn’t mean it still won’t happen.

The following is a brief article by Alina Khan, published in FT Adviser, discussing the potential application of Inheritance Tax to pension funds on death, as proposed by Rachel Reeves in her Budget last October. While we await the outcome of the ongoing consultation on this issue, I thought you might find the piece insightful. It highlights how various stakeholders are exploring creative and possibly more workable alternatives for generating tax revenue from pensions upon death.

“There will always be winners and losers with any new tax policy but it is better than having a policy that does not work at all, according to Tom Selby, director of public policy at AJ Bell.

Speaking as part of a panel discussion at a Tisa (The Investment and Savings Alliance) report launch, Selby alongside Kirsty Anderson, retirement and tax specialist at Quilter and Andrew Tully, technical services director at Nucleus, discussed alternative policies to the government’s plan to bring IHT into the scope of pensions.

The report by Tisa looked at two alternative proposals.

These were for inherited pension pots and DB lump sum death benefits to only be taken as taxable income over time if the beneficiary is a dependent.

The second was for a standalone flat rate ‘inheritable pension tax charge’ to be paid on all unused pension funds and DB lump sum death benefits above a threshold.

Selby pointed out that with any new policy there will inevitably be some losers but that was better than the current proposal, which he said did not work.

“Whatever is brought forward [by the government], whether it will be IHT [on pensions], one of the two proposals from the report or something else entirely, people are going to pay tax on death in a way they don’t pay tax on death at the moment,” he said.

Any challenges a new tax policy would bring would need to be “worked through”, according to Selby but he reiterated there would always be some losers in any scenario.

The current proposals to bring IHT into the scope of pensions was the most “complex, convoluted and time consuming” way to tax pensions on death, Selby said, urging the government to take a step back and fully examine whether IHT was the best route to go down to raise revenue.

Poor consumer outcomes

Tully believed the current proposals would cause poor outcomes for everyone, from beneficiaries who will receive benefits slower, to personal representatives who will have more work to do and ultimately for HMRC who will get money slower.

He felt the proposals laid out in the Tisa report would speed up the process and allow beneficiaries to access funds quicker.

“If we can get the money out to beneficiaries quickly, within a couple of months, that has to be much more preferable than waiting nine to 10 months,” he added.

Tully also pointed out many people have multiple schemes and therefore the process may be delayed due to one scheme taking longer than others to process the request, if the current proposals were to go through.

“Having to wait until the slowest common denominator [the pension scheme] figures out what they are doing in a year’s time, before everyone else can start paying out, doesn’t feel like a particularly helpful situation.

“So being able to leave each scheme to pay money out as quickly as possible can be a huge benefit for the beneficiaries,” he added.

Although it was not part of the modelling in the Tisa report, Anderson felt it was important to mention consumer behaviour and how the government’s proposals would discourage people from saving into their pension because of the unknown IHT liability.

Speaking to advisers, Anderson had anecdotally heard of many questioning the point of using pensions going forward if people will be penalised for saving into them.

“While it [pensions] will change and evolve it will definitely still have its place but if people are no longer going to save into their pensions or not save as much, it is going to possibly move the reliance back on the state. It is something we need to consider,” she said.

Renny Biggins, head of retirement at Tisa, similarly had heard anecdotal evidence of clients being advised to draw their pension down quicker with people in the future potentially not contributing as much because of the IHT liability.”

alina.khan@ft.com

Rest assured, as soon as the results of the consultation are published, I will be in touch again.

Please feel free to pass this to anyone who might find it interesting. 

As always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.

Yours sincerely,

Graham Ponting CFP Chartered MCSI

Managing Partner

Pricey Pineapples

A short Wimbledon inspired piece this week.

But it’s not about what’s happening on the grass… no, our eyes are already on the trophy.

In particular, the pineapple on top of the men’s trophy

Source: All England Lawn Tennis and Croquet Club

It seems to have captured attention this year, with lots of people asking about its meaning and history.

But actually, it’s not just Wimbledon. If you keep your eyes open in London, you start to see evidence of a bit of an obsession with the fruit:

Source: Wikimedia Commons

The pillars at the ends of Lambeth Bridge… topped by pineapples.

… golden pineapples on the railings in Devonshire Square…

… and if you look closely at the top of the south towers of St Paul’s Cathedral*… yup. Pineapple*.

Not just London of course – head up to Dunmore on the River Forth in Scotland to see the most spectacular of all https://www.nts.org.uk/visit/places/the-pineapple

So what gives?

In the 1700s, pineapples were the ultimate luxury good. They were basically impossible to import from the “New World” without them rotting – only one or two might make the journey across the Atlantic in a fit state to be eaten.

The surviving specimens ended up on the royal tables of Europe, where they had the double win of being unusually delicious and rare as to be priceless. And of course, once a king has something… the lords and ladies want it too.

So they started building greenhouses (called “pineries”) to grow their own – at Kew Gardens, Hampton Court Palace and Kensginston Palace. In 1764, it cost about £80 to grow a single pineapple – roughly £12,000 in today’s money.

Rich families would ostentatiously serve pineapples at dinner parties. Slightly less rich ones would simply have the pineapple on the table (often re-using it multiple times). And there was even a roaring trade in pineapple rental for a single evening; it really was the ultimate status symbol.

And like all symbols, it spread everywhere. Pineapple = wealth and luxury.

But technology changed everything – steamships, canning and refrigeration meant that by 1822, a pineapple could be bought for about 25p in today’s money… the rare becomes the everyday.

Or does it…

https://freshdelmonte.com/rubyglow/

Del Monte currently have this “special” red pineapple available for $395! Tastes just like being back in the 17th century (I assume).

*In fact, London may have dodged a bullet there - architect Sir Christopher Wren allegedly wanted the main dome of St Paul’s to be a pineapple 60ft high!

Please feel free to share this with anyone you think might find it interesting. 

As always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.

Yours sincerely,

Graham Ponting CFP Chartered MCSI

Managing Partner

Bidding is Big Business

he most valuable painting ever sold at auction was Leonardo da Vinci’s Salvator Mundi. Sold for $450m in 2017.

Source: Leonardo da Vinci - Getty Images https://commons.wikimedia.org/w/index.php?curid=64103353

And it was sold, broadly, in an auction process which is in your mind’s eye already. You know, something like this:

Source: Sotheby’s

A rapid-fire auctioneer gabbling and gavelling away, as people make curious gestures (a bit like in the painting) to signal their bid.

But.

There are auctions happening constantly which make $450m look like pocket change.

In particular, internet search. Google searches generate about $260 BILLION per year in advertising revenue*.

The sponsored slot at the top of the screen? That’s the most valuable.

Source: Google

Now, Google don’t use a gavel. They use something called Generalised Second Price auctions (GSP) to try to make sure that no-one pays too much or too little:

•  All sellers say their maximum bid to appear in the top slot.

• The seller with the highest bid wins (obvs).

• But they pay the next highest bid.

So, in the search above, for slot #1 Sports Direct would pay whatever Adidas had bid. And Adidas would pay whatever Hoka had bid. And so on.

The psychology of it is this:

• Imagine Sports Direct were prepared to bid £200 for slot #1.

• Imagine Adidas were prepared to bid £100 for slot #1.

• Sports Direct’s ideal would be to pay £100.01 – juuuuuust enough to beat Adidas, and saving itself £99.99 it doesn’t need to pay.

• So, Sports Direct pays £100 (Google is prepared to miss out on the extra 1p to keep advertisers coming back)

• And Adidas’ pain at coming second is eased by knowing that it will pay HOKA’s third-place price for a second-place slot.

Everyone’s annoyance at losing the auction is cancelled out by getting the next-best spot at a discount! And all of this is happening in the background every time someone searches for anything.

Lots of papers have been written on whether this is the best theoretical system** … but as Google has been using it since 2004, I reckon it’s more than smart enough!

I’ll leave you with our favourite auction story.

In 2015, a Chinese billionaire bought a Modigliani painting for $170 million. And he bought it on a credit card, so that his family could bank the reward points and “continue flying for free”! I guess that’s how you stay a billionaire…

Please feel free to pass the newsletter link on to anyone you think might find it useful. 

As always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.

Yours sincerely,

Graham Ponting CFP Chartered MCSI

Managing Partner

What’s the most successful advertising campaign in history?

Coca Cola rebranding Santa Claus to red and white has to be up there. Nike with “Just Do It” perhaps? More parochially, I’ve had Hastings Direct’s telephone number in my head since childhood: “0800 Double 0 1066”

Nah. There’s one that’s so good, it created a social norm (and a Bond film).

“A diamond is forever”

Source: Diamonds Are Forever

Launched by De Beers in 1948 to try and boost flagging sales of diamonds after the war, they made up the whole tradition of engagement rings.

Just. Made. It. Up!

And the psychology of it was super smart:

Source: De Beers

It even told someone how much to spend!

In 1940, 10% of engagement rings had a diamond. By 1980, 80% of rings were bling. And De Beers’ sales in the US went from $23 million to $2.1 billion. Today, the global diamond ring market size is over $80 billion.

Now that’s a good campaign!

But. Technology is changing the game.

Because in 1948, you bought a natural diamond (usually from De Beers), or you bought nothing.

But in the last two decades, clever people have worked out how to create artifical diamonds, some of them purer than anything found in the ground.

And the lab diamonds are now selling for about a tenth of the price of a natural one:

https://www.paulzimnisky.com/Lab-Diamond-Sales-Grow-as-Prices-Fall

And, no matter how good your branding, price eventually starts to tell. Lab diamonds now account for nearly half of all diamond engagement rings**. Ten years ago, that number was basically zero.

De Beers are now being priced out of the market they created! Billions of people will keep buying engagement rings. But they won’t be De Beers diamonds.

Doesn’t matter where you look in the world, from diamonds to football clubs to semiconductors.

Someone is always coming for the king.

As always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.

Yours sincerely,

Graham Ponting CFP Chartered MCSI

Managing Partner