25 Aug 2015, 10:04am
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  • This correction ain’t all that much yet…

    be careful what you wish for. You may just get it

    1508_2266

    The Grauniad sets us right: On the sea of red v sea of green debate, the answer is, of course, that red is an auspicious colour in Chinese culture, indicating wealth. Thanks to Tom Phillips, our man in Beijing.

    All around there are headlines of market corrections and doom and mayhem, plus the curious fact that the Chinese seem to use green for falling prices

    So an Ermine takes a look and wonders, hmm, is it yet time to pump up the old HYP with a bit of cheap stuff? One of the shares I could use is Unilever, I recall being a bit sore when I read UTMT had got in at about £24 and I was already well behind the curve. So I sat on my hands, there’s always be another day, plus I’m not really that keen on a desultory 3.8% yield… In an HYP it is crucial to get a decent yild when you buy, because one of the corollaries of a HYP peortfolio tends to be that these are established companies, and Slater reminds us that elephants don’t gallop. So you must. not. overpay.

    UTMT has described the firm’s strengths and weaknesses well, notable is a fair sized exposure to emerging markets, and investors really hate anything to do with EMs right now, and so the company should be down the toilet, right?

    UTMT would still have the edge on me

    UTMT would still have the edge on me

    Well, not so fast. Now it could certainly get there, it depends on whether this market rout has got legs. I feel it does, but others don’t, and what do I know. However, it does highlight the need to have a clear target of where to be prepared to buy at. For HYP shares (usually in the FTSE100) I start to get uncomfortable paying more that the long-run market PE of about 15 for the FTSE100 although many of these big brands tend to be high-ish, which is why I hadn’t got in with UTMT. I was spoiled by building a lot of my HYP in 2009 and 2011, there is some hazard that that makes me overcautious buying in normal times, and to totally go on strike in heady times like the last three years.


    memories of this being in on the radio in the lab in the heady dotcom days of 1997, when buying dotcom shares was going to make me my fortune, though work was good enough I had no thoughts of FI/RE

    So I’m all for a market rout, but let’s face it, what I really want, what I really really want, is a bear market – 20% off recent highs at least, and half of that fall is to get to fair value IMO. And so far, sadly, none of the trigger values for stocks I actually want to buy has been reached, despite all the excitement. There are, of course, areas of temptation. I really want to buy JII, but it’s just not really there yet. So far, this seems to be a rout, not a market capitulation, and the starting point had been from outrageously lofty levels. We’re back to late 2012 on the FTSE100. I want the Summer of 2011…

    So in the absence of anything really worth buying I’m drip-feeding into my existing holding of Vanguard Lifestrategy 100. Not because it’s terribly exciting, and the price is only back down to what it was at the beginning of this year, but because the cost structure of funds on TD are made for drip-feeding. I’d hate to look back if this turns out to be short lived and to have done nothing in the swoon. That’s the trouble with trying to use downturns – the hardest part is actually buying in the fog of war…

    24 Aug 2015, 9:49am
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  • BTL Investors discover the problems of leverage and tax arbitrage

    It’s good to take a short break from the exciting carnage on the stock market and sink some needle-sharp teeth into some egregious special interest pleading. Maybe I’ve be offered an opportunity to buy the FTSE100 below 6000 by the time I’ve finished this :) 5000 by the end of the day – or maybe next month… Happy days are here again

    It’s an evil market all round, British property, and the Torygraph has taken up the cudgel on behalf of Britian’s overleveraged and undertaxed BTL investors

    What is also becoming clear is that worst hit will be those modest, middle-class savers who have prudently chosen to invest in buy‑to‑let, often alongside pensions and Isas, as a means to supplement their income.

    The mechanism of Mr Osborne’s tax attack is the removal of landlords’ ability to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax.

    Let’s actually parse this bullshit, and translate it

    Middle class savers seeing property as a one-way investment, borrowed shitloads of money they didn’t have to ‘invest’ in an illiquid asset class, and now whinge like drains that they can’t claim back tax on their borrowings. Some of them even whinge that their kids can’t get on the housing ladder without spotting the irony. (okay I added the last bit about their kids)

    Well, welcome to the real ‘king world you greedy sons-of-bitches. I can’t waltz into a bank, borrow £200,000 and plunk it down on stocks, claiming back the tax I pay on the interest either. Diddums. Indeed, the horny-handed toilers who just want to buy a house to live in the damned thing don’t get to claim back the income tax they paid on the money they earned to pay the mortgage interest, so exactly why you demand the privilege so you can soak tenants better beats me. Once upon a time buyers could do that, it was called MIRAS and that was iced fifteen years ago because it simply led to higher house prices because people bid up to what they can afford.

    Connie, a BTL 'Landlord' where the bank owns three quarters of 'her' property portfolio

    Connie, “my five properties were my pension” a BTL ‘Landlord’ where the bank owns three quarters of ‘her’ property portfolio

    Let’s hear it from Connie

    I never thought that mortgage interest, which I regard as a cost, could be taxed as though it were profit.

    How delightfully tragic, my dear. You know the poor little people you beat for the sale, you know, Joe and Josephine Smith who were actually going to buy that house to live in it? They were going to pay the tax on their mortgage interest, so WTF makes you such a special case, eh? I haven’t actually asked them, but I guess they also regard it as a cost, FFS.

    The fundamental problem is that if you have to borrow money to ‘invest’ then you are a hair’s breadth away from destruction. Plus there’s the wider issue – exactly why were we tax-subsidising people to borrow money to royally screw up the already deeply borked housing market in this country?

    There’s nothing fundamentally wrong with being a landlord, if you have the capital or your business model works given the cost of capital at normal commercial rates. But if you need tax breaks on the cost of capital to make your business model work, then you are being subsidised to piss on your tenants who can’t get that tax break, and it really is high time that perverse incentive is stopped. The Torygraph listed a whole load of special-interest pleading, but it’s basically on behalf of people who have invested in an undiversified, illiquid asset class on margin to become rentiers 1. It’s just not the same as buying productive plant and machinery to make more widgets better, where I can see the case to setting interest paid against tax.

    Undiversified, illiquid assets, and margin are not hallmarks of prudent middle-class savings, this isn’t something suitable for widows and orphans. If this is your retirement strategy and you’re an average grunt rather than Nathan Rothschild, and you think of it as prudent, well, we’re not in Kansas anymore…

    Notes:

    1. I don’t have a particular problem with people being rentiers, but you have to have capital to do it. If you can’t afford the entry ticket, then work for your living instead, rather than trying to arbitrage a tax-privileged borrowing situation relative to your tenants, because, well, you’re vulnerable to the loophole being closed ;)

    Valuation matters – the dirty counterfactual to steady index investing.

    I’m going to stick my neck out against a common shibboleth here. Compared to many UK FI pursuing people the Ermine has only a short accumulative investing life; this is because I am FI, I haven’t done a stroke of work for more than three years. Because I am earning zilch I still have a very large cash holding of several times my erstwhile gross salary. Some of this was won hard by working for The Firm, but a decent part of it was won hard by investing in 2009 and to a lesser extent in 2011, with a generous risk-free punt assisted in taking up The Firm’s kind offer of Sharesave in 2009 with both hands, yes, please, lots, and a little bit of help from ESIP. In retrospect I could have played the latter far better, but the stupid mind-games played by The Firm hammered my perspective somewhat, and I focused on pension and ISA savings.

    Once I get a steady pension income I can invest a large chunk of this. However, I have a shorter investment perspective and can’t take 30 or 40 years to do it because a) I’m likely to be dead by the end of the term and b) the ravages of inflation will destroy roughly half the value every ten years at the long-run UK inflation rates. In comparison, a worker starting out now will steadily earn the money they will invest in the market.

    Disclaimer

    Most of you have 30,40 years of working and investing life ahead of you. Bear that difference in mind, and remember that this is my opinion. The history of the world is littered with people honestly believing things that are totally wrong. This article is worth exactly what you paid me for it. Remember you are not me. The UK PF/FI-RE blogosphere has changed greatly in the last few years for the better with younger writers looking to escape the rat race extremely early. Most of you are young and in the prime of your working life. You are not me, a grizzled veteran with a dwindling stock of financial ammunition but a decent sized accumulated bunker where I will make my stand. Etc.

    This also assumes you are looking at making money through stock market investment. By far and away the best way to make money through your own efforts is to add value through starting a business, which gives returns greatly above the return on a diversified portfolio of stocks, which are basically a secondary market for businesses other people started and sold to us all. The trouble is that the odds against success are absolutely terrible and the lifestyle isn’t that great in the early years either. Which is why most of us are (dis)contented wage slaves working for The Man. Working out whether to pay your suppliers or your fellow humans working for you when the kitty is nearly empty is a peculiar type of stress that employees just never get to experience.

    Enough of this disclaimer shit, I’ve done my duty. You have been warned that this may be a total load of arrant bollocks, like anything else on here :)

    Slow and steady investing in low cost assets is the received wisdom

    Received wisdom is that to build capital in the stock market as a wage slave, save a steady amount every month come rain or shine. Do this in a widely diversified low-cost index fund for decades and you’ll be sorted. Minimise platform fees and fund fees and take advantage of tax privileged accounts where possible. Here is a decent instruction manual and here is someone living the dream.

    Let’s first take a butcher’s hook at why this works for most people. Basically if you work for 20 or thirty years, then look at the FTSE100 (in practice you’d go for a wider index)

    1508-ukx

    note Owl’s comment that the scale should be log Google will fix this for you if you go settings vertical scale log and if you click on the image to go there I have set that to log

    your job is now to find any start period where you are worse off at the end of 20 years that you were at the start bearing in mind that this chart doesn’t show the effect of dividend income so you need to tilt it up by about 3.5% p.a. which is the long-term average yield of the FTSE100.

    But it gets better – since you are buying whatever you can get for regular lumps of cash, you buy more in bear markets, Google dollar/pound cost averaging to see how it works. Your accumulated capital is roughly doubled over a normal 40-year working life because you reinvest earnings. Although I am eternally cynical about the magic of compound interest, a doubling is worth having – it is more valuable if your earning power peaks early, which seems to be one aspect of the modern career arc compared to mine. You can simulate your odds on firecalc. I’m not going to spend any more time on talking about how great slow and steady investing is because this is about the counterfactual, for people who don’t have decades of investing ahead of them. Loads and loads of other people are going to give you that spiel, and if you have 20 to 30 years of accumulation then knock yourself out and JFDI. It’s lowish risk, as long as you anticipate there still being a global financial system in 30-50 years time. If you don’t then you have much bigger problems on your hands that fretting about early retirement, and you are misallocating intellectual and nervous capital by reading further. The fundamental win of slow and steady investing was identified many years ago by Jesse Livermore the Boy Plunger

    And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!

    That’s not to say the Livermore was a Boglehead, far from it 1 , but he was a shrewd operator. In general, the market goes up over the long term. Put the time in the market, and you get more of the up.

    Valuation matters more for people with shorter time scales

    One fellow raised this a few years ago and got continuously slaughtered for it by the cognoscenti to the extent he shows serious signs of becoming paranoid (Rob, don’t even bother commenting should you come across this tiny backwater – I thank you for your ideas which I came across in 2008 but I won’t tolerate conspiracy theories because life is too short). GIYF for readers interested in the story, the keywords passion saving will take you most of the way there. Nevertheless, if you don’t have thirty years then you should at least look at the Shiller CAPE and ask yourself if this carries no meaning at all to inform your investment decisions – Jarrod Wilcox’s overview is a good summary.

    Long story short, run towards fire. Buy when valuations are low. There is a corollary that you should sell when they are high, which I don’t use, because I have come to the conclusion that I am not a good caller of the time to sell. As a result I buy and hold 2, I just don’t sell. But I do modulate when I buy, and for the last couple of years when valuations have been high I have not committed new money into the market, I have focused on discharging capital gains tax liabilities 3 by selling unwrapped holdings within the CGT limit and either buying the same or diversifying into my ISA. Yes, I’m buying overvalued stocks, but on the flipside I am selling overvalued stocks so it’s a wash from the high-level view.

    I can’t afford long term drip feeding, because it ain’t going to help me fast enough. I don’t have a huge talent for spotting the up and coming. But valuation has served me well three times now, and hopefully will serve me well again if the sound of distant thunder turns out to be an incoming storm.

    more »

    Notes:

    1. Livermore was an extremely active investor, and not only that, one who favoured shorting stocks. Because stock markets creep up over the long term, you are fighting a headwind as a shorter. Livermore scored by shorting through the Great Depression :)
    2. This philosophy inherently limits me to HYP style dividend paying shares and income versions of funds/ETFs
    3. you can discharge more CGT in bear markets because your unwrapped holdings are worth less. But that would come at the cost of shovelling new money into a bear market, so it’s better to defuse CGT more slowly in bull markets.
    21 Aug 2015, 4:40pm
    personal finance shares
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  • A distant sound of thunder

    Ah, the lazy hot days of summers are conducive to all sorts of rumblings – here in East Anglia there is a strong predilection to thunderstorms. But there’s another sound of rumbling in the distance, and that’s the sound of distant promise in the markets…

    thunder and lightning, very very frightening...

    thunder and lightning, very very frightening…

    You start getting people talking about global plunges (though bear in mind it’s silly season and news is thin, so this may still not stick yet) and running pictures like this –

    1508_tradersand the ermine feels the slightest waft of a breeze across the whiskers, and the snout twitches to point in the direction of the interesting scent of fear… I have been bored shitless by the markets these last couple of years, I’ve made some desultory purchases like HRUB and a bit of EM stuff, but they didn’t really feel right (and weren’t right) but not enough of them to make any big hit, indeed the time may come to add to these. Most of the time I’ve been selling my own stuff back to myself to get it wrapped in an ISA – that sort of tedious business is what markets hitting new highs are for. But these new straws in the wind seem to indicate things could start to get interesting again…

    When I left work in 2012, I transferred my entire AVC fund into cash, because I did not know when I would have drawn down the cash I had saved, and would need to draw my pension early. At the same time I would have needed to invest this AVC fund, saved specifically to compensate me for the loss of taking it early. It looked like the market was on a high at the time, which turned out to be patently not true.

    I only have the choice of these two finds in my AVCs and cash

    I only have the choice of these two finds in my AVCs and cash (the FTSE100 isn’t as bad as it looks since I would get dividend income). The blue one already served me very well 2009-2012

    Okay, so I sold out at a local high in March 2012, but it then proceeded to make half as much again. I can be sanguine about that because there’s a lot more than this in my ISA, the overall value of which has tracked up by more than the blue line 1  Obviously had I a decent crystal ball I’d have held on and sold three years later, but I don’t regret this, because I have learned one thing about shares, and that is

    be no forced seller

    The rough rule of thumb here is that money you will need to call on within the next five years has no business being in the stock market. I did not know in 2012 what the future held. At the time, before Osborne’s changes, I believed I would need to draw my main pension and spring this cash tax-free, possibly to backfill any money I’d had to borrow in the meantime, alternatively to invest it. So cash it was, I accepted the 8% loss to inflation over that period. The insurance of cash against market turmoil has a cost, life is like that. If you’re a forced seller caught on the hop, you could get to eat a 50% loss and have to make a 100% gain to be back where you started. You really don’t want to do that.

    But now I will get a lump of this tax-free and have a steady strategy to pull out a personal allowance-worth each year. Unfortunately I’ve already contributed 2/3 of this year’s ISA allowance selling my own unwrapped shares back to myself to use this year’s capital gains allowance, but it starts to look like there will be a stronger case to commit new money to the market if there is a decent rumble. I can do that in my SIPP and with the remaining part of the AVCs – these in particular I know I won’t touch for another five years. I would have been windy of committing them to the markets in the recent highs, but some of that objection is falling away. Five years is a long time in the market – even if I were so unlucky as to buy the FTSE100 at the peak before the financial crisis (6730 on Oct 12 2007) I would be at 6487 five years later (and would have received five years worth of dividends). The odds improve no end in market swoons, and this one starting seems to be a general worldwide across the board throwing in of the towel, so something nice and boring like VWRL seems to be worth buying into in moderate monthly amounts across the next six months with the rest of my ISA allowance.

    Extracting the AVC money seems to grind like the mills of God, exceedingly slow, but hopefully the market won”t have recovered by the time I get a definitive answer as to whether I can transfer part of it as opposed to the whole lot. If part I can shift the residual AVC fund into that L&G 50:50 global index because I know I won’t be needing that for 5 years, if not then I will do something with VWRL in my HL SIPP. It looks like the markets are set to get a bit kinder to me, and all the other net buyers out there. Now that I know my time horizons I can use the information to allocate more money to the markets.

    So I raise a glass of summer wine to fear and loathing in world stock markets. Of course, it could be the final surrender as capitalism gives up the fight in the face of shocking government debt, Chinese overhangs and falling productivity. Or it could be the second shoe dropping of the financial crisis – all the stuff desperately batted into the air by governments who didn’t want to face the facts. But in that case we’re all stuffed anyway, que sera sera.

    Notes:

    1. note that this is not because I am an ace investor, the share uplift has indeed been most decent when I unitise, because over the last few years it didn’t matter what you owned, you were going to do relatively well. But of course over those three years I have contributed three years of ISA allowance too.

    What I learned about financial advice and pension freedoms

    Today I found myself in a place I never though I would find myself – the offices of a firm of Independent Financial Advisers (IFA). I learned a fair amount about regulated financial advice, about regulation, about why I am having difficulty in getting hold of my own money. There’s a lesson in it for people at The Firm saving in AVCs. Like everything else on this blog it is opinion, not advice, if you want financial advice speak to an IFA. I personally found vouchedfor.co.uk easier to use than unbiased.co.uk, but your mileage may vary. I have a very specific and somewhat unusual request

    How do I transfer the DC component of my works pension (in AVCs) into a SIPP so that I can front-run my main DB pension until NRA. That way I can avoid taking an actuarial reduction for drawing the main pension early

    If you look up the glossary for AVC I say it’s like a SIPP for people in DB pension schemes. In terms of what it does, that’s right, but in terms of getting your hands on it early, that’s a maybe. More about that later, but bear in mind the difference means a lot of hurt and possibly a charge on the transfer. For small amounts below the personal allowance you may be able to dodge that (H/T DIY Investor) but the amount I am looking at is more that that. It isn’t quite six figures but it’s more than £30,000, which seems some FCA-mandated threshold where pension people start to jibber and start backing away as soon as they hear this is linked to a DB pension.

    What did I learn about independent financial advice?

    1. It is there to protect you from yourself and making hasty stupid mistakes, not to teach you about finance. I learned diddly squat about finance.
    2. If your IFA steers you towards a percentage of execution fee then you are not rich enough to be there. Basically an IFA’s time is costed at about £150/hour. You need to have investible assets of more than about £500,000 to be worth using financial advice on an hourly paid basis – otherwise the percentage fees range between 2 to 5%. If your business is worth less than about £2000 to the IFA they don’t really want to know. The long-run return on equities is somewhere around 5 to 6% real, if you’re paying 3% to an IFA your ROI is impacted by at least 50%. If you pay them hourly then as long as the percentage fee on your assets is lower you get more of your money back. Unfortunately if you can understand that you probably don’t need an IFA… Before RDR rich people were fleeced to subsidise give the proles financial advice 1. I am a prole – I will never have a networth of a million pounds.
    3. An IFA does not teach you about finance. They are there to tell you if you are being stupid, and possibly show you why. I didn’t get to learn much about that because it appears that front-running the DB pension is not a peculiarly dumb-ass thing to do. I am obviously glad to hear that, though it surprised me that the IFA had never come across the idea before. Ipswich has many residents who work(ed) for The Firm when it was a research facility rather than a jobbing-shop managing outsourced IT crews, these particular residents are no spring chickens because The Firm stopped recruiting that sort of people in the early 2000s and started to taper down in the early 1990s. I am somewhat surprised that more of my erstwhile colleagues didn’t jump to this obvious win and that they haven’t been banging on the doors of the town’s IFAs demanding to defer their pensions for the secure income and front-run their pensions using their AVCs (there is no GAR malarkey associated with The Firm’s AVCs – the main advantage of using AVCs is to get a bigger PCLS).
    4. You must listen between the lines. When doing the equivalent of the finametrica risk profiling I was beginning to answer the question ‘do you expect to need your capital in the near future with a yes. This is the AVC capital, and I think of what I am doing as running down that specific lump of capital. There is a world of difference in the regulatory world between saying I want to get an income from capital and ‘I will need this capital’ even though I am looking to run that flat in five years. If you want flexibility in what you can do Do. Not. Say. Anything. About. Needing. Capital. Just don’t – preferably you are aiming to leave it to your heirs, you have that little need of it. Thus taking an income of £X p.a. over five years from a lump sum of £5X is very, very, different from saying I will need to use this capital of £5X in the next five years. Confused? I was.  I got it right, and my risk profile comes out roughly the same as the finametrica test.
    An Ermine's risk profile - batshit crazy

    An Ermine’s risk profile – batshit crazy

    This was complicated by the fact that I was there to look at a specific part of my assets – this was not a 360 degree review of my financial situation. The whole regulatory system struggles with that, which is a bastard. With this specific piece of money I am a timid mouse – because I expect to consume it all 2. I acknowledge, however, that normally this is a rum way to run a pension.

    What should people in The Firm learn from this?

    This is not advice, it’s my opinion. If you want financial advice speak to an IFA.

    If you are a BRT payer stick with the AVCs, because you can salary sacrifice into the pension scheme, so the taxman doesn’t steal 32% of your money in tax and NI contributions, effectively amplifying every £100 you don’t take home by about 50 % (for every £100 you don’t earn you get almost £150 in the AVCs) as opposed to if you do that with a SIPP where you get £125 in the SIPP. Take the extra in the AVCs and if you do decide to front-run your pension then be prepared to pay the IFA tax. Hopefully by the time you do that it won’t be there – if it is, well, you still saved more in the NI so let it go.

    If you area HRT payer then ideally you would first put money into a SIPP to bring you to the BRT/HRT threshold and then AVC the rest. Unfortunately I don’t know if you can do it that way round, I suspect the AVC would be taken off first. So you need to inform yourself if this can be done that way. It’s a tough call, because if you need to run down a larger AVC pot from age 55 and are not drawing the main pension you will pay more as a percentage to an IFA to take it out – you need to model this with Excel to see where the extra IFA cost of taking the AVCs out crosses the tax advantage you get in the BRT region of your savings. If, on the other hand, you are only pushing your salary down to the BRT/HRT threshold, the forget AVCs and use a standalone SIPP for the flexibility, though bear in mind that the advantage of AVCs was that your tax-free PCLS is bigger if you can wait until you draw the main pension.

    You should also start talking to people about your AVC transfer a year to six months before you are 55 and want to do it.

    What should I learn from this?

    I am grateful for having a decent slug in a DB pension scheme, so if I have this extra grief and cost here then I need to focus on the fact that there are many other problems I simply don’t have in the pensions department. I do not have to worry about outliving the pension. Over periods longer than about 20 years a FS pension does get eroded comparative to other people’s earnings over time; it is the job of my accumulated ISA savings to lean against that sort of wind

    I left work precisely to get away from stupid jobsworths and nitpicking rules. I had a rotten experience of that with Hargreaves Lansdown despite their vaunted reputation for service, and I’m coming round to being prepared to pay about £2000 to get rid of the aggravation because dealing with jobsworths and rules is rules types makes me want to lamp them. Lots of people in the pensions biz seem to be really frightened of pension transfers connected with DB schemes, and fundamentally they want paying to get over/insure against their fear of being sued later on. Such is life. I was vaguely tempted to leave this a year, start using some of the income from my ISA and try again when some of the dust has settled. But I am scared shitless by some of the rest of what Osborne is saying about pensions. I very strongly suspect that in five years time there will be no tax-free PCLS or it will be limited, and some of what they are saying about pensions being no longer tax-advantaged makes me want to shake this down while I can. There will, of course, one day come the evil time when NI and tax are fused and no doubt an upper limit on the amount that can be held in ISAs. But I will do something about the things I can do something about. And maybe I should bear in mind the wise worlds of Thomas Jefferson

    You ask, if I would agree to live my seventy or rather seventy-three years over again? To which I say, yea. I think with you, that it is a good world on the whole; that it has been framed on a principle of benevolence, and more pleasure than pain dealt out to us.

    There are, indeed, (who might say nay) gloomy and hypochondriac minds, inhabitants of diseased bodies, disgusted with the present, and despairing of the future; always counting that the worst will happen, because it may happen. To these I say, how much pain have cost us the evils which have never happened! My temperament is sanguine. I steer my bark with Hope in the head, leaving Fear astern.

    Most of that shit won’t happen. But it’s prudent to favour the bird in the hand… My original plan was to take the 25% actuarial reduction and invest the AVCs to compensate for the loss, but since I am in good health I will probably be better off favouring security over investing raciness, dodging the actuarial reduction and investing only half the AVC fund, and Osborne has made this possible for me.

    Notes:

    1. This is the second hit I have taken from that damn RDR. I don’t particularly think that saving rich people from their own stupidity/laziness is a particularly grand aim, considering the shafting that the proles took, but that’s just the way it goes.
    2. strictly speaking I will probably use half of it and some savings to keep filling my ISA allowance over the next five years, but that’s a different story
    11 Aug 2015, 3:03pm
    personal finance:
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  • The Ermine has been stitched up by Hargreaves Lansdown

    As the years roll by the Ermine is becoming grizzled of years, and I have the opportunity of becoming a pensioner rather than an early retiree. In the long glide path from leaving work to getting to this stage I have gradually burned through some of the money I had saved as a wage slave, and just like the aeronautical metaphor, my room for manoeuvre drops as time goes by because the reserves are falling lower.

    A while ago I opened a SIPP with HL, to make use of my £3600 p.a. tax-advantaged savings allowance. What with Osborne’s changes, I was going to take a portion of the DC AVCs I saved in The Firm’s pension scheme to add this to my HL SIPP, then take my tax-free lump sum and draw down the rest under the annual personal allowance for five years until I reach the normal retirement age for The Firm.

    Now I saved in the AVCs pretty much exactly a third of the notional capital that stands behind my defined benefit pension, precisely for the reason that I could take this AVC as the 25% pension commencement tax-free lump sum, If I transfer some of that I give up some of this tax-free capacity, but I can still draw the money tax-free and before 60, just in a different way from how I designed the idea in 2012. The reason I can do that is Osborne’s changes in April 2014, obviously I didn’t know that in 2012 😉

    So I take a butcher’s hook at how to actually do this, starting with their guff on transferring pensions, and I discover that the blighters have tossed rocks all over the runway as I am coming in to land. To wit:

    An Additional Voluntary Contribution (AVC) linked to a defined benefit scheme could give a higher pension and/or tax-free cash if not transferred. We normally insist you take advice to confirm it is in your interests to transfer such pensions.

    Which s a bastard, because this is not a huge amount of money I want to transfer, it’s a few tens of thousands of pounds. I don’t know exactly how much financial advice is but I figure it’s going to be about £400, most of which is going to be to write the letter on fancy headed notepaper that it’s okay for me to get a hold of my own bloody money. It’s a bit like solicitors who don’t get out of bed for much less than a few hundred if you want them to dirty up some of their nice headed notepaper with their laser printer to threaten some oik.

    So basically HL want me to pay about 1% of the transfer to an IFA to cover their arse. I rang them up and outlined what I want to do and why and they said nope, rules is rules. IFA signoff required. So I am now investigating other SIPP providers to see if I can avoid paying swindlers and leeches IFAs for access to my money, but it’s not looking good. I observe that Cavendish Online take a similar line so I may be stuffed on dodging the IFA tax

    Unfortunately you will not be able to transfer from any of the following sources:

    • Additional Voluntary Contributions schemes (AVC) linked to defined benefit schemes

    And I took a look at Monevator’s piece on online financial advice – I found vouchedfor a bit more useful than unbiased which used to be the IFA goto place for search.

    I have only ever taken financial advice once in my life, and it was disastrous

    – which is why I am trying to avoid this. Not just to save myself a few hundred pounds, but my only experience of finacial advice stank. When I was 29 and looking for a mortgage the lovely green-eyed LAUTRO ‘adviser’ Sue persuaded me to go for an endowment mortgage, dangling the potential possibility of the endowment doubling. The young Ermine had no dependants and no use for the life insurance. If I had that need, The Firm’s pension scheme had death in service insurance worth more than the mortgage which was the grounds I finally got a claim settled  for reinstatement to where I would have been with a repayment mortgage.

    However, even if endowments hadn’t started to fall short I was shit for brains to be swayed by that promise anyway. A mortgage term is 25 years, if you take £100 in crisp £20 notes and stick it in your mattress in year 0 then half the value of what you can get with it dies in about 10 years due to inflation, so if the endowment nominally doubles in 25 years you’ve still been stiffed. The Bank of England’s inflation calculator tells me indeed that £100 in 1989 would be worth £222 in 2014 when that mortgage would have been redeemed had I not moved and paid it off early. Precisely what the endowment industry managed to do to screw this up so royally still escapes me.

    It was galling for my parents, who had taken the trouble to properly educate me in things financial. Although this is not a job that parents seem to consider part of their domain  nowadays, my working-class parents did, and they made a decent fist of it. My parents taught me among other things don’t spend more than you earn son, that the NAV of an IT differs from the share price, and my mother had described to me how a mortgage works down the the detail of the payments being mainly the interest to start with and repayment of the capital speeding up towards the end. They had strongly advocated repayment mortgages and told me why, and with the hindsight of a quarter of a century they were absolutely right, but in the tragedy for parents the world over there is no antidote for youthful stupidity and black-and-white thinking – to ask a 29-year old to qualify the double your money promise against effect of inflation on period of time that is nearly the same as his age is a big ask. It takes time and life experience to turn some kinds of knowledge into wisdom. I had the knowledge, but not the wisdom 😉

    how a traditional mortgage builds equity

    how a traditional mortgage builds equity. From the excellent Mortgages Exposed

    Or maybe I was a particular twit. They were strange times, the late 1980s, though the housing market feels the same now, there are people in Britain today who may be on the verge of making a similar mistake

    Anyway, while I now accept that the decision to buy a house then was the dumbest financial thing I have ever done, the amplification of that cock-up through what was basically self-serving and wrong financial advice against my interests makes me leery of the whole financial advice scene. It’s not an experience I feel I want to repeat at a gut level, and it’s not an experience I want to pay for.  I guess I can jump over that by reminding myself this was money the taxman would have stolen 40% of, and indeed money that inflation has bitten 8% out of since 2012.

    17 Jul 2015, 10:21pm
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  • Windfall for tourists as Carney trails interest rate rise

    The Grauniad tells us it’s a good time to be a British tourist, all thanks to that Carney chap trailing an interest rate rise. I can’t help feeling that empty promises of  rising interest rates are just like a lasting solution to the Greek predicament, this is a movie that we’ve seen before and will see again – announcement of interest rate rise only to welch on the deal when push comes to shove. But a lot of people seem to buy it. Or perhaps they’re pissed off with the Grexit shenaigans. Either way, we’re back in 2007 again in relative terms to the Euro, though we are all still flat on our financial backs with stars going round in front of our eyes. And that’s before you even think of Greece.

    1507_eurogbpNow an Ermine could take the opportunity to hit Eurotunnel, duel with the myriad desperados and striking Frenchmen, and join the massed ranks of British wage slaves on their annual family two weeks in the sun, or I could think to myself maybe I’ll pass on that. I’ve always avoided school holidays for travelling anywhere because it’s damned hot and the price goes up and, well l’enfer c’est les autres avec leur fractious rugrats on public transport in the heat of summer. After 30 years of avoiding this sort of fun I’m not about to start now.

    Nevertheless, perhaps I could take some of my ISA for a summer holiday. Last year I was a forced seller and sold IDJV 1 for about £16 because it had fallen to what I had paid for it. It was unwrapped, I’d already maxed my CGT allowance so I couldn’t sell any of the rest of my holdings at a profit even though I needed the cash, hence I had to borrow some. Now it’s still a bit higher than that at £16.91, so I’ve told TD to let me know if it falls to a bit below what I sold at, because then I can effectively bed and ISA this over six months.

    All sorts of other foreign stuff will get cheaper. Now the other side of the coin is that all the foreign stuff that I already own will go down the toilet a bit. As it is this isn’t a hugge issue for me as I am hopelessly unbalanced worldwide

    Ermine total equity distribution

    Ermine total equity distribution

    because my HYP is the largest lump and it’s UK biased. Index True Believers would sell off half of that and pump up that devxUK and EM. I’m okay with buying EM and have done some of that already, and it bleeds now of course 😉 I’m not touching the US at current valuations but I would quite like to see some of that IDJV, in my ISA this time thanks very much. I’m not in a great hurry – 1550 would do me well. I should probably knock it off on the EM and lift some bombed out dev world. The problem is that as the ISA gets larger the annual steering wheel of new contributions gets smaller compared to the overall size. Since I don’t sell and I bought a lot of the HYP in the bombed out years of 2009 to 2011 I’m going to have a hard time balancing this out a bit. But a high pound and a low Euro helps…

    So you can keep your sea, sun and sand. I’ll get my summertime kicks on the market, particularly if the Greeks go and scare the horses a bit more. I like hot lazy summers of snarl in the markets.

    Notes:

    1. IDJV is basically Eurozone big fish.
    15 Jul 2015, 11:00am
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  • UK government pensions consultation

    I shouldn’t think there’s anyone reading this who doesn’t read Monevator, but there’s apparently a consultation on about UK pensions. Props to The Accumulator for trying to sift the mutually contradictory desiderata in the comments thread into a narrative suitable for Her Majesty’s Government, who will probably file the results in the round filing cabinet on the floor.

    Nobody actually does a consultation to find anything out, they do it to put a veneer of faux democracy on the decision they are going to take anyway. Most of the motivated commenters are richer though not necessarily wealthier than I am 1, so the issue of the life time average and the annual contribution limits exercise many. I would have been sore about the annual limits as set now but I didn’t have £225,000 handy to put into a pension when I was going for it so I was okay. This isn’t my problem any more, because once I am 55 I won’t have space to avoid paying tax on pensions, so more pension saving isn’t useful to me. In the unlikely event that I decide to become a wage slave/productive member of society again I’ll just have to suck it up and pay tax, as my personal allowance will already be eaten up by existing income. Which is obviously a disincentive to putting my shoulder to the wheel of raising Britain’s dreadful productivity, though I will show later that it appears the Government has already decided I am over the hill in contributing to STEM activities, so it’ll be making knick-knacks on Etsy for me then. Bollocks to that, Iain Duncan-Smith. That’s the joy of financial independence – being able to issue that command.

    I paid less tax in my last three years by using pension saving than probably at any time throughout my working life even though I was in theory a 40% taxpayer. Yes it would be nice if I could save more than £3600 p.a. into a pension now and get back the tax, but so what.

    The straws in the wind are that the Government want to do for the 40% and up tax relief on pensions, perhaps making it about 33% for everyone, because the people they want to incentivise are basic rate taxpayers, higher rate taxpayers are rich enough to sort themselves out. It’s worth observing that a basic rate taxpayer can get 32% tax beneift if you can save into a pension by salary sacrifice, because the contribution comes off your pay before NI and tax are charged. But that’s for some future budget. Let’s just say that I am not yet putting my £3600 into a pension because if I can get 33% rather than 20% relief it will cost me £2400 rather than £2880. It’s not a huge amount of difference but it’s worth waiting till March 2016 for.

    The overall feeling seem to be that the well off and the rich have been making hay on the pensions front and this will get screwed down. In some ways pensions are an odd incentive – the government is encouraging people like me to leave the workforce early, some 8 years (relative to The Firm’s NRA) to 15 years (relative to my State Pension Age), while at the same time hollering that the country is short of scientists and engineers. I am tickled by the casual ageism of the Government’s report on High Level STEM Skills – supply and demand

    However, it is the inflow of new STEM graduates that is more likely to help ensure workers have knowledge of the latest science and technology – retaining older individuals does not do this.

    That’s the trouble with those old dogs – you just can’t teach ’em new tricks 😉 Bless. What they are saying is that we need young scientists and engineers – the Zuckerberg doctrine at work.

    away with ye - dead wood in the white heat of technology

    away with ye – weed out dead wood in the white heat of technology

    I have heard the theory that while the artistic side of CP Snow’s Two Cultures deepens and matures with age Zuckerberg may have a point in technology that young people are just smarter –  it seems echoed at GOV.UK 😉  I also observe that companies can’t be bothered to train young people in their specialisms these days – to wit:

    A representative of one of the major engineering companies noted, “For mechanical engineering, I would agree [there is no shortage]. However, for electrical / electronics, there are simply not enough graduates with the right degree and employers are trying to recruit from a small pool of those with the right degree content (i.e. higher-voltage direct current is a pre-requisite for the transmission and distribution industry: there the supply of graduates is inadequate)”.

    You, Mr Representative, are the problem, because of the fecklessness of your company. When I joined the BBC, with their specialism of colour TV, they damn well trained their graduate entry for a few weeks into the intricacies of the subject at their training facility in Wood Norton. You go to university to learn how to learn, and grasp the high-level aspects of your chosen field. Exactly what part of investing in people does this damn company not understand?

    The upshot seems to be that the Government wants to spend less on pensions tax relief, and in particular less on pensions tax relief for the well-heeled. This was also a theme of the Coalition government before this one. The Tories clearly have the interests of old money at heart with their fondness for inherited wealth and the iniquity that goes with that encouraged in the Summer Budget, but they are perhaps less fond of the nouveaux riche and their tax avoidance through the pension system. Hence the double targeting of the lifetime allowance, aiming to limit tax-advantaged pension income to about £40k (SWR of 4% on a lifetime allowance that seems to be trending towards £1,000,000, currently £1,250,000) and limiting the annual contribution rate to £40,000. The combination seems a bit rough – elementary arithmetic shows a young pup in the finance industry could just about make it, if he gets his running shoes on and saves the full £40k every year from graduating at 21 to becoming a greybeard at 52 (how many 52-year olds are there in finance?) but he better not want to buy a house, he needs to be prepared to eat ramen in those first few years and not inflate his lifestyle. In practice it’s not quite as bad as that, compound interest typically doubles the real value of savings over a 40-year working life, but it’s not going to be easy to reach the lifetime allowance with the annual allowance.

    I don’t understand the double whammy. There’s a case to be made for the lifetime allowance – there’s no need to tax-favour pension incomes of more than twice the median wage, but I don’t really see the point of the annual allowance limitation. And I certainly don’t agree with having both limits in place – one of the other seems okay. People’s careers vary much more than they used to, and the lifetime allowance sets a target of saying ‘this much income can be saved tax-advantaged, no more’. The annual allowance arbitrarily limits the capacity of the feckless Johnny-come-latelys to fix their pension savings in their forties and fifties – not everybody is a Steady Eddie on this.

    Notes:

    1. you are rich by the size of your wad and/or income. You are wealthy by how much of your income is committed/how many years your wad will maintain your lifestyle – open-ended for the financially independent. There is correlation but not necessarily causation between the two, because of the astronomical variation in lifestyle costs

    China doesn’t really seem to get this stock market thing

    While our eyes are focused on the slow train crash that is Grexit, over on the other side of the world there is an interesting example of King Canute seeking to hold back the waves. In China they seem to be of the opinion that their overheated stock market, having gained over 100% in the last year, is supposed to stay there. If you’re one of those capitalist running-dogs that is going against the story looking to sell, well, you can stop what you’re doing right there. Hardened Western investors who went through the dot-com boom might ask themselves what the good reasons were for last year’s 100% heft in a generalised index 1

    from Bloomberg

    Shanghai Composite Index from Bloomberg

    So they stopped people with a 5% or more stake selling, and the government lends money to people to buy shares :) There’s something about the point of this whole stock market thing that is being missed here. The Chinese stock market is also a young market, it seems compared to other world markets there are a lot of retail investors buying shares on margin – what on earth could go wrong? This is classic New York 1929 bucket-shop trading. Maybe in a few decades they will  become sober index fund passive investors, but first they have to get the momentum-chasing speculator out of their systems.

    China’s investing culture remains backward and immature.

    Howard Gold

    Markets elsewhere have been on a roll of a long time, and while Grexit is unlikely to hurt too much outside Greece this one could be the second shoe dropping. There seems to be a lot of ruin in China as it tries to reorient itself from its early 2000s economic model to something that matches the post Lehman-crash world. There’s a lot of ruin in most economies, and it doesn’t necessarily lead to trouble, but by its sheer size China could have big knock-on effects.

    Better to be a dog in a peaceful time, than to be a man in a chaotic period 2

    There haven’t been tremendous buying opportunities in the markets for two or three years now. But interesting times lead to interesting opportunities. There’s still too much zombie puffery inflated by easy money after the 2007 crisis. Emerging markets are probably where it’s at in 20 years’ time, and perhaps we will have more opportunities to pick ’em up cheap in the next few years if this sucker goes down. Of course, associated with that will be all sorts of other misery. I’m not doing a Dubya and saying ‘bring ’em on‘. China has big challenges ahead with the whole get rich before getting old thing, and I personally have avoided investing in it 3 because I have no feel at all for the country – my preferences in emerging markets lean towards India, Latin America and Africa from a demographic point of view. Howard Gold is quite right to describe EMs as having gone down the toilet, but I’ll be surprised if they stay there for the ten years he is calling out. I don’t have enough EM exposure, because in the years after 2009 I was building a HYP. And I don’t want to be a dog…

    Notes:

    1. this question being, of course, the one they failed to ask themselves in 1999 – ain’t experience and hindsight a wonderful thing?
    2. May you live in interesting times is a good line, but not Chinese, so it’s not right to to use it for China ;)
    3. other than in generalised index funds

    Don’t be in thrall to Total Return

    Poor old Greybeard over at Monevator has stuck his head above the parapet again saying he will use actively managed investment trusts to smooth his retirement income and make it easier to manage. Meanwhile Insourcelife has paid down his mortgage in his late 30s, some ten years earlier in his life cycle than I paid down mine in my late forties. 1. Paying off a mortgage early is an opportunity costThe Accumulator sensibly decided to invest instead. Here are two people giving up some Total Return, OMG, that’s nuts!!!

    The world of personal finance seems to be moving towards an intellectual materialist rationalism that favours Total Return over all else 2. Now if you are a 20-something with 35 plus years before you can get a hold of your pension savings then yes, I agree TR is what it’s all about in those pension savings taken in isolation. If you are a retiree who wants to featherbed your adult children because you think the robots are coming to take way their middle class jobs then TR is important too, because although you can’t take it with you they will and a little bit of you will live on, enabling you to do the whole terror management theory thing of living beyond death. Beats having your head frozen, I guess.

    The trouble is that life is a balance, and often maximising one aspect above all else has undesirable consequences. Money is crystallised power, a claim upon future work. You can prioritise one aspect of it like total return, but then you will have to deal with being exposed to massive volatility. It’s easy to sit back at 30 and say I’m cool with that but you need to have gone through a couple of stock market crashes to know if you are cool with that really. Maximising TR means you should run towards that sort of fire :)

    The Ermine is not a Total-Return maximising rationalist

    I have done some dumb things in personal finance. I retired 8 years early – the gross money I would have earned in the remaining eight years probably roughly equals my total networth 3. Oh no – hundreds of thousands of pounds kissed goodbye to-  how crazy is that? Well, I don’t know – the world of work was driving me round the bend with it’s stupid metrics and micromanagement – I am ERE craftsman, not gamesman. The view is a hell of a lot better, too:

    giving up a six-figure sum to see this

    giving up a six-figure sum to see this

    or this

    or this

    instead of this

    instead of this – hell yeah.

    I paid my mortgage off early – even at the time I knew this was a teeny bit irrational, and took a whole year with it dropped down to to about £1000 4 mulling over whether I should pay it off. Then I did, and although every so often I observe that I take an income suckout between leaving work and getting hold of my pension savings, faced with the same I’d do it again, because at that time I wanted peace of mind that if I got iced from work I could lock down and make it through.

    There’s a time to maximise your total return, and that’s probably when you’re young, because you aren’t usually putting much in. But as you go through life, beware of black-and-white thinking. Sometimes you have to consider throwing some red meat to The System and giving up some total return, particularly after you have retired, because it is about the ride, not just the money. Otherwise we are in the danger of becoming that “man who knows the price of everything and the value of nothing” Oscar Wilde warned of in Lady Windermere’s Fan.

    I’ve given up a very decent six-figure sum, pasting my potential Total Return by about 50 to 25%. I  did it because it is more important to live to see another few decades with health intact, and sometimes you have to take chances in life. It is nearly three years since I left work, and would I do it again if I had my time over? Hell yeah – because the aim of the game is to maximise Total Life Experience, not total return. It’s a balance thing, not a single variable.

    For sure, I’m poorer for it in money, but I am richer for it in Life. Money is not the only thing you can run out of…

    The Escape Artist put it this way

    Why behave as if this one life we get is just a dress rehearsal?  If you are one of those people and you carry on working in your all consuming City or Corporate job, then you are wasting your life.

    If maximising total return is stressing you out in retirement as you see your capital eroded which is reminding you of the Grim Reaper’s call then give up some total return. Use investment trusts, have a plan to annuitise at some stage/stages, give up the fight slowly for an easier ride.

     

    Notes:

    1. Insourcelife is American so paying off a mortgage may be an easier ask as houses are less expensive relative to wages I believe, certainly from looking at US real estate windows on a business trip in 2007 where I could have easily bought a house cash, but impressively Insourcelife has done this with children which probably more than offsets the difference!
    2. I’m projecting some of my own prejudice here, but passive investing is still a belief system IMO. Any belief system has axioms, and I am uncomfortable with some of them, in particular the ‘valuations don’t matter’ one. My perspective is different, however – I don’t have 30 years of investing without extracting returns ahead of me like a young Boglehead starting out would have
    3. the opportunity cost is in fact a fair bit lower, I was a HR taxpayer and couldn’t have extracted anywhere near the gross amount because of limitations on pension contributions introduced since I retired.
    4. it was a flexible mortgage so I could have ramped it back up at will up to the original repayment track
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