London’s West End season is wrapping up for another year (#sad). There are no surprises with Olivier 2018 nominations – Hamilton features in almost every category. Good. If you haven’t yet seen it, you should.
Like any Londoner with a square foot of outside space I own a compost bin. It houses remains of several years’ worth of leaves and hedge trimmings and not a single scrap of kitchen waste. Because: I also own a wormery – a lidded bucket which is home to several thousand tiger worms (eisenia foetida).
Vermicomposting involves joint action of worms and microorganisms to break down organic waste. Since the process doesn’t rely on heat, it can be done on a small scale and entirely indoors.
The journey so far
I have been vermicomposting for three years. It hasn’t always been smooth sailing.
My first attempt ended in mass worm death. I took their bucket outside and chanced to placed it under a broken gutter. It rained heavily for several days. The wormery should have been able to cope with rain, but I guess a constant drip from a broken gutter was a stretch too far. It filled with water, the worms drowned. I felt bad about it.
In last summer’s heatwave we came close to another accident. It was 30 degrees in the shade, I hadn’t checked up on the worms for a couple of weeks, the wormery needed emptying of compost, I procrastinated. When I finally lifted the lid there was a layer of semi-dead barely moving worms on the surface. Decisive action saved the colony. They wouldn’t have lasted much longer.
The eco angle
Is having both indoor and outdoor composting facilities an overkill? Not for me.
In winter I rarely go out in the garden. If I didn’t have a wormery, in the cold months most of my kitchen waste would end up in the rubbish bin, thus adding to my landfill footprint. Because: my faults are legion and laziness is definitely one of them.
Luckily my worms don’t share my vices. These amazing little organic factories work tirelessly day and night transforming tea bags, pizza crusts and apple cores into a thick lavender hedge and several healthy rose bushes.
It may be doubted whether there are many other animals which have played so important a part in the history of the world, as have these lowly organised creatures.
– Charles Darwin
Even my long-suffering house plant perked up once I started feeding it worm fertiliser, else it would’ve been dead and composted a long time ago 😉
The composting angle
My garden is too small to keep the outdoor compost bin constantly supplied with carbon for the right C:N ratio (about 30:1). Some of my friends’ bins are fly-infested receptacles of smelly gelatinous mess because of that reason, especially in spring when there are no fallen leaves to balance out nitrogen-rich kitchen scraps. With a tiny garden like mine, wedged in among terraced blocks of flats, this could provoke unwanted scrutiny from delicate neighbours, the council, and other assorted vermin.
It may be counterintuitive, but a small compost bin is more difficult to look after than a large compost heap. It’s more sensitive to outside temperature variations – there’s little to be done about it without turning composting into a full-time job – and there’s less leeway for mistakes.
A wormery can take a larger proportion of nitrogen than the outdoor bin. Worms eat the waste, so it doesn’t have time to rot or ferment; good drainage and ventilation keep anaerobic bacteria in check. This is further helped by worms burrowing in the compost and me occasionally digging in it as per instructions, and because I want to see the worms 🙂
Manufacture of synthetic fertilisers produces large amounts of greenhouse gas. On top of this, soil microbes convert excess nitrogen unabsorbed by plants into nitrous oxide, so a large chunk of the liquid synthetic plat food that people pour on their flower beds goes up in the air.
Worm compost is better for the environment than synthetic fertilisers: the nutrients are released slower, plants have more time to absorb them and less of the good stuff ends up in the atmosphere. It is also full of microorganisms that enrich the soil and help keep the plants healthy. And best of all, it’s all free 😀
Worms make great pets
My worms live in the cellar in winter and out on the patio in a shaded corner in summer. There’s no smell. If I stick my nose into the bucket and sniff hard, the most I get is a damp earthy smell, like a tomato plant.
Worms are quiet, don’t annoy, don’t whine, don’t chew up furniture, nor shoes, and there are no vet bills. They are ideal pets for the commitment-challenged. My wormery can go without food for weeks while I’m away – all I need to do before I leave on holidays is drain the bucket of any liquid (this can go straight in the garden, plants love it) and add a handful of kitchen scraps mixed in with plenty of paper or cardboard. Then place it back in the cellar, and I’m good to go.
- Garden earthworms are not suitable. Apparently they have a thirst for freedom and need to burrow in soil – both undesirable tendencies for creatures you’re planning to keep in a bucket with damp shredded paper. On the other hand, tiger worms, also called red worms or manure worms, often found in fallen leaves on the forest floor or in manure piles, are surface dwellers and like living in colonies.
- I could use paper or cardboard, but honestly, I don’t see myself doing this for my outdoor compost bin, checking it twice a week for temperature measuring the pH ratio, adjusting the mix of scraps I put there based on conditions. I find it easier to keep up the motivation when there’s some living thing I’m trying to not kill.
- I’m not an organic gardener (if I can be called a gardener at all) by any stretch of imagination, but I don’t like putting chemicals in the environment if I can help it.
There was a good to fair chance of me hitting George Osborne’s pension allowance taper this year, so I spent the last couple of months trawling the internet, looking for ways to avoid this eventuality.
The results were mixed
The good news is that I can keep my pension allowance at £40,000, probably for the last time. The bad news is that I’ll have to pay more NI than I would’ve if George had not been inspired to meddle with pensions in the first place.
Here’s how it used to work.
- My employer’s pension plan is non-contributory. They pay a percentage of my salary into my pension regardless of whether I choose to contribute myself.
- On top of that, I can salary sacrifice whatever I like – as a lump sum or a monthly payment – into the company pension from my pay, and my employer will chuck in an additional 7.5% of the amount sacrificed. Because: ‘ee NI is 2% and ‘er NI is 13%, which is 15% in total, divide that in half and you get 7.5%.
- For every pre-tax £100 I salary sacrificed into my pension I had £107.50 paid into the plan.
- Naturally, each year I would salary sacrifice whatever I could in order to get the 7.5% uplift. Then I would transfer that amount from the company pension into my SIPP. Because: lower fees.
Enter George G. O. Osborne. Things become complicated.
Those whom George considers to be “high earners”, now have their £40,000 pension allowance tapered down to £10,000 if their adjusted income exceeds £150,000. BUT only if their threshold income is more than £110,000. Mechanically pension allowance taper works the same way as the personal allowance taper for incomes over £100,000: for every £2 of income over the limit you lose £1 of the allowance. Does that sound unnecessarily complex? That’s because it is, and wait till you hear more.
My threshold income is as follows:
- My net income (which includes my salary, bank interest, SAYE dividends and P11D benefits); plus
- Any salary sacrifice I make into my pension (since the arrangement is flexible, it’s caught by the anti-avoidance clause); minus
- The gross amount of my SIPP contributions.
The last point is key: if I make pension contributions via salary sacrifice, then they are part of my threshold income, but if I make a personal contribution into the SIPP where tax relief is given at source, then that amount is excluded from my threshold income. Of course, by doing so I lose the 7.5% uplift I would have received from the company and I have to pay 2% employee NI.
Each £100 of pension allowance I keep by claiming relief at source costs me £19 (I have to forgo £200 of salary sacrifice given the 1:2 taper), but its value to me is the £15 tax deferral and £25 tax saving. So the differential benefit is at least £6.
My adjusted income is:
- My net income (same as above); plus
- Any salary sacrifice I make into my pension (same as above); plus
- Any pension contributions my employer makes;
In my case the difference between adjusted income and threshold income is pension contributions – my own, paid into the SIPP, and my employer’s, paid into the company plan. Pension contributions made as salary sacrifice are included in both.
Bad laws badly written
It annoys me how poorly drafted the rules are. The whole thing is rife with contradiction and confusion. Let’s take the definition of net income. The HMRC website states that the net income is taxable income less any reliefs. You’d think this would mean gross income less personal allowance, dividend allowance and personal savings allowance, which would be consistent with the verbiage in the self assessment tax return, where total income on which tax is due equals total income minus personal allowance.
But no, it does not. Net income is in fact gross income: your personal allowance doesn’t enter the calculation, neither does the £5,000 dividend allowance, nor the personal savings allowance. So if your income is more than £150,000, the interest and dividends you receive in taxable accounts – even if the amount received is less than the tax free limit – reduce your pension allowance due to the taper. It would be nice if the HMRC Pensions Tax Manual made this clear.
Another thing that strikes me as inconsistent is that rental income is included net, i.e. after subtracting allowable deductions. I can’t claim platform fees against my SAYE dividends, but a buy-to-let investor can deduct property expenses from the rent he receives. As an aside, rent-a-room scheme is looking increasingly attractive: £7,500 p.a. tax free AND it doesn’t impact the pension allowance by the virtue of being tax exempt and hence not part of the net income.
One last time
My past disregard of all matters Personal Finance has endowed me with some carried forward pension allowance, which is the sole reason I can avoid the blasted taper this year. I’m over the limit on adjusted income, but my threshold income is under the £110,000 mark. Next year … unlikely, but we shall see.
I never thought I’d say this, but at least I don’t have a DB pension. From what I’ve glimpsed on the DB plans, the rules there appear even more confusing.
Guides and tools
Below are some resources I found useful.
As per usual, reader beware: I have gathered only what I deemed applicable to my current situation. The reference list is not intended to be complete, nor can I vouch for the accuracy of any of the materials.
- Willis Towers Watson provide a free app for calculating annual allowance, but you’ll have to input your own figures.
- Pru’s Annual Allowance Calculator is a version of the Towers Watson app, and you still need to provide your own numbers. It won’t tell you what sources of income should or should not be included in the calcs, but despair not: this guide will.
- Scottish Widows clarify the components of net income, threshold income and adjusted income.
- AJ Bell’s guide has some easy to follow examples.
- Royal London have more examples. With diagrams.
- You can call the Pensions Advisory Service on 0300 123 1047.
- If you have 30 minutes to kill listening to elevator music as you wait for someone to answer the phone, you can also ring HMRC on 0300 200 3310. If you manage to get through to them, they’re actually very helpful.
A few words on the subject of LISAs
If in future my pension allowance is reduced, I may have to open a LISA account. That’s annoying because a LISA isn’t as good a deal to a higher rate tax payer as the pension.
A higher rate taxpayer wants to save £100 of his pre-tax income into a pension at the age of 39, and earns a 5% annual return until he retires at 58 (let’s ignore NI).
In 19 years’ time his pension will be worth £100 x 1.05 ^ 19 = £252.70. A quarter of this can be withdrawn tax free. The rest of it can also be withdrawn tax free, provided he keeps his annual pension drawdown within his personal allowance. This shouldn’t be very difficult, as any tax free income from his ISAs can be used to supplement the pension income. With no mortgage and living modestly, he doesn’t need to pay much (or even any) income tax post-retirement.
A higher rate taxpayer wants to save £100 of his pre-tax income into a LISA at the age of 39, and earns a 5% annual return until retiring at 58.
In 19 years’ time his LISA will be worth £60 x 1.25 x 1.05 ^ 19 = £189.52. This is tax free, but so what? If he’s living modestly and has tax-free income from other ISA products, that’s a waste of his personal allowance.
Also, LISAs don’t have the same protections as pensions, e.g. in case of bankruptcy, and they will count as “savings” if you ever need to claim unemployment benefits. Granted, the possibility seems is remote, and having other ISA products renders it a moot(ish) point. Still, one can never be sure.
LISAs weren’t brought in for the benefit of the people – they were brought in so that HM Treasury can get more tax revenue sooner. If I were a conspiracy theorist, I’d say the additional complexity and confusion that the taper rules introduced to pensions were part of Osborne’s plan. But I am not. And I don’t think they were.
I think the hurried, badly written legislation, which has turned an already complex area into a multi-layered clusterfuck of convoluted rules, guidelines and definitions, really was the best he could do. George Osborne simply wasn’t a good Chancellor.
- With no differentiation between the cost of living in London vs the rest of the country.
- There are more things to take into account, which are not relevant to me. The full list can be found on the HMRC website.
- I don’t expect to pay 40% tax after I retire, so ignoring any investment return and assuming tax rates don’t change, the tax I’ll pay on the £100 when I start drawing my pension is £100 x 75% x 20% = £15.
A hoarder slumbers in most of us, I fear.
3rd Rock from the Sun had it all wrong. Humanity’s favourite pastime isn’t to do with sex; it’s to do with acquiring dwelling places and filling them with stuff. From the Old Testament to the Aeneid to modern literature, people’s obsession with possessions is staggering.
On Tyrian carpets, richly wrought, they dine;
With loads of massy plate the sideboards shine,
And antique vases, all of gold emboss’d
(The gold itself inferior to the cost)
You know that icebreaker in group trainings – if you could meet any famous person, living or dead, and spend a day with them, who would it be and what would you do? I’d meet Virgil and I’d take him to Westfield. He’d love it there.
It’s under our skin
Maybe there’s an evolutionary explanation? Perhaps monkeys who hoarded their sharp flint flakes had a better chance at survival: having immediate access to tools and/or weapons meant that they didn’t need to look for a suitable stone each time they wanted to knock something on the head. I don’t know how it began, but I think we have been like this since the beginning.
A couple of my more obscure uni electives were in comparative religion, whence I was expected to read (and occasionally even comprehend) both Testaments, the Quran and bits of the Tripitaka. It’s all the same shit, by the way: teaching peasants to not challenge those in charge in exchange for jam after death.
As they admonish serfs, slaves and assorted free paupers to forswear material possessions (should be easy enough to do when you have nothing), holy scriptures go into fascinating minutiae describing the items to be forsworn. We have detailed inventory lists of Job’s and Abraham’s livestock and servants, Solomon’s gold, chariots, housewares, robes (the dude liked purple, apparently), wives and cattle, in addition to all the stuff he inherited from David. As for Muhammad’s arsenal of bejewelled weaponry, armour and silk shirts, not only do they have descriptions – they have names. Unlike his horses, slaves and some of his women. Parts of the Nirvana Sutra read like House Beautiful shagged the GQ: for your next spiritual retreat consider this unique West Bengal mansion with beryl walls, lattice windows and golden hand railings. Arrive in style in a latest model luxury four horse wagon sporting a white roof and golden bells.
My point is, consumerism – present or aspirational – is part of our civilisation. Giving it up is damn hard.
One month in
Did I manage to get through the month with no new stuff? No. Below I present a list of the offending articles:
- Huawei modem (£15.99 from ebay). I recently switched from Virgin to BT, and their sixth generation Home Hub can’t be set to bridge mode. I have an extended home wifi network where Apple’s Time Capsule and three Airport Express gadgets provide great coverage, automatically back up my data, and I can use airplay in every room and in the garden. In my defence, I tried to get that BT thing to work. I really did. After four hours of messing about with settings (and a lot of swearing) I had to concede defeat: the only way of getting around double NAT is to put the Time Capsule in bridge mode and connect it to the Home Hub via LAN, but then the backups are soooo slooooow. I’m no expert, but I think it’s because the Home Hub OS is rubbish and can’t deal with the throughput of data from my laptop to the Time Capsule. Also, Airport Express don’t connect to the Home Hub, so the network can’t be extended, the signal in the garden is weak and none of the airplay devices work. I figured, fuck it, I’m allowed one exception that enables me to use fibre the way fibre is meant to be used.
- Five kitchen towels (£0.00; gift from mother). Why people need kitchen towels when there’s kitchen roll is beyond me. And especially since I already owned two perfectly adequate tea towels. Also, I banned her from buying me any more kitchen stuff a year ago, clearly with no results.
- Cheese baker (£0.00; another gift). It is a truth universally acknowledged that 15 minutes in the oven can transform average camembert into a gooey piece of heaven on a cracker. Or garlic bread. Or a carrot stick. Or a celery stick. Or an asparagus spear. With walnuts. But what is it with this thing for specialist dishes where no specialist dishes are required? You take camembert, you pierce the top, insert some rosemary or garlic, place it on a baking tray, into the over it goes, and voilà! I can’t even re-gift it because we had to use it.
I hope I can do better next month.
It’s February, it’s freezing, and I could certainly use some exotic booze. So as to cheer myself up I’ve been planning this year’s holidays, looking at flights… trying to fit it all into my budget.
When it comes to sticking to budget, my strategy relies heavily on British Airways reward flights, paid with BA Avios points. I used to travel a lot for work, and at one time had accumulated a nice balance of over 170,000 Avios. Since I was too busy working to have any time for leisure, the points just sat there unused. Fast forward five years and the balance is down to just over 58,000. Still enough for a few holidays, methinks 😉
Ways to get Avios
The BA have a list, but mine come mainly from flying the miles on Oneworld flights, my Amex card where I charge work expenses as well as personal spend, and hotel stays on work trips.
For online shopping connoisseurs avios.com operate a sort of a cashback site, only with Avios points. At the moment they are offering 14 Avios for each £1 spent online at GAP UK. If it weren’t for my No New Stuff Year, and if I were in need of t-shirts, why not?
Ways to spend Avios
Again, the BA have a list, but value for money varies. Also, the list changes more frequently than I wish it did. For example, we can no longer use Avios to pay for Eurostar tickets, so adieu free ski train to Bourg Saint Maurice. Annoying.
Know your partners and allies
Information is a power. For an aspiring holiday cheapskate the most important thing is knowing when and where there are free flights and discounts available, also, knowing when and where there are points available that could be later exchanged for free flights and discounts. I think Oneworld Alliance members are quite generous with their loyalty schemes, and as a group they cover a decent patch of the sky.
The BA open their reward flights for booking a year in advance. Not all Oneworld airlines offer free flights so far in advance, but in my limited experience 8 to 9 months is the usual.
If I remember correctly, Kayak had published some research some time ago saying that flights were cheapest around 14 weeks before departure. BA reward flights don’t work that way. Their price in Avios is fixed and doesn’t change over time — the only thing that changes is their availability. It’s a classic case of birds and worms.
Compare all options
For those who have enough Avios and are reasonably well organised, reward flights are hands down the best option. (Except for transatlantic flights mentioned below.) Cabin-wise, BA’s reward flights are equivalent to premium economy or economy plus. Which means there is some flexibility with date changes (for a price), a free checked in bag, and you can choose your seat.
If I didn’t have enough Avios, I could buy them for cash. For instance, 10,000 points can be bought for £175, which is 1.75p per point. Alternatively, if all reward flights are gone, I could book a regular flight and part-pay with Avios. In this case I would effectively be selling my Avios of cash. These are the two options where value for money varies quite a lot, and the game is now always worth playing.
In most cases, buying Avios with cash to pay for flights (or anything else) is not a good deal at all.
Below are a few flights I looked at last week.
If I couldn’t get a flight to Gibraltar for £35 and didn’t have any luggage to check in, I wouldn’t pay 29,000 points for economy plus. I’d go for basic economy and get £90 off with 16,000 points, bringing the cost down to £74.30.
Also, buying 14,000 Avios and using them to book a reward flight is much more expensive than just paying a cash price.
This Glasgow flight is the only exception to the buying-avios-for-cash-is-a-crap-deal rule. Even if I had zero points and hence bought 10,000 Avios for £175 with an intention of only ever using 8,500 of them, and assuming there was an available reward flight to book, that would still be cheaper than flying basic economy. Crikey.
Rome and Tallinn flights seem to be the same deal as the one to Gibraltar. I usually travel light and dislike checking in luggage, unless I have to. If I can’t get a £35 reward flight, then basic economy with 9,000 points to Rome cost about the same as economy plus with 16,000 points. I would choose basic economy. Ditto Tallinn, where the Avios price is the same, but the cash price for basic economy is £30 less. I like my window seat, but not enough to pay £30 for it. I’d rather spend it on booze 😉
Exceptio probat regulam. The value for money of BA’s reward flights to NYC is usually worse (at times much worse) than part-paying with Avios. I think it has something to do with airport fees and taxes, but I can’t be sure.
For flights to the USA I’d simply have a look on skyscanner.net first, then, if the BA ticket is close’ish in price to the cheapest alternative (which sometimes can happen), I’d look into part-paying with Avios. Otherwise I’d just fly a different airline.
Package holidays, car rentals and hotel stays
A lot depends on how many points you have and how easy they are to acquire.
If I were traveling for work at a rate of 60,000 Avios points per annum, I’d use them to pay for whatever I could. But I am not, anymore. Although the points can be used to pay for car rental and hotel stays, the sell price is usually so low that I pay cash and save my points for reward flights. It’s not worth it.
And finally, I never use Avios (or cash) to buy food on board a flight. The stuff that airlines pass for food is not only overpriced, it also tastes like warmed-over cardboard mush. Why anyone would inflict it on themselves on a short haul flight AND pay for it is beyond me.
The blogosphere is full of musings on whether one shobuld invest or pay off the mortgage first, and then invest. Both arguments have merit.
To invest, or to repay the mortgage, that is the question.
Cash is interchangeable, so when I buy stocks and shares while keeping a mortgage I’m investing borrowed funds. I am not entirely comfortable with leveraged investing, and I most of what follows should be read with that in mind.
I’m also a higher rate tax payer. To me a personal pension has significant tax advantages. Because: 25% tax free lump sum that can be handed over to the bank at a perky young age of 58 along with a note asking them to please chisel their name off the land register and return the title deeds to my pile of bricks, thanks.
Raise a glass to freedom
Financial success is objectively quantifiable. To an aspiring FIRE’ee, a decision of investing vs repaying the mortgage should be a simple function of tax efficiency and expected risk-adjusted return. Alas, we all carry the baggage of our parents’ views on money, not to mention our own bad financial decisions. It tends to get in the way of rational thought.
In 2012 I made a mistake of buying more bricks than I needed by taking on a larger mortgage than I was comfortable with. Because: I had no fecking idea what I was comfortable with, and buying as much house as the bank would allow was all the rage back then.
I’m getting I am sick and tired of being tethered to that infernal loan and all that comes with it, such as three-hour remortgage calls where I must discuss my spending habits with a clueless 20-something mortgage adviser, who tells me that £6k in interest and fees over the fixed rate period is cheaper than £5k in fees and interest over the same fixed rate period. I’m tired of having to worry about keeping my job for the fear of losing my home. I hate owing money.
There’s no way I’d pull the FIRE plug without repaying my mortgage first.
Do I hate paying tax more than I hate having a mortgage?
The answer is, mostly, yes.
So this makes a pension – with all its uncertainties and restrictions – my vehicle of choice.
Tax laws may change
Since 2006 there have been more than a dozen changes to lifetime and annual allowance, mostly aimed at reducing the amount I can save into my pension. In addition, both the annual and lifetime allowance have been reduced by inflation. They will begin indexing the lifetime allowance from April this year, but that may also change. Because: Corbyn.
Even without Corbyn, if our fair country’s finances become truly dire, the government may seek to increase tax revenue by abolishing the 25% tax free lump sum. If they were to grandfather the pensions already in drawdown, this could be accomplished with a loss of a relatively small number of votes. We humans are surprisingly amenable to being robbed, provided there is no immediate impact.
How about an ISA then?
When it comes to clairvoyance, I see just as far into the future as anyone else. Having said that, I think that HM Treasury would find ISAs more difficult to tamper with than pensions, and probably less profitable.
ISA savings pots are generally lower, additional tax revenues would be less predictable, and the population of disgruntled voters a lot larger. The annual ISA allowance could be reduced with limited grumbling from the public (the majority of the electorate don’t have £20k p.a. to chuck into stocks and shares), but that’s about it.
Mortgage overpayments vs ISA
My current plan involves retiring at 45 or thereabouts, so I’ll need non-pension savings to tie me over until I’m 58. This makes an ISA not only attractive but necessary.
The opportunity cost of overpaying my mortgage is the tax free investment return I could have had by investing the money in an ISA instead. Historically shares have generated about 7% p.a., which is much more than my current mortgage interest rate. Is it right to compare a long term stock market return with my current mortgage interest rate at a time when stock valuations are at a historic high and mortgage rates are at a historic low? Who knows. ¯\_(ツ)_/¯
ISA contributions come from post-tax income, ditto mortgage overpayments. Investment return inside the ISA wrapper is tax free, but so is any mortgage interest saved by overpaying.
The only sticking point is that ISA allowance can’t be carried over into future tax years. Even on fixed rate mortgage deals overpayments tend to be more flexible than that, and most trackers allow unlimited overpayments. If I fail to take full advantage of the ISA allowance for a few years because I’m busy overpaying my mortgage, then later, having extinguished the mortgage and finding myself with more investable cash than ISA allowance, I’d have to use taxable accounts. I know I’d regret that. Because: I hate paying tax more than I hate having a mortgage.
Mortgage overpayments vs taxable investment accounts
Keeping a mortgage while investing outside the tax wrapper is borrowing to invest without any mitigating factors. That would take larger cojones than I possess, so I’m afraid I’ll have to pass, thanks:
- A mismatched risk profile on the asset vs liability side. Investment grade bonds aren’t paying enough to cover my mortgage interest, even before taking tax into account. Hence my hypothetical taxable investment would have to be shares, which are exposed to a number of risks not mitigated by the short position on the mortgage side, such as business, forex (either directly or indirectly via the issuer’s geographical distribution of revenue), regulatory… Monevator wrote about it recently.
- Tax. For a higher rate tax payer, expected investment return has to be rather high to make the game worth the candle. FTSE 100 dividend yield is currently 3.9%, so, ignoring dividend allowance, my mortgage interest rate over the remaining life of the loan has to be less than 2.6% to break even. Any capital gains will help, but they will be subject to a 20% capital gains tax.
- Timing. Given the current CAPE, and the historical relationship between equity valuations and interest rates, the time when I’m likely to be most inclined to decrease my mortgage principle – when the rates go up – is likely to be the time when I’m most likely to be in the red on the invested capital side.
Mortgage overpayments are part of my Fixed Income allocation
Housing costs – in whichever form – are inevitable. As Ermine of Somerset once put it, a hairless mammal in Northern Europe will always need a home. The rule of thumb is that housing should cost up to a third of net income. This would imply that home-owning financially independent early retirees should aim have up to a third of their net worth tied up in home equity.
In addition to the above, I don’t think that a person’s primary residence is an investment in the housing market. I consider my home to be an annuity that will pay my notional rent for as long as I live.
In its essence, home equity is an inflation-linked fixed income instrument, and therefore, assuming a classic 60/40 portfolio, the total value of fixed income securities plus home equity should be less than half of my net worth. It is not. By this measure, I’m very overweight on fixed income vs stocks. Given current PE and CAPE of equity markets, this may or may not be a bad thing, but the point stands.
So what’s the plan then, Sherlock?
It’s a tough one.
Come April 2018, I’ll have no more carry-forward pension allowance. For the first time in what feels like an age there will be more than a few spare pennies to allocate between the mortgage and the ISA.
The case for repaying the mortgage as soon as may be is a solid one. From purely emotional point of view I’d like nothing better than to be rid of it. The whiny little loss avoider inside me would love to be rid of it even if it meant delaying early retirement by a year or two. Regardless of what happens in the markets in the next 10 years, I’d find it difficult to regret owning a mortgage free home.
BUT, financial independence is a numbers game, and numbers tell a slightly different story. I am underweight on equities in the context of my total net worth. Moreover, by trying to not waste a single penny of my pension allowance, I’ve been lately remiss in the article of emergency money. I can use my ISA allowance to rectify for that; a cash ISA can be moved to stocks and shares at a later date.
So, for the coming 12 to 18 months my plan will have to be:
- Use up all pension allowance;
- Use up all ISA allowance, and put most of it in cash to top up the emergency fund;
- Overpay mortgage with whatever is left.
- Except when people say that mortgage overpayments, by increasing home equity, also increase exposure to the housing market. And so we shouldn’t put all our eggs in one basket, etc. That is nonsense. I took 100% of my exposure to the housing market when I exchanged contracts. The fact that there’s a mortgage is irrelevant: it has no impact on any future (hypothetical) gains or losses I’ll make on my place, and the loan will have to be repaid regardless of what happens to it.
- Why can I ignore the dividend allowance? Because: it reduces my pension allowance under the pension taper rules.
Last May I went sailing around the Amalfi Coast; part of the programme was a visit to Capri. A nice little island. No sandy beaches to speak of, berthing costs too much to even contemplate, but you can anchor in front of Marina Piccola, and there are other possible anchorages on the East side of the island. Restaurants usually have a shuttle service that will take a visiting millionaire from his yacht to dinner and back. Everyone else takes a dinghy. A bottle of sparkling water at a restaurant costs €5.
It’s easy to feel poor on the isle of Capri.
And it’s even easier to feel poor when you’re trying to stick to a budget with a 60%+ savings rate. I mean, really, self-imposed famine rations are a pain in the arse. I try to remind myself that it’s all for the greater good of both my present and my future selves, but the weak consumer sucker inside me is all like:
Staying strong is easier said than done. Especially when the crew you’re with are not sailing down the Straights of Self Denial with you. I’ve spent some considerable time feeling a little sorry for myself and contemplating whether it wouldn’t be easier just to throw the battle and carry on working till I’m 58 or 68 or 70 or whatever.
An impartial observer might say that in spite my so-called famine rations, stuff somehow keeps accumulating in Ho’s Keep. This became very obvious when I had to clear out space in the spare bedroom for visitors recently. If I really am so poor then where the hell did all that crap come from?
I think the answer is mostly sales. I’m a sucker for a bargain. Polarised Ray-Bans 50% off? Sure, I’ll have two! Just in case we go sailing and I lose a pair overboard, y’know… there’s no sell-by date on sunglasses. Rationally, I know that any limited time opportunity to save money by spending it is a marketing trick, and still I fall for it by failing to remind myself that a Final Sale is never final. Final reductions are advertised twice a year, and that’s not counting the Black Friday Week (yes, it’s a week now).
I need to have a No New Stuff Year. Realistically though I’m unlikely to last that long, so let’s change that to No New Stuff Five to Six Months.
Here’s what I’m allowed:
- Groceries and drinks;
- Personal hygiene items (e.g a toothbrush);
- Washing powder/detergent and such.
Here’s what I’m not allowed: anything else. And specifically:
- Books and/or magazines;
- A new watch;
- Any items of clothing or footwear;
- Any sports gear that doesn’t already come under clothing or footwear;
- Any cycling gear that doesn’t already come under sports gear, clothing or footwear.
You get the idea.
Let’s see how it goes. I’ll write an update in a couple of months.