In praise of the pensions lifetime allowance

The deal with pensions is this. In return for saving money for when you get old, you get to save before tax is taken off. There aren’t many legal ways of avoiding tax, but that’s one of them. The downside is that you don’t get your sweaty paws on the money until you are 55 1. And even then, if you want to preserve the tax-free status of that lump you are rate-limited on the amount you can draw, which is also fitting IMO. My pension savings are worth nowhere near the lifetime allowance, I will still be a taxpayer as a pensioner in a few years.

It costs money to run a civil society, and that money comes from taxation. There are issues in that running that society seems to get dearer and dearer and more and more complex with time, but that is a different fight. Nobody likes paying tax. Nevertheless, that civil society would have to support you when you are old, so easing back on the tax early in your life in return for you being less of a burden later on is the rationale for that deal.

I’m not going to be popular for saying this, since many people affected by the lifetime allowance (LTA) are dedicated followers of Ayn Rand, who feel they have the resources to be entirely self-sufficient and apart from the rest of us lowly scum, but the reason that this tax bung is there is to encourage people to do something they otherwise wouldn’t do. It only needs encouraging up to a point, and that point is okay at  £1,000,000. The retired colonels of the Torygraph continually spit bricks about how unfair this limit is because it stops them saving more money into a pension, but I don’t see what the problem is, on two counts.

  • If you can save a million pounds then you are ‘king rich by British standards 2. It’s not like they point a gun at your head as say you can’t save any more, they simply take the tax break off you for any further savings. So save somewhere else, chump. And pay your tax, you aren’t Google, though by all means plan to pay as little as possible, legally. If you can’t manage the concept and you really don’t like it then there’s a whole world out there…
  • You can buy an annuity with that £1m of £28,000 p.a. for life rising at 3% p.a (presumably retiring at 65), which is more than the average UK household income for working sorts.

That’s a pretty reasonable limit – we will give you a tax break to save enough until you reach the average UK household working income. Where I do think they are wrong is placing an annual limit of £40k. There shouldn’t be a limit IMO – the £1M LTA one is good enough to define the ambition of what this is designed to do. If you want more, then save more but end of the tax break for you. It doesn’t matter if you earned that £1M in three frenetic years as a young finance wallah or you plodded away for forty years. It’s about how much of an income that will buy you. I’m not that exercised about limiting the tax advantage to 20% either. There’s no big deal in having the rich get there faster, as long as the total tax break is limited by the LTA. Good luck to them – the rich still get old like everybody else 😉 I wouldn’t even limit contributions to earned income, your pension would be a much better place for your inheritance than going into jacking up the price of houses for everybody else.

Yes, it doesn’t greatly favour FI/RE because you need more if you are going to pack it in at 30. But in the end exceptional results need exceptional efforts, and until the robots really do come for everybody’s jobs then there isn’t a huge case for incentivising people to retire early. Contrary to much of the bitching about the LTA if you happen to have saved more than the LTA historically when they dropped the limits from the original £1.8m then you can apply for LTA protection to protect your large pension savings from tax. The deal is then that you don’t take the piss by adding to them. Again, this is fair enough – you aren’t retrospectively shorn of your tax-advantaged hoard. You are already rich enough and don’t need any additional incentive to save for your old age. Celebrate your good fortune and knock it off  😉 Obviously if you survey your domain and decide you did build all that and want to live in Galt’s Gulch, well, er, go and knock yourself out. It appears that the perpetrators of this Randian paradise on earth haven’t solved some of the fundamental requirements of a government, such as defence of the realm

Contrary to much of the commentary on the LTA you are not stopped from saving on reaching it. You are stopped from saving into a pension scheme and benefiting from advantageous tax treatment on your contributions. So save somewhere else FFS.

Notes:

  1. this age is a movable feast drifting upwards with longevity over the years to come, intended to keep 10 years before state pension age
  2. To qualify this, you are in the top wealth 5% if your household has £900,000 in assets from all sources including home equity, so if you are bothered by a £1m pension limit you are embedded firmly in that top 5%

sometimes you just have to hold your nose and do it

I wrote the first half of this in November last year under the heading “Valuation matters” when I was bored with the stock market, but couldn’t really take it anywhere. Things have improved in the two and a half months since, so I thought I’ll run the post.

Ermine approach to bear markets

There are two big problems with bear markets. One is the general noise and hum of people like RBS yelling sell everything. The other problem is that bear markets are usually shorter than bull markets, but steeper. So not only do you have a shorter time to get into the suckers, but it feels bad too.

past investment performance provides no guide to future performance

Standard FSA text you read everywhere but probably don’t believe at heart

I do have a fair lump of money to move out of cash, even while leaving my SIPP as it is. But what to do with a bear market, eh? I will do roughly what worked the last couple of times.

Valuation matters

Once upon a time, in the late 1990s, I got more and more interested in the stock market as prices rose, ‘cos I looked at the virtual bottom line and thought that it was real. Whereas now I get more and more lethargic as valuations rise, I cast about and struggle to find anything of interest to buy, and occasionally carp about it. Whereas a decent market crash would interest me again…

Let’s take a look at the enemy. Total Return values for the FTSE100 are only available back to 2012, but I got my FT All-Share TR from here, apparently derived from the ONS.

FTAS Total Return, log scale to preserve relative changes. Some big hits and a drop in the rate of increase of TR since the Millennium

The overall trend is up. And yet this is a game of two halves – whatever happened after the dotcom bust seems to have taken a bite out of the annual rise of the FT all-share total return, and given us bigger and more protracted retrenchments. Perhaps the change in annual rise is because inflation was generally lower in the second half period, but there’s no way of getting away from the fact that the retrenchments in TR are deeper and span longer periods. There’s real money to be lost here for significant periods of time.

Whether this is the result of structural changes to the economy, or perhaps the massed ranks of index investors beginning to kill the golden goose is something I am not clever enough to say. Perhaps it’s as simple as the increased financialisation of the economy, in the end somebody has to be paying for all those salaries in London. FirevLondon put it well

Financial services is, er, where the money is. Pay levels here significantly exceed almost all other sectors when you benchmark for responsibility, experience, lifestyle, etc.  The point is that these jobs are not easy to get and are not everybody’s cup of tea.

Just like people working in sweet shops don’t want for sweets, I guess people working in money don’t want for money. The kink in the chart may be as simple as the fact that these pay levels as well as soaring CEO pay have to be looted from the real economy because financialisation is an extractive rather than productive business, looks like shareholders have been getting a bum deal for the last 16 years as well as being shaken down twice. Or is that three times, including now 😉 Whatever it is due to, there’s a good case to support the thesis that it’s all different now, but the trouble is that it isn’t all better now.

If we are going to be carrying the deadweight load of all these spivs and CEO salaries on our backs, we really want to be buying in the suckouts, since the cost of the future income stream is cheaper, cos, well, the price of entry is on sale.

People made a lot about the last bull market being one of the longest on record, which is all fine and dandy, but if the price of longer bull runs is greater humdingers of bear markets that knock you back the odd decade then it still isn’t great news for steady buy and hold. The view post 2000 on the FTAS total return hasn’t been worth the climb compared to the 20 years before it. The slightly lower slope could be explained by lower inflation, but the multi-year suckouts are longer and deeper.

My aim is to long-term hold, and use the dividend income. So I am buying a future income stream, and I want prices to be low when I buy. They haven’t been low for the last few years, that’s the trouble with bull markets, they hang around too long and outstay their welcome, particularly that last one. I’m glad to see the back of it. All it’s been good for the last couple of years is to shift unwrapped assets into an ISA wrapper, rather than put much new money into the markets.

Buying into bearishness with index funds

I have stood next to the open goal of bear markets before, tapping a bit of wedge into it at the same time as buying that Cash ISA, That Cash ISA is still the same one as I bought in March and April 2009, when I also bought the other half as a S&S ISA in April and started hitting AVCs. Cash has lost value in real terms whereas the S&S ISA and the SIPP paid me handsomely.

There are similarities to 2008 in that the stock market and the pound are tanking. The combination of these gave both my AVC funds and my ISA a good heft. This bear ain’t really got into it’s stride IMO, which is just as well for me. I have about 3k worth of ISA allowance left plus about two grand of cash in there. This year in an aberration of common sense I adopted the nice little quarterly regular drip-feeding approach of a good index investor, largely because I couldn’t really get excited about much, but figured I can’t just sit on cash. So for the last two quarters I’ve been buying gold, and in the first quarter I did some racy stuff like buy into Russia, EMs and oil, all of which have tanked faster than the unwrapped assets I sold. I’m taking the Zombie approach to the busted value of the last enterprise, at least the gold is up a smidgen.

However, in a decent general bear market, you don’t actually have to be clever at what you buy. What you have to do is be buying. There’s a hell of a lot to be said for indexing into a bear market. You can sort out the asset allocation later when the rubble has stopped bouncing.

What does a bear market look like, and how do you know one?

A bear market is a fall back of 20% against recent highs, apparently. How do you know one – I spent too much time a while ago trying to formulate a black box determination of a bear market from the price signal. A bear market is not just about the price. It is also about how people feel. You know a bear market from the number of pundits screaming that everything is doomed – indeed I’d go as far as to say a bear market is much more about how people feel about the market that the price signal the market is giving, it’s the sizzle, not the steak.

The trouble is that the depth and duration of the retrenchment is unknowable at the start. Is this like 2008/9? Is it like the dotcom bust? The 1930’s? Is it the final denouement of capitalism culminating in a war of all against all, or maybe a modest wobble like 2011?

This unknowability means I don’t want to be buying all in one go, a good bear market happens across a year or more, the 2011 wobble was a few months ISTR, but the trouble is you can’t know where the bottom is. So I want to be getting in steadily over a few months, perhaps a year. The five grand for the ISA is easy enough to do, buy £1000 of VUKE and do it again over the next few of months. VUKE because it’s the FTSE100 that’s getting much of the stick at the moment. As well as that I have about 8k left in a cash ISA, which I can now deploy into the stock market. Unfortunately, having tried with Charles Stanley, it appears that I can’t actually open a S&S ISA by transferring in a seven-year old cash ISA without opening a new ISA for this year, which I can’t do 1. I could, of course, transfer the cash ISA into my TD Direct ISA which I already contributed to this year, but I don’t want that any bigger, I need another two S&S ISAs to bring the value of my shares ISA down to the FSCS compensation levels. This gets more relevant in times of market turmoil, MF Global is the poster child for what can go wrong here…

So I guess I am stuffed until April on moving that cash ISA, which probably isn’t so bad. If this is a big one, the bear market will be just getting its boots on by then, I should imagine we will still all be thinking it’s financial Armageddon. In time for the new ISA year 😉  I am pretty sure that buying VUKE now will look like a terrible idea by then. As will buying it in February. And March, May and June. But I can’t know, and that’s why sometimes you have to hold your nose and buy into bear markets anyway. It’s a dirty job, but somebody has to do it. I can’t call the bottom of a bear market. But I don’t have to, all I need is get in while the sale is still on.

It’s a lot more interesting than steadily socking away a few hundred pounds a month into an index fund in a bull market, even if the interesting is the same sort of interesting as living in interesting times. It’s the drama of bear markets that I like, well, and the fact that valuations get so much better. Despite everybody saying valuation doesn’t matter and you can’t time markets etc I can recognise a hissy fit when I see it. 2009 was good. 2011 had its moments. Perhaps 2016 will be up there as well. Of course, it is entirely possible that that kink in the long run TR of the FTSE100 is indicative of a deeper malaise – after all the suckouts seem to be deeper than they used to be and getting deeper, and despite the great celebrations when the FTSE100 crawled above the peak sixteen years ago it still seems to be walking wounded. I’m happier buying it at 5700 2 than 7000-something, although I am sure it will test 4500 sometime this year. I wonder if this will also be the year the Greeks default just to double down 😉 Let’s hear it from iii’s Rebecca O’Keefe

With every upturn being followed by deeper falls, investors are increasingly wary as it becomes more and more difficult to determine what might happen next.

We know the rough outline what’s going to happen next. Shit is going to go down, and keep going down. Until it doesn’t go down any more. The dotcom bust went down for three years straight, most of the other bear markets were two years or less. You shouldn’t have money in markets you will need in the next five years, so it’s likely you’ll be at least a year or two into the bull that follows the bear before the five years is up. Buy, not all in one go, and forget about it for five years. If the suckout lasts longer, well, you got different problems, bud.

If there is a deeper problem of returns then the value of some numbers on my TD Direct/CS screens which would be visible on the internet if we had any power and broadband while the zombies fight in the streets aren’t going to be a big problem for me, compared to the marauding zombies and preppers like some Cormac McCarthy novel. But if that doesn’t happen then we will still be using oil in ten years time and I’ll wager we’ll be paying more than $30 a barrel for it. People will probably still be buying things made out of stuff that somebody is going to have to dig out of the ground. We probably won’t have given up eating and Facetweeting. I can’t be bothered to try and work out who will be providing this. That is the nice thing about bear markets. They are absolutely made for the mindlessness of index investing, because a synchronised gloom grips people and they flog everything off cheap. You don’t have to be smart about what you’re buying. Just buy something reasonably diversified.

I’m not a fan of steady index investing across time. But I am a fan of indexing into market swoons, and then sitting on the spoils of war. Later on I will buy some individual shares/ITs once I feel there is an upturn, which of course will only be detected after the event. But on the way in, it needs to be like a slow-motion supermarket sweep contest, repeated regularly and paced out over months.

It’s never a good feeling to buy into something that’s tanking. And to do it month after month. I know what that felt like in 2009. But compared to the feeling when you look back afterwards, well, that isn’t so bad.

Pound cost averaging into a bear market isn’t smart and its not clever. But it’ll work, I’m happy to take the punt because I’ve been here before. Which is why I started buying yesterday.

 

Notes:

  1. I have since asked them, and they have given me explicit dispensation for that
  2. that should probably be 5200 by the time I post this

I want to learn to spend a little more, with grace, with gratitude and with a new map

Everyone is on the New Year’s resolutions track, and most PF folk want to save more. I am going to take a different line this year, because I am in a new territory. That needs a new map. It’s been a long time coming, over six months between when I started the process of transferring my DC savings to Hargreaves Lansdown and actually seeing the numbers tick up. It has happened now.

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

That’ll be a nice Lamborghini, and to hell with the money. Secondhand, in my case, as I am using five years worth of pension, not a lifetime’s worth.

So the long period of coasting between my last pay packet in June 2012 and the first appearance of a regular income in the new tax year worked. I will enter the new tax year with some working cash to spare, and all the earnings from this year to toss into the SIPP on March 31. It has been a very different perspective, living on the fossil wealth of my erstwhile career to living on an income. That period felt like a limbo – yes I had retired but there were hazards that meant I might have had to work. Now it is very likely that I will never work again, at any rate at the level of most of my working life. Sticklers for accuracy will, of course point out that a pension is also fossil wealth, but living with it expressed as an income is different to living off saved capital. The amount in the SIPP is such that I could rush out and purchase a Lamborghini – I’m quite taken by this red one  – I am not rich enough to buy the quarter-million jobs but I am good to follow through on Steve Webb’s recommendations for the lower end of the secondhand market.

Passing through the turning point is difficult – there is a big  difference between living off capital and using income

I was always a salaryman, not an entrepreneur, and so as I left the workforce and the income tap turned off, I lost my main financial navigational instrument, the first law of Wilkins Micawber – spend less than you earn. This has guided me across thirty years of working life, but once the annual income falls to zero, this waypointer spins in a pathless land and knows no North. And at the same time the source of accumulation ceased. That I was able to still accumulate is tribute to an ageing bull run that seems to have finally reached senescence. I am not complaining, as someone who now has too much asset allocation to cash 😉 I am disappointed in RBS’s definition of cataclysmic year. WTF is the use of a fall of 20%? 50% is what I want :) OTOH this fellow has he S&P at 800, 1200 will do me.

For three years the answer on how much can I spend always came back ‘as little as possible’. I struggled initially because I couldn’t serve two masters, and eventually accepted the slow fall in working capital.

Decline and fall

The turning point

Some of that struggle was simply not acknowledging that I had passed the accumulation phase, had reached the apogee of my earning power and accumulated wealth. It felt wrong because for thirty years previously it would have been wrong. The switch to living off capital may be doubly hard for people in the PF community who have focused on accumulation for many years. I am lucky and perhaps privileged – my main pension is expressed in terms of income not capital and I am burning up a Lamborghini’s worth of DC savings ahead of it to avoid the penalty of drawing it early.

Everybody else’s New Year’s resolutions are how to save more or earn more. Mine are about learning to spend more 😉

Over at Quietly Saving Weenie is sensibly looking to push her savings rate up. FFB40 has set himself a plethora of goals broadly aiming to earn 100k this year and presumably save a fair chunk of it. ERG is doing forex trading and matched betting.

I now have the answer to Micawber. For the next five years I can spend up to £14k a year and not fall behind 1, which roughly matches Mr Z’s Goldilocks spender‘s disposable income. If I drew an income from the ISA I could push that to 18k. That’s the equivalent to earning 20k gross p.a. which is apparently the white collar minimum in London according to FvL. God knows how people do it – I left London 28 years ago earning more than that in real terms because I was pissed off with being skint all the time and living in shared accommodation. I must have been a terrible spendthrift, because nothing indicates to me that London living has got cheaper in real terms over those three decades. But I obeyed Micawber’s rule, so while none of it stuck to the sides I was debt-free.

I have not been spending anything like 18k p.a. across the last few years. I don’t aim to take it with me into a next life, so I need to become a curious combination of Mr Zombie’s Jones’ and frugalistas. I need to keep his chart on the level, not go for the networth increase and accumulation that has been the watchword until now, otherwise I will be rich in the graveyard but poor in life. That is a big change in perspective.

We went to Orford to celebrate the milestone where Mrs Ermine bought me lunch at the Pump St Bakery  and I finally managed to crack open the wallet and blow £20 on some fine products from Pinney’s smokehouse, after observing this fine piece of cold war brutalism across the river in the January breeze.

Orfordness radio station, erstwhile site of the failed Cobra Mist Cold War over the horizon radar

Orfordness radio station, mothballed in 2012, erstwhile site of the failed Cobra Mist Cold War over the horizon radar.

The village seemed totally quiet, I guess this second weekend of the new year isn’t a time most people are on the razz. Unlike Steve Webb’s exhortation, I’m not going to go mad, but it is a significant change to my situation. I need to reflect upon the upside of spending, without being suckered into the stupid consumerism that promises but doesn’t deliver. I spent so much effort over the years to shoot needless spending, and I find I don’t know what to do here.

Then last night we went out to the Fox at Newbourne to celebrate some more, and in returning we passed the Firm and I recalled the first time I had come there twenty-seven years ago, also in the night, and it felt as if the circle had turned now fully, when I change from being a retiree to being a pensioner 😉 The pub has positive memories from the Firm – many project topping out celebrations as well as a fair few summer lunchtimes dreaming up project ideas or setting the world to rights in the distant early years before the dotcom bust. It was a different world of work then, much more creative and less micromanaged routine paint by numbers…

I froze all my SIPP savings in cash as of March 2012 because I believed I was leaving then and would have needed to liquidate that AVC fund as a pension commencement lump sum. It happened to be a local high for  the FTSE100 around the 5900 mark. I occasionally cursed myself in the intervening period for not leaving it invested, but I lived by the old rule of thumb – don’t have capital you expect to call on in less than five years in the markets. If the period is longer it’s worth taking the volatility of the markets because inflation will also be eating at the value. And as it turned out the FTSE100 is within spitting distance of March 2012. Had I kept it in the 50:50 FTSE/global fund I would be notably better off now. But what the hell. At the moment the stock market can’t hurt 2 my SIPP or main pension, and I’m okay with giving up the upside. I will take market risk all in the ISA and soem unwrapped equity holdings.

I am now an oddity in the PF universe

because I have crossed to the other side of the accumulation/decumulation divide. Most writers are in the accumulation phase. Indeed the only other exception I can think in the PF blogs I read is Jim. As such my aims and risk profile have changed in a big way. There are many standard FI/RE things on my old map that I will not need to do –

no need for pension saving (beyond the £3600 to get £720 p.a free money for a few years). Having earnings has buggered this tax opportunity up somewhat anyway.

While on zero income I carried an emergency fund of several tens of thousands in cash across the three years, because I needed to be my own lender of last resort in an emergency. Nobody lends money to someone without an income 3, but I have an income now. I was lucky – no emergency happened. Some of this erstwhile cash reserve needs to get invested and start working for me now that I have an income and could borrow against the future income stream again, in the same rationale as Jacob ERE. Of course I will still need an emergency fund of sorts, but much less. I will retain my NS&I ILSCs and shift the rest into a new S&S ISA. I don’t need the three-years expenses cash buffer to smooth investment income, because I won’t be living off investment income.

I am nominally working in this tax year, it will be my 35th and final year of National Insurance to pay. I will electively pay that NI, to become fully paid up.  I asked for a State Pension forecast which is about £7100 p.a. It’s not quite clear to me where I got this good fortune, as I have been contracted out for 20 years, and the last time I asked for a statement in 2009 the amount was £5700 p.a. I am not sure I can rely on the existence of a State pension – it’s still another 12 years before I’d get it which is 12 years for some government to decide to means test it. If I were to get that then I personally would have an income of the typical UK household. That is more than enough for me.

I have an ISA originally designed to compensate for the actuarial reduction to my pension from drawing it early, which is no longer required because I won’t draw early. A source of tax-free income is always nice, and I will continue to build this up, though the market crash will no doubt make this smaller in the near future. In the long run (10 to 20 years) it will compensate for the erosion of my pension relative to workers due to earnings inflation outstripping RPI, and gives me some buffer against modest strings of bad times. If peak oil happens, zombie apocalypse or other shocks to the system I am still stuffed of course. Otherwise I am like this Telegraph pensioner, I will never be rich, but I will never be poor. Thirty years is a long time – for perspective thirty years ago I was still working in London… Things will change.

That ISA may begin to compound. I am not a great believer in compound interest in helping you get to financial independence. But once you reach FI, and in particular if you don’t need the income from a lump of capital, it starts to snowball. In its short life of about six years of contributions and no withdrawals, the accumulated dividend income has put in about a year’s worth of ISA allowance into the pot on top of my contributions, which is being reinvested. The ISA needs splitting and part transferring to other platforms, because it is now way over the FSCS guarantee 4.

I don’t really know where I’m going with the ISA because the original aims has been overtaken by events and Osborne’s changes. But I will have a lot of cash looking for a home from that large emergency fund and the PCLS, and Fortune seems to be smiling on me by beating up the stock market for me in advance for 2016. I bought a lot of gold ETFs in stages in 2015 to try and get more defensive in the face of a frothy market, and up to RIT’s 5% asset allocation. This is the first and only of my 2015 purchases to turn a profit now. The less said about HRUB, oil, mining and emerging markets the better for now, though I confess to a temptation to double down on some of those. Every dog has its day 😉 OTOH if the market continues to take even more stick then that is a time to build the HYP too – you can’t build a HYP cheaply  in the heady heft of a bull market.

What can go wrong

There is always lots that can go wrong. Let’s face it, in the 1960s of my early life we had Kennedy and Khrushchev glowering across the Cuban Missile crisis and B52 bombers on 24/7 watch over the North Pole with nuclear bombs. Somehow, despite frequent accidents we survived. The 1970s had the oil crises and the Winter of Discontent as the unions manipulated the government like puppets on a string, and 26% annual inflation in 1979. The 1980s had two harsh recessions, a lot more Cold War sabre rattling, Thatcher’s goons in running battles with Arthur Scargill’s goons. The 1990s had the implosion of Russia and all the hazards that entailed, the slaughtering of UK housing as a can’t fail asset class and the Asian financial crisis which was the birth pangs of capitalism trying to adapt to a tripling of the world workforce as the Iron Curtain and other barriers to trade began to fall. The 2000s had the dotcom bust and some of that increasing world workforce weakening the power of labour versus capital in the West; we are still trying to work out where all the rubble is ongoing to fall. The 2010s seem to be about more geopolitical risk, and ugly confluence of mediaeval religious tenets with 21st century technology, along with a lot of chickens freed by the neocons coming home to roost. On the subject of religion, in one generation the West lost all the moral and intellectual principles that were lauded by Niall Ferguson for making it such an effective economic machine with its shared values from the Enlightenment – we are all consumers now. Those shared values had their problems too – they ossified the class system and justified a lot of actions we would now disapprove of, but they were a common myth of perhaps a different nature from our current one of continuous growth. We seem to be still working on a replacement story for how/why to be better at being human, which is probably not purely a materialistic enterprise. That’s a drag given our economic creed knows the price of everything and the value of nothing.

So far we have survived. There will be change across the next thirty years, some of it welcome, some of it unwelcome. I think I have made a reasonable fist of hedging what I can. I do not have enough to hedge wars of all against all, zombie apocalypse or even the sort of aggravation Moneyweek has been trying to scare its readers shitless about to sell more magazines.

There are far too many people in the world for us all to live the American Dream of the 1950s never mind like the Wolf of Wall Street, although I hazard that we could all live like kings of old materially.  But I have come to see the wisdom of accepting the uncertainty without dwelling on it – coffee for the things I can do something about, red wine for those that I can’t change. The bearish argument always sounds smarter. But as a way of living life to the full it sucks – it raises your blood pressure and makes you miserable. So I am going to park that. Yes, I may one day regret not having a bug out bag and guns and ammo. But hopefully I will also have missed living ten or twenty years thinking about the bug out bag and the ammo. Humans need to be careful gazing long into the abyss, because else the bastard will blink and look back into you.

What I know will go wrong

There are some things we do know. Brexit or not will scare the horses, and it’s an intricate mess from which it’s hard to see which way is up. Taxes will rise, because they have to, we’ve lived beyond our means for a long time and are still at it. For all the bellyaching income taxes are in fact at low levels in living history, which is part of the problem. The young Ermine at the start of his career paid a much bigger proportion of his pay in tax and national insurance 5 than the old Ermine in the last three years of his career. The solution to paying high taxes is be no tall poppy – live a reasonably economical life, because then you have the push-back of lots of people on your side. If you are going to live more than  a third up Fire V London’s scale you are going to pay a shitload of tax until you get into the upper reaches (whereupon you will pay clever people to avoid tax for you in creative and highly inventive ways). Likewise if you want to live in London and decide your children are special flowers who need private education, then this decision creates a fierce money burning furnace that you need to continually feed. You will find it difficult to minimise taxation and need to focus on increasing income to feed the fire. You takes your lifestyle choices and you pays your money.

There may, however, be trouble in raising taxation. I can imagine the integration of NI and income tax, which would hit me with a tax hike on pension income. Reducing tax exemptions are another way. Pundits are screaming blue murder about tax relief above the basic rate on pension contributions. In the UK 15% of people pay over half the income tax take. Monevator is talking about going Galt with dark mutterings about  “supporting other people’s lifestyle choices, rather than the essentials of State and a worthwhile safety net”. This was a large part of my hitting pension savings hard too.

On the other hand I find it hard to view people spending less time at the office as a bad thing. They really should spend more time with their children and see them grow up – my working class parents saw more of me growing up in the employment environment of 40 years ago than typical middle class parents both working to pay for their consumption do now. The latter of course have far more and better Stuff and numerous fast and furious fancy foreign holidays, but time isn’t a renewable resource. The days are long but the years are short. If the robots really are going to come for our jobs then more free time is an upside, not something going wrong 😉 The trouble is a lot of people won’t have that choice, the power structure is such that extra productivity will likely increase the return on capital rather than increasing overall human happiness. The solutions Asimov’s Solarians took to arranging their society so the humans had a high standard of living in a work-free world always cause palpitations in right-thinking people, so I don’t know how that will pan out.

ambitions in things other than finance too

There seems to be a big thing about goals and metrics in the PF community. Personally I think goals and metrics suck the joy out of life and work, so I don’t do that. But a total amorphous mess isn’t effective either, so I have some ambitions. January is a terrible time of year to try and start anything – we really should be starting our year somewhere between February and May so you get a bit of a leg-up in cheer and hope from Nature. Although if we are all going to sit behind screens in a virtual world like those Solarians perhaps that will become irrelevant in the years to come. We will become Spacers all watched over by machines of loving grace with “All other contact accomplished by sophisticated telepresence viewing systems”  – with the smartphone as the fore-runner of the technology.

So rather than goals I am going to go for ambitions, and I will change my mind frequently and give some of them up ere the month is out in the time-honoured tradition :)

No thanks. Unlike the rest of the country, I am lighter and richer in January ;)

No thanks. Unlike the rest of the country, I am lighter and richer in January 2016  than in December 2015 ;)

I don’t need tosh like this – the joy of owning my own time is that life is more chilled, and as a result I eat better and less. It also helps that a lot of what I eat comes from the ground, not from the industrial food system, for that I have Mrs Ermine and the Oak Tree farm to thank.

Chris with the squash harvest. There are no Clubcard points on this lot...

Chris with the squash harvest. There are no Clubcard points on this lot…

Unlike it appears the rest of the UK, I managed to lose weight in December, and have been for some time since retiring. It is within the realms of possibility that I may one day see the same weight as when I was 21, before I draw my main pension. This is an aspect of health that I persistently and continuously screwed up while working – retire and I discover the forces of natural equilibrium slowly shift to the right target. I have still never seen the inside of a stinky gym and I’m not going to. But I have the time to walk and bike to places within the town, I don’t usually drive unless I am going to leave the city limits or shift heavy stuff. It should be noted that average people like me 6 are way, way too lazy to lose weight through exercise. You can’t outrun a bad diet.

I want to do some hillwalking, to see prehistoric stones, to travel more slowly, to cycle in interesting places 7 in the UK.

Living frugally simplifies some decisions. I want to still live well and intentionally even if this simplification is lifted.

I’m not drinking homebrew again.

I want to learn morse code.

One thing I want to do in 2016 is to bust some of the media junk out of my life and to read less crap. Before the millennium people wrote books because they had a story to tell, and publishers were valuable gatekeepers because they had to take a financial risk to publish. Increasingly it seems people write ebooks because it’s seen as a way of making money, rather than telling a story, they trade websites because they want to buy the clicks and SEO without adding value. Movie companies trot out sequels and prequels because they’re safe. All in all the media and information space is trending towards arbitrage and extractive rentierism, and the quality of material online and the signal to noise ratio of search results is falling. I spent perhaps too much of the last three years, looking at the world through screens. It was cheap and I learned a lot, but I noticed an increase in clickbait and content farming and a material decline in quality.

I want to originate, and to co-operate with creative people. I want to tell stories because I think they are worth telling, and to create and shape things because I think they are interesting. And I am privileged enough to be rich enough that I don’t need to try and make a buck, I want to pursue the intellectual freedom to craft and leave my work to speak for itself.

man-with-savingsI want to leave the world of grubbing for money behind, it is coarsening a lot of discourse as it becomes always-on. In the gig economy work spreads like velveeta into all waking hours. I occasionally talk to people and see the hungriness in their eyes as they are trying to compute whether I am a networking opportunity. I can save them the trouble. I am an introvert, a retiree and of independent means. My networking value to the gig economy is bugger all, I’m not swimming in the same ocean.

I will engage if something interests me, but people find it hard to understand that it is difficult to incentivize an Ermine with money, despite it being the universal currency of making people do what you want. There are surprisingly few people of independent means in the modern world, despite that fact that Britain is a far richer country than we used to be. The ever-hungry money furnace of consumerism is making most of us poorer faster than human ingenuity and the accumulated capital and knowledge of generations is making us richer.

I want to preserve the sweetness of this freedom from the rat race, expressed well in this 1960s ad. For thirty years I was motivated by earning more, before I was challenged by events to ask myself why. The learning and the wisdom gained in the crucible was hard won, to change the ‘just because it’s what everybody else does’ to ‘I need enough, and enough more than enough to match my risk perception and view of the world, and then stop and get off this hamster wheel’. Work is overrated – even a frugal Ermine could live like a king of old.

On the flipside, I don’t do some of the things retirees do to fill their days. I don’t volunteer, because if you want a commitment from me you have to pay, to express some appreciation for the commitment. Otherwise you may get assistance from me, but on my own terms and with no strings. That’s just me, it’s not a criticism of other people living by different values.

I can pursue some interests I mothballed because they were expensive, travel, birdwatching, recording and photography 8. I may buy the oscilloscope I considered a while ago.  In general it’s yes to experiences and tools and to things I use to make and do things with other people, no to the beach and no to ‘this XYZ (mobile phone, gizmo, whatever) will transform your life’ – it never does.

I want focus. I want to do one thing at a time and pursue flow. I want to listen to music again as I did years ago – in the dark and on my hifi once it’s been repaired. I want to get off the modern trend towards doing three-and-a-half things badly rather than one thing well at any given time. I have trialled some of this with books – when I read books I read exclusively. And if the book bores me enough that I feel I want to do something else then after about five minutes I stop reading and decide this is not for me. I don’t listen to music or audiobooks when I am on my bike. I listen to the birds and try and be aware of the traffic around me, not immerse myself in a e-bubble. Consumerism being what it is, it is trying to turn this into the modern self-help religion of mindfulness. Two generations ago, parents and schoolteachers knew all about mindfulness with the two simple words – “pay attention” :)

I want to keep regular use of smartphones out of my life. They have their uses, but they should not become a vade mecum, despite everybody else feeling that way. If Steve Hilton can run a tech startup without a phone a retired Ermine can resist becoming a gormless zombie illuminated by the blue glow of the latest iPhandroid whatever. It is very very hard to originate anything on a smartphone, but it is a fabulous tool for passive consumption and tethering to the Hive Mind. If I want to take pictures I’ll use a camera. If I am recording I will use an audio recorder. I don’t want to tote a device that does sixty-seven things all at half cock. Jennifer Lawrence was absolutely right. You can’t live your whole life behind your phone, bro

That’ll do for ambitions for now. Across the lean years I learned how to bridge the gap with not enough, and now I want to learn to live well with enough, and live intentionally, and with grace and kindness. I am a different me from the mindless consumer, and I will handle the change slowly and carefully, because the world has become even more talented at invoking mindless consumerism, and presumably some of my inherent flaws are still latent. The challenge now is to spend wisely under my control, rather than being constrained by resources.

So yes, I want to spend more this year than last. But I want to claim the gift of the seven lean years, and spend it to enhance the quality of my life and that of those I care about, rather than to fill my house with consumer trash and my time with empty manufactured experiences. And I’d like to learn to do it with gratitude. Because for all the challenges and the doomsday razamatazz on the news, I live in a special time and place, where humanity has solved a lot of tough problems and it’s working on more. I want to tip my hat to the giants on whose shoulders we all stand, and not waste that gift in the time I have left.

Notes:

  1. this is conveniently and by design roughly the maximum rate I can draw keeping below the tax threshold, plus 25% from the PCLS
  2. obviously an unending economic crash would take me out like everyone else
  3. this is not strictly true, there are all sorts of bottom-feeding lowlife scum that lend money to people who don’t have incomes. I’m just not prepared to swim in that foetid pool
  4. note this is £50,000 on S&S ISAs not the higher £75,000 level for cash deposits. This is protection against your platform going bust, not against you making bad investment decisions
  5. the single person’s personal allowance was appallingly low in 1982, less than a quarter of a modest pay level, then tax on the rest at 30% plus NI at 9% means the youthful Ermine paying 39% was closer to a modern HRT taxpayer at 42% marginal than a BRT taxpayer at  32%, and paid that high tax on much more of his modest salary than the old Ermine, although that was distorted by pension contributions of the latter
  6. I deeply detest all sports and have done ever since school, and yet it is quite remarkable that a sport-loathing Ermine is in fact a lot less inactive than much of the adult population of the UK. Just nowhere near active enough to shift the needle on the dial regarding weight
  7. taking the bike most of the way there in my camper van ;)
  8. I actually turned a profit on the latter two over the last three years. But I was using fossil wealth in terms of gear bought while working, and was limited in opportunity by limitations in finance

Now is the winter of our future consumer selves

The shortest day is one where attention turns to Winter, and the promise of an eventual Spring. I’m going to be contrarian and think about a nascent Winter – for the collective spendthrifts that seems to be the Great British Public, from hero to zero and beyond in six years:

this ain't gonna end well

this ain’t gonna end well

I see the party out and about, particularly at this time of year. So does Barclaycard – apparently the lower oil price has done wonders for the restaurateurs of the country.

apparently Barclaycard process half of credit card transactions in Britian, which I find hard to believe. Anyway, these are the changes in spending

apparently Barclaycard process half of credit card transactions in Britian, which I find hard to believe. Anyway, these are the changes in spending

The good thing is that the predicted rate of change in overspending is slowing. And of course everybody is feeling chipper. Bless their cotton socks, the opposition tried to make political capital out of this without doing what I am doing in this post and hollering out like Scrooge

Britons – you are overspending way beyond your means. Cancel Christmas and Stop It Now

After all Cameron got into no end of hot water when he said that a few years ago 😉 Learning from the flack he took, which is basically don’t you dare tell people to spend less, even if it is the very thing they need to do, what this came out like was

Ms Malhotra added: “Of course families need access to credit and the ability to borrow to invest for the future.

Families do not invest for the future. They live by YOLO.  Families overspend and firefight the mess as best they can later

No. I’m sorry, but the general level of financial awareness in Britain is just not that high. Families in general have no understanding of the meaning of the word invest. The principles my parents outlined thirty years ago still hold. Don’t borrow to buy wasting assets. Only borrow if you will save more in total (housing – where you expect a relatively settled lifestyle) or earn more than the total cost (education, in some circumstances which are getting rarer). For all else pay cash, and if you haven’t got it you can’t afford it.

There are very, very few good reasons to borrow money in Britain. Under some circumstances borrowing money to buy a house is one, although I am not so sure that now is one of those times. I borrowed too much money to buy a house. The damage to my personal finances is still visible after 30 years – the only reason I am in a better financial position than some of my peers is I managed to shut down some of the other ways British households misallocate capital by borrowing it.

Let me tally a number of ways many families fail to invest –

  • in the immortal words of a good lady friend “they pick up financial commitments like pets and children without thinking through the financial consequences”
  • They borrow for university, an asset that is being rapidly devalued through oversupply and becoming an increasingly unaffordable luxury. Once upon a time (1990s to 2010) you could have made a case for investing in a degree. It’s tough  to make that case now.
  • They borrow to buy wasting assets like cars, for God’s sake. You can get a damned fine used car for £5k and a decent runner for less.
  • They borrow to buy shit they don’t need to impress people they don’t like and keep up with the Joneses
  • They overspend on Christmas because they lack the integrity to tell their children that times are harder now. The road back from that sort of inattention is much longer and harder than recognising straitened circumstances at the time and shutting elective spending down until you know where you are.

There are other subtler ways that people malinvest, but borrowing to spend on wants rather than needs is never ‘investment’. The shortest day of the year seems a good time to recall that borrowing money is a great way to give your future self a hard time. There are going to be a good many consumers whose forthcoming financial Winter will hold no Spring.

The problem is that very few people invest. And those people, which probably includes many regular readers, are people who are relatively wealthy compared to most Britons. You don’t usually get wealthy by investing, that is what Work is for if you spend less than you earn, but it is often the way you stay wealthy. There is a massive difference between investing and spending. Opportunities to invest are hard to find and come rarely, and usually involve some sort of uncertainty. Opportunities to spend are commonplace.

Of course families need access to credit and the ability to borrow to invest for the future

is a chimera. I’m of the opinion that Britain would be a much happier place if there were far less access to credit for British families – like the credit controls of the 1960s and 1970s. The excess of credit since then seems to have made the banks richer and the people poorer, because they are increasingly forced to overspend on housing precisely because of this credit. It is a classic tragedy of the commons – of course I want to borrow more mortgage to outcompete you. But like an ostensibly neutral country supplying arms to both sides, the banks have no specific loyalty to me, it’s when you can borrow more to fight back that this becomes a gun that fires on both ends – we both pay more for our houses and the banks get to lend more money out. What’s not to like? Well, the opportunity cost of what else we could have done with that money!

Sooner or later we are going to have to nail this problem. Sometimes you shouldn’t be allowed to do what you want to do, and the litany of commonplace consumer cock-ups with credit is getting longer and longer. It’s no fun any more, and the promise of endless financial winter doesn’t sound so great either. We managed to shut down a lot of Money Shops. We managed to slow the number of Liar Loans on owner occupation. We are taking the battle to the tragedy of the commons otherwise known as BTL. There is hope. Perhaps we need to make it easier to repudiate consumer debt, then banks would be more circumspect about who they lend money to, since the old ways of having credit controls is considered dirigiste and fuddy-duddy in these laissez-faire times. What exactly is so terribly wrong about expecting people to have the money up front for their consumer wants?

Since you, dear readers, are presumably not among these consumer spendthrifts, a happy Christmas to y’all!

The future of work looks like becoming a relentless rat race

The Grauniad has some good articles on the future of work out today, and it looks like going to seven degrees of hell unless we can seriously reduce the number of people who want/need work. The latter is quite possible, but it is a social and political problem. I guess I can take some solace from being part of the solution, leaving the workforce eight years early. The issues were foreseen in the depths of the 1930s Depression by John Maynard Keynes with his piece on Economic Possibilities for our Grandchildren. Keynes extrapolated some of the trends from the beginning of the Industrial Revolution to the 1930s, and increasing productivity, and figured we’d all be working less. These trends are being amplified by automation and to a smaller extent globalisation. As one of their commenters observed about automation

“Automation is fundamentally the substitution of capital for labour. The problem is that the people who already have the capital are the ones who will benefit most, because they’re the ones who will invest in the new automation.”

That, fundamentally, is why some of you are pitching for FI as soon as you can get there. Because you want to be on the side of Capital…, you want to be on the winning side of the fight 😉

Let’s take a look at some of the other issues

Workplace Structures/Delayering

If we ignore summer jobs as a kitchen porter, an Ermine travelled from Technician -> team technician -> (interruption of MSc) -> design Engineer -> research engineer -> international team leader -> strategic engineering consultant-> then some period of wilderness as coder, pseudo ‘intrapreneur’ 1 then running into the flack and financial crisis that made me want to get out-> engineering consultant on prestige project -> right outta there

That’s roughly seven layers up the greasy pole, and it got harder as time got by, because of this delayering as well as the natural narrowing of the pyramid. I had to switch across four companies and three cities to get there. The Guardian tells me

Rather than moving up in one direction, ambitious employees will be able to move sideways, tapping into new networks

Am I the only cynical bastard who reads this and thinks, well that’s fine and dandy for the company, but WTF is in it for the ambitious employee? Sideways moves come with sideways pay. I heard a load of this bullshit at The Firm in the latter years where they were thinning out the management structure, the aim of one prize prick was only six levels ‘twixt the lowliest employee and the CEO. As a result we had line managers trying to manage over two hundred people at some point. Be that as it may, the ambitious employee does get to broaden their experience, true, and in places like London where you can find enough other places to work this may be showing up as a positive force because you take this and sell it to another firm for the pay rise you didn’t get in the sideways move. Look at the career progression the ONS shows for younger cohorts (I am roughly the middle track)

career progression is much faster now

career progression is much faster now

It seems to indicate career progression is much faster now. So maybe it all works out all right in the end, although it doesn’t really square with Merryn Somerset-Webb’s commentary on the extent of the welfare state or indeed nearly five million households on working tax credits 2. If the ONS chart is really adjusted for inflation as it claims then all I can say is that inflation adjusted real money doesn’t seem to stretch anywhere near as far as it used to 😉 It’s the old saw –  luxuries are much cheaper now while essentials like housing and childcare have gone up like a bastard…

Intrapreneurship? WTF?

“Large organisations have a huge challenge in attracting the millennial generation to come and work for them. Those people expect much more entrepreneurial environments – more freedom to operate, less control,” says Philippe De Ridder, co-founder of the Board of Innovation, a consultancy firm

Philippe, me old mucker, I don’t know what you’re smoking at the Board of Innovation but it must be good and I bet it isn’t legal. Out there in the real world some of those poor bastards from the millennial generation are working on London for bugger all, otherwise known as interning, because presumably these large organisations are struggling to attract talent so they have to pay….boom..tish….nothing? The Guardian offers internships here and some, though not all are even paid these days 😉

Another piece of the interning pie is this sort of thinking:

Van der Mersch argues that there are career development opportunities for cloud workers, with many startups using the site as a way of testing out freelancers to see if they’re a good cultural fit before offering them a permanent job – and vice versa.

There’s already the interesting concept of a permanent job at a startup – over half of startups fail within the first five years making the permanence a moot point. I learned some things with that Web design stuff, in particular that people who want you to work for free will never pay you properly. True character will out…

Not all of us want to be startup entrepreneurs

There’s a much larger social perspective here, which is what do most of us want to do with our lives? Do we really want to give so much headspace to working, or do some of us want to  turn up, do a reasonable day’s work and then go home and do something with the rest of our lives, you know, all the way from having children to maybe doing something other than work? How the hell have we come to this ugly pass where earning a living takes up so much nervous energy and angst, in what is a rich First World country? Now some of it is due to globalisation and the fact that two thirds of the world (the Communist countries and what used to be known as the Third World) were largely outside the capitalist system, and now this has changed the water is finding its own level. Living standards in the First World will have to fall until they meet rising living standards elsewhere. That’s not enough, IMO, to explain all of what’s happening to labour. Some of the problem is increased mobility and communications. A hundred years ago if you were the carpenter in your town you didn’t have to be the best for 200 miles around, just the best for 20 miles around and you’d have a lifetime of work. Whereas now if you want to grok code for Google, you’d best be among the upper reaches of the bell curve compared with people in a radius of five thousand miles. There are no middle-level regional search engines.

The gig economy is all right for some and not for others

I’m with Lucy Kellaway on this FT article – one of the biggest issues about freelancing is that a lot of it isn’t about the work, it’s about getting the work.

You are forced to become a one-woman sales team, endlessly having to flog yourself — which means networking and being nice to people you don’t like much. You also have to do all your own tiresome admin and then, when your computer crashes, you have to be your own IT help desk, too.

FWIW I have some experience of running a separate company, I ran a modestly successful web design operation on the side for a few years. But what I above all else hated about the job was selling and finding new business, and in the end I wound it up when a large customer moved their work in house. Some of us just don’t want this endless fight. Being a startup entrepreneur is a fantastic story and it’s great for some people – but I’d put that number of people at a lot less than half of us.

For a contrary view on the precariat Money Week tells us that yer average self-employed geezer is on £50k p.a. It’s a classic example of lies, damned lies and statistics, since this assertion comes from Boox who presumably have the same supplier of marching powder as Philippe, since they are making this rosy conclusion on a sample of 1000 of the self-employed and when you ask the ONS then you find that the median income from self-employment has declined to £207 p.w or £10764 p.a. Nice creative use of sample bias, Boox. Presumably the self-employed army of Avon and Betterware and Kleeneze reps who infest my letterbox with their worthless tracts to get enough self-employment income to claim tax credits rather than be mentally tortured for being unemployed under the DWP sanctions system don’t need Boox accounting services 😉 Roll on the universal income if only so that I will be able to find the odd real letter among the blizzard of multilevel marketing material one day.

This is what many Britons mean by self-employment. You can easily get your 16 hours a week hawking crap like this. £50,000 p.a.? I guess it's possible in theory, unlikely in practice

Avon catalogue I think. I don’t read dross like this though I could wish people didn’t get uptight if I throw it away. This is what many Britons mean by self-employment. You can easily get your 16 hours a week hawking crap like this. £50,000 p.a? I guess it’s possible in theory, unlikely in practice

That’s the trouble with working from home opportunities. If you need someone to design the business for you, you’re always going to be on the bottom rung at best. Part of the reason is encapsulated in the Google strapline for that link

Working from home is a great option if you want to spend more time with your children. 

Trying to process self-employed statistics is always going to be the devil’s own job because of the wider range of forms of self-employment. Presumably the Government will move an Ermine from the ranks of the economically inactive – a slightly offensive term for a beast with investment income of a significant part of the NMW, to the ranks of the self-employed though I will still be virtually catatonic in terms of hours a week worked. The only information HMRC collect is the total earned in the tax year – it’s irrelevant if I earned that in five minutes of frenzy or 220 days of getting  a pittance for twelve-hour days.

History is written by the winners

Part of the trouble is the narrative is being written by the winners in this fight. From Robin Chase, co-founder of Zipcar

She says: “My father had one job in his lifetime, I will have six jobs in my lifetime, and my children will have six jobs at the same time.” Does she think that is that a positive thing? “Well,” she says, “it seems strange to me that we would always recommend to companies that their revenue streams are diverse, yet for individuals, the smallest and most fragile economic unit, we say: you must only do one thing all your life. What a crazy way to live; 87% of people in full-time employment are not passionate about what they do. When I look at this new way of work, I think of it as opt-in. It gives people economic agency, it puts them in charge. And it gives them flexibility. People love those things.”

Well, she would say it’s all great – because it’s great for her. There’s something to be said for diversification in income streams, and for those with the temperament, go for it. I can say from personal experience working a job and a bit is a lot harder than working one…

The narrative sounds great from Robin’s lips. Maybe not so great from the huddled masses working minimum wage jobs on zero hours contracts. Now we should ask ourselves why we encourage many people into higher cost lifestyles such as having more children than can be paid for with the wages their talents can command , and then mentally torture them using the DWP sanctions system when they fail to find the jobs that aren’t there for their abilities/time commitments. The Quiet Man IDS thinks this is a failure of process and 14 day warnings are the answer. There’s something to be said for George Osborne’s more direct approach of limiting benefits to families with up to two children; it may be unpopular but it is at least honestly straight between the eyes and aims to fight the fire before it starts. Either way these are not concerns for the likes of Robin – after all people have agency, they’re in charge and have flexibility, so that’s all right then. Me, I’d want to be on the side of Capital in this fight rather than Labour. The battle between the Irresistible Force and the Immovable Object ain’t gonna be pretty.

Work is increasingly always-on in a random way

The 1990s dream of being able to work at home with phones and remote access and what-have you happened – in a big way, from the Blackberry email appliance to the smartphone. But it was a gun that fired on both ends, it seems, because it corrupted the meaning of the working day too. Once again, that’s great for the startup, and the entrepreneur – that technology lets you look a lot bigger than you really are. It also facilitates the zero-hours contract and a pernicious leakage of work into time that once upon a time was clearly off the clock.

There’s a secondary problem in that a lot of work nowadays is terribly hard to qualify whether it is done well, and many of the political issues that ERE described in his post about careerism start to raise their ugly heads.

The difficulty of qualifying a job then runs up with bullshit metrics that focus on process rather than intent. This delightful piece of management theory gives us DWP setting targets for the number of the unemployed sanctioned, because presumably some pipsqueak has prior knowledge handed down on tablets of stone that x% of claimants are taking the piss. I’ve no doubt that many well be, but nevertheless the point of the DWP isn’t to turn down the claims of x% of applicants, it is to evaluate the claims and pay up if they meet requirements. If we are spending too much on unemployment benefit than that is the job of Parliament to fix – by paying less, by paying under fewer circumstances or whatever. The setting of job performance targets to process statistics by incompetent gits who don’t understand statistics, the inherent variability on small sample sizes and who are fetishisers of tickboxery is making a lot of jobs needlessly crap with a misery of micromanaged metrics.

Perhaps what you measure is what you get. More likely, what you measure is all you get. What you don’t (or can’t) measure is lost.

H Thomas Johnson, Lean Dilemma, 2006

That’s all very well, but in the case of the DWP as so often the managers set the targets on an internal marker. Even the Harvard Business Review concedes the problem as applied to CEOs

Human beings adjust behavior based on the metrics they’re held against. Anything you measure will impel a person to optimize his score on that metric. What you measure is what you’ll get. Period.

We pay the blighters more and get less for it. As the guy said

if we measure just what’s easy, we’ll maximize just what’s easy.

The Ermine is introverted, it was already picked up at school that I was not a team player – I never have been, and never want to be. I believe that the finest engineering work is had in a duel with the laws of physics and the constraint of engineering without the incessant background flapping of lips, although like all things balance is needed, I won’t go as far as to say every man is an island. And I was able to work with and lead teams, but it probably is true to say I did my best work alone or with fewer than two other people. Success was identifiable in innovation, in faint signals pulled out of the noise and the success of projects and their teams.

It’s absolutely at right-angles to the current correct business thinking, which is all about the hive-mind and networking and collaboration – the group is the hero and individual talent and expertise is zero. The hive-mind is normative, it stamps out dissent and difference. Not in the old way of prejudice and stereotyped -isms, but in new ways. As Lucy Kellway observed, this conformity takes new forms – people in the new East London cavernous creative spaces have no space for the ugly. What really worried me, however, was that when she was making a radio programme, even the sound engineers were pretty boys. Engineers aren’t meant to be pretty. When I worked for the BBC, this wasn’t the case, you could immediately tell Production from Studio Engineering in the Television Centre bar – as soon as you got in the door and looked round 😉

I’m glad to be out of it

To some extent as you get older you get less adaptable, and while I can use some of these methods I don’t want to live life that way, and I am lucky enough to have the choice. In one of the other good articles on this topic in the Graun Jeremy Rifkin (author of The End Of Work) opines

A lot of the change, he suggests, has to do with a transformed idea of freedom. When the older generation thinks of freedom it imagines it as autonomy, self-sufficiency, personal choice. “Freedom is exclusivity.” When the younger generation thinks of freedom, he suggests, it is no longer about exclusivity, it is about inclusivity. “For them the more networks they are in, the more social capital they establish, the more free they feel,” he says. “It is about expanding the network. This is the sharing economy.”

Partly, though, I say, isn’t it also that grim economic necessity has become the mother of all that invention, all those millions of apps? The fact is that in developed countries, that generational gap about ideas of freedom is also a glaring generational inequality in assets and opportunities.

Rifkin likens the gig economy to the establishment of common land in feudal times. “This sharing economy is reestablishing the commons,” he says, “in a hi-tech landscape. Commons came about when people formed communities by taking the meagre resources they had and sharing then to create more value. The method of regulation of these systems is also comparable,” he suggests. “If people are trusted and vouched for they are accepted as part of the sharing economy group. If they behave badly they are excluded. Your social capital means everything in this new economy.”

I read that a couple of times, and I still can’t work out whether it is the most arrant load of claptrap or there is a kernel of truth and I’m just on the wrong side of the divide. I recognise some of what he says about the sharing economy. I also recognise squarely that my view of freedom is exclusivity – the freedom to choose what I do with my time, and largely with my resources. I don’t understand the part about networks, but then I am not a cloud person, and I always ask who gains from munging my data ‘for free’. And yet I see the symptoms of this networked utopia at least – in every railway station the soft glow of smartphones reflecting off other people’s eyes. People used to think you were a nutter if you talked to yourself in the street, and I still have the urge to cross the road when I hear someone talking to nobody in particular before realising that they are on the phone yelling out details of their love life or business transactions to all and sundry.

Perhaps what looks to me like a dreadful, overweening and controlling aspect of work for employees, or a revoltingly competitive bear-pit favouring the loudest wide boys selling their wares on the freelance/entrepreneur side is simply a new generation defining new ways of being human. If it’s the latter, then it should all come out in the wash and good luck to them, I will try and stay on the side of Capital and sit back and enjoy the ride. I do wish that people would seem to be happier with the result, however. It looks like hell on earth to me, but maybe I just don’t understand the digital commons. I confess that one of the first thoughts I had when I read Paul Mason’s stuff about the end of capitalism and the sharing economy was ‘yes, but what will people eat and where will they live’ which a fellow reader took up with greater vim.

man-with-savingsA lot of the things that are offensive about the way work is going cease to be offensive once you are financially independent. What is going wrong is the power balance between capital and labour. If you don’t need the money then the power balance swings back, you can afford brinkmanship or indeed to walk away. As my favourite 1950s ad says, the financially independent can walk tall, because they can walk away. However, it does take over 10 years of decent and continuous earnings at a pretty high level become financially independent, or several decades of still a decent level for the rest of us. It’s the dirty little secret of the retire early scene – you need to earn well to get to retire early, as well as not screwin up. Most of the narrative out there is about not screwing up, which is necessary, but not sufficient nowadays.

If you are entrepreneurial you can do that well in the gig economy, because more of the fruits of your labour accrue to you – as the old saw goes you never get rich working for someone else. It is presumably the successes who are skewing those ONS figures up for cohort earnings for those aged 21 in 1995, but at the same time the ONS figures show the reality of self employment is an average wage of less than the National Minimum Wage. If you work in finance or IT you can do it in less time too, indeed you will need to do it, because if you work in an office where fewer than a third of your colleagues have grey streaks in their hair 3 then statistically you want to be FI or have alternative employment planned by the time you are twenty years from State Retirement age.

Perhaps all the non-entrepreneurs will be kept as pets by the entrepreneur winners, via universal income so they don’t all gang up against them, while the go-getters charge around like flash Harrys with bigger and bigger yachts. Else there could be trouble in Paradise.

Notes:

  1. thank you, Guardian, for that piece of jargon/insight
  2. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/423621/ChildandWorkingTaxCreditsStatistics-April_2015.pdf
  3. based on a working life from 21 to 67, and assuming their hair goes grey around 50)
26 Nov 2015, 10:55am
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  • An Ermine finds himself working but not worth training

    I have spent the last three years running the other way whenever anything associated with the dreaded W word came up, blanked the ranks of recruiters (they thin out fast enough after six months), turned down the odd design and build and done the odd one pro bono rather than face the grisly issue of self-assessment. But eventually my luck ran out and I was offered just enough to be worth registering for SA, particularly as I am short one year of NI for 35 years to get a full State Pension 😉

    That’s working as a minimum-wage contractor, rather than as HRT paying consulting engineer that is, sic transit gloria mundi, eh? At least it’s only about three days a month. I did some scientific work and electronics for a bunch of guys, so I have to lose about five grand of income somewhere – my SIPP looks like a great place to start. Paradoxically, I would be daft to claim the cost of my microscope and chartered engineer subscriptions to reduce my income as real self-employed workers do, because washing as much income as possible through the SIPP nicely returns me the 20% VAT I paid on the microscope in the form of an income tax refund on tax I don’t pay. It’s a strange old world indeed, working below the tax threshold.

    I’m a deeply lazy bastard, and after 30 years of it I don’t need to sell my time for money. I didn’t even have Jim’s transitory ennui, three years out of the workplace has taught me the world is plenty interesting enough to keep me occupied. Unlike Jim, my exit from the workplace was a rout, not a controlled exit, I was therefore saved from that sort of angst. You just don’t mourn the scenery of the long road trip if you got to crawl from the wreckage fifty miles from journey’s end 😉

    However, recently I failed to step back quickly enough after a fellow doing the books for an enterprise dropped out hastily, and I ended up with  running the books, and doing in the corporation tax and companies house annual return, so I will continue to earn some wedge for that and some on and off scientific analysis and engineering. I followed TFS’s step by step guide how to register and fill in your self-assessment tax form It’s early days yet, and I have the suspicion that I really should have started here since I am not an employee. It appears I have a year to get this right, and he’s dead right, it is not straightforward. 1.

    work... I calim no originality here, it's more system integration/applications than design

    one example work in the form of a remote temperature sensor… I claim no design creativity here because this is a COTS product, my role is more system integration/applications than design

    You can’t motivate the financially independent with money

    I did this to help out rather than to be able to buy a Cornucopia of Crappy Christmas Consumer Shit 😉  On the other hand I am not a Zen being of true light and ultimate detachment. I have a problem with working for free 2 in a role where people have been previously paid for it, and also particularly where there is something that needs to happen by particular times. However, I’m not that sure that the money will change my lifestyle.

    a different aspect fo the activity called work

    a different aspect of the activity called work

    Being a lazy toad the first thing I did was make a PERL script to munge the downloaded online bank statements 3 into something I can import into Quicken, because life is far too damn short to key hundreds of transactions on minimum wage. I set them up way back when with Quicken, because I understood it. The dude who quit in haste was setting things up with Sage One Accounts and running parallel, but I shut that down because Sage One will nickel and dime us for add-on this and add-on that to get the management reporting of product lines and cost of goods sold that Quicken already does. Sage One will make the figures add up and track VAT but it won’t help you answer the question “are we spending more on making product X than we get selling it” which is a pretty fundamental thing people want to know if they’re running a business.

    It was the classification and categorisation of Quicken that help me understand and bring order to my own personal finances. While I wouldn’t go as far a the Rhino and consider myself Ermine Enterprises PLC tracing where the money went, using the principles I learned running that multimedia company taught me to chase the waste. Before, I had simply used Quicken in order to make sure Micawber was satisfied and get the numbers to add up. Spending less than you earn is 80% of the win of personal finance – do that over a working life and some of it will stick to the sides.

    By the time they’d finished upgrading Sage to be as useful as Quicken it would be cheaper to pay an bookkeeper to reconcile the bills from the time-honoured shoebox. And anyway. the Ermine Does. Not. Do. Cloud. I just don’t get it how people entrust key functions like that to cloud, but then I’ve seen dodgy sorts hold my data to ransom. You spend a lot of effort putting transactions into an accounting system, and cloud providers own the keys to your effort. When they say pay more or else, you get to pay more. Of course they all offer a low cost trial period, I believe this is the same way street drug dealers work to raise their customer base 😉

    The strangeness of inverse taxation

    I’m not doing this for the wedge, though it will enable me to pump up my SIPP contribution this year to more than the £3600 my non-earning self has been putting in, which will mean I get an extra 20% payrise from the taxman simply by washing this through the SIPP. I will stay below the personal allowance and am a mustelid of sufficiently grizzled fur as to be able to use flexible drawdown. Once you earn more than the personal allowance then that’s a waste of time in a money roundabout 4, but an Ermine is far too idle to put in enough work to earn the personal allowance.

    Now I’ve managed to get through my working life without ever having filled in a tax return because I was a PAYE wage slave and I can’t say the prospect thrills me – I’ve turned down odd jobs in the past because I couldn’t face that. But the win on SIPP and State pension shifts the needle on the dial enough to make this worth doing, at least for one tax year, where I will put my entire gross pay into the SIPP, although it will only cost me 80% of my gross pay. It’s only going to be about 5k, but it’ll work hard for me, and I get to spend the remaining 1k on beer and crisps… It’s interesting to observe that last year the Consolidated Dividends dept of my ISA almost worked as hard as I will this year 😉

    There’s something deeply futile about working post FI

    What’s the bloody point? I’m still of that opinion – I have to take this wedge and lose it in a SIPP, purely to game the system and win the £1000 I can’t be arsed to juggle 20 bank accounts for. One of the things I learned in the seven lean years 5 from 2009 is what enough looks like. I’m not currently there yet, but once this SIPP starts paying out on average £15k 6, then there’s no point in earning more from then. No consumer shit is worth spending more time in an office, and above all else, I don’t like working for free, particularly for the taxman. End of – so as soon as I draw my main pension I need to cease earning any income from work ‘cos it’ll all be taxable.

    OTOH if I don’t manage to work out how to transfer this SIPP I might consider working enough to stall drawing my main pension for another year or two, then take an actuarial hit and invest the AVC tax-free PCLS. One of the other things I learned in those seven lean years is stay flexible, nothing ever turns out as planned.

    National Insurance deliberations

    The other place this is useful for me is that I only have 34 years of NI contributions. I need 35 for a full State Pension, should such a mythical beast still exist in 12 years. A lot of those years are contracted out, but 10 aren’t. I need one more year, and it so happens that buying NI contributions as a self-employed ‘striver’ is much cheaper (£2.80 × 52 weeks ≅ £146 p.a.) than buying Class 3 voluntary contributions as a gentleman of leisure (£14.10× 52 weeks ≅ £733 p.a) , because the Government fetishises earned income over rentier income, the Calvinist devils. Investing £146 to get a potential 2.5% uplift in State Pension sounds like a punt worth taking to me. The Government is going to have to sort its shit out with this ‘working is good for you’ prejudice if robots really do start to drive jobs out of the economy.

    There are, however, other subtle issues which  I don’t really understand. To be honest, anybody with a fair amount of DB pension should basically appreciate their good fortune and maybe not carp like this about losing out, because you’re losing out something you wouldn’t have got had the change not been made, and FFS there are a whole load of problems to do with pension saving you just don’t have compared to everyone else. But yes, if you contort yourself in knots you might make a case that under some circumstance you lose out. The issue is described in more detail here, but boils down to

    The old basic SP without add-on SERPS etc was £116pw if you got the full whack, and you should not lose out by the move to the new system, even if as a teacher you were contracted out of the State Pension earning related bits. That sets a lower floor, assuming you have 3o years of contributions up to next tax year, but it’s not inflation-linked. Your DB pension provider has to compensate for the loss of SP up to some arbitrary inflation linking – about 3%, and historically the compensation over that has been the inflation-linking of the old SP. But that nominal £116 is frozen at the change, and the contracted out years are held against you.

    The new SP is £151. Even if I hadn’t been contracted out, because I am a year short I’d lose £151÷35×0.8 (0.8 because I’d be 100% taxed on any extra, reducing the loss) or £3.45 p.w. which is £180 p.a. That will be sorted, but I will still lose (151-116)×24(contracted out years)÷35×0.8=£19.2 p.w. which is nearly £1000 p.a. for being contracted out, and the effective value of that deduction will increase with inflation.

    I therefore have the opportunity to add 80p a week to my State Pension (£41.60 p.a) for each year of NI I pay after April 2016. It’s not actually clear to me whether this year (where I would not be contracted out) counts for contracted in years under the old system, where it would punch higher than the new system (due to 1/30th rather than 1/35th). If it won’t then I will choose not to pay it this year from the small profits threshold regulations. Although £42 a year isn’t much, I may choose to consider myself working for some small amount and electively invest £150 NI a year for the next five years as I have a reasonable chance of living for three years beyond 67 (after which I’d have my money back) and after that I’d be in extra time.

    The ONS is right. An Ermine’s human capital is shot – it’s not worth training older guys…

    The ONS have officially declared older workers a waste of space. I will wear my badge with pride :) It was that Monevator fellow that stated young people are already rich, and the ONS is right behind him

    Doomed, i tell ya, doomed...

    Employed human capital by age group, 2014

    Figure 4 shows that the stock of human capital is disproportionately concentrated in younger workers. For example, 41.4% of the working age population are aged between 16 and 35 but this group embodies 66.1% of the human capital stock, showing that being relatively young and having more years of paid employment remaining more than offsets the effect of having higher earnings whilst being relatively old.

    Arguably a 21-year-old Ermine leaving Imperial College in the teeth of Thatcher’s first recession carried the potential of all the putative earnings of an Ermine all the way up to retirement in 2012. Since a pension is deferred pay it’s hard to know where to allocate the next 25-30 years of pension ‘earnings’, after all I have to live that long to get it. As for the dividend income from my ISA which is effectively my DC pension, presumably the ONS looks at investing returns with the same dim view as Osborne looks at leveraged Buy to Let – as a tax on the otherwise productive activity of the economy.

    I was looking at improving my competence at this bookkeeping lark. 20 years of running Quicken and about 10 years of running a multimedia limited company on the side taught me the basics of doing this, and although I used to submit VAT returns on paper the online version asks the same things and numbers the boxes the same as over ten years ago.

    So I take a butcher’s hook a the AAT. Now the Ermine is an individualistic and solo learner, I am happy to read books and try and take the AAT test which is a modest investment of the odd hundred pounds. But it appears that you can’t self learn all of it and have to involve a training organisation, and all of a sudden the costs skyrocket. I want the learning but I don’t want to pay the training fees, and now that ONS chart makes sense. There’s no point in investing in training an Ermine because there’s no decent return in it compared to the school leaver. I’d have to set up in business and start doing other people’s books and that sounds far too much like work to me.

    The other thing is the pace of the CBT e-learning is terribly slow. I was totally unaware that businesses could transfer the risks of customer invoices to banks, and it appears in two ways – either debt factoring or invoice discounting. With one you get the customers to pay a third party, who advances you a lump of the invoice as they chase the customers, with the other you get a credit line which is a certain percentage of your outstanding sales invoices. The e-learning takes five minutes to play-act out what I’ve just described in two lines. I really hate the trend towards video for instruction nowadays – it forces a dreary pace on things, you can’t speed up or slow down with bits you get or don’t get, and unlike reading you have to grind along at the pace of the slowest learner. Likewise for the solvency sketch, it’s pretty ‘king obvious that you run out of money if you have to pay people faster than you get paid. I believe I would have jumped to that even as a callow late 1970s school-leaver.

    Much of this training seems targeted at school leavers who have little idea of what a business does. I am okay on that, it is the peculiar conventions of bookkeeping and accountancy I am unfamiliar with. I can make the numbers add up, identify if things are costing more to make than they earn from analysing the classifications and the flows of money in Quicken. I can fill in the VAT returns and the annual accounts, again from understanding the flows of money.

    But I find the specialised lingo counter-intuitive – take this for example. WTF is an increase in assets the same sort of thing (a debit entry) as an increase in expense? If I buy a load of shares my bank balance goes down, yes, but I have something of value to show for it. Whereas if my expenses increase, my bank balance goes down but it just gets to piss me off. This really isn’t the same thing at all.

    However, I solved the problem for the princely sum of £0 with this Open University book on accounting free on Kindle. Apparently years ago in the 1600s the Italians decided assets increasing were classed as debits, and we’ve been stuck with this bizarre convention ever since. Which explains why I kept on failing those AAT tests 😉

    You do not need expensive classroom training for many things. Sometimes an enquiring mind and having learned how to learn will do, so the ONS can take their human capital and stick it where the sun doesn’t shine as far as this human capital deadbeat is concerned.

    Notes:

    1. I owe TFS a beer, because I have managed to complete this now without gnashing of teeth
    2. The Guardian asserts this is a specific problem with my generation and gender, though I don’t observe this particularly in the local environment, grey hair predominates in charity/volunteer roles, and I note the younger generation may be forced into unpaid work to broaden their CVs, which may distort the survey
    3. the modern way is to use a third-party service like Yodlee, give them your bank login details so they can log in to your bank and transfer this data, which is how Sage One does it. As soon as I read that I decided these were not people I am prepared to do business with, because doing that instantly gives the bank carte blanche to repudiate any losses you incur due to fraudulent activity even if unconnected. No thank you sir. Not. Going. There.
    4. until you reach the HRT threshold
    5. I know, it’s six, but I will only start to draw this in the next tax year
    6. when I toss in the PCLS spread out over five years, assuming it isn’t recruited to save my sorry ass from a market swoon
    16 Nov 2015, 5:21pm
    personal finance rant
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  • The Guardian misinforms punters how to deal with the cost of Christmas

    The Guardian, which is a broadsheet paper aimed at the left-of-centre middle classes, hipsters and other good sorts, brings us an article on how to deal with the fiscal impact of Christmas. Which is absolutely, totally, stupendously wrong on all counts. It is like, WTF is wrong with these guys. It’s a total riot of wrong-headed gormless thinking. They trip up right out of the starting gate, with the headline.

    Overdraft or a ‘money transfer’? How to ease the cost of Christmas

    Repeat after me, you addle-brained punters, you never, ever, ease the cost of anything by borrowing money to pay for it 1. You always make your future self pay more and go without so your greedy current self can Have. It. Now. That’s fine and dandy when you’re in short trousers, but by the time you’ve gotten to 18 and over when you can legally buy beer and drive a credit card, you should have noticed something about Christmas.

    Christmas is not a random event

    It’s so unrandom that I can tell you when it will be in a hundred years time – 25th December 2115 since you ask. It’s not a random event or some act of God – well, depending on who you speak to it might be, but not in the OMG that’s totally unforeseeable category of things.

    less bad than the timer.. just. Still begs the question, why...? Just why make it, why buy it?

    Do not spend more than you have to on crap like this

    The choice is not overdraft or money transfer, you blithering nincompoops, because the other thing about Christmas is that is a totally gratuitious and elective expense. There is nothing at all wrong with spending shitloads of money on consumer trash to see the beatific smiles on your kids’ faces for five seconds if you save up for it first. You did, didn’t you? We presume since you are an adult you have noticed that regular things happen, er, regularly…? Mind you, I do wonder when the writer was born

    This is a relatively new facility on offer to some credit card holders, and allows someone to take part of their credit limit in the form of cash that is paid directly in to their bank account.

    Err, I used this newfangled facility to borrow £15,000 interest-free from MBNA to put down as a bigger deposit on my first house, over 25 years ago. There was a lot wrong with buying that house, but the MBNA loan was repaid and did not cost me any more than £15,000. This feature ain’t that new.

    Not only are the Guardian normalising infantile consumer behaviour, they are also telling their readers

    Go find a store that is offering x% higher prices for your Christmas goods. And shop there

    Normally you’d look for money off, but borrow for Christmas and you are spending more on your Consumer Stuff than you need to, which is the mark of a prize airhead.

    It’s simple. You spread the cost of Christmas by saving up for your consumer splurge before Christmas. Otherwise all you are doing is getting the same goods but paying more, or paying the same money and getting fewer goods. And that’s just pain stupid, dear Guardianistas. Don’t do it to yourselves.

    If you need to borrow money for Christmas, you can’t afford it

    So do yourself and your family a favour, cancel it for a year, and resolve to start saving in January for this predictable expense that will come round in 12 month’s time. You worked hard for that bloody money, and it’s rude to take 10-20% of your time working for the Man and just toss it down the toilet because you can’t think ahead. Suck it up for this time and resolve to get your act together for next Christmas, because y’know what? You have 13 months, starting now 😉

    That’s an F for Total Fail, Guardian. Do not borrow money for predictable expenses, because if you do you are spending more to get less.

    Notes:

    1. unless you can borrow for a total effective cost below inflation, which is not the case now

    the penny and the steamroller at Monte Carlo

    Note: the lower part of this post has rapidly moving/flashing graphics

    I am slowly inching my way to being able to run my DC pension flat in front of my DB pension, effectively burning up the DC fund over five years, drawing my DB pension at normal retirement age. The latter will give me enough to live on, and I can keep my ISA tax-free income reinvested against the day when wages in Britain begin to increase in real terms, whereupon I will start to fall behind without being on the side of Capital. Or I can use it to hedge against the demise of the NHS, when healthcare will become at best insurance-based like in most other European countries, or at worst like the evil that is the US system. I am fortunate enough to avoid doctors and hospitals at the moment, but nobody gets healthier as they get older.

    Running a DC pension flat over five years is an odd time-frame

    There’s an age-old rule of thumb, never have money you will need in five years anywhere near the stock market. Ever ask yourself why this is so? The basic reason is that the equity premium is tiny – about 1/20th of the capital sum per annum, and this is the fella who is fighting on your side. He is such a puny bastard you either need a lot of time or a lot of money on your side. They ain’t making any more time, which is why compound interest won’t save your ass unless you work till you have one foot in the grave…

    On the other side of the ring is the Bad Guy – volatility. He’s a moody bastard – sometimes euphoric, and sometimes down in the dumps. He will drag the aggregate value of your share portfolio up and down as he pleases, and that volatility is massive, because Mr Market is the 600lb gorilla, and if he’s in a grump everybody gets to know.

    So I asked myself what would happen if I started out with a lump of about 80k – if I want to run it flat in five years I can’t really use much more than that, and there is no point in running my DC SIPP into the revenue from my main pension as that is already over the personal allowance, so I’d be taxed on the SIPP in its entirety.

    Right off the bat I can take ~£20,000 as a tax-free lump sum, and this is the obvious thing to do. 1.

    After taking the PCLS I can take ~£11,000 per annum income tax-free from the personal allowance, and simple arithmetic shows that after I have iced £20k from my stake I have £60k to run out, and 5×£11,000 2 is 5k short of the £60k balance. If I am lucky they will lift the personal allowance towards the end of this Parliament 3 and an Ermine will squeak under the finish line with the goose feathers unplucked.

    What about that steamroller then?

    about that steamroller

    about that steamroller

    I have paid a lot of tax in my time, and I considered contributing £3600 a year to the SIPP over those five years at a cost of £2800 p.a.. Somehow I want a way for the taxman to share in the risk, so I asked myself the question of what I think about tackling the steamroller of the stock market

    What would happen in my SIPP if rather than cash I held it in some index fund of a market that isn’t on a high CAPE, so FTSE 100 or 250 rather than S&P500…

    more »

    Notes:

    1. the PCLS is a special case, the actual income from the SIPP is the tax-free personal allowance each year
    2. the personal allowance is £10,600 at the moment
    3. the aspiration that nobody on the full-time national minimum wage should pay tax ought to help with that
    4 Nov 2015, 11:21pm
    personal finance
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  • The Latte Factor and the Coffee Outlet as Performance Art

    The Latte Factor is one of those personal finance staples – the meme is that if only you could kick your daily coffee habit you would retire years early and help the environment too. It’s also unAmerican thinking and to be stamped out in a consumer society, natch.

    I’ve been lucky enough to work in places where people got together in coffee clubs and the companies provided hot water taps and tea points where you could plug in a kettle and sit with colleagues and set the world to rights every so often. Sometime I wonder if this was simply the more relaxed working pace of the past before everything got all so dreadfully competitive. There now seem to be workplaces you have to log out to go for a piss never mind entertain the concept of a morning and afternoon coffee break.

    Forces in the economy are making luxuries cheap and necessities dear. Sometimes I gawp in amazement at what you can do now – coffee, 3d scanning with a kinect games controller, the power of computers that I paid thousands for in the mid 1980s packed like sardines into smartphones the size of a packet of cigarettes (remember them?). We’ve go so much better at Stuff but in crafting this consumer cornucopia we’ve also built a world where everybody wants to be somewhere else, preferably facetweeting in smartphone-space as they run into lamposts in the real world.

    And yet for all that awesome technology more and more Britons will never earn enough to buy a house, and the pressure of work on their relationships is such that having kids is less fun for anybody involved in the enterprise. But all that is a different rant. Let’s take a look at this particular consumer luxury, where our office workers at least have other wage slaves to make them coffee.

    Coffee seems to have taken over from tea as the British beverage of choice over the last 40 years or so, but it seems only recently that we are so coffee-deprived we have to buy it on the go. Judging by the number of Starbucks, Costa Coffee, Cafe Nero and the like it’s big business. The Ermine has a reasonably simple approach to coffee, it needs to be good enough, so generally non-instant, but filter coffee is fine. Those stove-top contraptions much favoured by Mrs Ermine are fearsome – a needlessly harsh and aggressive jolt. A cafetiere/French press is fine though there is always the problem of where to put the grounds, which will eventually block up your sink if you lose them that way. There’s no need for greater complication – the Heston Sage favoured by some of the more metropolitan frugalistas is overkill IMO. Plus you need domestic staff to clean the bugger out, the whole heat and milk combination is never easy on them downstairs…

    I never used public transport to get to work after leaving London and just didn’t get into the habit of buying prepared coffee, for the first half of my career this sort of metropolitan effeteness just wasn’t even available, though it crept in in the last decade or so, The Firm outsourced anything it could, and the introduction of a tuck shop selling overpriced coffee in paper cups was one of the improvements. Which then picked up a Costa franchise I think, and the price jumped 100%. So I’m not an expert on prepared coffee other than the DIY sort, which works fine for me.

    However, I recently darkened the threshold of a Costa Coffee joint with my mother, well when you’re pushing eighty then if you want to go mad and buy overpriced coffee then you can damn well knock yourself out 😉

    A Costa Coffe joint. They all look the same, I hear. And why are mobile phones so crap at taking pictures...?

    A Costa Coffee joint. They all look the same, I hear. And why are mobile phones so crap at taking pictures? Observe the two CCTV cameras over the till… That’s the trouble with paying minimum wage, you can’t trust anybody

    So I took some time to note the carefully orchestrated buying experience. There was a small queue, so they line the punters up by the curved glass cabinet on the right where there is an array of sugary treats, all with enticingly foreign-sounding names, but you know that they are basically industrial sugar with some esters made in a factory somewhere along the New Jersey Turnpike to give it a semblance of something dearer. I resisted, but took the time to observe.

    The theatre troupe has three members –  the first teenager behind the till who takes the order, and flannels the prospective punter a little, presumably they are incentivised to upsell some of the sugary crap. No thanks, two Americanos, and since my mother prefers too little rather than too much milk, he writes it onto the ticket, to make me feel special. I never worked out what the third actor did. Maybe the CCTV is watching them watching the others, we never have found an answer to the centuries-old problem of who watches the watchmen…

    OLYMPUS DIGITAL CAMERA

    This then goes into a queue to the barista, who was probably a student, at least he looked old enough so he could legally buy beer 1. He may have been on the same course as Monevator, because in front of him he has a gleaming instrument of coffee gustatory creation, a finely honed machine with which the barista of distinction can meld to produce aromatic brews of the finest creations of the coffee-growers art, bringing a colourful piece of sunny Africa and South America to a grey day in Ipswich.

    What he actually does is add three-quarters of a cup of hot water to a quarter of espresso, ‘cos this piece of kit doesn’t do ordinary coffee. The cups are about half an inch thick, instantly chilling the coffee to just about warm enough. I guess you don’t want the punters to take too long over their coffee and want the cups to go through the industrial dishwashing machines without breakage.  I learned in my time as a kitchen porter in the late 1970s you only needed cups to be half a centimetre thick to minimize breakages – we sometimes lost one or two of the cups from the Directors’ lounge running through the machines, which happened to be decent china, whereas the cups for the hoi polloi only broke if someone was hamfisted and dropped a tray of them on the floor.

    So we got to enjoy some watered down espresso. Which is exactly what an Americano is. Now my mother got her value out of her outlay, because she came for the experience of seeing the world go round and to drink a cup of coffee with company. An I got to observe some consumer theatre and wonder on the world a little. But if I did it every day on the way to work, and it was the coffee I wanted, well, to be honest I’d feel ripped off  – watered down espresso tastes like watered down coffee does. You should make it at the strength you want it, not stronger and then water it down. And Costa really ought to change those cups. If you get coffee to go you have the privilege of a paper cup, which reacts with the coffee to give you that prized waxed paper flavouring but at least doesn’t chill the result.

    It’s perfectly possible to bypass all the theatrical drama – at work in the late 1990s/early 2000s they had machines in the canteen which could make a very decent cup of coffee all by themselves – beans went into a great big hopper at the top and they brewed decent filter coffee typically in batches every five minutes, dispensing this on demand, and indeed with a hot water spout if you wanted to water it down. No baristas needed. Of course you don’t get to play with the microfoam and all that stuff, but I fear the Ermine palate is just not as sophisticated as the metropolitan types – like so many products, once you’ve got out of the low-quality bottom end of the range 2 then good enough is good enough and there’s no point in over-thinking it IMO. But of course playing with the microfoam adds artisanal drama and the opportunity for you to feel special, and let’s face it, if you’re prepared to pay over two pounds for your morning coffee then you need to get to feel special – Because You’re Worth It ™

    It was an interesting lesson on the consumer experience. The product is a vehicle for the performance, and a lot of the performance is there to try and make the customer feel special, one of a kind. As Katherine Rosman of the WSJ said, engagingly

    giving that little lift that can come from a quiet moment of self-appreciation. That’s when a cup of coffee is so much more than a cup of coffee.

    This is the principle behind a lot of attempts at consumer marketing . Tesco tell you that ‘your’ store is changing – no it isn’t, their capital asset used to sell you groceries needs a refit. The named Coke bottles are a different take on the same old game, as are all those loyalty schemes that the good people on MoneySavingExpert dedicate much time on getting the most out of. So much consumerism is theatre – you’re buying the experience, not the product. The theatre is cheap value-add – the delightful thing is that this part of the value provides a feeling, it isn’t durable, so you keep coming back to renew it.

    The mysterious marvels of the microfoam…

    Having said that, I’ve also learned that I have been saved from chain coffee-shop coffee by my history. In 1970s Britain people used to make coffee with heated milk and instant powder coffee 3  – they weren’t used to it at all. It was disgusting to my taste, raised on Tchibo and Melitta 4 coffee imported from Germany by my mother and relatives. You couldn’t buy filter coffee in British stores in SE London at the time.

    I still associate the taste of heated milk in coffee with those days, and that was a world where we hadn’t been taught fat was bad, so a skin could easily form on the heated milk, which is just plain creepy. It appears that in the intervening four decades, people apparently prize the unique qualities of heated milk and wax lyrical about the many forms of heated milk in coffee and the art and craft of doing this, to me, disgusting practice. I am therefore always going to be a barbarian at the gates of the metropolis in this respect. I realised this, right at the end of writing this post, when I read this lady

    Yet, I don’t want to make myself a cappuccino at home in the morning, pour it into a thermos and drink it cold and frothless when I arrive at my office some two hours later.

    For Gawd’s sake, disregarding all the intangible Because You’re Worth It ™ bits about the theatre and the impracticality, never, ever, keep hot coffee and milk in a Thermos because the coffee heats up the milk and over time it gets to taste like that disgusting 1970s brew. Keep the hot coffee black in the Thermos and then add the milk after you’ve poured it out. Sorted :) Obviously if you want hot frothy milk added then yes, you are SOL but if you can slum it with hot filter coffee and cold milk that sorts the latte factor problem out, though not the “little matter of self-appreciation”.

    Notes:

    1. that’s 18 in the UK
    2. the low quality end being all forms of instant coffee
    3. I grew up in a working-class background. I sincerely hope that Britain’s doctors and bank managers didn’t do this, although they probably eschewed coffee altogether, after all the whole point of being middle class in those days was genteel bourgeois living and being able to send your kids to public/boarding schools. You just didn’t need the kick to the back of the neck that an espresso delivers to get you out of bed and on the way to work at 6 am, tea was perfectly adequate. The British palate was a coarse and unrefined thing before the 1980s, this was a nation that found the Vesta curry exciting. In fairness to those gastronomically unsophisticated generations, this was a country that had the shit bombed out of it and only exited rationing in the 1950s, so the pragmatic favouring of quantity rather than fancy cuisine was understandable
    4. these are nothing special now but when the alternative is Fine Fare instant coffee powder it’s the height of Continental sophistication
    24 Oct 2015, 3:28pm
    personal finance
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  • Compound Interest – quantitative takedown

    I keep getting flack for being cynical on compound interest. I was an engineer in a previous life, and this is amenable to quantitative analysis, here are the charts on why compound interest won’t help you that much to retire early. It will help you a bit. but if you want it to do the lion’s share then be prepared for a nice 40 or 50 year working life.

    You know the story of Alice in a Wonderland of Compound Interest. Astute Alice saves £1000 a year from 18 to 38. She then stops work to have children, never saves any more in her pension and retires at 68 on £1M. Lovely jubbly. Cat-brained Camilla jumps to it at 38, and saves £1000 for 30 years until 68 but lives on cat food and baked beans for the rest of her life.

    Let’s test this for Sensible Susan who works for 40 years from 21 to 61. Nobody in the personal finance field wants to work for 50 years like Alice :)Warren Buffett tells us that she should expect an annual real return of about 5%. She works in the public sector and never gets any real career progression. To normalise everything I have her saving one unit of real money every year, all these entities live in an inflationless world where their nominal rate of return on capital is deflated by inflation to get the real return. At the end of her career she looks back at how much each tenth of her working life has contributed to her pension. Compound interest sees to it that the early years contribute more, that much is clear, and of the total amount of 120 units accumulated, 67% is compound interest – it triples her money.

    Amount each tenth of her career (four years to a pie slice) steady savings contribute to Susan’s pension, saving exactly the same amount in real terms for 40 years and at 5% p.a. real return

    She observes that the savings in the first third of her working life contribute half her pension capital, she goes out and tells all the young pups that the first 12 years of savings are the most critical, if she had started at 35 she would be on cat food and beans. Quod erat demonstrandum.

    Let’s cast a beady eye at how this compares with the real world:

    Susan got no career progression. Let us hear it from the people at the ONS on this subject. The downturn is because everyone took the earnings sucker punch from the financial crisis, I correspond roughly to line 2. Look at how the career paths of people 10 years younger than me leave my cohort for dust 1 😉

    career progression is much faster now

    I got roughly three times real terms career progression over 30 years, this happens faster now though it may peak earlier, and I did better than the ONS average. It’s not unreasonable to expect someone to save to a pension as a constant proportion of their gross salary. Let’s say Susan got 2 times real terms career progression over 40 years – compound interest still more than doubles her money, it’s 63% of the total of 164 units

    Susan saves a steady segment of salary as it doubles in real terms

    Susan saves a steady segment of salary as it doubles in real terms

    Just for the record, this is what this would have looked like for me, getting 3x career progression although that was in 30, not 40 years so I have just taken eight of Susan’s four-year segments, getting 3x career progression over that 32 year time. 52% of my total of 134 units comes from compound interest – it’s doing a hell of a lot less of the lifting than for flatline Susan. But I end up with more 😉

    three times career progression in 32 simulated years - the pies are eighths, not tenths in this chart

    three times career progression in 32 simulated years – the pies are eighths, not tenths in this chart. The pies are more even than Susan’s

    It is the combination of career progression and the shortened working life of FI/RE types that makes compounding a lot less relevant in the real world. I’m not even particularly exceptional here – a 30 year working life is early retirement, not the extreme early retirement, and I dramatically lacked ambition compared to what people like RIT or The Escape Artist were prepared to do to retire early. I would imagine they got more than three times real terms career progression.

    Even that’s not realistic, though. There is a problem in humans called hyperbolic discounting, which means when we are closer to something delivering it gets much more interesting. The young Ermine didn’t really bother about pensions, though of course I signed up the The Firm’s scheme – companies were more paternalistic in those days and told you what was good for you. As the concept of retirement hove into view and I got within ten years of NRA I started to divide the tax privilege of 40% by the number of years (10) and saw I would struggle to get that sort of return on cash, and all of a sudden AVCs (a DC type of pension saving) became interesting, so I set to it. Tax savings mean a HRT taxpayer gets a 66% return on net income foregone, compared to the 25% for a basic rate taxpayer. I was lucky enough to be able to save to AVCs by salary sacrifice, so I took some basic rate tax + NI savings which still worked out to about a 50% ROI. The whole thing gets a hell of a lot more interesting. I don’t know about you, but it really, seriously, pissed me right off to be working two days a week for the taxman to I tried everything legit as I started running into HRT – first employee share incentive plan shares, and then somebody introduced me to AVCs and life was sweet. Life is too short to work nearly half for the government 2, a third is okay, more than that, sod that.

    I tried to simulate the effect of that by increasing the Ermine’s later savings by 1.3 times, which reflects the better return on net earnings lost that a HRT taxpayer gets. It somewhat underestimates my later savings, I was simply not prepared to pay 40% tax at all after a bit, so any bonuses and pay increases were salary sacrificed to AVCs and in the very last two years I hit AVCs harder driving my pay well below the HRT threshold. But ignoring that and simulating my boosted contributions from HRT alone, the contribution to my savings if I had saved steadily as a proportion of net income is much more even across the eighths of my career –

    Add HRT boosts into the mix a way into the career plus career progression and compound interest is beaten out by bigger contributions later

    Add HRT boosts into the mix a way into the career plus career progression and compound interest is beaten out by bigger contributions later

    Compound interest is about half the total 145 units. Unlike for the slow savers it just doesn’t do much for aggressive savers, and I was never a particularly aggressive saver compared to the people who want to retire in their forties!

    There’s a takeaway from this all – yes, compound interest will help you triple your savings to FI, if you are unambitious and you want to work 40 or 50 years. It will roughly double the savings of the typical FI/RE saver. Where it really starts to show up is once you have FI and your aggregate savings are significant. Some anonymous dude called Cumulative Dividends has put more money into my ISA 3 than I have this year. He appears to be gathering speed with time – in the last tax year he contributed nearly a fifth of what I did. He is one aspect of compounding, there is a similar but volatile and flighty bastard called Capital Appreciation that is the other.

    I will not be drawing down my ISA savings for probably another 10-15 years until my final salary pension starts to be eroded relative to other people’s earnings (earnings inflation is usually higher than price inflation) and then I will start to use the tax-free ISA income to top my pension up, and finally start to run the capital down or part-buy an annuity in 20 years’ time. Who knows. Compound interest helps people with capital, but it doesn’t help ambitious early retirement savers to build capital that much, though it roughly doubles the money. As for Alice in compound interest wonderland, well that is Alice in Wonderland – the weakness of that is the unrealistic 10% annual real return. Alice may get that in Wonderland, but you ain’t gonna get that in the real world. Put the work in or put the time in.

    You shouldn’t take away from this that you don’t need to start saving to a pension early, all the parts of the pie matter, but you shouldn’t take it as totally devastating if you didn’t start early. If you have any ambition to early retirement at all, the myth of compound interest and the trickle of free money from Time isn’t going to do the heavy lifting for you in the accumulation phase.

     

     

    Notes:

    1. I acknowledge they need that better career progression, to be able to pay for student loans if applicable and housing which is dearer in real terms than back in the day. It’s still an impressive feat and I tip my hat to their superior industry or negotiating power, at least up until ’09
    2. I know, indirect taxes and Tax Freedom Day and all that, you can reduce indirect taxes by not buying loads of Consumer Shit
    3. over its ~six year existence
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