10 Years May Not be Enough

The shore that Phoebus has design’d for you, At farther distance lies, conceal’d from view.

I’ve been playing with spreadsheets again, and I’m not liking what they’re telling me, which is that 3652 days may not cut it. It might, but it’s not very likely. My expectations of investment return have been optimistic, and unless we soon have another market crash a’la 2008 followed by a 10-year bull run, come 2025 I may not have enough to retire on.

How much is enough

Nobody knows for sure. Retirement calculators, Monte Carlo simulation and stress testing can give us a reasonable idea, but we don’t really know. Hence we end up using some sort of an estimate, and usually that estimate has an inbuilt layer of fat, just in case.

My estimate is a million in invested assets, including pension, indexed for inflation (December 2015 = 1), and no mortgage. That would give me about £1.9k post-tax income per month – enough to fund my life and leisure in retirement. It’s more money than I spend now, but I’ll need more when I retire. Because: I’ll have more time to travel.

Why this sucks

All that headspace which my work occupies – I need it for personal use. In a recent Banking Standards Board survey 26% of respondents said work had “a negative impact on their health and wellbeing”. I’m no wimp, in fact I don’t have much patience for weakness, but I’m getting sick and tired of being knackered all the moverloving time.

I want to retire so I that can slow down, take more trains and fewer planes. I want to know what trees are called, where they come from, and which tree families they belong to. Ditto rocks. I want to use my Natural History Museum membership more, I want to go to movies when I feel like it, not when I have time, I want to read more books, see more of this weird and beautiful planet we live on, maybe learn a couple more languages, or at least improve the ones I’ve tried learning in the past, my German sucks, for example. I want to kitesurf, sail, swim, walk, cycle, climb, discover. I need more time to do things, and I want to take my time doing them. I don’t want to get home at 3am from a weekend away and have to be at work by 9am the following morning.

What to do, what to do

Reducing my working hours is not an option in my role, my contractual 7 hours a week are a joke anyway, since I’m paid for results and not the time spent achieving them. Changing employers would solve nothing, I’ve tried that a couple of times before. I can’t be self-employed; as much as I’d like to dodge some tax and NI, it’s not possible in my industry in my line of work. So what’s left is biting the bullet – hard – and hanging on ’till it’s over.

Here’s what I’m not prepared to do:

  1. Increase my savings rate. There’s nothing else I can cut without turning my life into a miserly existence. I am aware that there are people with lower discretionary spending budgets than mine. It sucks to be them, and it would suck to be me if I were one of them.
  2. Take in a lodger. I had a lodger, and I didn’t like it. £7,500 a year tax free sounds like a good deal until you consider the downsides. I guess one gets used to not having to share.
  3. Matched betting. Again, I’ve tried it, it wasn’t for me, although it should be noted that it works for some people.
  4. Any “side hustle” that requires effort to generate income at an hourly rate that’s lower than what my job pays me, and particularly Kindle eBooks. I like books, and I find the idea of writing low quality ebooks to flog on Amazon almost … upsetting.

Having said this, I’d make one exception to expending effort at a low rate per hour, and that is acting as an extra in a Bond film.

Story time

Back in the day, when I was young and good looking, the company I worked for had a leadership development programme[1], which involved, among other things, an international secondment. I was one of two people selected from our office. For the secondment part I could pick any international office, provided they had a vacancy and agreed to take me. At the time, aside from the usual suspects, being our branches in global financial centres, there were vacancies the Bahamas and the Cayman Islands.

I, being a boring idiot with no imagination, went to a proper city with a financial services industry, whereas my colleague… didn’t. He went to the Bahamas, and promptly started flooding my fucking inbox and later facebook feed with photos of sunny beaches and pool parties. Also, boat parties[2]. Then when Casino Royale came to the Bahamas to film their beach scenes, he signed up as an extra, the animal, and got paid to play frisbee in the water with some girls in bikinis.

So, ok, having thought about it, maybe I’d do it too. Even if I were retired at the time, I’d make an exception.

Going back to spreadsheets

I’ve looked at it this way and that, and the earliest I can repay the mortgage is 2023. That assumes that I don’t get sacked from my job, use all my pension allowance and ISA allowance, and don’t invest anything[3] in taxable accounts, except my portfolio allocation to gold ETFs, which could be about £6k p.a.

Given that I want to retire with 4 years’ worth of expenses in cash outside of ISA and pension, and given that I’d have to live on that cash plus the ISA until I can access my pension… it’s tight. And I haven’t even begun thinking about whether or not I should continue paying NI contributions post-FIRE in hopes of maybe someday getting more by way of state pension.

And then there’s the joker – am I or am I not going to buy a boat? It’s a cheap way to travel near, but it’s a fixed cost at home when you’re away traveling far. Do I want it enough to work 2 years longer than I’d do otherwise? Am I sure that I don’t want it enough so I could say no to it and never regret it? Also, if I bought a boat and then things went south later, I could rent out my place and go live on the boat. If I couldn’t afford moorings in the UK, I could take it to France or Holland. The Med is tricky in summer, but winter is usually fine, and there’s always Turkey.

So I can laugh at RIT changing his delivery date every 9 months, but my own cojones are an untested quantity. There’s nothing safe about a 4% safe withdrawal rate. I’m aiming for 2.5%, and it looks like time ain’t on my side.

Notes:

  1. I know. It sounds like cringey ENTJ bullshit with a side of “how to lick your boss’s ass”, but really for the most part it wasn’t like that… it was quite good, actually. I guess every experience is what you make of it 😉
  2. How he found time to get any work done is, to this day, unknown.
  3. SAYE shares don’t count. I can’t do anything about it other than to not participate, which would be akin to leaving free money on the table.
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Death and Taxes

Get place and wealth, if possible with grace; if not, by any means get wealth and place.

They say I won’t be able to take it with me. I say it’s a rebuttable presumption, and even so, I hope it will be a few years yet before the disposition of my assets after my demise occupies more of my headspace than trying to figure out how they’re going to turn back that dead ice dragon in Game of Thrones. Surely they’re not going to perma-kill Viserion, right? … Right?

Taxes

The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing.

— Jean-Baptiste Colbert

I’ve been lately contemplating on tax. This year my income tax and NI will come to £37k or thereabouts, which is more than double the amount of my annual expense budget, including mortgage interest. Add to this number the council tax, VAT, IPT, alcohol duty, airport taxes and import duties, and it soon becomes apparent that I render unto Caesar three times more than I expend on my own worldly pleasures.

This begs the question: what the fuck?

And why, even with me paying this amount of tax, do I keep hearing about the country’s finances being a mess, teachers, doctors and policemen overworked and underpaid, and don’t even start me on the infrastructure. How do Normandy and Brittany afford their acres of marina moorings – mostly public property owned by local communes – when my council in London has to economise on garbage removal?

The Scandinavian model

No discussion about income tax goes far without some social justice warrior pointing out that top marginal tax rates are higher in Scandinavia. If we only taxed the rich[1] more, then all would be well and good.

I find it funny hearing people, some of whom haven’t even been to Scandinavia, speak of The Scandinavian Tax System as if they knew what they’re talking about. Also, Scandinavia is a geographic region – not a nation. Here’s a crash course: Norwegians can be eccentric at times; they mostly keep to themselves. Danes are a little fatter and louder than the rest, but generally good fun. Swedes are alright, and just so we’re clear, Finland and Iceland are not in Scandinavia.

Going back to tax, personal income tax rates in Sweden and Denmark are higher than in the UK, and the Norwegian top marginal rate is 0.1% lower than in the UK. Yet all three Scandinavian countries raise significantly more tax revenue – both as a percentage of the GDP and the share of the aggregate tax take – from individual income taxes than the UK does. That is because tax rates are not the most important feature of these countries’ tax systems. Their tax takes are high because their taxes are quite flat: they tax most people at high rates, not just the taxpayers in the top income decile. Below are some numbers from OECD Data and OECD Stats that help illustrate this point:

  1. Top marginal effective income tax rate including employee national insurance / social security:
    Norway Sweden Denmark United Kingdom[2]
    % of income 46.9% 60.1% 55.8% 47.0%
  2. Tax revenue raised from individual income and payroll taxes, including national insurance / social security:
    Norway Sweden Denmark United Kingdom
    % of GDP 21.2% 27.9% 24.7% 15.3%
    % of total tax take 55.7% 63.3% 53.8% 46.2%
  3. The level of income at which the top marginal tax rate kicks in:
    Norway Sweden Denmark United Kingdom
    Times the average wage 1.6 times 1.5 times 1.2 times 4.1 times

So the next time you hear someone pipe up about taxing the rich like they do in Scandinavia, please feel free to point out that if the UK were to adopt, say, the Danish model, this would mean that all income over £43,885 (1.2 times the average wage of £36,571) would be taxed at the top rate of 55.8%. There’d be no tax free allowance, income up to £5,400 would be taxed at 8%, after that the basic tax rate would be about 40%. Also, Denmark is the only Scandinavian country with inheritance tax; spouses are exempt, by everyone else pays a flat 15% on any inherited property over £33,500.

I’m not suggesting that if Britain adopted the Danish (or Swedish, or Norwegian) tax rules, that would be a bad thing. The country needs a broader tax base. And we’d get a lot in return – free universities, free healthcare, very heavily subsidised childcare and aged care for most, free for those who pass the means test. I could get decent and affordable moorings for my retirement yacht … it’s preferable to an allotment.

No welfare state without a welfare society

However, in practice, the Scandinavian model may be difficult to replicate. Henrik Kleven in his 2014 paper demonstrates what we kinda already knew. Social attitudes matter. In Sweden the rich, however defined, don’t to support the welfare state. The society pays for its own welfare through taxation: everyone pays a lot, and those who can afford to pay more do so, generally without excessive hissing.

Socialism, just like democracy, works better on a small scale; when it comes to spreading the wealth, it helps to have a relatively small, homogenous population. People are happy to chip in to help out us, not so much them. Social welfare without social cohesion is a real hard sell – that’s one of the reasons why polarising events (see: Brexit) aren’t good for the welfare state, nor are polarising politicians (see: Corbyn).

The Starbucks subsidy

When it comes to personal taxes, the UK is running concentration risk: 50% of income earners pay 90% of all income tax, 40% pay none, and 1% – about three hundred thousand people with incomes over £160,000 a year – are responsible for 28% of the tax bill. Three hundred thousand people is the population of Wandsworth.

As for the 40% who pay no income tax at all, I submit it as my opinion that it’s a mistake to have working people pay no income tax. All that it accomplishes is cut the payroll bill for low wage employers, e.g. in hospitality and catering. I call it the Starbucks subsidy. People work for net pay, not gross, so personal income tax is largely borne by the employer, but for those who distrust the invisible hand of the market, there’s a tool called the minimum wage. It should be set at such a level that a person with a job is able to both live himself and contribute towards supporting the young, the old, the unlucky, and those who are unwell.

There also should be a link between public spending and people’s own purses. How else can we claim that we as a society together decide how our money is spent? Anything other than this is merely a gimme-more-of-yours, which is both unhealthy and unsustainable.

The wage gap

It all boils down to one main question: can we have a welfare state with a low-wage economy? I say we cannot. One or the other has to give. By OECD standards, the UK’s average wage is not that low. And yet 40% of people don’t earn enough to pay income tax. If we’re keen on keeping the welfare state intact, then the median wage needs to come closer to the mean. The minimum wage has to go up, and all working people have to start paying tax.

Would there be job losses? Yes. But would it really be such a bad thing? At least then we’d  be able to identify the people in need of re-trainign and redeployment. Perhaps then the productivity would finally begin to improve. The UK has had a productivity problem since the 50s, and any economist will tell you that productivity growth is the only way of ensuring long-term prosperity.

Brexit

Widening the tax base is doubly important now that we’ve effectively terminated the lease and served an eviction notice to foreign capitalists who, until Brexit, have been using Britain to gain access the European single market. This New York Times article explains why, but if you don’t fancy reading it, here’s the gist:

The UK’s favorable financial and legal environment helped draw foreign capital. But it was access to the EU that allowed this to happen on a large scale. Since the early 1980s, leading global corporations have located plants and offices in Britain, sometimes taking over British businesses in the process, using British soil as a terrestrial aircraft carrier to assault the single European market. Trade figures for the past three decades show with brutal clarity how dependent the UK is on this aircraft carrier status, and how much it stands to lose if a full Brexit is carried out.

In the City of London quite a few of the 300,000 people who pay 28% of income tax depend on foreign – mostly American – capital. Some of these people are foreign-born[3], and some are not. Regardless of their place of birth or the location of their client base, they pay taxes in the UK, which help support the NHS and other public goods.

Pos-Brexit, their jobs will not move to the continent immediately: people and their personal situations are complex, companies want to retain good performers, also, there aren’t enough people in the EU-27 with the right skills to take them. But as people relocate, resign and retire, eventually these jobs will follow the capital which they service, and so will the tax revenue. Britain needs a plan on how it’s going to replace this revenue. Broadening the tax base could be an option, if only we had a political party with the cojones to do it.

Notes:

  1. the rich /ðə rɪtʃ/ noun [plural] those who earn more than I do.

  2. For simplicity’s sake, let’s ignore the anomaly of the 62% effective marginal tax rate on incomes between £100,000 and £120,000.

  3. immigrant /ˈɪmɪɡr(ə)nt/ noun  a foreigner living in Great Britain. As distinguished from expat.
    expat /ɛksˈpat/ noun  a Briton who lives in a foreign country.

Stocktake: Q1 2018

And while he rolls his eyes around the plain In quest of Turnus, whom he seeks in vain, He views th’ unguarded city from afar, In careless quiet, and secure of war.

What’s new?

Stephen Hawking is dead.

Also, there will be no special Brexit deal for the City. To be honest, we knew that – I spent this past year getting ready for it. I thought I’d get used to it, my anger would morph into something like acceptance. It hasn’t happened.

Granted, the manner in which the so-called process is carrying on isn’t helping. It’s like watching a slow motion train wreck. The EU are asking Britain to tell them what Britain wants. Britain is terribly sorry, but is unable to oblige: apart from a general preference for eating cake and having it, Britain hasn’t yet settled on what it wants, specifically. Can someone please send our government a memo reminding them of the seven habits of highly effective people? Number one: begin with a fucking end in mind.

Also, I don’t have any more carried forward pension allowance, so my tax rate is going up, just in time to start paying for this clusterfuck that our gullible xenophobic half got us all into. My pleasure.

Savings rate: 60%

The actual year to date average is 73%. Let’s hope it lasts 😉

Property wealth: overpay mortgage by £20k

Not yet.

Pension wealth: use up all available allowance

Done.

Financial wealth: Emergency Fund & Freedom Fund

Emergency Fund: not yet, but there’s hope.

Freedom Fund (aka S&S ISA): ongoing.

Tax: pay no more than £25k income tax in 2017/18 tax year

Fail. It’s going to be more like £30k+

No new stuff year

I’ve decided that I don’t need any more stuff this year, and am trying to restrain myself from buying anything non-perishable. I’ll admit, it’s harder than I thought.

Pension Allowance Taper

A chosen ewe of two years old they pay To Ceres, Bacchus, and the God of Day

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”[1], 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.

Threshold income

My threshold income is as follows[2]:

  • 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[3]. So the differential benefit is at least £6.

Adjusted income

My adjusted income is[2]:

  • 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.

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.

Example 1:

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.

Example 2:

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.

Notes:

  1. With no differentiation between the cost of living in London vs the rest of the country.
  2. There are more things to take into account, which are not relevant to me. The full list can be found on the HMRC website.
  3. 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.

No New Stuff Year: Update #1

Like polished ivory, beauteous to behold, Or Parian marble, when encased in gold

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:

  1. 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.
  2. 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.
  3. 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.

Come Fly With Me (You Can Pay With BA Avios)

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.

Be organised

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.

Gibraltar.png

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.

Glasgow.png

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.png

Tallinn.png

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 😉

Transatlantic flights

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.

Mortgage Overpayments

Capital Ring
‘T is here, in different paths, the way divides; The right to Pluto’s golden palace guides; The left to that unhappy region tends, Which to the depth of Tartarus descends.

The blogosphere is full of musings on whether one shobuld invest or pay off the mortgage first, and then invest. Both arguments have merit[1].

To invest, or to repay the mortgage, that is the question.
– Hamlet

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.

Let the past die. Kill it, if you have to.

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.

Now 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:

  1. 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.
  2. 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[2], 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.
  3. 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:

  1. Use up all pension allowance;
  2. Use up all ISA allowance, and put most of it in cash to top up the emergency fund;
  3. Overpay mortgage with whatever is left.

Notes:

  1. 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.
  2. Why can I ignore the dividend allowance? Because: it reduces my pension allowance under the pension taper rules.