16 Oct 2014, 11:32am
personal finance
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  • The difficulty of managing money in silos

    Pensions, ISAs, NS&I - they all break your capital down into silos isolated from each other  Image: dsearles/Flickr

    Pensions, ISAs, NS&I – they all break your capital down into silos isolated from each other Image: dsearles/Flickr

    Silos are bad for organising a lot of things where the contents should all be pulling in the same direction, singing from the same hymnsheet and other associated buzzword bingo 1. All through my working life companies have moaned about ‘silo mentality‘  – well WTF do they think is going to happen when you reward people for individual results using S.M.A.R.T. metrics, the stupid berks? Knowledge is power, and you don’t want to be an interchangeable outsourceable meatspace unit x – you want to be the irreplaceable kingpin…

    The same intractable problem is easily introduced into our personal finances – some of it by foibles such as mental accounting, but a lot of it is by government action – if you want to take advantage of certain tax breaks you are pretty much forced to split your money into different silos. Pensions are the obvious example, a one-way silo that you can draw on after 55 2, and ISAs, which only have tax protection inside the silo.

    The whole reason humans invented money was to create a divisible and fungible token of wealth – later on that became a fragile store of wealth 3 too. That’s all very well, but in practice we don’t really seem to like operating in a miasma of undefined cash or debt swilling around, so we often break it all up into itty bits and tackle each one of these on their own. In doing so we often lose the big picture – the classic case is somebody carrying credit card consumer debt who has savings, or even worse, has money in the stock market. There is no point in having savings if you have debt that is at a higher interest rate than the net return on those savings unless you have a specific reason for it. If you are carrying chargeable consumer credit you have no business being in the stock market – fight the nearest fire that is burning faster before worrying about the flames on the horizon.

    The Silos of Tax-advantaged Savings

    The biggest and most complex of these taxation silos is the pension. It has the greatest restrictiveness, and is therefore the hardest to manage. It’s also usually at a high-water-mark in your 50s.

    As you get closer to the magic 55 the problem of silos gets a lot more acute, and doubly so if you are an early (pre 55) retiree. For an early retiree with a defined contribution pension the decision is clear – draw the pension from the age of 55, because you have no other earnings income (that’s what retiring is) so you get more of your money back paying less tax by choosing the longest time period to draw it. That favours drawing from 55, all other things being equal. If you’re still working that’s nuts, but if you aren’t, knock yourself out.

    However, just before 55, you have pension silo that is a dead hand that demands maximum feeding at the expense of the ISA silo, or indeed your general free cash flow, because it is the most lucrative. For instance, the Ermine specifically took out a DC pension when Osborne’s pension reforms were mooted, because, well, it’s rude to turn down a guaranteed roughly 10% p.a.  uplift on about £7000 in cash, tax-free if you swing it right. The fact that this allows me to defer my main pension increasing it by 5% is an added bonus.

    Trouble is, you have to design your savings plan and glide path while you are still working, and I predicated mine on an ISA allowance of £9,000 p.a. and being able to ignore pensions, because I didn’t want to have to take out an annuity at 55 or wait until I was old enough for it to be worth it.

    I’ve only been retired for two years, and in the meantime they’ve mucked around with the silos so much that the original plan is in tatters. My original aims were simply to fill my ISA each year, basically by selling unwrapped holdings up to the CGT limit and tossing them into the ISA and topping it up a bit from savings. The increase in ISA allowance means I want to top it up a lot – there’s another £5000 p.a. to find. And then Osborne changed pensions so that it’s worth tossing £9000 into one to win £2000 of tax that I paid years ago back – even if you’ve never paid tax the deal is on offer, though it’s only really favourable for people close to being able to draw the prceeds in a couple of years.

    Fortunately I overestimated my spend rate; I expected to have to draw the pension after a year and a half, so the start of this year. When I do draw it I get hold of my 25% pension commencement lump sum which is a shitload of cash saved up for this, and then have to push that into ISAs for a few years. It is this which makes me keen to max my ISA allowance across the intercession between stopping work and getting hold of the AVCs.

    Then I needed to find about £10k for an opportunity that has come up, and so I am now up against the end of my free cash flow. I still have deep strategic cash savings in NS&I and a Cash ISA, which would easily cover that but I am loath to break into them, because God knows when I will be able to save and preserve cash in real terms with NSA&I again, and I don’t want to lose the ISA capacity. So heck, it’s time for the Ermine to borrow money!

    Lenders are all computers these days, and all lending is predicated on income

    The last time I borrowed money from a bank as a loan was in the mid 1980s. At that time there was this quaint custom of going into the bank where you would talk to someone about what you want the money for and what your income was etc, so I went into my bank in South Kensington and showed the fellow the payslips and how much I wanted to borrow for a car. Arguably what the bank manager should have said was don’t be such a damn fool you young whippersnapper, a car is a wasting asset that will depreciate faster than you will pay down the loan, but for some reason he didn’t, I had another £2k in my account and everything was fine. They got their repayments on time every time and that was that. It was a damn fool thing to have done, don’t ever borrow money to buy a car, particularly as cars as much cheaper now in relative terms. But I got away with it.

    It so happens that I am still with the same bank, branch and account because I can’t be bothered to fiddle about with this, I never go overdrawn so many of the so-called benefits of switching aren’t of value to me. So I spark up their website and inquire of a personal loan for £8k, using the non-credit referenced query. Income – 0 (I suppose I should have put in my ISA income, but what the hell). Now bearing in mind this is my own bank and they should damn well know that my Cash ISA has more than enough money to cover the £8k, but the answer is basically

    Computer say no, fuhgeddaboutit m8.

    There’s apparently a hidden assumption that has crept into lending money these days, and that is that you are a good li’l consumer trying to buy more consumer shit than you can afford at the moment, but your income is enough to service the debt. There seems to be no concept that a member of the consuming proletariat may have the money but because of the silo structure it is in the wrong place and he may lack liquidity. Let’s face it, who would you rather lend money to – some kid wanting to buy an iPhone or somebody with financial assets of many times your loan but ensiloed in a pension AVC or shares that can’t be sold till the next tax year? There’s no question – go for the iPhone toting kid any time 😉

    Now in the 1980s, I would have gone to see Mr Bank Manager, I would explain that I have these CGT embargoed shares to cover it, and if that isn’t enough that in two years I would have my AVC of way, way more than the loan amount and I am being sensible in deferring my pension so this loan is in fact there to use my capital to make more money. It isn’t for a wasting asset like an iPhone or a car, and he would look back over 20 years of running that account, figure £8k isn’t quite enough to do a runner to Rio and advance the cash. But we aren’t.

    Computer says no

    Now unlike many people I never go on the assumption that I have the right to have people lend me money, so that’s just the way the cookie crumbles, more loss Mr Nat West, because compared to most people they advance personal loans an Ermine is probably a good bet.

    Where can a skint Ermine borrow from – aha – Wonga and Credit Cards 🙂

    My main problem comes around the turn of the next tax year – I need enough liquidity to max the rest of this year’s ISA, and to max my SIPP this tax year. There’s no point in drawing money out of a Cash ISA to fill a S&S ISA – it’s the old Silo problem again, that money is already in the ISA silo so there’s no point taking it out the bottom and chucking it back in at the top. That silo needs new money.

    As soon as the tax year is done, however, I get a new CGT allowance, so I can sell some unwrapped shares and pay off the loan 4. For a short period I even considered Wonga or The Money Shop, despite taking the piss something rotten a while ago. A two-week period over the 6th April would actually be the correct use of a payday loan, but the thought of being spammed shitless for the next 10 years by their ilk wasn’t really an attractive proposition. This from Moneysavingexpert is pretty much all I need to know.

    1402__wrong_way_signage

    Yup, got that. Wonga is probably more crafty than I am clever…

    Mrs Ermine didn’t really approve, either. So let’s take a step back. Now it so happens that every month Barclaycard entreat me to borrow money from them. I don’t use the card, but I have it because I figured that after leaving work nobody will give me another credit card until I become a pensioner, so I may as well hang on to the ones I have got. Presumably Barclaycard still think I am working for The Firm, because I told them truthfully that I was when I took it out and they haven’t asked me since. So like clockwork, every month they send me something like this

    1410_bcard

    Now I don’t know how ‘king stupid Barclaycard think their customers are, but a 0% interest cash loan with a x% fee is not 0%. At first sight this is a loan for 9 months at 1.9%, ie a loan at an APR of 12÷9×1.9%=2.6%. It’s actually a little bit worse than that because you have to repay a credit card loan at quite a high rate, about 3% of the loan outstanding per month, so you don’t get to use all of the cash for all of the time. The car loan was so long ago I can’t remember if you have to repay a bank loan every month. Here in practice you either get not to use the full loan amount or you effectively borrow a smaller amount at a higher interest rate, say about 5%. And you must must must ensure you repay the minimum amount every month, I’ve always taken card firms up on the Direct Debit pay minimum amount off each month, so the first thing you have to go on getting the loan is chuck some of it into the debited account ready to pay the loan down.

    I actually prepaid the 1.9% fee – ie paid too much into the card account before taking the loan so the fee is taken from the existing credit balance and not the loan, because I suspect they would charge monthly card interest on the fee, which they can’t it it’s not carried 🙂

    Then I repeated the operation with MBNA, who offered me a year and a half loan for 5%. They also offer this every month or so. I still have a soft spot for MBNA – 25 years ago they lent me £15,000 interest free which was a significant part of the deposit on my first house. And I really didn’t pay any interest on it – in those days 0% interest really meant 0%, no fees involved. The fact that it was a tremendously stupid time to buy a house, very much like the present time, indeed, can’t really be blamed on them.

    That will take me into the time when I can draw my DC pension, and all of a sudden I am rolling in liquidity, particularly as the impending stock-market rumble means I can probably liquidate more unwrapped holdings CGT free as they fall to par. Which is dead good, as stock market rumbles are exciting and opportunities to get stuck in and pick up value. I love the smell of fear in the markets in the morning. And it so happens that I have a fair amount of uncommitted cash in my ISA. Maybe I can stop writing articles like this and write more like this. If I can have just one word in Mr Market’s shell-like, if he could just delay the denouement a teeny bit, so say Q4 of next year, I’d be in a better position to use it. If he has to throw a benny earlier, I may have to switch some of my AVC fund that is currently in cash into say a FTSE100 index. The trouble is my AVC fund is currently already exactly 25% of my pension capital by design, so I can’t really use any increase that much…

    Oh yeah, about that classic bad case of somebody carrying credit card debt but with savings, indeed who has the temerity to be in the stock market to. Well, that’s me. What the hell, do as I say, don’t do as I do 😉

     

    Notes:

    1. you can take the Ermine out of The Firm, but not yet the biz lingo out of the Ermine, it was drummed in over 20 years
    2. corrected 20 Oct from earlier version “only fill until you are 55” which wasn’t what I meant
    3. money in terms of cash is a fragile store of wealth because it tends to depreciate over time as it is created at a higher rate than the value accumulating in the economy
    4. I was dead chuffed when IDJV that I hold unwrapped fell to the price I paid for it in the current market loathing for all things European. That means there’s no CGT to pay, so I sold them and that will give me some extra liquidity at the turn of the tax year – or I can simply to an internal transfer of the cash into my ISA this tax year, leaving only 2k to find this year. It’s an ill wind…

    ah, I miss those index-linked NS&I savings, wish they still did them as it’s a fantastic place to stash some cash away from the ravages of inflation.

    Isn’t it amazing how complicated things can become, although I’d go out on a limb to say that your particular set of circumstances must be pretty much unique 😉

    The “computer says no” was something we experienced when trying to open up a joint account recently: “Occupation?” er, “none” I replied but it didn’t “fit” and they couldn’t use “unemployed” as that was only for people claiming JSA so we had to go as “other” but by golly they were confused. It might have been easier to lie and say self-employed or something

    “don’t ever borrow money to buy a car”: oh no; borrowing for a car in 1974 was one of my best financial decisions. Inflation roared off, so the bank was effectively paying me for borrowing its money.

    The chance may recur in a few years time. Not just yet, though, I suspect.

    Maybe you need to be a little wary of tinkering around too much with your silos – as you say, things have changed big-time in the last couple of years but who’s to say the goalposts won’t move yet again in the next couple, especially after the general election…

    I agree with you regarding these current market drops maybe being potential buying opportunities – for me, it’s great to see a bit of volatility again !

    I don’t usually pay over any of my allowance into the ISA pot until right at the end of the tax year, but I could always fill it earlier if necessary – it means there’s always dry powder available for a big opportunity.

    16 Oct 2014, 7:40pm
    by BeatTheSeasons

    reply

    I remember reading somewhere that borrowing against an ISA is specifically prohibited.

    @mistersquirrel What’s wrong with ‘retired’ then 😉 Mind you, aristocrat or ‘gentleman of leisure’ has a certain ring to it. What about ‘writer’ – after all you get paid for some of what you write. I guess I could go for ‘investor’, ‘sound recordist’ or ‘photographer’ and even ‘chartered engineer’ as I haven’t managed to totally avoid some filthy lucre. Fortunately I haven’t had to fill in any forms like that since quitting The Firm.

    I miss NS&I dearly, and it’s a bastard having to hoard them because there’s no knowing when they’ll happen again!

    @dearieme that was 40 years ago 😉 Surprised such early indulging in bad habits didn’t set you into bad ways – after all debt wasn’t so normalised then!

    @DM – although pensions tinkering has been pretty grievous over the years they usually do let you grandfather the rights/LTA you have. I have protected rights to draw my occupational pension from 50 not 55 because this was part of the terms before A-day. Since my pension contribution days are largely behind me and I’m within about two years of drawing it I’m reasonably relaxed on changes. Fingers crossed….

    I usually aim to fill about half the ISA by this time dripping in pro-rata. Though I stitched myself up in 2011 by hitting it hard in the Summer of Rage in 2011. Against the leave it to the end is the study that showed people who could should go for it in April because the money has longer to work in the market. But I’m an unashamed market timer not a mechanical investor so to hell with that…

    @BeatTheSeasons it’s a pension that can’t be assigned as collateral for a loan. Hence the recommendation for early retirees don’t pay off your mortgage early even if you can – use the 25% tax-free lump sum for that. Which is effectively borrowing against your pension but nobody gets to know. I didn’t do that, so I get an income suckout now and a massive capital heave after drawing my main pension, that I then have to shovel into ISAs over quite a few years. So the don’t pay your mortgage off advice is right, but I was in a fearful place at the time and just wanted to minimise all risks and that included people with size-9’s repossessing my house. That wasn’t tremendously smart in retrospect but I could afford to get it wrong.

    Having said all that it appears if you have insurance in an ISA from years and years ago that cannot be assigned L&G get around this in this ISA mortgage product by running a term life insurance product alongside it.

    Borrowing money when you have assets but have no job? That’s what a margin account is for.

    Hehe I enjoyed this, especially the slightly embarrassed last line 🙂

    But hang on.. surely an ermine could just write a blog post containing the following words:

    “Would one of you lend me £10k until next year? Submit your desired interest rate here”

    ?

    😉

    Actually, on a (slightly) more serious note – couldn’t you have looked on a p2p lending site? I’ve never gone into any of those websites from a borrowers point of view, so I’m not sure if they care about “income” or not, but I thought the idea was that lenders can look at individual applications and choose who to lend to, and at what rate? Although to be fair, even if “eligible” you probably would have been looking at around 5% (I’m guessing here) so you probably did ok with your credit card method.

    .. Although I still can’t believe I really just read this tale on *your* site! What have you done with the real ermine?

    @JAL funny you should mention Zopa, as I have instructed them to cease lending and I will slowly suck out my cash from there too as it becomes available.

    They use credit scoring too, and require an income of £12k a year.

    It’s always good to know when you can break the rules 😉

    @George I’m starting to get that feeling. In the UK CFDs are taxable though spreadbets aren’t. Which is a shame as CFDs probably suit my requirements better.

    “There’s no point in drawing money out of a Cash ISA to fill a S&S ISA – it’s the old Silo problem again, that money is already in the ISA silo so there’s no point taking it out the bottom and chucking it back in at the top.”

    Perhaps I’m just confused by the way you’ve written it, but don’t forget that you can *transfer* a cash ISA to a shares ISA — i.e. You don’t need to (and shouldn’t) take money out of the cash ISA.

    And thanks to the budget you can someday transfer it back to cash if you want to. 🙂

    @Monevator I probably did make a mess of that. I have 4k of space left to contribute to my S&S ISA for this year. Although I hold the cash ISA to have the liquidity of cash, very soon (this time next year) I will transfer it into S&S. But I still need to find 4k of non-cash ISA to max the ISA allowance this year. Some of that will be courtesy that nice fellow at MBNA this year, due to the cashflow squeeze, but I don’t want to miss out 😉

    If you have sufficient liquid assets to be accepted as a customer by a private bank, then they will do things like lend money to individuals with no employment income but financial assets that can be used as collateral.

    For the rest of us, Handelsbanken, which has a growing number of branches in the UK, does traditional, ‘go and speak to your friendly bank manager’ style banking.

    @Owl thankyou for that tip! I didn’t realise this still exists in the UK, indeed there is one in Ipswich 🙂

    I’m nowhere near the levels for private banking, but even after I draw a pension I will be anomalous because I will have about half my ‘income’ from investment dividends. In the UK most banking, lending and credit cards seem to be predicated on earnings income or pension income, it seems there are few capitalists of middling ‘incomes’. I may talk to these guys.

    “there is one in Ipswich”: slowly stuff happens. Cambridge is going to get a Metrobank, and has already got a new, local bank, Cambridge and Counties. http://www.ccbank.co.uk/about-us

    20 Oct 2014, 9:50am
    by living cheap in London

    reply

    You can only pay into a pension until age 55?

    I am showing my age (& ignorance) here but that is something i didn’t know.

    My “official” retirement age is going to 67 based on the current status quo…. so that’s a 12 year absence of pension tax relief. I am trying to understand the political/economic reasoning behind this but I am confused. If anyone can shed any light on this i would be most appreciative.

    In reality I’ll be retired earlier than 67, but I wasn’t planning to draw down the private pension until this time.

    @living cheap > You can only pay into a pension until age 55?

    Not at all, you can carry on contributing for a long longer than that. I believe at least to 75. 55 is currently the age from which you can draw a pension. You have the right but not the obligation to draw it then. This age will creep up as time goes bym but I am old enough for it to be 55 for me.

    I had thought my pension contributing days are behind me, since I am not earning. But when Osborne dangled his new scheme I figured a guaranteed uplift of about 13% p.a on cash was worth going for. Some of this borrowing is so I can contribute 2880 to a SIPP this tax year as well as fill my ISA for this year. I can pay the borrowing back next tax year when I get another capital gains tax allowance, because I have assets I can’t sell without incurring CGT, and it’s better to borrow a little than pay CGT 🙂 Silos complicate things…

    20 Oct 2014, 1:15pm
    by living cheap in London

    reply

    Gotcha! thanks for clarifying – you had me on the ropes with your second paragraph “a one-way silo that you can only fill until you are 55”.

    I’m currently splitting my retirement investing between my ISA’s & my pension so I can (in theory) get to the ISA £’s if i need it younger than when i want to draw my pension from.

    ‘living cheap – thanks for picking that up – sorry, it’s garbage and what I meant was one way in that you could only draw on after 55. Corrected now!

    ISA savings are the classic way of filling the hole pre 55. Not paying your mortgage off until you get the pension commencement lump sum is another way that works well with ISAs… I wouldn’t have to borrow this if I’d gone that way

    21 Oct 2014, 12:02am
    by Ray MacDonald

    reply

    Banks and credit cards – pah!
    Costco in Canada is dumping Amex and moving to MasterCard, so my wife applied for one so she could buy some groceries there. They don’t take Visa.
    We applied to the same Bank who gave us a shedload of credit limit on our Visa card. After taking a jaundiced look at our pension income, the Bank gave us the card alright- with a paltry credit limit. We can make about one trip to Costco and that’s it for a month.
    Do these bozos even look at anything but monthly income?

    You may have to adopt a de-silo-isation strategy if that nice Mr Balls puts an upper limit on your ISA holdings. Which I hereby forecast he will.

    23 Oct 2014, 5:44pm
    by living cheap in London

    reply

    I’ve actually got some stock of Handelsbanken in my ISA: I figured it would be a steady safe stock to own for the long term.

    28 Oct 2014, 10:30pm
    by paullypips

    reply

    Tesco are actually doing a credit card transfer with no fee at the moment:

    http://www.moneysavingexpert.com/credit-cards/balance-transfer-credit-cards#Tesco10mths

    Many thanks for a great blog.

    […] regard it as a calamity and I’m prepared to pay for my folly by paying 5% on the money I borrow for a few months rather than 2% on a mortgage […]

    @dearieme that may well be the case, I’ll take it as it comes, you can’t hedge everything!

    @Living Cheap – I see the Swedish Rijksbank have dropped rates to zero so the ride may be “interesting” 😉

    @paullypips ah, but I am a financial pariah because of the absence of income! Though more to the point I already have a Tesco credit card and these offers are usally teasers for new cardholders – I only have three CCs in all and this is the one I use normally.

    […] but can’t  access them for the moment. Those assets can be the value of your future work, or next year’s un-CGT-embargoed share sales . But this is a very small set of Wonga’s client base, because usually when you […]

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    […] their credit cards. In TFS and mistersquirrel’s favour, it was an Ermine rather than they who contributed to this statistic, though I used it to avoid crystallising a capital gain as opposed to spending money I didn’t […]

    […] The Ermine owes > £10,000 on credit cards at 0% interest 3. The money is now sitting in bank accounts – because you pay up front to borrow this […]

    […] by inflation these savings are an in emergency break glass sort of thing to the extent that I will borrow money for short-term requirements rather than break into this, because once they’re gone there’s nothing else available […]

    […] must feel after having a steady income for most of your adult life. Ermine has spoken about this many times and I am not sure exactly how I will feel about it. My best guess is that I’ll always be […]

    […] couldn’t sell any of the rest of my holdings at a profit even though I needed the cash, hence I had to borrow some. Now it’s still a bit higher than that at £16.91, so I’ve told TD to let me know […]

    […] Micawber and started to fall behind but corrective action was taken within two months,  and more recently to avoid having to sell more than a capital gains tax allowance worth of […]

     

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