19 Oct 2016, 12:40pm
personal finance:
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  • Investing in…the State Pension?

    One for early retirees older than 40, really, the known unknowns are too great when you’re younger, but otherwise it could be an offer of an annuity at an unbeatable rate of more than 100%. Try getting that on the open market!

    I’ve never really taken UK State pension into account in my financial planning, for two reasons. One is that it never seemed to be near enough, and I always assumed it was going to be means-tested, and the second is that I have sufficient private pension. I’ve also been contracted out for 2/3 of my working life, which means I would get less anyway.

    Over the 30-40 years of an adult working life, you will go through many fads and phases of the State pension, you will see at least 8 government administrations, well, assuming that the logical conclusion of Brexit isn’t a one-party state at some point. Each of them will fiddle. As a result I filed the SP in the ‘too hard to think about and not very relevant to me’ department.

    Now someone pitching for financial independence and retiring early is likely to have a shortened working life, I had 30 years of proper working, ie rolling up at a place of work and getting paid for my trouble. When I started work you had to have 40 years of working life to earn a full State Pension, elementary arithmetic showed me that leaving university at 21 and retiring on a typical white collar pension scheme retirement age of 60 was going to leave me a little short, and I compounded the issue my taking a year out to do an MSc in the late 1980s 1. As it was there were no other periods of unemployment until my career ended at 52. Fortunately for me they changed the rules in 2006 I think so I only needed 30 years. I was chuffed, because 52-21-1 makes 30 years so I was home and dry.

    Then they changed it again in 2016 so I needed to get 35 years, and now I am SOL because not only am I 5 years short, a sixth of the total, but I was also contracted out and there were dark mutterings that this will cost me a lot. Looks like my original suspicion this will be means-tested on money-grabbed out was right.

    I’d already gone through the pain of getting a national insurance record statement from HMRC, which involved filling in forms and sending them off up North somewhere and waiting an interminable period before a computer printout landed on my doorstep through the post. I read this Torygraph article bitching about how it was all too hard and thought I would actually go read the PDF written by the ex pensions czar Steve Webb, because he always struck me as a sensible sort of fellow except for a brain fart when he invited pensioners to go get a Lamborghini.

    That'll be a nice Lamborghini, and to hell with the money

    That’ll be a nice Lamborghini, and to hell with the money

    He now works for Royal London insurance because ,well, nobody voted Lib Dem in the last election and he was one of them. Turns out he has written a pretty coherent guide, and it appears that the Telegraph was shit-for-brains when they wrote their article, or collectively feeling the after effects of a particularly excessive office party. In particular, their “Topping up your state pension guide” is the dog’s bollocks, written by none other than Steve Webb. I can only presume the Torygraph journos are arts/PPE grads who are scared by  flowcharts ;).

    It’s so good I’ve saved a local copy of it here because when I go through my older posts featuring external links, it is clear that Jakob Nielsen was on the wrong side of history in his 1998 “Fighting Linkrot” article. That’s battle was comprehensively lost, we all know what happened, the good guys lost and were trampled into the ground.

    You can now get your NI and State Pension forecast online

    Something that I learned from Steve was that you can go here

    http://www.tax.service.gov.uk/check-your-state-pension

    and go get your own SP forecast. It helps if you already have a HMRC ID like from self assessment, and you want a copy of your passport nearby, but it went okay for me, and you get much more detail on your NI payment history than the old system. It turns out an Ermine’s NI record, if I had stopped contributing in April last year, is good for a State Pension of  £141 p.w, which is about £7300 a year.

    Now at a SWR of 4% that is effectively a bond portfolio of £182500. It has different risks to a bond portfolio – it has political risk rather than market risk. That’s not so bad if it is part of your portfolio, as opposed to nearly all of your retirement savings, however, because diversification of risk is a good thing. Its nature, however, is well suited to underpinning market risk, and bond investing in boring. I personally hold no bond assets whatsoever, but this is because I have a deferred defined benefit pension due in four years, and this covers the same sort of risk. I also have far, far more equity savings in my ISA than my SIPP, because I don’t want to pay tax on my savings, so I am running that SIPP into the ground ahead of my pension.

    The State Pension offers an early retiree a great annuity rate

    For two possible reasons – if they are an early retiree they probably don’t have 35 years of NI contributions, that’s the whole point of early retirement, and moreover they may have been contracted out. It is the second reason that makes it worth me contributing another three years of NI contributions, because that will wipe out my contracted out deficit, and I will reach the upper ceiling of £155.65 a week, ~£8191 a year. The obvious question here is ‘is it worth it’. That nice fellow Steve has done the dirty work for you here. You can choose to sit on your early retired chuff and pay voluntary Class 3 NI contributions, at ~£730 a year (it depends which years you are buying, I am assuming in my case these are years going forwards, though I could pay a little less to buy out years 2013 and 2014). which buys me ~£207 a year according to Steve.

    A far better way, however, is for an Ermine to be self-employed for three years and to pay his Class 2 ~£150 a year NICS. An ermine obviously doesn’t want to pay tax, so I work at a very low level, nominal minimum wage for 1 day a week. However, I don’t spend a day a week doing that – I hired the magic of PERL to extract the records from a bank account to inject into Quicken for that job, where the previous lot used to type in all the transactions. Because I don’t need to pay PERL any wages, my earning rate goes up from NMW, but I go a lot more part-time to compensate 😉 The pay rate is still pretty piss poor compared to The Firm, but it beats NMW by a long chalk, and I don’t pay tax on it 2  😉

    Now paying £150 to get £207 a year for say 10-20 years 12 years in the future sounds like a bloody good deal to me. I paid my £150 with alacrity and good heart this April for the year 2015/16. Technically Steve Webb is right and I should refuse to pay for 8 years and then pay up all at the end, because for all I know I could cark it tomorrow or sometime in the next 12 years go and do a Jim and go back to work because I miss the metrics and performance management shite so terribly that I need it back in my life. But sod it, I am going to pay my £150 early for peace of mind. And next year and the year after that.

    There aren’t many places you can go buy a deferred to 67 inflation-linked annuity returning 138%. Normally you are looking at 3% and have to have one foot in the grave to get a better rate. Even if you can’t find a way to look self-employed and go the Class 3 NICs route you’re looking at an annuity paying 28%. A top rate, risk and asset-class diversification and backed by Her Majesty’s Government. You owe it to yourself to at least ask the question of whether you can do this 😉

    force majeure

    There’s always going to be the tin-foil hat brigade that say that these promises aren’t worth the steam off their piss and will be repudiated. I am/was one of them, but in the end it’s down to Stephen Covey’s Circle of influence versus circle of concern. Personally I prefer the other statement of the same conundrum –

    For sure, the government may repudiate the State Pension, tax the crap out of it, the buccaneering Brexiteers may destroy the value of the pound so much that a pound buys you half a peanut in 20 years or there may be a war of all against all. Any or all these things may come to pass. I’ve got a lot more chilled than when  I was working, shit happens but not usually all the shit happens. There’s somebody offering me a taxable inflation-linked income of £890*0.8 3 for a one-off cost of £600 spread over four years, and over there there are people offering me the same £891 as an annuity for about £23,000. I’ll take the government up on their kind offer and to hell with the downside. I can afford to lose £600 for those odds.

    Notes:

    1. Looking at my NI record I see that either my younger self bought the extra NI when I went back to work, or for some reason doing an MSc on a Manpower Services Commission grant meant I got NI credits for that year. I didn’t get NI credits while doing my undergraduate degree
    2. because I am careful to only have income below the personal allowance, rather than I am keeping it all in the British Virgin Islands with Mossack Fonseca
    3. 20% tax
    11 Oct 2016, 11:56am
    personal finance rant reflections
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  • to live different you must do different

    The Ermine has been using some of that extra time you get in retirement to go travelling, after a jaunt round Salisbury Plain with the archaeologists working for  military 1 and then on to Dartmoor, when I met up with Andy from liberate.life to talk about the modern workplace. Andy is a driven and hardworking chap so he’s already written the post by the time I get round to writing this, so I will stick with this picture of Haytor on Dartmoor, which is near his neck of the woods.

    a fine rock and worthy fo a moderate scramble to get up to

    a fine rock and worthy of a moderate scramble to get up to

    where we had lunch. Lots of stuff discussed, because he has a different take on the world of work.Very different to mine, particularly how to approach it.

    Occasionally a younger fellow has managed to use their initiative to find out how to contact the Ermine by email, along the general lines of all that work philosophy’s all very well, but how does it apply to me? And it’s saddened me that I’ve never had much of an answer to that. My story is a tale that started in a different era, and while many of the tools of the trade are the same, many things are tougher now, while conversely some specific opportunities are much greater now. After that discussion, perhaps there is a way to mitigate some of the adverse changes, of which more in a future post.

    We humans are storytellers, but we often narrate the story of our lives in other people’s words

    Let’s face it, we call that culture – Romeo and Juliet stand proxy for infatuated lovers even after 400 years. Less inspiringly the Kardashians stand for sucess, and  Donald Trump for alpha maleness, froth and scum float to the top as well as the cream.

    All the world's a stage, and this is one of the 'alpha male' castings. I don't get it either.

    We aren’t fussy about where we get our stories – all the world’s a stage, and this is one of the ‘alpha male’ cast of characters. I don’t get it either, but he does it for a lot of people.

    We borrow from stories and weave the threads into the image of our ideal lives. The story of how work and life fit together comes from many places – it comes from how we saw people do that growing up 2. A lot of it comes from advertising, where clever people tell us stories to try and get us to spend money on things and services. Take a look at Ad Age 3‘s top 15 campaigns of the 21st century, and the way they talk:

    Some of these ad campaigns are here because they changed the way consumers thought about the world around them

    Their words turned into your stories… The lead quote was a corker

    “Historians and archaeologists will one day discover that the ads of our time are the richest and most faithful daily reflections any society ever made of its whole range of activities.”

    Marshall McLuhan

    Your life has been designed, and not particularly by you. Most readers of PF blogs 4 are earning more than the median wage (~£27,000, FTE) – I hazard that this is the point where the fight switches from earning more to spending less, and the spending has a lot of the narrative written by people paid to make you spend more. Sometimes it’s good to see the extreme point to understand yourself – take a look at the phenomena of superyachts, which as PhD researcher Emma Spence has discovered, is basically all about consumerist willy waving writ large. You, dear reader, have to make do with with more house than you need and an iPhone. Nobody needed an iPhone 20 years ago, now everyone is walking around with £500 worth of easily pinched/broken hardware on their person…

    That is one tasteless ugly piece of kit, non? And this is the attractive side. Apparently something to do with Philippe Starck, he of the elegant lemon squeezer. Where’s a Viking longboat or Jonny Ive when you need ’em eh?

    What you consume is often the most egregious version of others writing the script, other parts of life have elements of this. I got to nearly 50 without realising that I actually had agency over how old I was when I retired. I hadn’t realised this was under my control, FFS – I took the age of 60, the normal retirement age at The Firm, and accepted that without bothering any brain cells with asking why this was so.

    Some of the things we can do are constrained by what other people do. The price of housing, for instance, given an endless supply of credit, will tend to find a level where the cost of servicing a loan can be managed by two people working full-time, because that’s what most people in that market are doing. Low interest rates and low inflation won’t help to pay off the loan over a working life, because it makes all the numbers bigger. For some odd reason we think low interest rates make houses more affordable. It just makes them dearer.

    Most people don’t get to financial independence under their own steam. To be different you have to do different.

    Many people’s idea of financial independence is getting the State pension, roughly when they are 67-70. They effectively outsource the job, although whether that gives a decent standard of living very much depends on whether they are paying rent and/or have other sources of non-work income on retirement. That’s the default setting, both in terms of time and in terms of money.

    There are two major areas you can do different to your peers. You can earn more, and you can spend less. The greatest win to be had is, of course, targeting both. Retirement Investing Today is an example of what you can do here. Unfortunately you immediately have a major problem when you want to swim against the tide, and that is that humans are social animals. If you are going to do different then spending less is going to make you look poor to your peer group. And most people just hate that feeling.

    Earning more is the obvious other way to go, then. You need to have the talent and the luck, but even if you have those, you tend to take a hit along the spending axis. This is because your work peer group becomes more spendy as they earn more. In practice the axes of spend less and earn more aren’t orthogonal and mutually independent. There’s probably no real way round it, in the accumulation phase you are likely to look on the poor side to your colleagues. I guess this is what seems to makes it easier for introverts to chase FI  – one of the few cases where this trait is an advantage.

    Not so easy after all. How about spend less? Fight consumerism by targeting the base of the fire.

    1610_advertising

    You’re changing the story there – in this case the story pumped out by the advertisers of what a good life looks like. After all, good ads changed the way consumers thought about the world around them. I presume this was in the direction of spending more and consuming more, because otherwise, what’s the point? I’m quite taken with the poetic description from Brandalism in this piece of agitprop 😉

    Advertising shits in your head – but, first, its torrential, golden flow stains your magazines, your phone, your computer, your newspapers and your streets. Advertising shits all over and dominates our culture. It is a visceral, powerful form of pollution that not only affects our common public and cultural spaces, but also our deeply private intimate spaces. Advertisers want your ‘brain time’ – to shit in your head without your knowledge.

    It’s why I run Adblock Plus and Ghostery, both set to 11 – kill ’em all. Destroying advertising as much as possible makes life simpler and more pleasant. It is a shame that at the inception of the Internet, we failed to craft a decent payment model, so advertising and the surveillance model became the original sin of the Internet, but there we go.

    I don’t have a beef with real people recommending real things they have trialled, it is the automated stuff like Google Ads that is the problem – anonymised mind-spam sold to the highest bidder. A while ago I went to a meeting in Leeds where I discovered how people think about blogvertising. A very few of you 5 will see I have an Amazon box on here – all of those are books I’ve read or things I’ve mentioned on here. I was running Google ads, but never saw them, because that’s what AdBlock Plus does for me 😉 When I realised I was running ads for Wonga and consolidating loans, because that’s what personal finance is about to most people I pulled it. Not because I thought any of my readers were going to be swayed to the dark side and toddle off to their local Money Shop to buy some overpriced money at extortionate rates, but because I didn’t want to be part of the problem.

    There are three non-spending areas that cause a lot of hurt for British consumers below 45

    Consumer spending causes a lot of trouble, because it’s a never-ending tactical battle fought one little piece at a time. But three strategic changes have caused a lot of damage to the personal finances of people starting out now. Let’s take a look at these

    University, and the apparent dearth on non-university alternatives

    When I started university in the late 1970s, fewer than 10% of school leavers entered university. It was much easier to fail exams in those days, because they were norm-referenced. It isn’t entirely clear to me what you have to do to fail exams now, because we have lost the cojones to tell some young people, and more specifically their parents, that they simply aren’t up to the mark academically.

    In itself that’s not so bad, but because so many more people go to university, the old system where the taxpayer fronted the cost in the hope of getting more tax revenue in the future from the higher earnings became unaffordable. Even if everything else were the same, it would cost five times higher proportionally 6 to take 50% of school leavers through university than 10% was in the 1970s.

    When you flood a market with five times the product, you also devalue it. When I started work, having a degree was a serviceable proxy to indicate I was in the upper 10% of academic ability, and for jobs that suit that sort of thing (engineering, science, research, for me) that was relevant. When nearly 50% of people go to university a degree tells you roughly they are of average brightness or above. Knowing someone is average or more is useful, but probably not something you’d pay £60k for over a working life.

    There appears to be no control of numbers going to university in the UK, it’s all about the money, which is a shocking abdication of political will IMO. Contrast this with the situation in Germany where numbers are controlled in some cases. Yes, it goes against the free-market-money-is-all mantra, but it’s also a damn sight cheaper to go to university in Germany. In fact it seems a damn sight cheaper to go to university just about anywhere in the EU other than England and Wales. Shame this option is probably only good for the next couple of years for British wannabe graduates, who are SOL afterwards 7 🙁

    The fundamental problem with university in the UK is the product is getting astronomically expensive at the same time as it is being devalued. University has become an unaffordable luxury. Unlike Germany Britain is also not particularly improving the non-university options, much noise is made of apprenticeships but it is often simply a mask for cheap unskilled labour. The trends in the world of work are running away from unskilled labour. An apprenticeship where the apprentice learns something about a craft is good, but is only good if the craft is likely to remain one done by people in the future at decent rates of pay.

    Housing

    In Britain we used to build social housing but we sold that off to the then council tenants to buy votes. I seem to recall Thatcher expressly forbade allowing councils to use right-to-buy revenues to build more housing. As a result less than a fifth of social housing flogged off cheaply is replaced, I am surprised it’s that high. We used to have credit controls up until 1980-ish but removed those, because the free market always delivers the correct solution, even when it is banks incentivised to lend money to people who have no capital but need to buy an essential good. So we have high house prices and richer banks. It’s not just the banks, anybody with capital, from banks to people who buy up houses and then rent them out to people without any capital at exorbitant rates and no real duty of care to make the joint habitable. So we now have high house prices, richer banks and richer BTL investors. Well, at least somebody is winning I suppose…

    As an example of just how out of touch the government is on this, Gavin Barwell, the Housing Minister, no less, delivers himself of the Marie Antoinette-esque recommendation that people should leave their housing equity to their grandchildren, FFS. That is so deeply fucked up it’s not even wrong. We’ve seen this movie before. When you go and see National Trust stately homes

    concentrating inherited wealth led us to stately homes and a tiny part of the population owning nearly everything

    concentrating inherited wealth led us to stately homes and a tiny part of the population owning nearly everything

    you are looking at what happens in a world where inherited wealth accumulates across the generations, combined with a world where the return on labour was very poor. It took a couple of world wars and a lot of technological progress to break that up. Even then, the aristocracy, sharp blighters that they are, simply requested an inheritance tax exemption on agricultural land, got it, and this is why most of Britain by area  is still in the hands of a few hundred family estates who were gifted the land by William the Conk more than a thousand years ago. Obviously they don’t drive the tractors themselves – they get contract and tenant farmers to do the dirty work, kill our birds, pollute the drinking water, flood our towns and cities and then claim subsidies for the activity for shits and giggles  because they can.

    What should happen IMO is a total escheat of all property on death 8. Those damn grandchildren didn’t work for it, and if they aren’t to get their throats cut by the massed and desperate hordes of people who weren’t born with a silver spoon in their mouths in the accommodation dystopia being created, then the current trajectory of ever-increasing housing costs needs to be shifted. I was able to save enough money through my working life to buy a house from a standing start. That’s getting harder and harder to do as more and more funny money chases property, but no, Gavin and George Osborne, more inherited housing wealth is part of the problem, not the answer. Unless you are actually going to go out and kill all the poor people who are dirtying up your nice world.

    The world of work is changing

    The accelerating trends in automation and globalisation, are part of a general shift of power from labour to capital that has been going on for the last 20 years. In a double whammy for poorer First World residents, globalisation is amplifying the shift of low-skilled jobs that can be moved to cheaper labour forces. While this is undoubtedly good for business and capital, if you were part of that unskilled labour force in the UK you get so see your jobs go. The last 20 years have seen a tremendous fall in poverty and inequality, but that’s worldwide. Let’s hear it from Tim Worstall – right-wing nutjob and apologist for unfettered free-marketology sans compassion for poor saps less clever than he is, riffing off this paper written by Ayn Rand Chari and Penlan. Take it away, Tim:

    According to a World Bank Study, in the three decades between 1981 and 2010, the rate of extreme poverty in the developing world (subsisting on less than $1.25 per day) has gone down from more than one out of every two citizens to roughly one out of every five, all while the population of the developing world increased by 59 percent.8 This reduction in extreme poverty represents the single greatest decrease in material human deprivation in history.

    That’s a pretty good outcome from an economic policy and it’s why I support the process of globalization quite as much as I do. Absolute poverty, that peasant destitution, is something I regard as an abhorrence. Killing it off through economic growth I thus regard as not just desirable but a moral duty.

    OK, but there’s a problem with this, as the paper points out. For some policies will be good for one set of poor people, those absolutely poor out in the Great Big World, yet bad for another set of the poor, those who are the poor in the already rich societies. And this globalization and free trade mixture is exactly one of those policies that has this effect. Rising inequality in the rich nations is a logical result of adding those couple of billion low wage workers to the global economy. We could predict it would happen, theory tells us it should happen and it has happened: no one should be surprised about that.

    I’ve made clear around here a number of times that I both understand this point and also think that it’s a perfectly fair price to be paying. Yes, of course, that’s easy enough for me to say as I’ve not got to pay it. […] But that the relatively lowly paid in the rich countries stand still for a bit while the absolutely poor of the world climb the economic ladder to the joys of three squares a day, yes, I think that a price well worth us all paying.

    Delightfully technocratic, Tim, and for all I know you’re right, it is indeed tough to fault the logic from a strictly rational/intellectual POV, the reason I can be sanguine about it is that while not as rich as Tim I am still on the right side of that inequality divide. You’re a clever cookie, Tim, the the sleight of hand is that price well worth us all paying. Seems a bit rough that it is just the poor who get to pay the price, Tim, might have been a bit more helpful if you’d like to chip in and  help out. As it is you only have to weep crocodile tears and wring your hands, because that’s conveniently precluded by the Ayn Randian logic. The UK poor aren’t standing still, they are going backwards – unskilled jobs are shit and getting shittier, for the simple reason that the value of unskilled work is falling. The second part of Tim’s article is a load of rationalising about why you can’t do ‘owt about that because if you redistribute towards your locally poor you shaft the globally poor- to wit

    It’s entirely possible that we could have some policy or other that makes our own, rich world , poor better off. But which at the same time makes the absolutely poor of the world worse off. And if we did have such a policy, and we were also concerned about the poor, then we shouldn’t have that policy. Even though it benefits our poor they’re not in fact all of the poor. And given where our poor are in the global income distribution then they’re almost certainly not the poor that we should be worrying about.

    He uses the specific examples of agricultural subsidies 9 in the US to show how this works, and the EU has its own version of this. 10 I can’t fault his logic, but I would pay money to watch him try and develop that line of thinking with some of the people in the UK who have been at the losing end on globalisation. A government isn’t voted in by the people of the world, but by the people of a specific area. The Brexit vote was an example of regional pushback. Trump is another. Poor people find it deeply offensive when rich people tell them their standard of living has to fall to help some bunch of poorer people elsewhere while the rich swan off and don’t take any hit themselves.

    This process of requiring more skills is drifting up towards what used to be known as middle class jobs, because it’s now automation that is coming for some of those jobs. When I considered learning something about accounting to become more competent and doing the books for a business, I came to the conclusion, supported widely in the comments, that it wouldn’t make sense to invest in training for something that is likely to disappear or be outsourceable. This is a microcosm of the wider ‘should I invest in university problem’, which is part of the topic of Poppy Noor’s little rant here, though I do think she needs a dose of  ‘if you want to live free, your utopia is irrelevant‘ to get her to be effective about changing her lot in life rather than be right about how it isn’t right.

    Being right about how things aren’t right makes for a deep and satisfying rant, but the chat with Andy on Haytor left me wondering how a 25 year younger Ermine would tackle the changed world. It would need to be different from the way that served me okay.

     

    Notes:

    1. It’s seriously unwise to go for a looky-loo on that bit of Salisbury Plain without the military’s help 😉
    2. which of course puts it about 30 years behind the times we actually try to live it in
    3. I am tickled that they don’t like people using ad-blockers. Reconnaissance behind enemy lines is always a tough game
    4. This is a total guess, but you’re not going to be worrying about financial independence and retiring early much lower down the scale. You’ll be worrying about making next month’s rent
    5. those that aren’t running adblockers, and if not, why not?
    6. I am making the handwaving assumption that the increase in population is roughly tracked by the increase in taxpayers
    7. It wasn’t me wot did it despite being an old git, I was a Remainer
    8. I’d generalise that further but the great thing about land is you can’t hide it in overseas tax havens
    9. Agricultural subsides subsidise the rich landowners in the UK, I don’t know enough about the US situation to know if it’s different, though I’d say CAFOs, and subsidised high-fructose corn syrup are indicative of a different sort of pathology than consumers sponsoring the aristocracy
    10. One of the tragedies of Brexit is that a big potential win from it, canning agricultural subsides, was nixed early on
     
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