This correction ain’t all that much yet…

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

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

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

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

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

UTMT would still have the edge on me
UTMT would still have the edge on me

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

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

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

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


BTL Investors discover the problems of leverage and tax arbitrage

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

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

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

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

Let’s actually parse this bullshit, and translate it

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

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

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

Let’s hear it from Connie

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

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

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

There’s nothing fundamentally wrong with being a landlord, if you have the capital or your business model works given the cost of capital at normal commercial rates. But if you need tax breaks on the cost of capital to make your business model work, then you are being subsidised to piss on your tenants who can’t get that tax break, and it really is high time that perverse incentive is stopped. The Torygraph listed a whole load of special-interest pleading, but it’s basically on behalf of people who have invested in an undiversified, illiquid asset class on margin to become rentiers[ref]I don’t have a particular problem with people being rentiers, but you have to have capital to do it. If you can’t afford the entry ticket, then work for your living instead, rather than trying to arbitrage a tax-privileged borrowing situation relative to your tenants, because, well, you’re vulnerable to the loophole being closed ;)[/ref]. It’s just not the same as buying productive plant and machinery to make more widgets better, where I can see the case to setting interest paid against tax.

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

Valuation matters – the dirty counterfactual to steady index investing.

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

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


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

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

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

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

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

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

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

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

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

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

That’s not to say the Livermore was a Boglehead, far from it [ref]Livermore was an extremely active investor, and not only that, one who favoured shorting stocks. Because stock markets creep up over the long term, you are fighting a headwind as a shorter. Livermore scored by shorting through the Great Depression :)[/ref] , but he was a shrewd operator. In general, the market goes up over the long term. Put the time in the market, and you get more of the up.

Valuation matters more for people with shorter time scales

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

Long story short, run towards fire. Buy when valuations are low. There is a corollary that you should sell when they are high, which I don’t use, because I have come to the conclusion that I am not a good caller of the time to sell. As a result I buy and hold[ref]This philosophy inherently limits me to HYP style dividend paying shares and income versions of funds/ETFs[/ref], I just don’t sell. But I do modulate when I buy, and for the last couple of years when valuations have been high I have not committed new money into the market, I have focused on discharging capital gains tax liabilities[ref]you can discharge more CGT in bear markets because your unwrapped holdings are worth less. But that would come at the cost of shovelling new money into a bear market, so it’s better to defuse CGT more slowly in bull markets.[/ref] by selling unwrapped holdings within the CGT limit and either buying the same or diversifying into my ISA. Yes, I’m buying overvalued stocks, but on the flipside I am selling overvalued stocks so it’s a wash from the high-level view.

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

Continue reading “Valuation matters – the dirty counterfactual to steady index investing.”

A distant sound of thunder

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

thunder and lightning, very very frightening...
thunder and lightning, very very frightening…

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

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

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

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

Okay, so I sold out at a local high in March 2012, but it then proceeded to make half as much again. I can be sanguine about that because there’s a lot more than this in my ISA, the overall value of which has tracked up by more than the blue line [ref]note that this is not because I am an ace investor, the share uplift has indeed been most decent when I unitise, because over the last few years it didn’t matter what you owned, you were going to do relatively well. But of course over those three years I have contributed three years of ISA allowance too.[/ref]  Obviously had I a decent crystal ball I’d have held on and sold three years later, but I don’t regret this, because I have learned one thing about shares, and that is

be no forced seller

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

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

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

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

What I learned about financial advice and pension freedoms

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

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

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

What did I learn about independent financial advice?

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

This was complicated by the fact that I was there to look at a specific part of my assets – this was not a 360 degree review of my financial situation. The whole regulatory system struggles with that, which is a bastard. With this specific piece of money I am a timid mouse – because I expect to consume it all[ref]strictly speaking I will probably use half of it and some savings to keep filling my ISA allowance over the next five years, but that’s a different story[/ref]. I acknowledge, however, that normally this is a rum way to run a pension.

What should people in The Firm learn from this?

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

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

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

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

What should I learn from this?

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

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

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

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

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

The Ermine has been stitched up by Hargreaves Lansdown

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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