UK FI/RE folk are fortunate compared to other Europeans

I guess we’re still European at the moment 😉 Though I do wonder if our good fortune is perhaps connected with our impending departure from the continent. I came across Mrs W of whatlifecouldbe.eu1– who is already FI at 32, this is their story. Basically Scottish lass goes to work in Germany in 2005, meets handsome young Romanian fellow starting college, ten years later they have a couple of nippers and are FI/RE. Even my grizzled and cynical old heart is warmed by the tale of chutzpah, enterprise and general derring-do.

I confess that when I read the story of what makes them FI, invested 100% in a single asset class of German rental property it makes me feel a little bit squiffy for the FI part of their future, particularly when I hear Mr W’s diatribe about the SWR and equities in general. But then I recall that he is still in his early 30’s at a guess, so while I intensely disagree with Mr W’s approach to diversification and cavalier use of leverage,  it will probably work out just fine in the end though probably not exactly as planned. These guys have got human capital in spades. It’ll be all right on the night even if something goes wrong with the FI side of things. This fearful Ermine would be scared of with the mix of leverage and lack of diversification. Unlike the Ws, I have already earned all the money I will ever earn, so I have to be more timid, because I have no human capital in reserve.

What makes you FI/RE in your 30s is very different from what makes you FI/RE in your 50s

The world is too unstable to convincingly clock off in your 30s, unless you have a very serious trust fund behind you. Yes for Petra Ecclestone2

Petra Ecclestone. unlike you or I, doesn’t need to earn the money to put into her investments

no for people who have to earn the money to become FI.

In Petra’s case her dad did the heavy lifting, though I believe her mum wasn’t a pauper either. Mr W nails it, however, when he says passive income is worth more than net worth. Back in the dark days of 2009, I took the same line, albeit in a different asset class, and started building a high yield portfolio – at the sorts of valuations one was getting then it was possible to envisage getting there. And in all fairness I still have that HYP, and it’s paying a decent steady return in aggregate for what I paid for it then. The bad odds for FI/RE are written in the stats of the SWR – if it’s 4% then you need to save 25 times your desired annual spending rate that is a big ask for a working life of 20 to 30 years. You ain’t got years enough to get there from here if you are looking to live a normal life of spending most of what you earn.

You can get there if you earn a heck of a lot more than you plan to spend, but you then have the living like a celibate monk in a brothel problem because you will be surrounded by spendy peers. You can get there if you are prepared to work for 50 years, because the faint whisper of assistance of compound interest may give you a bit of a leg-up3. But otherwise it’s a very, very long stretch. In your working life it’s also good to be able to buy a house, which is a hedge against paying rent, otherwise you will have to lift your savings target to cover renting for the rest of your life, so it’s all a tough ask.

Having an unleveraged stash of wealth it’s the canonical way older people look at becoming FI – you build up enough stock of assets that the flow of income from them is enough to make up for the flow of income you aren’t getting from selling your time or skills for money.

At this point most Brits would yell Get into BTL in my ear and indeed that’s what an awful lot of people do. If you still carry a mortgage on that BTL then it’s a bit like taking out a mortgage to buy the assets in one’s SIPP or ISA, it obviously reduces the upfront costs and you can get a lot more bang for your buck. For someone like me that would be insane, not just because I loathe real-estate as an asset class with a deep and heartfelt hatred born of the way it hurt me early in my working life, but also because I don’t have any earning potential left – my human capital is close to zero. You just don’t carry debt when you are all out of human capital4, because it’s a drag on your financial capital. But looking at how Mr and Mrs W do it, I wonder if perhaps leveraged BTL is more healthy in the young than in the old.

We are greatly privileged in the UK in terms of tax-sheltered accounts

We can shelter £20k a year in ISAs tax-free and up to 40k a year in SIPPs tax-free, which is stupendous compared to the paltry $6000 annual limit for the US equivalent of a SIPP, an IRA. In Canada that’s about $15000 CAD, about £9k p.a. Here we have people bitchin’ and a moanin’ about the lifetime allowance of £1M, our North American FI colleagues would find it hard to get that much after a normal lifetime of working. Then there’s free health provision, which is a whole world of hurt for US FI/RE people, which is a lot of money you don’t have to save for.

Then let’s look at the situation in Europe – countries like France have a wealth tax, and countries like Switzerland charge tax on the imputed rent of a house. In Belgium No More Waffles is battling a dividend tax rate of 30%.

There is, of course, a case to be made that is all a byproduct of the way British elites are keeping their money to themselves, tossing a few crumbs for the upper middle classes, making it look like anybody could do that. After all Britain has an ignoble tradition of government facilitating large scale tax evasion through looking the other way as far as tax havens and things like trusts to circumvent the already generous IHT allowances. Perhaps the FI/RE community is just slipstreaming the kind treatment of wealth and its owners, because they have to save much more money at a much higher rate than normal workers are doing. The generosity of the ISA allowance is roughly the same as the median UK household income of ~£23,000. Your average FI/RE saver is chuffed if they get to a savings rate of 60%. Getting to 90% is a serious stretch, so let’s face it, that £20k ISA allowance is one for the rich – FI people earning £50k p.a. net and probably normal people earning at least twice that. The rest will struggle to fill it each year.

Of course all this lost tax probably makes living in Britain a bit more shit for other people, and as a result said elites get an angry howl of rage when they hold referenda. So perhaps we might have had a better collective quality of life if the tax-sheltering regime were not quite so generous, but you have to work with the world as it is.

It’s not all upside, however

There’s trouble brewing in the increasing shitstorm being made of Brexit, where none of the protagonists can agree what success looks like though they all have very fixed but orthogonal views of what it should be. That, combined with flatlining productivity could lead to serious unrest in the years to come. There are some things historically peculiar to Britain – the general godawfulness that is hideously expensive housing. The horribly unequal distribution of jobs with all the investment happening in the southeast and London. You can find cheap housing in the UK, just not near any work of substance. Then there’s expensive tertiary education, which could be circumvented by studying in Europe as Mrs W did, but is no longer an option5

Be grateful for what you have, UK FI/RE people, and sweat it while you’ve got it.

Gratitude is good for the soul, and British FI/RE aspirants have a massive leg-up in tax privilege compared to many other First World countries. Celebrate your good fortune, and hit it while you have it…

 


  1. I was surprised there are so many German FI blogs, and surprised to see German blogs are written addressing the second person singular not the formal third person plural 
  2. Queensberry rules require me to point out that the Graun makes out that Petra earns her crust. Do you believe that explains how you get to own a Hollywood mansion at 25? Me neither 
  3. A bit like NASA’s ion drive, compound interest’s action is feeble compared Saving Hard, the equivalent of the sturm und drang of chemical propulsion. But it keeps going steadily, and over timescales longer than a FI/RE working life it can add up significantly 
  4. there are specific times when it’s okay for FI/RE people to carry debt because of the 55 limit on drawing pensions, but as a general rule, don’t 
  5. Whether the Erasmus scheme that served Mr W (and Mrs W perhaps?) carries on for UK students after Brexit is unclear but probably no because of the issue with free movement despite the Brexit boosterism of the torygraph – even they have to confess the Swiss had to craft a replacement after they voted to can free movement. For the Torygraph scenario to be right the UK Government would have to craft a Swiss style UK Erasmus replacement and fund it for cheaper studying in EU universities than the high cost of studying in England. In other news, a flock of pigs was seen flying to the coast 
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50 thoughts on “UK FI/RE folk are fortunate compared to other Europeans”

  1. Also, it is possible to earn £17850 per year tax free in the UK if your only income is savings income (including P2P).

    – Income allowance 11850, starting rate for savings 5000, personal savings allowance 1000.

    Then 2000 from dividends from next year tax free. So £19850 per year tax free outside of your ISA.

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  2. I’ve invested in property and it has worked out well for me so far (famous last words…) but then as you say I guess I have (relative) youth on my side. The leveraging aspect of BTL does make it attractive despite the risks and all Osborne’s tax changes. Having said that, as I get older I plan to move more towards SIPPs/ISAs mainly because (a) they can be more diversified and (b) they’re a lot less hassle.

    I do worry about the way the country is heading. I don’t believe the Tories will build the 300k houses a year they’ve promised. And even if they do, if all those extra houses get bought by local and foreign investors then there’ll be a lot of angry people. I would definitely support a stamp duty hike on foreign investors – like they’ve done in Vancouver. And I would support a push to make sure landlords pay the tax they owe (rather than simply slapping more taxes on).

    I would also support a crack down on tax avoidance of the rich hiding wealth overseas and multinational corporations moving profit overseas. I saw this week that Kelloggs paid only £60k corporation tax on £900m UK turnover. Unfortunately I don’t think the Tories have any intention of doing anything about this (despite constantly saying they will).

    The EU is creating some new laws to prevent tax avoidance but the UK will leave just as those come into effect – funny that.

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  3. The Canadian government would never allow such generous tax-free contributions. Our RRSP (your SIPP) is capped at 18% of income and that is reduced by any contributions you make to a pension plan at your employer. When I worked I was lucky to get $3500 per year into my RRSP.
    Our TFSA (your ISA) was at one time $10K Canadian per annum but that was reduced to $5500 because “only the rich” could take advantage of it.

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  4. BTL for the amateur is over, the ongoing correction in tax advantages will squeeze remaining yield out …..& those landlords too stubborn to give in will eventually go bust. The trick therefore is to sell your single property now before the crash when everyone else is running for the exits; BTL as an asset class won’t disappear though, it’ll just turn pro, with high-net-worth individuals reclassifying their property portfolios as companies.

    They & increasing hedgefunded private rent empires will then milk the homeless classes of whatever their salaries will allow, re-routing the profits via the UK’s scores of offshore tax havens into their deep pockets. It’s just the next stage in the maturity of the profession, commercial landlord services, like its always been for office blocks & industrial estates. You could buy into these through funds if their management charges are reasonable.

    The positive in this increasing injustice is that for the small fry with a BTL flat, it was always a precarious existence, with most not appreciating the level of illiquidity risk involved in tying up your lifesavings within one basket. As for the latest promise to institute measures that really, really will increase housing supply this time [it’s different] – well, anyone who believes that must be very excited that Santa’s coming soon.

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  5. Ermine, you will still be European, with or without Brexit ….

    Yes, UK is good for FI.
    Some extra info on the swiss situation :

    – max CHF 7000 a year into the Swiss SIPP ( “third pillar”).
    – tax on imputed rent.
    – Wealth Tax. ( Substantial in French speaking part, less so in the German cantons)
    – Dividends taxed at normal rate.
    – Substantial tax on real estate gains. Would be over 100k£ in my case…
    – Healthcare costs second only to the US

    Switzerland is not a tax haven….

    On the plus side there is no capital gain tax and salaries are good. But once you no longer have a salary then it becomes very attractive to move countries. In my case probably DE, before Brexit the UK was on the shortlist.

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  6. Interestingly a few weeks ago the US Republicans were floating the idea of capping 401k contributions at a very low level (to claw back a few bucks to pay for their other tax cuts). This was considered a progressive (as opposed to regressive) tax change since only very wealthy people are able to contribute a large dollar amount. The proposal was dropped in the end.

    I sure do miss having an ISA though.

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  7. Has anyone considered the possibility that while publicly sitting on the fence underneath that calm robotic exterior May is a staunch remoaner?

    That she knew post crisis austerity was biting hard enough for Corbyn to be in the ascendancy?

    That she called the snap election not to strengthen a majority, but precisely to weaken it such that she *had* to call in the DUP knowing full well that this would have the *intended* consequence of making Brexit effectively impossible to deliver?

    I put it to you that this is the true run of events and as such May is the most startlingly brilliant politician of all time?

    If Machiavelli were alive he would be on the phone to 10 downing street asking for tips, if May played chess she would regularly be hammering Kasparov..

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    1. You give Theresa May too much credit. I dont think she is stupid, it’s more that I don’t think she is selfless enough to hatch such a plan. There’s no way she would weaken herself like that on purpose. Mind you it did seem at times like she was deliberately trying to lose the election, I mean what was all that about fox hunting, and social care? Mad.

      I think it’s more likely she was hoping to win a big majority of 50 or 60 MPs and then she’d have been able to ignore the loony hard brexiters in the party.

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      1. haha – yes even I am struggling to buy into my own hypothesis here?

        I love the way Davis had a crack at deserting his post, threatening to quit if his mate got sacked for watching porn on taxpayers time – genius!

        nice site BTW..

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      1. Naah, no need, I understand how the system works & have just enough money to do a Branston – take off to a UK tax haven when anything bad really happens.

        Good move getting out of your BTL, by the way.

        Excited what else Santa’ll bring you?

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      2. What? You’re going to start manufacturing pickle?

        I guess your UK tax haven will also have to be amenable to growing small onions and the like?

        Time will tell whether my BTL exit was good or bad.

        I’d argue you understand a system, but that system is one of your own invention differing markedly from reality?

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  8. I’m pretty sure Belgium has NO tax on capital gain, which makes them a paradise for FIRE. If someone can confirm, then I feel “criticizing” a 30% tax on dividends is really petty. Also, having a dividend based strategy in a country where capital gain is not taxed and dividends are heavily taxed sounds like a terrible strategy?

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  9. Wow, thanks for bothering to take the time to look into our story, and for writing this article. While I’m sure the situation in the UK is far from perfect in many ways, it’s still a lot better than in a lot of other countries. I find it fascinating that despite the EU, tax and investing laws differ so much from country to country. Germany has a personal allowance of only 801EUR per person, for example. Investment earnings above that are taxed at 25%. That’s one reason it made more sense for us to invest in real estate – wouldn’t invest now though, the market’s gone through the roof. We don’t rely 100% on real estate though – Mr W has a (mostly passive) online business that covers all our expenses several times over, and we’re slowly branching out into ETFs too.

    You’re right about how the amount of human capital you have can affect your attitude towards FI. We’re not worried about having a lack of diversification because if things were to go tits up tomorrow we could always go out and earn more money. You’re also right that things probably won’t go to plan – we can’t possibly predict the future but we’ll figure out a way to deal with whatever life throws at us.

    A couple of side notes:
    1) Our paltry and out-of-date blogroll is just the tip of the iceberg as far as German financial blogs are concerned. If anyone’s interested, check out Finanzblogroll.de, a portal that lists over 100 German financial blogs!
    2) The university situation is different in Scotland. Scottish students who study at Scottish universities don’t have to pay tuition fees while studying. You just fill in a form once a year and it all gets taken care of. This was one of the first pieces of legislation enacted by the Scottish government when it came into existence and I’m heartily thankful for it!

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    1. I find it surprising that the Scottish lack of tuition fees doesn’t cause more unrest across the UK. Its iniquitous given that the tax regime is the same for all. To put it another way, you could say non-Scottish graduates simply have to pay an additional 9% income tax. It doesn’t seem right somehow?

      Or have I missed something?

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    1. I find it surprising as well. I nearly spat out my coffee the other morning when they said on the news that universities in England are thinking of introducing a new fast track 2-year degree that will “only” cost 22,000 instead of the 27,000 for a 3-year degree. I had no idea university cost so much in England! I don’t know much about the whole thing, but I wonder how Scottish universities can get by without tuition fees while English ones can’t? Ok, so Scottish universities get tuition fees from their non-Scottish students, but still the vast majority of their students are Scottish. If I was English I’d be kicking up a stink!

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      1. The downside for Scottish students is fewer places are funded as it has to come out of general taxation, rather than the fees following the student as in England. Also the price differential means that Scottish students are rarely going to consider a university in the rest of the UK.
        A friend in Scotland tells me that a young person needs only to be resident in Scotland for a year to qualify for free University (assuming they can get a place)…

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      2. Ah, I remember that terrible situation well. Only about 10% of school leavers went to university when I entered Imperial, but I was funded from general taxation. I personally think that a drastic reduction in student numbers and actually getting behind them and supporting them right would be a good thing, rather than the everyone’s a winner approach. It would choke off necky employers demanding a degree for jobs that don’t need a degree.
        We would need an exam system that discriminated by ability and a numerus clausus, like they do in…Germany.

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      3. Yeah I know what you mean, I had a friend at uni who really, really wanted to be a nurse. In the hospital helping people. Hands-on stuff. But to be a nurse he had to spend 4 years at uni writing 5000-word essays entitled “What Is Health?”. That’s not what he wanted to do with his time. He dropped out in 3rd year and now he works in a hotel in Dubai.

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      4. Us Welsh are not quite so generous. If you’ve lived here for 3 years you pay around £4k per year tuition ( for Welsh universities ) but it’s still a darn sight better than £9k.

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  10. I can’t help feeling all these “I have reached financial independence through highly leveraged investment in residential lettings” are this decades equivalent of “I have reached financial independence through day trading internet stocks” in the 90s

    Obviously I’m a n out of touch cynic who has no understanding of the new paradigm we have just entered

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    1. I know real estate isn’t everyone’s cup of tea, and I’m fully aware that things could all go horribly wrong tomorrow, but I’m also 100% sure we’ll be ok no matter what happens because we will always find ways to earn money. I suppose that’s the advantage of still being in our mid 30s. Even if it does all end tomorrow, at least we’ll have had two years of freedom to spend with our very young kids, and that’s something no real estate crash can ever take away from us.

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      1. I think that’s the key difference in thinking, and I’m all for it. FI means something different for people in their thirties, and getting to see your children grow up is a fine use of the ultimate consumer good – time. If for some reason it doesn’t work out, well, you have got a win in that time banked, and you can do something else.

        I take it the BTL mortgages are without recourse in Germany? or you are doing ti as a limited liability company. Leveraged exposure is the thing that would frighten the living crap out of me in that situation, but that is because early in my working life I experienced a property crash and watched one neighbour get repossessed and the other jump before they were pushed. That sort of experience stays with a fellow – I recently moved, and bought cash, and had enough cash to carry two houses while I moved. But owning that much property was still stressful because of that 25-year old memory of nearly getting crushed by that steamroller.

        But you can’t knock the payback rate, I suspect just about everybody who is FI in the UK has BTL apart from me 😉

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      2. The worst case scenario if we can’t keep up with the mortgage payments is that the bank will repossess the flat. The bank has no right to our personal assets. That would be very scary!

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      3. That is good – the mortgage is without recourse. It’s much more like taking a loan to purchase business assets than a home mortgage.

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  11. but no one had a blog back then so you didn’t have to read about it.

    anyway isn’t btl the old paradigm now?

    blockchains the new paradigm?

    let me at those bitcoins…

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      1. Indeed, including equities – I’ve spent the last few minutes looking at my ISA trying to really, really picture “what will it feel like when this is half of what it was today” and hoping that this Monevator post will still have the cogency it did in 2009 😉

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  12. “… the paltry $6000 annual limit for the US equivalent of a SIPP, an IRA.”

    But the IRA is only a part of US retirement saving. And in some ways an IRA can be closer to an ISA than a SIPP.

    Most US salaried employees have access to a employer-sponsored 401k. Here the employee’s pre-tax personal contribution limit is $18k/year if under age 50 and $24k if over. Additional employer contributions can take this up to $54k, or $60k for over-50s.

    Not paltry at all, then.

    https://www.irs.gov/retirement-plans/401k-plans-deferrals-and-matching-when-compensation-exceeds-the-annual-limit

    Personal 401ks can also be created. And for government employees, comparable alternatives such as 403b and 457b exist.

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    1. Interesting – the IRA with employer contributions does have more annual allowance than our pension contributions, I believe the limit is £40k for employer plus employee contributions.

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  13. Irish tax regime is punitive for investors – ETFs are taxed at 41% on both gains and distributions. How do you like them apples?

    It makes it very hard to do FI / RE, without getting dragged into an overheated property market – oh yeah, that rental income is taxed at 58%, for higher rate taxpayers.

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  14. Totally agree how we are greatly privileged re tax-sheltered/ brokerage accounts in the UK. I’ve lived and worked in many countries, however, it appears the UK offers more attractive/ tax efficient options.

    For example, lets take the S&P 500. In the UK, you can fill in a W-8BEN (assuming you’re a UK resident) and reduce the withholding tax from 30% to 15%. When I was in Singapore (and had the option of trading the Stock Exchange of Singapore, as well as the US market) there was no such option of reducing withholding tax. That’s just one example (and country) where there were no tax-sheltered options.

    Also, if you reside in Europe (and have UK brokerage accounts…certainly with Hargreaves), you can make further payments into the account and trade within the account. Hence, you can add cash contributions and reinvest your dividends in your fund and share account. However, not within your ISA and no further cash contributions are allowed outside the EEA.

    Under European law, their FCA regulation allows them to accept business from clients who live in countries which are members of the European Economic Area (EEA).

    Thus, there’s also some flexibility with the UK brokerage accounts for those who wish to live outside the UK…

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  15. I moved over from the UK to the Nordics permanently several years ago and yep FI would appear to be a lot more attainable in the UK (and the US) than here for a few reasons:

    – Saving is tougher. The tax breaks of ISAs/pension funds are not available. They simply don’t exist here and all interest or capital gains are taxed at a minimum of 30% (as is rental income). Local tax authorities are also rather less utterly dysfunctional than HMRC and go straight after the money you have put away tax-free in ISAs in the UK etc.

    – Investing is more expensive. The falling cost of investment services that began in the US has made a decent impact on the UK but has yet to reach the furthest corners of Europe (Index tracker with an initial charge/exit charge and performance fee anyone?).

    – Really highly paid jobs don’t exist. The “work in the City of London and make a decent pot in a short space of time” option is not available either. I don’t know anyone who makes 100k, for example. That sort of money is really unheard of here, even though it costs £6 to get a coffee and a bun at the local cafe. The government makes it hard for you to be poor and equally hard for you to be rich.

    – Cutting spending is harder work too. Lack of moneysavingexpert.com type communities combined with monopolistic suppliers of food (where I live 80% of daily groceries are sold by just two national conglomerates making the power of the big 5 UK supermarkets seem puny) and utilities (no/very little choice) makes smarter day-to-day spending tougher.

    Lucky I like a challenge then!

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    1. I guess that’s probably the “better quality of life for most people” that you get when the tax regime isn’t quite so generous to the better off 😉 Interesting that there’s less spread in wages too. Surprised investing is still dearer – can you not use financial providers in the UK or EU if they are cheaper. Appreciated the tax issue is still there, but an entry charge on index funds is just cheeky!

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  16. Very interesting – I am pretty much convinced by the argument that the UK offers a particularly beneficial set of circumstances to the FI seeker..

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  17. Hi Ermine,
    Thank you for the links to German-language FI blogs! Although it is nicht meine Muttersprache, it is an acquired second language and I am pretty sure I left my heart in Germany while working for DLR. As an American closing in on FI (August this year!), I am torn between living abroad, in Germany, or staying in the land where there is a prescription pill for everything and guns for everyone but a complete lack of public services, universal health care and mass transit.
    I have looked into the requirements for becoming a citizen of Austria, another country after my own heart, and they are actually quite reasonable for anyone who is FI.
    More food for thought.

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  18. I can use some UK platforms but not others and I guess the man in the street here could shop abroad too if they chose. But most simply don’t know of or don’t trust low cost providers from a different country. Personal taxes are not so different to the UK actually but yes it is a homogeneous society with nothing like the inequality you find in the UK or US. I like the innate modesty and humility of everyone here but the flip side of this is an almost complete lack of hunger and ambition which takes some getting used to. Basically it is tricky to build a world-beating company when everyone leaves before 4pm to pick up the kids. Anyhow. I digress. Keep up the great work, Ermine!

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    1. Maybe look into opening an account with Interactive Brokers? They are very comfortable with international and expat investors, multiple currencies, and so on. From there, I’d consider Vanguard’s Ireland-domiciled or iShares’ Ireland-domiciled ETFs. Annual charges will be in the 0.08-0.5% range, with 0.2% or so pretty typical, no entry, exit, or performance fees on top.

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  19. WOW i’ve only just come across your blog and I’m glad I did. I think your right that we are lucky in some ways to have our tax wrapper ISA’s. Hopefully Brexit wont affect any of the ones currently in play, I kinda fancy the lifetime ISA’s but fear that fortune favours the young and I’m just a wee bit too old (ie not enough years on the clock to actually get the best from it)

    Little Miss Fire
    https://littlemissfireblog.wordpress.com

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