31 May 2015, 12:17pm
personal finance
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  • Briefcase and The Hardest Grafter – spectacles pitching the poor against each other

    Ah, the taste of bread and circuses, harbingers of decadence in the declining imperium bereft of leadership, vision and ideas. The ermine is not a bleeding-heart liberal. I even believe in making the distinction between the deserving and the undeserving poor which is beyond the pale in right-thinking circles these days, because I believe Britain is probably rich enough to assist the former whereas the latter will expand to consume all resources – witness the bizarre goal of eliminating relative child poverty of the Labour administrations, which is going to lead to serious misery in this.

    1505_briefcase

    I am out of touch with pop culture, and loathed the concept of ‘reality TV’ ever since DxGF tried to make out there was some merit in the original Big Brother that she was addicted to – I stuck about 10 minutes before deciding this was shite robbing me of minutes I’d never live again. The description of two current/proposed ‘reality’ TV shows gives me a chilling feeling that we are going back to the days of cockfighting and circuses having dwarves and other sorts of gawpery that I’d thought we’d left behind decades ago. There’s nothing wrong with reality TV exploiting people who are compos mentis and who have other choices when they sign on the dotted line. Violating the latter condition for spectacle makes me queasy for what it says about our respect for others.

    I know part of the point of art is meant to hold up a mirror to us, so that the ideas and thoughts can resonate with the messages locked behind the firewall of our subconscious, transforming unvoiced fears into safe signals so we can know ourselves better. One of the drivers behind the search for financial independence is the fear of becoming poor. It pushed me to go through a period of elective privation to escape the Man, and underlying many of the tradeoffs in FI/RE is elective privation now against unelective privation later.

    It’s not surprising that after a period of economic retrenchment mining this seam of fear is rewarding for story pitchers. Take the American CBS show The Briefcase, where two families short of cash are given a briefcase of ~$100,000 and instructed to share it with the other, as sort of financial version of the Prisoner’s Dilemma. Over on this side of The Pond the BBC is looking for Britain’s Hardest Worker – to pitch a bunch of these against each other and the winner gets £15k. At least our American friends are both more generous and in theory every participant can win!

    According to the Beeb

    The series will tackle some of the most pressing issues of our time: why is British productivity low? Is the benefits system providing many with a reason not to work or hindering their working opportunity? Is the hidden truth about immigrants simply that they work harder than Brits – and we need them as much as they need us – or are they simply prepared to work for a lower wage? And have the young simply not inherited the work ethic of older generations or have working conditions just got too hard? Who in Britain still knows how to graft? It’s time to find out.

    The Ermine Bullshit-athon failed scanning this because it isn’t designed to process a signal more than half ordure so I had to take it in manual

    “You lot on the couch out there – you know that jobs are getting worse and many of you fear in falling out of a comfortable living in this generation or the next. Projecting your fears upon others is an easy way to relieve the pressure. Let’s take your mind off the fact with this exploitative drivel where we pretend hard unskilled work is the route out of poverty, because as we all know that is so true these days 1.”

    Now the PR release does raise some interesting questions. As Merryn Somerset-Webb describes in the FT (h/t Monevator for the link)

    The 16 hours bit is because that is the number of hours our system insists that you work in order to claim in-work benefits, something that has nasty implications for UK productivity

    […]

    If you incentivise people to work part time you get a lot of part time workers with unsatisfactory careers (and low productivity). And if you use the tax system to show that you favour housing above all else you get very expensive houses and as a knock on, possibly lower levels of productive investment than you would like.

    so the BBC’s thesis that the tax credits in-work benefits system that helped Gordon Brown get unemployment down might have pole-axed UK productivity has friends in other places. It may even be true – the endless special cases and indeed the historic pro-natalism of the tax and benefits system creates some strange distortions in what types of lifestyles it promotes – witness the truly bizarre spectacle of comfortably off people bitching ‘S’not fair’ 2  to Osborne’s removal of child benefit from higher-rate taxpayers some five years ago.

    I’m not at risk of being subjected to either programme, and I’m very happy to say that I’m not paying for the BBC version of it, but I feel uncomfortable with the divisive image that’s being held up to me by these programmes and the popularity of other poor-shaming TV shows like Benefits Street. One of the changes that I see in British society is an increasing stratification by income, though in other ways we have become far more tolerant and accepting of diversity.The most egregious example of this stratification is shown in the proposal for the city-state of London, where an Ermine was born and raised. This  is a place where people figure you need an income more than 10 times the UK average income to live. I grew up in an (admittedly south of the river) part of the city in Zone 2. Although I could buy a flat in the area I’d struggle to buy a house.

    These programmes feed on the fear of falling down the financial pecking order, as some of the distortions we have enjoyed relative to the rest of the world are being flushed out by globalisation and automation. We need insight, analysis and leadership to navigate these changes as best we can. Not bread and circuses to distract us from it. Yes, I’ve taken the piss at length from the middle class who have been acting dumb selling off their house for school fees and holidays, and carping they can’t afford Silly Bandz for their children. That’s because one can live perfectly well without school fees and Silly Bandz. But I draw the line against going further in the line of entertainment. In an increasingly financially stratified society I suspect that many well off people never come across people who are really poor, because we live increasingly separate lives. That’s fair enough, but to gawp at such fellow humans on TV without having the humility to remember that there but for the grace of God you go seems to be a retrograde step. The poor may always be with us, and I don’t know the answers – mindlessly throwing money at the problem doesn’t work, but taking the piss by gladiatorially setting some against others in the name of entertainment demeans both the watchers and the watched IMO. A respectful philosophy is good – NoMo PoMo.  Merryn Somerset-Webb’s analyisis and the positing of questions, yes. Cheap TV, er, no. Nietzsche has some sage advice for prospective viewers

    when you gaze long into the abyss. The abyss gazes also into you

    It’s always good to be open to alternative points of view, so here is a Torygraph article telling us that this is an excellent insight into the heart of darkness that is the feckless poor that we should ogle not because it says something about us but because it says something about the reality of the human condition in Britain. Maybe a couple of hours with the Trussell Trust would be a better way to get the inside skinny rather than sitting on one’s backside being ‘entertained’ by other people’s desperation. And since everybody else writing about this sticks up a picture of the Jennifer Lawrence I am going to too, even though I haven’t read/seen Hunger Games 🙂

    1505_jlaw-2060x1236

    Rupert Myers of the torygraph doesn’t seem to understand the role of having choice in whether something is exploitative when he compares this with other reality TV. If The Hardest Grafter rings me up offering a place they will be met by a long string of the finest Anglo-Saxon cursing them and the horse they rode in on. If they ring up someone poor enough for it to be an attractive option then that someone doesn’t really have a choice. The reason all those Lefties draw the analogy with Hunger Games is not that the participants of this show have to kill each other. It’s that they don’t really have any ‘king choice as to whether to volunteer for the spectacle, because the chance of an upside win compared to a zero is worth shooting for. Compared to that, all the other reality TV bozos who ended up eating kangaroo testicles electively chose to do it among other good options of spending their time. I presume that when Rupe read Law at Emmanuel College Cambridge he was introduced to the role of metaphor and allegory in a narrative. Heck, as a decent writer he’s been known to indulge. Don’t be a punk, Rupert.

    Notes:

    1. The JRF indicate (PDF) that work is a route out of poverty for about half of households – low skilled work and having dependent children don’t seem to be conducive to that
    2. to save anybody the bother, yes, ‘snot fair to SAHM households. In a similar way that finding myself subsidising my well-off colleagues’ family holidays through their universal child benefit across 28 years of my 30 year working life wasn’t fair.
    24 May 2015, 11:44pm
    economy personal finance rant:
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  • Middle-Class inflation – it’s big, it’s bad, and it’s eating your lifestyle

    Brought to you by the Ermine department of first-world problems  this Torygraph article ruminating on how terrible middle class inflation is gives me much to sink some needle-sharp teeth into on so many fronts. It misdiagnoses the problem, the sense of entitlement is risible, and hell, there’s opportunity for much fun. Let’s take the headline and standfirst

    How ‘middle class’ inflation is threatening your standard of living

    An extensive Telegraph Money study into our readers’ spending habits reveals the alarming rate at which “middle class inflation” is taking hold

    Telegraph

    Dudes, your lunch was eaten, digested and shat out t’other side years ago. How come you only just noticed? People have had the time to write books about the problem. Ermines have written posts on how the middle class needs to wake the ***k up and get ready to take the sucker punch, middle class families on the brink, savoured the come-uppance of Shona Sibary stupidly selling her house in bits to fund her excessive lifestyle then discovering she doesn’t own her house anymore. The middle class threw the poor and the working class under the bus by voting for neoliberalism in the 1980s 1 that destroyed blue collar jobs, without asking the questions about where this was all going to lead. The Guardian was drawn out with a riposte along the lines of what part of we’re all in this together did you not understand…

    So what is this lifestyle-eating inflation you speak of, Mr Telegraph? Well, the cost of some desiderata has been going up faster than average wage increases – to wit

    increasing cost of luvverly stuff going up

    increasing cost of luvverly stuff going up

    Let’s take a butcher’s hook at what these essentials are. School Fees – despite every child being entitled to free education in the UK and indeed this is wot drug up your ‘umble scrivener that’s not enough for some people, and all those hard-working furreners are bidding up the price. Health insurance. Eh? We have the NHS, and if you are rich enough to be middle class then if you want to jump the queue for your hip replacements then take the Ermine line. It’s about 15k to pay privately. Things like that are what the middle class used to save for before they discovered home equity lines of credit to buy consumable shit. They knew a thing or two, your grandparents when they saved for rainy days, ‘cos they’d seen hard times… Dental care, well, yes, it probably is increasing, but it’s what, £200 a year. You’re not middle class if a 100% increase in that is going to make you sweat, and stop giving your kids sugary shit advertised on TV, at least after they have changed out their milk teeth. Holidays – the middle class used to have one foreign and maybe a UK holiday a year. Now you’re deprived if you don’t have four. The enemy is consumerism, and the enemy is within – lifestyle inflation.

    What are we comparing this with? Average wages covers a multitude of sins, but most jobs created in Britain since the mid 1990s have been  at the lower end of the scale. These are not middle class jobs where people aim to send Tabitha to public school. Some of these are jobs where people aim to make last week’s rent. These are some of the people that you, Middle Class Boss Person Sitting in your Corner Office, downsized or outsourced or just plain fired. You would have to compare middle class wages for this to have meaning. In fairness, the poll of their subscribers’ income indicates times are getting hard for them. Again, there could be sample bias – Telegraph readers are not spring chickens  – indeed a fair number may have retired between 2007 and now time because they’re not picking up da yoof.

    The Daily Mail and The Telegraph have the largest percentages of over 65s, making up almost half of their audiences – at 45 and 46 percent respectively.

    themediabriefing

    One item shows just how damned ungrateful the middle class is. The price of the average new car driven by Telegraph readers is £13,456. When I first read this I went WTF? you can get a new car for that little? The last car I bought second-hand in the early 2000s was ~£5000. These Torygraph readers presumably buy a new car every three years because that’s what one does if you haven’t been educated otherwise. Given that they therefore spend on average a shade under 10% of their gross wages, roughly £4000 p.a. on new cars and this big-ticket item gets 6% cheaper than the last time they bought it you’d think the blighters would show a bit more gratitude.

    A word in your shell-like, Mr and Mrs Middle Class. The good times ain’t ever gonna roll again, because you are in competition with the whole freakin’ world now, rather than a third of it. And most of the rest of the world is generally poorer than you, they’re ready to work harder, because the extra wedge will make a bigger difference to their lives. They want to eat your lunch and your nice sinecures where Mr Wealthy but Dim used to cling to the pipes of capitalism like slime-moulds slowing down the system a bit. Your kids may actually end up richer in absolute terms but feel far poorer and less secure, because being middle class is all about relative status.

    How did we get to such a sorry pass, eh? Let’s take a look at history, shall we.

    A history aside

    We have to go a long way back, to when the definitions of a middle class lifestyle were defined – roughly meaning owning your own house in the ‘burbs outright by retirement, a decent middle-management job, sending up to two kids to private school 2, owning a car and having a foreign holiday a year, though the latter were children of the 60’s and 70’s. This was the deal struck by Whyte’s Organisation Man 3

    Way back in time, there was a hell of a bust-up called the Second World War. Shitloads of capital got destroyed and a lot of people got killed and hurt. The British Empire that had coloured in most of the map of the world pink imploded, because so much of the energy that was used to rule other places had to be recalled to defend the homeland in an existential struggle that is still now worthy of admiration and I am grateful that a flame was kept alive in Britain while the lamps went out all across Europe, twice in 50 years.

    The British Empire in 1915, when the sun didn't set on it. Sic transit gloria mundi and all that...

    The British Empire in 1915, when the sun didn’t set on it. Sic transit gloria mundi and all that…

    In the aftermath of this the world divided into power blocs with different ideologies, glowering at each other across iron curtains and Berlin walls and suchlike – they drew clear borders and so it came to pass that Russia and China were outside the global trading system as perceived by Western middle class consumers and the firms they worked for. And the green bit didn’t endanger Western jobs either.

    First, second and Third worlds. Decoding the colour scheme should be clear enough :)

    First, second and Third worlds. Decoding the colour scheme should be clear enough. You’re with the blue team 🙂

    Communications were expensive and computers were dear, hard to use and few and far between. 4 There were no useful databases  – there were shocking levels of basic admin work and most middle management couldn’t type – they dictated their memos for others to type out for them. In 1979 at university in one of the premier science institutions of Britain I looked up books in the library using the high-tech solution of…6×4″ index cards in polished wooden cabinets.

    What a database looked like 30 years ago

    What a database looked like 30 years ago

    Cold war capitalism’s world was smaller, productivity stank by modern standards, far more people were employed and there was far more work for people at lower end of the ability spectrum.  People had children earlier, and jobs were more stable – the residual defined benefit pensions were a carry-over from this era, when employers sought to hold on to staff (and in the case of scientific and technical jobs, invested in training people).

    There is an argument to be made that the number of scientific and technical jobs were artificially inflated during the Cold War compared to what the economy needs which is why there was a push to educate some of the lumpenproletariat in grammar schools and free university education provided you could pass the tougher exams of the time. Again, I am personally grateful for this – I gained from the grammar schools and free university places, but when I entered Imperial College 7% of school leavers went to university. We could afford free university education then, and I would be all for making it free again – provided the entrance criteria were made tightened up again so that these free places went to, say 10% of school leavers. 5

    Then in the 1990s along came the Internet improving communications enormously, the Iron Curtain came down because it turned out that the problems of communism showed up in economic breakdown earlier than the problems of capitalism show up in economic breakdown 6. The Chinese decided they would like to join the party on their own terms.

    This means that a UK worker at the start of their working life now is competing with three times as many people as I did in 1982; the odds are in fact worse because the world population is higher 7 and better communications means that the pool of workers that can be drawn upon is far larger by at least an order of magnitude than it used to be. On the plus side you live in a far richer country, healthcare is better, opportunities for the talented are far-far better, which is the flipside of the better communication, so the average post-Gen X reader of this (if there are any 🙂 ) has probably progressed a lot further in their career than I had at the same age. Many such have travelled and worked abroad and had a wider experience that I have. I’ve worked in international teams but never based abroad – it was by no means impossible but it seems much more prevalent now. 8

    Living standards are normalising worldwide. So far this is a win for humanity but a lose for Mr Daily Telegraph and his kids

    So, roughly boiled down, the problem with the middle class is that they are in competition with a lot of their worldwide peers, but they normalised how rich they expected to be relative to other people in Britain in an era when they were only in competition with the rest of the First World. Globalisation is reducing inequality worldwide, but increasing it in the First World 9. When it comes to specifically their children and their dreams for them, then not only are their children going to face far worse competition than their parents in the employment market did as communications get better. The birthrate in the UK isn’t as high as it is in places that can supply the competing workers which amplifies the competition. It is patently clear to me that middle class parents who want their offspring to have a middle class lifestyle need to start getting on the side of capital for their kids unless those kids are both brilliant and driven. Leave them shitloads of money, because Dim Rich isn’t going to find sinecures like they used to in a more competitive world. Even Halfway Average rich ain’t gonna get ahead through hard work faced with those odds.

    Alternatively they could adjust their expectations of how rich relative to other people they want their children to be. Mr Money Mustache’s takes the battle to the enemy as usual – if you don’t want your kids to join the rat race then maybe teach them not to race rats, which is broadly what the current charade that passes for ‘education’ goes for. We need to teach children to learn and adapt in a changing world, we aren’t making factory units any more. Then there’s the whole automation and Humans Need Not Apply thing. Just like Dustin Hoffman was urged to get into plastics, Capital is your best hope now – don’t buy shit you can’t afford and identify yourself with what you spend money on.

    Seeking validation in what you are as opposed to what you have is also a potential win here- Erich Fromm posited the question in the 1970s. If you’re rich enough to be reading the Telegraph article and thinking ‘that’s me’ then you have the choice – clearly if you are a single mother working five zero-hours jobs to pay last week’s rent you don’t really have this choice, but that’s a different problem from grizzling that the price of wine and holidays is so expensive these days, dahlink.

    Living standards will go down for the middle class – they need to keep an eye on quality of life

    One of the problems the middle class seems to have had is they lost their historic values of thrift and deferred gratification. Once upon a time they knew to put money into healthcare and schools before blowing it all on holidays, wine, eating out and going to the movies. The middle class had annuities to look after them when they got old (before those DB pension) because they saved for it, no doubt encouraged to do so by seeing what happened to the poor in the poorhouse.  Then they got soft.

    Living standards are going to go down because of the shift of power from labour to capital. Mine is, yours is probably. The smart response is to roll with it – because although there’s some correlation of quality of life with living standard, if you deliberately change attitudes to the changes ahead of time you can do more with less, your quality of life need not go down with your lowered living standard. This is because many aspects of quality of life (autonomy and being able to express free will) are not a function of stuff or resources. It won’t be easy but fortune favours the adaptable.

    The middle class are locked into the school-university-job loop. It’s broken for the middle classes – an ever increasing money pit that is less and less likely to pay off for the next generation anyway. Mr Money Mustache nails the problem succinctly

    It may be that most parents of the very-upper-middle class are still operating from a scarcity mindset. If they are addicted to a high consumption lifestyle, earning $600,000 per year but still making car and house payments, they will assume that their children will need to earn and consume just as much in order to be happy. This of course dictates a job in the top fraction of the top percent of the economy, and education with enough prestige to secure such a job.

    There’s a lot of conspicuous consumption in the Telegraph’s list. The school fees etc are all passing on the image of replicating what worked in the past. Fingers crossed that past performance is a guide to future returns despite the rapidly changing world, because if not this is a dramatic misallocation of capital. Above a certain level, quality of life and standard of living are different things. That rings hollow if you’re poor, because it isn’t true for you. But if you’re griping about the price of wine and foreign holidays over the canapes like our DT readers, then you still have choices. Use them well, before you don’t have any choices because you can’t tell the difference between what you want and what you like.

    Notes:

    1. That’s a slightly harsh charge as technological progress would have done that job a little bit later, but they didn’t  help people change, since the postwar consensus was nuked around then
    2. this seems to be a peculiarly UK aberration, I haven’t detected in from US writers for instance
    3. that old  ideal cast a long shadow on the ermine, because I did not grow up in a middle class background, I learned some of this from books and inferred from the values of those around me, particularly those at university, who were mainly from a richer background than me. The deal started to fall through in the early 1990s, paradoxically just as Thatcher was defenestrated. This distorted model jammed my vision to seeing what was going wrong. I learned from my mistake – the OODA loop is a description of how to stay on guard against being trapped by a mental model becoming obsolete. There are many assumptions about the modern world that may unravel – and the principle of being able to preserve value in financial instruments and the SWR aren’t immune from that
    4. When I started as a professional electronics engineer in the eighties there was a single VAX computer for circuit simulation accessed by green-screen terminals via 9600 baud serial cables and all the output was in Courier text – shared across the entire facility of a couple hundred people. Most of the time you did your circuit simulation by building it in the lab and measuring and messing with components – I can do all this at the same time on the same machine as writing this now.
    5. I’m not against those that don’t make the bar paying their way as now – if you want a vanity degree or have an insight that you will get a return on investment knock yourself out
    6. harbingers of trouble with capitalism seem to be the destruction of the middle classes that I’m writing about, rapacious consumption of natural resources to produce worthless tat and increasing inequality leading to revolution as the rough trajectory capitalism is on, so it won’t necessarily end better. A capitalist consumer economy needs consumers and rising inequality is running consumers out of town, a process slowed by rising debt.
    7. when I started work in 1982 there were 4.5 billion of us compared to 7 billion now
    8. As a simple example, I admire and am gobsmacked by Early Retirement Guy who had the bad luck to graduate into the credit crunch recession and took the enterprising solution to take off and travel and see if the dust would settle. I left school after the Winter of Discontent, worked as a kitchen porter over the summer and started university in September. Gap years were for rich kids in those days 😉
    9. A view from the City of London’s Gresham College – the words of Christine Keeler ‘well they would say that wouldn’t they’ spring to mind, but the case is made well. Similarly the Social Affairs Unit and this paper seem to support this view
    22 May 2015, 3:54pm
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  • How important is a steady income flow to retirees?

    When I was working, I got a steady income. As two decades rolled by The Firm shifted about 10% of pay towards an annual bonus predicated on a stupid bunch of metrics to reduce pensionable pay, I always treated such bonuses as windfalls for investment – primarily in reducing the mortgage or as ISA feed later on. So I lived off a steady income.

    Reading Monevator’s post on investment trusts there is an assumption that retirees need a steady income flow. I’ve always made the same assumption, but on reflection I think this assumption should be challenged, because a retiree’s life is different to their working predecessor. Two things change in a big way:

    No dependent children

    Retirees don’t usually have dependent children under 18, though this assumption is probably more true for people coming up to retirement now that those planning it in 20 years time. In this country people tend to have children between 20 and 35, with a peak at 30 according to the ONS. People 1 had children earlier in the past, often in their 20s in the 1960s and 70s. It surprises me quite how nonchalant some people aiming for FI are about phasing this. For all the joyful Kodak moments etc, most people don’t deny that children are a big financial cost, and the sooner you get started the sooner you’re done with it – and indeed you will enjoy their company for longer too. A 25-year old having children will be 43 when the child reaches 18, a 35-year old will be 53. For the common two kids with two or three years gap that spans 46 to 56.

    people are having children later in life (Jefferies, 2008, image linked to source PDF)

    people are having children later in life (Jefferies, 2008, image linked to source PDF)

    There seems to be a recent tendency for children to remain financially dependent beyond 18 2– if they are dependent through university these ages move to 46/49 and 56/59. The early starter will be more employable, while the late starter could be well finished at fifty and in trouble financially if they want to retire early. They will need more money compared to the early starters just at the start of early retirement, at a time when money is particularly short because they can’t use pension savings – the earliest call on a SIPP is drifting up to 57 from 55 now. There is of course the opposing case to be made that having children impacts one’s career early on so you might accumulate more by delaying. If you’re okay with slightly early retirement (60 and up) then this may work out well, as you are into SIPP territory then.

    Lower general running costs including housing

    One of the things that clobbered me in my twenties was moving so often from one rented place to another – the Guardian’s Jenn Ashworth griped about this but I also had 14 addresses between leaving home and this house. I preferred flat/house-sharing, but that gets less possible as time goes by, because your pals tend to pair up, work elsewhere and so on. The instability of young life is expensive – you can’t accumulate tools and kit and you are always having to adapt – one place has enough kitchen paraphernalia, another doesn’t, all this incidental Stuff adds up.

    Then acquiring the first house – you need tools, you need to learn a modicum of DIY, everything is dear. I have all this stuff now – I don’t need new lawnmowers and saws and shit except to replace what’s worn out. With housing I’ve paid down my mortgage. The costs of running Ermine Towers is so much less than it used to be, because there’s little capital spend. Depreciation on a house is about 1% of the capital value or a bit more – if I factor in that about £2000 of utility falls off the house every year in terms of Stuff that Wants Fixing or upgrading it is about right, whereas renting it would cost £7000, though obviously the landlord would get to eat the £2000 operation and maintenance costs 3

    When I left early I looked at what my pension was going to pay after working for 30 years for The Firm (I made nearly 24) which was half final salary and targeted that as The Number I had to make up. Half to 2/3 of salary was a typical assumption of DB pensions and presumably this came from some acknowledgement that retirees would not have some of the big costs of their working selves. Often the pension commencement lump sum was there to clear the mortgage, though along with the kids dragging on their coat-tails into what used to be considered adulthood is a knock-on trend for people to have bigger mortgages later in life.

    Does all of  this income need to be steady?

    Up until very recently there was a big assumption built into the UK pension system that a pension needed to be steady – hence you had to buy an annuity on retirement. In Broke, I read that this was the historical way the middle classes dealt with the income on retirement problem – the destitute poor ended up in the poorhouse.

    Of my pension income I’ve lost about 25% by leaving work 8 years early. Unthinkingly, I fixated on a target income set by other people a long time ago. I lost my way in the details, and accepted two hidden assumptions, simply because that was how retirement was meant to look. One was that the amount needed to be half my final salary, and the other was that this needed to be a steady income.

    And then I went on a crash course on how to eliminate unnecessary spending between 2009 and 2012 because I wanted to get out and never have to work again. Freedom was that much more valuable to me than consumer doodads and rushed experiences. It was tough, but in that experience I learned what mattered to me and what didn’t.

    Discretionary spending

    Discretionary spending. Nice, but not essential

    I used the experience to drive waste out of my non-discretionary spending 4, but there has been a corollary – it skews the ratio of discretionary vs non-discretionary spending upwards. The former is more than half of the total. I have no income, so I am running down some cash savings. If I knocked out some of the discretionary spend I can easily meet TFS’s £10,000 a year target – this is largely because of the reasons given earlier – my running costs are lowered by fossil savings from my working life, particularly in terms of housing. I don’t have to pay rent and I don’t have to pay 32% tax and NI on earning the money to pay for the rent.

    Despite this I am going to invest in delaying my pension to secure a more fixed income, front-running it with a 5 year SIPP. The 5 year term means I can use cash for that rather than equities, which then takes me to the thorny question of my equity investments. They were designed to make up the difference, but my HYP has already reached the target amount thrown off as dividends 5. The surrounding globally diversified passive index shell I can’t qualify in terms of productivity – it increases my networth but it contributes little to my investment income. Theoretically you can take income either by natural yield (the principle behind a HYP) or by selling off units from a fund that is giving capgain, but the problem is ‘how much of this damned volatile capgain may I spend this year’ which is a tough call to make.

    Greybeard describes one way of smoothing the income across the business cycle. This is attractive to me, but since it turns out my equity holdings are entirely aimed at the Wants and not the Needs I wonder if I need the stability. Because I am child-free I have an option not open to those who want to leave money to their children, and that is of taking a joint annuity in 20 years time. Annuities get better value when you take them older because they’ll be paid for less time. This would address the stability problem, I would be in my seventies.

    On the other hand, I might want to leave money I haven’t consumed to better the world somehow. There shifting to investment trusts in 15 to 20 years may make sense – it is a low-maintenance approach, something like luniversal’s basket of eight would work. Yes, I would be paying something for the management and the income smoothing across the business cycle. But not paying  as much as for an annuity, which destroys all the capital in the interests of a steady income.

    These are not decisions I have to take now. In general, in finance, I’ve come to the conclusion that it’s best to keep options open. Things change over time, unforeseen shit happens.

    what I'll see as I go out of the park to reach the library. Beats wrangling Excel for a few years IMO, not everything going wrong stays wrong...

    what I saw as I went out of the park to reach the library. Beats wrangling Excel for a few years IMO, not everything that goes wrong stays wrong if you keep your options open…

    After all, I wrote this before wandering through the park to go to the library to pick up a copy of Nate Silver’s the Signal and the Noise precisely because shit happened but it broke me out of a rut where I could have been spending the next six years at The Firm staring at screens and every quarter having to dream up meaningless crap and lies to keep the performance management system happy because the top brass decided to manage by numbers and wouldn’t trust my boss to know if I am doing a good job or not. After leaving, had I closed off other options drawing my pension early, I would have been sore when Osborne’s changes altered the landscape giving me the front-running opportunities I can take now. Options are good, as long as they don’t depreciate the asset too much.

    Or split stable and volatile incomes – and spend electively going with the flow

    There’s a case to be made that a retiree should look for lower volatility income for their needs, and let the wants go with the flow. On a 100% DC pension that might favour investment trusts (and later on an annuity) for the needs part of the portfolio, with a decent amount of headroom for the unforeseen rises – after all any retiree quitting now really ought to allow for an increase of about 10 times in the real cost of the oil price across a 30-year retirement, with a corresponding knock on cost in domestic fuel.

    The wants part of your income could be invested with a higher equity exposure – anything from stockpicking to a world index tracker, and here you sell off units/shares each year to cover your next year’s elective spend. If the stock market goes through a rough patch then go on fewer holidays and more staycations, if it does well then salt away a bit to live larger in future and take more exotic holidays and eat out more. A retiree is in a great position to vary their wants spending according the the volatility of the stock market – to some extent you can also manage needs by shifting running costs along the Châteauneuf-du-Pape with caviar 6 <-> tap water and ramen axis.

    This sort of thinking probably benefits the extreme early retiree – quitting the rat-race at 40 or mid-forties. If you can live with the volatility, and let’s face it most UK extreme early retirees had some connection with the finance industry so are probably better qualified for this than the likes of me, you can probably do better spending electively with the ebb and flow of the market than going for stability across the whole income stream.

    Smooth the volatility with a 3 year cash pipeline

    If you don’t like the investment trust option you can soften the ‘how much of this damned volatile capgain may I spend this year’ question by pipelining it through a multi-year cash buffer. The only indicator you have is the market value – tie your elective spend to x% of that 7 and one year you are partying in Sydney, the next you are in a tent in North Wales.

    Lovely place, Wales, but I still don't want to have to use a tent to save money ;)

    Lovely place, Wales, but I still don’t want to have to use a tent to save money 😉

    I could use a three-year cash buffer and drip x% of the market value in at one end and spend a third of the buffer each year – that would make a three-year boxcar average which would probably soften the worst hits (bear markets tend to fall faster than bull markets crawl out from the wreckage, but three years is a long bear market. Just don’t mention Japan, okay?). That would be a lot of dead money if this were three years of my entire income but if it’s a part of it that’s not so bad.

    Using Ishares ISF as a proxy for the FTSE100 a 3 year buffer gives me an easier ride in the year on year change

    Illustration of buffering using Ishares ISF as a proxy for the FTSE100 a 3 year buffer gives me an easier ride in the year on year change – a 15% variation rather than 30%. Note ISF is not a total return fund, but the dividend yield is a lot less than the YoY variations. I have deflated the ISF share price by RPI relative to 2001

    Does the three-year pipeline being in cash cost on average more than the investment trust premium? Say you start with £1,000,000 8 Your cash buffer, at three years of 4% SWR is £120,000

    After all, let’s say on average equities give a real return of 5% and you lose 1% to the extra IT costs giving you a 4% p.a. real return with no cash buffer, or a 5% return on 88% of your capital, let’s be charitable to the Bank of England and say inflation is 2%, so you eat a 6% loss on the 4% going through your three-year buffer as it falls out the end. You therefore have to put 12.7% into that buffer, so in reality you’re getting 15% return on 87.3% of your capital.

    Each year on average the ITs turn your £1M into 1,040,000 and you get to spend the 40,000. With the buffer, each year your index funds returning 5% p.a turn your £878,000 into £921,900, of which you now take 4.2% to top up your buffer, leaving you with £885,000. Although I confess it wasn’t the answer I expected, you’re better off using the cash buffer and keeping fees lower, as your capital slowly creeps up in real terms or you could spend a little more. Over two decades this ends up in a doubling of capital reserves taking the buffer route as opposed to the IT route.

    Of course you can spend your retirement opening a bazillion current accounts and yomp the cash through the latest best paying account du jour to improve the return/lose less to inflation. Or pass the cash buffer through Zopa and a couple other P2P joints – don’t reinvest what your borrowers pay back but keep adding every year – this makes a pipeline well suited to the 3 year term and you will get your money from 3 years ago back, with interest.

    Decumulation is a bastard to get my head round. Initially I am going to decumulate cash, and that isn’t particularly challenging. In the equity part I can take the natural yield of the HYP section easy enough. But working out what to do with the foreign index stuff I’ve used to diversify the HYP isn’t clear to me at all, so far the 3 year pipeline through 1/3  Zopa 1/3 some other P2P operation and 1/3 cash 3year term account is the best I can come up with for that. Fortunately I don’t have to start doing this on equity savings for another 5 years, some clarity may come out of the murk by then.

    Notes:

    1. these people are women, the stats don’t track the guys
    2. The torygraph is pumping this up a little bit. In the 1970s many more children left school at 16 and could find decent jobs, it isn’t so surprising that more children were financially independent when they start earning at 16 rather than at 21 – 11% of school leavers went to university when I was 21 compared to about half now. It isn’t so much the dependent children at 25 that flabbergasts me, it is the late twenties to early thirties crowd
    3. These costs are shockingly lumpy – you need about five years of savings to smooth the costs. Presumably this afflicts BTL landlords too, particularly amateur landlords with just one BTL property – the statistics improve as the number of owned houses rises
    4. non-discretionary spending is on Needs, discretionary is on Wants
    5. This is because I won’t draw the pension early, so the difference to make up is less
    6. yeah, I know you’re a barbarian if you have Châteauneuf-du-Pape with caviar, but sod it, being your own person is one of the joys of getting older – if Jenny Joseph can wear purple and red then if you want to drink red wine with caviar just do it
    7. where x is your SWR of choice – typically 4 to 5%
    8. to make the numbers easier, for illustration. Consider paying an IFA if you start with that much – your time is worth more than mine
    18 May 2015, 7:39pm
    personal finance:
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  • front-running a DB or State pension with a new Osborne style SIPP

    I’ve written about this before, but it is getting close to doing it for me, hence a worked example. This is particularly useful for people with a legacy DB pension although the technique also works to smooth your income between retiring and getting the State pension, which is another defined benefit pension 1.

    A DB pension is defined only at a particular retirement age, usually 60 or 65, or use this calculator in the case of the State Pension. With a company DB pension you can often retire earlier, but you will take an income hit called an actuarial reduction if you retire earlier than the scheme NRA. In my case the NRA for most of my DB pension is 60, I will eat the loss from ‘retiring five years early’ for the last three years accrued when it was shifted to 65.

    When these schemes were designed in the 1970s and early 1980s there was more goodwill between companies and their workforce which was seen as more of an asset than now, the pension was part of aiming at staff retention, which is largely gone in a faster-moving, possibly more efficient and definitely more dog-eat-dog employer/employee relationship now 2. The actuarial reduction is rarely defined, and gives companies wiggle room to reduce their costs. As a result it’s usually best to take a DB pension at NRA, because it’s nailed down what you get. Individual circumstances can sometimes mean you’re better off to take it earlier, but that’s usually more to do with paying off debts with any tax-free lump sum.

    What to do if you want to retire before NRA?

    What you ideally want is a short pension to front-run the main pension until its NRA. This pays out between the date of your early retirement and the DB pension NRA. If you want to retire before 55 you also need to save enough money in an ISA or unwrapped to  pay your way to the earliest date you can draw pension savings, currently 55 but scheduled to rise to 57 and further – a gotcha to watch.

    When I retired in 2012 a short pension wasn’t an option – if I had used a SIPP I wouldn’t have been able to draw it down, but all this has changed now. So the question is now how much can I save into a SIPP such that I can run the SIPP flat in the (for me) 5 years between getting hold of it and the pension NRA, without paying any tax. There’s not much mileage 3 in a basic rate taxpayer saving tax on the way into a SIPP only to pay tax on the way out, although any sort of higher rate taxpayer will gain a useful amount drawing down a SIPP even above the tax-free personal allowance up to the 40% tax threshold.

    Put another way, I want to know how much can I put into a SIPP, such that I can withdraw the 25% tax-free lump sum up front and then a personal allowance worth each year, for (in my case) five years, from 55 to 60. With a NRA of 65 that would be 10 years. It’s reasonable to hold a five-year amount in cash, a ten-year amount would need to have some investment component for inflation protection – either some exposure to equities or some fixed interest bond-like stuff.

    more »

    Notes:

    1. a company DB pension is defined after each year you work for the company – they can change the terms for future accrual but not retrospectively for defined benefits already accrued. Whereas the State pension is defined by government and can be redefined – as has been the case recently
    2. until you get to the parasitic executive level, which seems to featherbed a ‘because we’re worth it’ layer of scum to loot shareholders more and more, because of course you have ‘pay the going rate’ to recruit top talent despite the fact that CEO pay used to be about 40 times that of the grunts (US study, Table 6), compared to over 200 times now and there’s been no notable increase in company profitability since then
    3. but there is some – even if you pay 20% tax on all of your SIPP income the 25% pension commencement lump sum saves you a quarter of the BR tax you’d otherwise have paid
    15 May 2015, 11:32am
    personal finance reflections
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  • of savings rates, metrics and goals

    Over the last couple of years the UK personal finance blogosphere has expanded massively – it is a great thing to see many more people taking their financial future into their own hands, and asking themselves what they want out of the whole work-eat-play-sleep tradeoff offered in a post industrial consumer society. One of the great things is that there is more awareness of these options – and that there are choices to be made, at least for some of us.

    Most PF bloggers seem to be in the accumulation stage, although there are a few who have passed across the event horizon to the other side like me – The Escape Artist for one, and I greatly enjoyed Living A FI’s post on crossing the Great Divide. My summary of the changes looking back on work to non-work is here. I feel different to most writers, not only because I am looking back from the other side, but also because I lack much of the laser-like analytical focus. It’s been just over five years since I started. I have changed, the world has changed, perhaps my work is done here.

    Of measurement, and metrics, and goals

    Many of us are quite analytical employing metrics and goals, tracking progress against these goals reviewing them and keeping score. In particular the notion of the savings ratio clearly works for most people. I’m a lazy barsteward and don’t do any of that. I had no idea what my savings ratio was – all I knew is it wanted to be as high as possible to shore up the defences against an earlier exit from The Firm than I had planned. I guess I took RIT’s £0 target and considered anything else a fail.

    Metrics never worked for me steer savings. For starters the whole goals and metrics things was one of the things that really pissed me off towards the end of my working life, I have no desire to gamify my life, and I lose the big picture easily if I focus on the details. I have never forward budgeted like you are supposed to – I have always tried to satisfy the Micawber rule by looking in the rear-view mirror and the shape of the road behind me in what I have spent, and adjusting the direction to keep the line on the right side of the Micawber threshold.

    The one exception is I track investment dividend income and capgain, benchmarking total return against VGLS100 and the FTAS, unitising every year. I probably need to rethink the benchmark as I am diversifying geographically. Maybe benchmark the HYP against VGLS100 and FTAS and the overall portfolio against some sort of passive world index fund.

    It’s difficult to work back and see what it had been when I was working – it was probably in the order of 80% for the three years as I ran out. This was easier for me than most because as I had discharged my mortgage. In theory saving has now switched into reverse – I don’t have use of pension savings yet and I don’t use the proceeds from my ISA. And yet one thing puzzles me – I look at how dramatic the contributions of Saving Hard make to RIT’s networth and wonder what is different. It might be as simple as I am ten years older and therefore the stock of accumulated resources was higher than the flow of savings, but on the other hand I didn’t have huge savings when I started in 2009 because I had favoured paying down debt in the form of the mortgage. I don’t count the value of my house in my networth because its value is more income-like in the rent I don’t pay. Shona Sibary is the cautionary tale of considering home equity as networth and spending increases in it. If you want to make money from residential property do it on other people’s homes, as a BTL landlord. I don’t do BTL and I don’t eat the seedcorn, so res property doesn’t show on my networth chart.

    I only have investment gain at the moment to carry things forward until first my SIPP gives me an income that I run down over five years and then my main pension comes in, paid at the normal NRA of 60 for The Firm for the vast majority of my time there.

    Ermine networth

    changes Ermine free cash and investments networth – ignoring house equity and any pension savings

    The stock market has been on a tear pretty much from when I left work, I have been lucky with that. This would have been tough had things gone the other way – as I crawled from the crash-landing of my career it would have been difficult to look at a gradual networth decline and not extrapolate that to a feeling of general wipeout and fail 2.0. Personal Finance is as much about the personal as it is about finance. The numbers circumscribe what is possible, but what matters is how you feel about the numbers and where they are going. That’s not always acknowledged – this is symbolic, it is part of the myth 1 of one’s lifestream.

    Not everything that counts can be counted, and not everything that can be counted counts.

    Albert Einstein William Bruce Cameron

    About half of these assets are in cash – I would have reached the other side (getting to 55 to use pension income) before the cash ran out even if the market had wiped out. But it’s as much about how it feels as about how it is. I fought against the fears of a fall in networth as I retired, but in the end Lady Luck smiled upon me – governments pumped stupid amounts of money into inflating asset classes, the oil price fell holding the inflation that would normally create at bay for a few years. I was fortunate enough to have invested in the right things, though over the last few years you just had to show up in the market and be reasonably spread out across sectors. Of course I would like to say that I was a stupendously brilliant investor. But that would be bullshit. So thank you, madcap governments who pumped up asset prices with fistfuls of funny money – I feel better set to face the coming crash than I did in 2012 because I will soon have pension income and once again an answer to that Micawber fellow…

    1505_this-too-shall-pass-bracelet

    Some of the government activity that made things look better in the markets may turn out bad in the end – perhaps as the decades roll by the centre cannot hold and it will all fall apart in a doom and death spiral. But so far, despite endless prognostications that the world was going to end including some of my own it hasn’t. Maybe it will end with a series of whimpers rather than a bang – after all the middle class is slowly being destroyed in the West and the whole experience of work is getting increasingly insecure, ugly and marginal for many 2, although a small number are making hay. Indeed, apparently by taking my engineering skills out of the workforce, I am a hazard to the economy and destroying Britain’s productivity. 3 To which I can only say f**k that – if you want humans to work longer then stop being stupid with metrics – as Liz Ryan summarised

    To hire talented people and hobble them with bureaucracy is the height of stupidity and poor management to boot.

    In the long run this too shall pass, indeed. More and more jobs are being controlled, measured and rammed into a rigid structure. I rose four levels up the greasy pole at The Firm – when I started as a young pup I could authorise £500 spend before needing authorisation from the next level up, when I left as a greybeard I had to get authorisation from two levels up get a train ticket to London. The only correct response of humans to that sort of ossification of processes and systems is to get the hell out, and let the devil take the national productivity 🙂 Work is supposed to sustain your life, not replace it.

    I am an outlier – much less analytical, and I don’t subscribe to some common PF shibboleths

    Maybe because I never worked in a management consultancy, I’m weak on the whole PDCA thing here. Philosophically I just don’t have the faith in in it when it is applied to complex and interactive systems, because it is hard to separate the variables properly, and also you are typically an observer rather than an active experimenter (unless you’re the Fed). As for the check part, the problem here is the dreadful uncertainty of some key variables – obsessing about the exact value of a variable with an inherently massive uncertainty leads to short-termism and massive over- and under- compensations. Lord Kelvin is all very well in his place but mistaking precision for accuracy can turn meagre knowledge into precisely incorrect beliefs.

    I’m with Mr Fox here rather than the prickly one – read widely and cover much ground, and read lots of stuff I don’t believe in (the efficient market hypothesis) as well as echo chambers of my own predilections and prejudices. I should know why I disagree with something, what the counterarguments are and I should have the humility to accept that I may be currently believing something that’s wrong simply because sometimes I know jack shit and sometimes see things wrong. I try to  at least do common memes the honour of trying to understand their premises. Nevertheless, I’m big picture fellow rather than streetfighting the details. I leave it to others to determine the details worth fighting – lower fees, yes, all the way, but I still can’t get excited about trying to win a return on cash.

    There are a number of common tenets in the PF community – passive investing, an ultimate ~4% SWR, the efficient market and some of the consequences of that hypothesis, that I don’t find common ground with. So be it, I have no desire to push what may simply be my ignorance onto others. So far I have survived six years of investing reasonably well. That’s still not a huge track record and it doesn’t span multiple market cycles. The job I had to do was much simpler and lower risk that for many – I wanted to top up my works pension to compensate for the missing eight years of working, which is easier than establishing a complete retirement fund for 30-40 years of working. I have largely done that now – the HYP pays enough dividends now to make up the shortfall, and being tax-free as ISA savings the target was 20% lower. I will half split future funds, half to build the HYP and half to built a more globally diversified index ETF section of the portfolio to insure against something currently unknown about the HYP philosophy going bad in the decades to come.

    The trouble with networth is while financial stock and flow are related, they aren’t locked together, and the variation is called volatility, and afflicts the stock value – the income flow is much less volatile. It was with great difficulty that I finally broke out of the instinctive association of volatility with risk. At some point, to become a successful investor, you have to do the Dr Strangelove thing with volatility 4 and learn to love it. It gives you your opportunities as well as your challenges.

    How I Learned to Stop Worrying and Love volatility

    How I Learned to Stop Worrying and Love Volatility

    Although volatility is sometimes associated with risk, it doesn’t stand proxy for it. For someone with a high proportion of capital in equities the volatility makes the savings rate/rundown rate unknowable over short time-scales of less than about five years, particularly if they are adding to their equity holdings.  I exchange some of my cash savings for equities rate limited by the annual ISA allowance. It is possible to derive some statistical estimates for the income from equities – after all the 4 or 5% SWR principle is derived from a Monte Carlo analysis of historical (US) data. However, the history of statistical analysis on equities is littered with some extremely big fails.

    There’s an implication that I have a positive savings rate at the moment despite having no income, because the networth is still rising, though the value is volatile. It’s a bizarre carry-on that investment capital can increase at a faster rate than I spend it, I guess this was the thesis of Piketty’s Capital in the 21st Century, and of course there should always be the memento mori that the stock market has been going absolutely bananas for three years and really cannot go on like that. It’s not like the world has suddenly become free of financial hazard. Presumably it would also be possible for a working saver towards FI to have a negative savings rate even if he were saving as much as he could, in the event that his investment capital were high enough for a stock market crash to diminish his networth faster than he is saving.

    This seems to be a problem with some of the common PF metrics – they start to fail you and become noisy and erratic as you approach the destination, because of the uncertainty of the value of equities. The rising uncertainty of the value can be seen as the increasing erratic trace of my networth as time goes by. This is characteristic of any equity based DC pension savings – and mine are buffered by about half the holding in cash.

    There will be two more jumps in the networth when my DC pension savings appear in the total – one when I get to 55 and the other when I get to 60. After that the fossil savings from my working life will be mined out, other than my pension after 60 which is deferred pay, a flow not a stock. The implication of that networth chart is that once I get these extra funds/income I will be underspending. That’s what happens when you shoot the demon of consumerism. There are many people who fixate on replicating their income when they were working, and want to be able to buy a new car every three years etc because that’s what a prosperous middle class lifestyle looks like, and good luck to them. My income will be less than when I was working, though it is possible that my disposable income will be a little bit more. The working me put a lot of money into the mortgage, and a lot into spending on rubbish, and the focus needed to get out in three years still serves me. The lesson stuck – consumerism involves a lot of spending that doesn’t necessarily lead to enhanced quality of life. One of the metrics the consumer sucker uses is comparing their Stuff and lifestyle with other peoples Stuff and lifestyles, rather than their own requirements. Busting out the TV and other instruments of consumer mind control like Facebook and social media in general help shift the balance closer to following my own needs and wants rather than those of the admen.

    Notes:

    1. myth as in psychological legend, not the alternative usage myth as in fictitious
    2. Lousy and Lovely Jobs: the Rising Polarization of Work in Britain, Maarten Goos, Centre for Economic Performance, LSE
    3. there seems to be much head-scratching as to why Britain’s productivity is falling, and early retirement isn’t fingered by Peston, for example, who seems to point to governments spiking the guns fired by Schumpeterian creative destruction
    4. hopefully without the drastic ending!
    10 May 2015, 1:43pm
    personal finance
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  • New free OU course on Managing My Investments

    This course may be of interest to readers,

    https://www.futurelearn.com/courses/managing-my-investments/

    Or not, but it’s free and apparently from the OU. I’ve never been educated into matters financial other than by my parents and by that fine Monevator fellow so I figured I’d take it for a spin.

    1505_learn

    9 May 2015, 6:41pm
    economy
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  • England’s shy Tories take the day

    Surprise result to the election it appears, well a surprise to the punditry though not necessarily to the odd canny investor 🙂 Shy Tories turned out in force and David Cameron is back in No 10, without the moderating influence of the crybaby Nick Clegg, who marched his party to their greatest success and their greatest doom all in the same action. I had a temptation to go with the headline England goes John Galt but that’s probably taking it a little bit too far, even in search of a decent headline. Why are shy Tories shy? – presumably because of the Scruton doctrine

    ‘Leftwing people find it very hard to get on with rightwing people, because they believe that they are evil. Whereas I have no problem getting on with leftwing people, because I simply believe that they are mistaken’

    Most people pursing financial independence will probably benefit on the finance front relative to other possible outcomes, some of the key items of the Tory manifesto are

    • Take everyone earning less than £12,500 pa out of Income Tax altogether 1

    Now on a technicality pension income doesn’t count as ‘earning’ although it’s subject to income tax, but the Tories probably don’t want to piss pensioners off either. The changes in personal allowance are quite transformational for the value of pension income, particularly when combined with Osborne’s changes. Before the Coalition, the personal allowance was £7,200 – with the best will in the world it’s probably a struggle to live well with an income below that even if you have paid your house off and gotten shot of the kids, whereas according to TFS £10,000 p.a. allows for relative luxuries including a serious consumption of alcohol which is just as well since it appears that pensioners are a bibulous bunch going on regular benders.

    I could wish for an end to the theatre of of passing laws to try and embed rises in taxes etc. The whole point of government is to pass laws, and to unmake them, so this is a damn fool waste of parliamentary time. As the old boy Yoda said, do or do not, there is no try. There’s no need for a faux legalistic framework, simply follow your manifesto and don’t put up the specific range of taxes you said you wouldn’t.It’s not like last time, Dave, where you could blame Nick for stopping you implementing Conservative manifesto promises. And let’s face it, you landed the mother of all sucker punches by getting Nick to renege on his no rise in tuition fees 2010 manifesto promise 😉 Nearly all voters have a dog in that race – either their children entering university or their grandchildren

    For those working and earning well I guess

    • we will raise the 40p Income Tax threshold to £50,000

    will be sort of welcome, though it’s not such a huge raise on what it was when I was working, unless it interacts with the notably raised personal allowance, in which case the combination is probably a decent lift on what it was five years ago.

    And yet the Ermine does wonder if we will get the 1980s back. Let’s have a song

    because on page 8 there is

    • We will find £12 billion from welfare savings

    Let’s hope that the theory is true that in the developed world we are all becoming more peaceful and less violent people because of the removal of tetraethyl lead from petrol. Caitlin Moran makes an interesting point in the Times (paywall, but free syndicated version in the Australian – Google is always your friend to read the Times for free – search the title 🙂 )

    Push the highest rate of tax for a few thousand people to 90 per cent and let the bin-men go on strike. Annoying but not fatal. If you are generally secure, a government can inconvenience you, make you poorer or make you angrier – it can, let’s be frank, be a massive, incompetent, depressing, maybe even immoral pain in the arse – but you, and your family, and your social circle will survive it. It is unlikely that the course of your life will be much different under one government than the next, however diverse their ideas.

    By way of contrast, what’s the worst – the very worst – that a government policy can do to you if you’re poor? Food-bank poor? Dependant-on-the- government poor? Well, everything. It can suddenly freeze, drop, or cancel your benefits – leaving you in the panic of unpayable bills and deciding which meals to skip.

    I have been lucky enough to have been in the first category, and now is time to tip a hat to Lady Luck, particularly as I came from a working class background, I grew up in a much much poorer Britain but perhaps a kinder one, and particularly one a bit more meritocratic. It’s not all luck – I didn’t spend money I hadn’t earned other than having a mortgage, which I did pay off, and I didn’t have children I couldn’t afford.

    We are all much, much richer now in material terms, but that is not enough – the contrast between us is widening 2it’s now much, much greater than they were when I was growing up. The rich are richer, strict rationalists will say the poor are richer than they used to be too, but humans are social animals who compare themselves against each other, so there be trouble in this materially better off paradise. And that, sadly, is part of the problem with how rich or poor we all feel, together with macro shifts in employment that are destroying the ability of the Average Joe to earn a living enough to buy a house and raise up to two children. It’s hard to establish what is really the cause of this – some blame the Establishment, some blame the inherent complexity and interconnectedness of the world and a loss of shared narratives, some blame peak oil and resource crunches 3, some blame the rich for ratcheting up the expectations of us all and pricing us out of the markets for fundamentals.  Take your pick, and of course remember the bearish argument always sounds smarter.

    I really hope that those £12bn of benefit cuts (can I nominate the £2bn welfare benefits for rich landowners be included in the roster of cuts) don’t give us another roll-call like the 1980s – Brixton, Toxteth, Southall, Lewisham, the Battle of Trafalgar Square. In a narrow sense I will probably be richer with the result of the elections, though there probably isn’t that much in it – I am not rich enough or poor enough to have been in great hazard from any likely government action. But I am fearful – of social unrest. As a student in London I shot grainy images of the soup kitchens under Charing Cross railway arches. That was not the Trussell Trust, but maybe it’s where it is going.

    Though I am in good health I am fearful of what will happen to the NHS in the next 30,40 years -I will need a larger emergency fund to deal with that, although at least the fear and loathing that is the US medical system is still some distance away.

    The Ermine will become richer soon…

    because I am getting older, specifically at some point I will pass the 55 mark and all of a sudden I will get hands on some of my own savings 4. Along with the saying that coffee is there to help me with the things I can do something about, red wine to help with the things I can’t, it is time to look to some of my values. I used to have a CAF card from years ago, but on that fateful day in Feb 2009 when I realised I was going to retire early I shut down all such activities. I have tried to reactivate this, because although I will become richer I will take every step not to pay tax 5. However, even as a non-taxpayer but an investor I do pay some tax, just not very much, in the form of dividend tax credits. There are in fact two great benefits of using a CAF card. The most specific one is that it makes it possible to take advantage of gift-aid and have it recorded and totted up in a way I can see, and presumably print off in evidence should I ever need to for HMRC, along with my dividend tax credits – I can track that I am not over-claiming.

    It should be noted that you can only set dividend tax credits in unwrapped accounts against Gift Aid – so ISAs don’t count. However, I have significant unwrapped holdings, and once I get hold of my own savings I will prioritise transferring SIPP money into ISA savings over unwinding capital gains allowances. So I will probably have enough unwrapped dividend tax credits for my relatively modest plans, at least until I become a taxpayer again as a pensioner.

    The second benefit is in some ways far greater. The trouble with charities nowadays is that they have adopted many of the traits of business, and in particular once they have your personal details they will pester you shitless with requests for more money, and if you’re unlucky, sell your details to some sort of do-gooding sucker’s list to other like minded sorts. I originally got a CAF card to avoid that malarkey. The Ermine has a simple principle when it comes to charities – unless there’s some sort of return, like with my RSPB membership 6 where it actually does something for me to reveal who I am then I want anonymity. Particularly if it’s a charity that deals with human problems, anonymity is king – don’t call me, I’ll call you, because of this selling of mugs lists.

     

    Notes:

    1. Conservative Manifesto 2015 page 5
    2. As an example, CEO pay was about 40 times that of the grunts (US study, Table 6), compared to over 200 times now
    3. I generally fall into this category, though I subscribe a little to the other camps too
    4. Yeah, I know, I don’t so much become richer but I get access to my own money
    5. I will run out of road on that once I draw my main pension, but I still have a few years of flying under the HMRC personal allowance to go
    6. where I get into RSPB reserves like Minsmere that normally charge for free or effectively prepaid with membership. Most RSPB reserves don’t charge.
    4 May 2015, 3:50pm
    living intentionally personal finance:
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  • The ethical investment conundrum

    As an example of living the FI principle, every so often people ask me “what is this investing thing you speak of – isn’t it all just a grand casino”. And I point ’em right over to that Monevator fellow who has done most of the hard work, specifically to the passive investing section. Although for a few pints I will talk the specifics of their situations I try and emphasise it’s all ideas and DYOR and all that – everybody is different ,in philosophy, temperament, risk tolerance and lifestyle. However, there are some things people often miss – a few people at The Firm were pointed at investigating AVCs and some others to consider a SIPP. Pointing people at passive investing is pretty much like buying IBM was in the old days – nobody gets fired for it, though it’s curiously passionless at times.

    And then every so often somebody comes along and throws you a curve-ball – in this case it is Mrs Ermine, who is looking at pension investing, and to date the general answer has been something like Vanguard Lifestrategy 100 – do so for 20 years and you’d expect to get about the amount you put in monthly back. This is because of the 5% SWR limit and ignoring compounding, as a rule of thumb it’ll do. This is part of her pension savings, Mrs Ermine is far more entrepreneurial that I am so some of the assumptions one makes for wage slaves don’t really apply.

    Unlike myself, Mrs Ermine thinks about the wider issues and comes to the conclusion that she wants to invest ethically. This is totally outside my ken. First thoughts are that it obviously reduces the action space somewhat and therefore will intuitively underperform. It also immediately debars you from index funds; you’re becoming an active investor if you decide that fossil fuels are a no-go area, f’rinstance, along with the whole Guardian thing. I know some other PF bloggers have given this some thought – Keeper of the Cauldron on fossil fuels and on wider ethical considerations here. The search for ethical solutions seems to take Cerridwen into racy territory – Abundance crowdfunding strikes me as having a risk profile way ahead of publicly quoted equities and terribly difficult for members of the public to qualify the risk balances.

    A last look at our unscarred friendly skies before flight resume

    A last look at our unscarred friendly skies in April 2010 before flight resume

    Now I have to admit that the cynical me doesn’t see a world of people deciding to leave fossil fuels in the ground unless something cheaper and hopefully less polluting comes along. I only have to see the 4x4s on the school run, listen to the increasing racket of jets in the sky and look at the concomitant scarring of our evenings with vapour trails and how quickly no third Heathrow runway at the start of the Coalition became a firm proposal for one to think that this is the wrong side of the bet, and that’s without the increasing power drain of IT since you’ll only prise smartphones from the cold, dead hands of the addicted consumers. I’d be surprised if this happens in my lifetime, and to be honest, if it does, I think all our investments are going to be written off in such a zero-growth or negative growth world. Capitalism needs growth like a vampire needs fresh virgin blood. It’s perfectly possible to postulate successful zero or low-growth economies, and indeed we seem to be going ex-growth as it is, but they don’t look like industrial consumerism, and they don’t have endless smartphones, city breaks and foreign holidays in them for most people.

    But this isn’t my fight. To invest ethically you have to decide either what is ethical, or conversely what isn’t. At the moment Mrs Ermine is in the latter camp – fossil fuels and industrial agriculture are what she wishes to avoid. It’s probably not exhaustive – indeed one of the issues of ethical anything is that it’s fundamentally difficult to be a blameless consumer if you chase anything to its logical conclusion. One should probably add CAFOs to the list, so Smithfield Foods probably fall into the beyond the pale category as well.

    An Ethical Investor is an Active Investor?

    To my eyes the two go together, although I’d like to hear different. By definition you’re selecting a subset of the investable universe. Now one option would be to be a stock picker, but that’s probably not how Mrs Ermine wants to spend her time, so it’s probably along the lines of this list of ethical funds. Now I don’t do funds unless they’re index funds and the history of non-index funds isn’t illustrious. I observe that Vanguard do offer a couple of socially responsible index screened funds in this list but again, what does that mean? Are there options for ethical investment trusts?

    The investment return is low enough as it is – that 4-5% real return hasn’t got much fat in it. To combine active investment and artificially reducing the investment universe seems to be a tough headwind to fly into. Even in the ITs – take Impax Environmental f’rinstance – over the last 5 years the improvement in NAV seems to have been buried in the -12% discount to NAV.

    The whole thing does my head in and I have no idea where one would start. The Ermine, with the libertarian social bias is not going to be an expert in this sort of thing but hopefully some readers have given this some thought. Am I missing any rich seams of knowledge or obvious goto places for ethical investment at low cost?

    1 May 2015, 11:56am
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  • Representation without Taxation

    There’s an election in the offing in Blighty, as it’s been nearly five years since the last one. There’s much hue and cry, although to my eyes less separates the three main parties than there used to, much is about the details and less about the big picture. Some of the big picture stuff is changing, and it’s changing is some pretty rum ways.

    Many years ago, in the 1770s in the reign of good ‘ole King George there was a bunch of uppity upstarts in one of the colonies of the Empire that got all het up about paying tax without any say in how it got spent, and their rallying cry was no taxation without representation. They had a point, and the rest is the history of the United States of America, no longer a colony for over 200 years.

    Now one of the aims of becoming financially independent is of course to minimise taxes. One of the curious twists of fate in Britain is that it’s much easier to do that when you have money – you can influence how much tax you pay by using pensions and by controlling your income. As a wage slave I was always a PAYE employee, so the main option I used was using pensions, but the ways of controlling your income are much greater for the self-employed. In particular paying yourself in limited company dividends can be a lot more attractive that paying yourself in cash income.

    However, a more recent accelerating trend seems to be increasing the personal allowance, which lifts more and more people out of the tax system altogether. Of course they still pay consumption taxes like VAT; another curious twist of fate is that those chasing financial freedom probably pay less of this sort of tax simply because you probably buy less Consumer Stuff.

    From a personal point of view, that’s dandy. And yet I do wonder what will happen as this trend increases, and we have a larger and larger number of people represented in elections but who aren’t personally impacted by the grubby costs of all the jam today we would like. Some of this trend is simply the results of increasing inequality of income and wealth, of course – if the 1% own 99% of the wealth and most of the income then it isn’t surprising that most of the tax revenue comes from a smaller tax base. Although I don’t agree with all of his conclusions, I think the Torygraph’s Jeremy Warner makes an interesting case in his article about the tax and benefits system –

    it also makes the government dangerously reliant on those with increasingly less direct interest in what the money is actually spent on, the more so given the growing focus on pensions, health care and other welfare entitlements. The contributory principle in taxation has all but disappeared. By progressively raising the tax-free allowance, the Coalition has turbo-charged this process of disassociation between revenue providers and users.

    Obviously the Torygraph is there to bang the drum for Wealth, but his case is supported by Mona Chalabi’s brilliant Guardian article that shows that higher rate taxpayers contribute the vast majority of tax revenues, though they are only 15% of the taxpayers by number.

    Contrast this with the situation when the Ermine started work in 1982. Ignoring university infill summer jobs and suchlike, this was my first real job, a junior test engineer lining up electronic sensor heads. I was intrigued to find that after compensating for inflation it paid better than the average wage is now. However, the personal allowance in 1982/83 was shockingly low – £1565, so most of that salary was taxable, and the basic rate of income tax was 30% with an additional ~9% national insurance. The young Ermine paid nearly 40% tax/NI on a higher proportion of his salary at the beginning of this career than the 2006 higher-rate taxpaying Ermine.

    People in those days were much more involved in the costs side of the tax and spend equation than they are now – if the personal allowance goes up to £15,000, which of course I am all for, personally :), then a typical two-person household earning the average UK household income of £27,000 need not pay any tax at all if they both earn roughly half. The whole tax/spend/representation thing is very different to how it used to be. Perhaps the argument is that inequality has gone up and so this is inevitable.

    Inequality has risen since 1982

    Inequality has risen since 1982

    There’s some support for that argument in the change in GINI coefficient since 1982, unfortunately although the figures show inequality has increased I have no feel for how significant a shift from ~33% to ~37% actually is.

    Maybe representation without taxation is just what you get as power shifts from labour to capital. I figure it’s going to lead to some strange places at times. It’s easy to make the case to no taxation without representation. I’m not so sure the other way round won’t have difficult birth pangs of its own…

     
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