Some are screaming blue murder about the ‘unforeseen’ rise in interest rates. So I thought it might be worth a look back at what it felt like the last time I saw this movie. Many, many, years ago in 1989, I was that guy. I was paying 7% on a low-start1 IO mortgage with an endowment set against the capital. Unlike, it appears, many new mortgagees now, I had the temerity to ask how much will it be if interest rates double that?
The question shows I failed to understand how this method of paying back a mortgage works, but quick as a flash the mortgage arrangement flack said “your repayments will double, but it’s historically unprecedented that rates double”
I figured I could pay that if I sucked my gut in, so I signed on the dotted line, and wham – biggest financial mistake of my life. It’s not just me – Vicky Spratt is still in negative equity after 2017, and reprises the ‘worst financial decision I have ever made’ quote. And now I hear the fast-rewind chipmunks of the Revox A77s I was working with in the 1980s as we cue the tape up to replay October 1989 interest rates shocks all over again, and I see headlines like The Mortgage Crisis has Changed Our Lives. Back then it took less than a year for the Bank Rate to go up to 14.88% and the unprecedented doubling to actually happen to me.
In itself that doubling wasn’t such a big deal. It is what happened next that has given me a visceral hatred of Britain’s favourite asset class, residential real estate. The lesson history offers y’all is a harsh one, and one that very few people will take, because it runs against the narrative of a dearly-loved asset class.
That history, dear reader, is that if you are struggling with your mortgage now and you only took it out in the last couple of years, then ask yourself what you would think if your house fell in nominal price by 10%. With inflation running closer to 10% than 5%, that is a real-terms fall of 20% in a couple of years, but this is where today’s high inflation rates works for you, because the depreciation of Other People’s Money means the real value of what you have to pay back falls sharply as time goes by.
In that respect you are better off than I was, inflation was ~2.5% in 1992, and 2% p.a. 1992 up to 1999 when I had sort of cleared the negative equity. You could do better, provided inflation stays high for a few years, you stay employed in the teeth of the higher interest-rate induced recession, and that your wages sort of keep up with inflation. And you last that long… Inflation of 8-10% for five years would do you no end of good. If you believe that they will get inflation down to say 4-5% in a couple of years then you need to watch for the second shoe to drop – negative equity.
It took me ten years to break even after negative equity clobbered the value of that house. The right answer would have been to GTFO ASAP while people were still bitching about interest rates, and rent. Sadly your only opportunity to do that is in the phony war part of the fight, when the papers are full of stories about high interest rates. When they start featuring sob stories about negative equity, you have lost the battle. Negative equity is a crafty stealth killer, you only find out how little people will offer for your house when you try and sell it, whereas higher interest rates lollop into your life tooting their horn on the daily news.
History doesn’t repeat, but it rhymes
On the face of it 6% is less than 15%, which Jeremy Warner uses to say it’s not so bad this time. The Bank of England deconstructed some of the 1980s problems in this 1995 report.
One of them was demographic, there were 1.2 million extra stupid 20-29 year old twits like me coming to the start of their housebuying years, and then Nigel Lawson gave the market a fillip by saying ahead of time that he would restrict MIRAS to one person per household. Which was perhaps my cue to say quite frankly, I don’t give a damn because as a single man I was a household of one, and could wait. But I missed that trick.
It’s not as if people didn’t warn me, but eight years at the tender ministrations of Britain’s evil amateur landlord scumbags gave me tunnel vision, must must must HAVE NOW. Which is why I still hate Britain’s amateur landlords with a vengeance. No, not you, dear BTL landlord. You are a special BTL landlord. It’s all them other lot, the bad guys over there. 99% of BTL landlords are self-identifying paragons of virtue not inspired by Peter Rachman, all I can say is that the other 1% sure as hell punch above their weight in misery generation in this septic isle.
The Telegraph’s Jezza W is right that some things were worse back then. If we take a look at the 2021 population pyramid, there’s a little bit of a hump in the 25-35 mark, but not a 15% heft. The attitude to repossessions was more robust, I saw it happen to both neighbours. But it took time – it’s a lot of aggravation, legal fees and bad press to repossess a house, so lenders don’t reach for that as first choice. Contrast that with the current government brokered extend and pretend grace period which by pure coincidence lasts very likely until just after the next election. I am shocked, shocked I tell you, to observe such synchronicity.
A war’s never over by Christmas
It took over ten years to make headway. One year ain’t gonna help you, particularly if the downturn cans your job. If you can’t afford it, then there’s a strong argument to GTFO now, like James in this article, before negative equity traps you for years. At today’s high income multiples, there may be a rational case for declaring bankruptcy if negative equity gets serious.
I did consider skipping the country and doing the Auf Wiedersehen Pet routine, but the trouble is that Germany went through a tough period then, as a result of taking over the moribund East Germany. It was easier to get away with leaving it all behind in those analogue days, but as it was I paid down the negative equity for years, and you, dear readers, have graciously put up with me hissing and spitting about it for a decade now.
I paid a bonkers 4.5 times my gross income for a house in 1989, but I had a 20% deposit, which brought the actual mortgage closer to the then prevailing norm of ~3.5 times gross.
People borrow a much higher percentage of their income nowadays. The trend is to pay about five times joint income, about 10x individual. Both employment and relationships are more fragile now, making the downside risk profile much worse. The Torygraph’s Ruby has some case that this is worse than the 1990s crisis, I guess the editor is on the beach so Torygraph editorial consistency has gone to pot. Bozza’s obviously got to his alma mater what with writing his pro Leave and pro Remain articles. Where he scored in an uncharacteristic display of competence was not publishing both of them on the same day in the same paper. You just can’t get the staff in this tight labour market…
Inequality was lower than it is now, it seems that the wage inflation the Bank of England is fighting is that of the better off City types, so expect everybody else to be on strike soon, if they aren’t already.
It’s a one-two punch – surviving high interest rates doesn’t mean you are out of the woods, negative equity is the slow, silent killer.
I had the experience of high interest rates and negative equity, but I was fortunate enough to be earning enough to be able to afford the higher interest rates, and retain my job through the interest-rate induced recession. It is the experience of ten years of paying down negative equity that was the real killer. Sure, paying higher interest rates is the immediate and present problem, but it’s the second punch that actually floors you. Particularly if you hang on to a marginal situation and the costs overwhelm you and you become a forced seller. The hazard of negative equity is much higher now than it was for the simple reason that income multiples are higher. Interest rates really aren’t the biggest danger
Buyers always get hurt when the government intervenes in the housing market, because in general government favours higher house prices, which shits on people wanting to buy a house. Some of the poor devils that bought a couple of years ago have a serious grievance to press on the government’s stamp-duty holiday, which has some similarities, in a history rhyming way, with the abolition of MIRAS for couples what was the gap I failed to mind in 1989.
A recession coming to somewhere near you
In a delightfully honest account, Karen Ward tells us how it works
The difficulty for the Bank of England — I mean, no-one envies them their job at the moment — is they have to therefore create a recession. “They have to create uncertainty and frailty, because it’s only when companies feel nervous about the future that they will think ‘Well, maybe I won’t put through that price rise’, or workers, when they’re a little bit less confident about their job, think ‘Oh, I won’t push my boss for that higher pay’. “It’s that weakness in activity which eventually gets rid of inflation.
I paid my dues in 1992. The Rt-Hon Norman Lamont delivered himself of this little gem, and indeed that Hansard piece is worth reading if you want to know how it will play out, the tape is cued and ready to roll, SOSDD.
Mr. Lamont : Rising unemployment and the recession have been the price that we have had to pay to get inflation down. That price is well worth paying.
The 2007 GFC was never paid down. It was bought off, and the historically low interest rates since then jammed the workings of capitalism, and a generation have grown up thinking this is the norm. There be much wittering about low growth in Britain, well, the deadwood hasn’t been cleared out for 15 years now.
I personally am grateful for that, I got the three years to run out of my decaying job and save enough to get FI. Perhaps I was the deadwood capitalism and globalisation would have cleared out ASAP had it been left to get on with the job. That is the point of having interest rates greater than inflation – borrowed capital has to be put to work generating real value, rather than chasing its own tail inflating asset prices, particularly unproductive assets like zombie companies. And housing…
I also benefited from the lift in asset prices, but not all of it is real, and those asset prices will fall in real terms over the next few years as the zombies are flushed out. That includes your stock market investments as well as mine, and it includes housing. Ten years plus of historically low interest rates have allowed monsters to grow in the dark. I have the feeling the next few years are payback time.
I paid more than the 6% current interest rates for the entirety of my 20-odd year mortgage term. But I paid that on a smaller capital amount, because having to pay interest on capital is what stops house prices from growing into the sky. No first-time buyer ever asks themselves ‘is this house worth this much money?’, because the backdrop is hateful BTLers screwing them shitless for rent, while occasionally trying to kill them to save a few bob on maintenance. That gives them tunnel vision of ‘anywhere but a BTL landlord’. What they actually ask themselves is ‘can I afford to pay the mortgage on it?’. If you have £500 a month to put toward a mortgage, at 10% interest rates that’s £60k you can pay for a house. At 1% that’s 600k. 2
The early 1990s interest rate peak was a result of the Bank of England losing the bet against George Soros to keep the pound in the ERM, and the bank rate dropped to < 7% by late 1992. It’s likely that interest rates will stay elevated for longer now, because fighting inflation is a marathon, not a sprint if we look back in time, and there is a decade of excessively low-interest rate excess to flush out of the system. The poster child for fighting inflation with interest rates is Paul Volcker, and Britain suffered those recessions too – I graduated into Thatcher’s second recession, it took me six months to find my first job, and the recession ground on for several years. The rhymes of history are there too, an energy shock, high inflation, low growth rising interest rates, an economy in coffin corner. There’s just not that many useful degrees of freedom.
It doesn’t matter who is in charge for the next few years, you will hear the basic sentiment of Norman Lamont delivered, because the only thing that fights inflation like a pro is a recession, as Karen Ward told us. Perhaps Labour will tax more heavily to raise benefits or snow parents with money like they did last time. But you’ll hear the words of John Major again, just like I did in October 1989
I understand the difficulties that many face with high interest and mortgage rates. But they – and the resulting slowing of the economy that we must see – are the means by which we will cure the problem. They are not the problem. […] So inflation must go. Ending it cannot be painless. The harsh truth is that if the policy isn’t hurting, it isn’t working.”
Young mortgage holders, like I was then, are particularly ill-placed for that because leverage is highest at the start of their mortgage journey, which amplifies the adverse impact of interest rates and negative equity. Nowadays renters in general, not particularly the young, are also exposed to the interest rates because so many ‘landlords’ are nothing of the sort. Back in the day, landlords actually owned their shitty hovels outright, because BTL mortgages weren’t a thing. Leveraged BTL exposes today’s renters to interest rates by proxy. Today’s amateur landlords don’t own their properties, they rented the money from a bank for less than the tenants could.
I do feel sorry for the people jumped into taking out a mortgage two years ago, against a background of an existential threat and a government desperate to keep house prices high, because their voters tend to be the sellers to these punters. The death of BTL – not so much. That’s investment for you, doesn’t always work out, particularly on margin.
Don’t fear the interest rates. Fear negative equity
In the meantime, remember that it isn’t high interest rates that kill you. It’s negative equity caused by higher interest rates. At the moment that hazard is lower because of high inflation, which writes off your mortgage for you in real terms without you doing a thing. But if inflation falls and those higher interest rates return to their long-term average, which is about where they are now, according to this mortgage broker, and my memory, then the ghost of negative equity will stalk the land again. If a third falls off the value of your house and inflation doesn’t help you out, that’s the equivalent of eight years of the four percent rise in interest rates we have had so far. I got to pay that down, year on sodding year for ten years, and that’s what gets you down. Oh and you can’t move until you have paid it off, else you now have a large debt following you around like a lost dog.
- although low start/adjustable rate mortgages (ARM) are nowadays associated with the liar loans of the GFC this was a rational choice for me given I had taken the insane step to buy a house then. It gave me a chance to pay off the £10,000 MBNA cheque that formed a good part of my deposit, within the interest-free period, and I cleared the probationary period and my expected salary rose. So I was smart about the micro, and majorly stupid about the macro. Well done me. ↩
- I have cavalierly ignored compounding and the necessity to pay down the capital by the time you retire, though people seem to be moving away from that quaint custom anyway. ↩
Simple Living In Somerset 
I bought my first home in 1987 and lived through this period too – it leaves it’s mark!
>I also benefited from the lift in asset prices, but not all of it is real, and those asset prices will fall in real terms over the next few years as the zombies are flushed out. That includes your stock market investments as well as mine, and it includes housing. Ten years plus of historically low interest rates have allowed monsters to grow in the dark. I have the feeling the next few years are payback time.
OOI, are you still trying to rid yourself of your ‘excess’ cash?
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> are you still trying to rid yourself of your ‘excess’ cash?
Yes. I hate holding it. I shouldn’t do any more goldbuggery. I don’t need to do bonds, ever, because: DB, State pensions.
I don’t really need to make my fortune, just rather hang on to the real value of a reasonable amount of what I have. So I was dripping into the market, though I’ve put a halt on that for the mo. OTOH the lower prices on some energy ITs due to the increasing cost of capital looks tempting.
Call me a cynical bastard but having Wagner in Belarus doesn’t sound like good news for Ukraine, and Vlad has been known to be a master of misdirection and stage management. That’s one hell of a whopping northern front to open up. Fat lady ain’t sung here yet at all IMO. Of course it could all be destabilising insurrection as our press is spinning it, but if not then it could be a tough winter. In which case those energy ITs may well perk up 😉 After all, they have only fallen by 10%, cash gets that bitten out of it every year these days. And I got to pay tax on the ‘interest’ that slightly offsets the real value bite to only a 6% malus. Bastards.
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Looks more and more like choppy waters ahead!
Many factors at play not least of which IMO are: inflation, fiscal drag, risk of market downturn/correction, and use it or lose it nature of annual ISA allowance(s).
Not ideal – but things could be a lot worse. Having said that, I am completely unsure as to what the new mid-term normal may actually look like?
For younger folks, near the start of their mortgage, retaining their jobs will IMO be key.
Have you considered purchasing some form of index linked annuity? Such an approach might fulfil several of your objectives (ie hating cash & retaining real value); albeit via capital surrender and taxable income. See e.g. https://monevator.com/weekend-reading-are-you-rich-enough/#comment-1670623
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> Have you considered purchasing some form of index linked annuity?
No. Not in the slightest. Because I can still live on my DB pension, albeit getting depreciated by inflation less 5% yoy. We were eating lobster on the North Cornish coast last week, so it’s not a desperately hard life on the pension 😉 I would expect to get a State Pension in < 10y unless they means test it, which is another annuity.
Some of the hazards ZX identified I've also felt, though not as analytically deconstructed as he did, I don't have his overview/chops. That makes me favour diversification away from the DB, which the ISA and GIA are. To some extent the goldbuggery is too, on a Harry Browne perspective. I am not looking to hit it out of the park any more, but an annuity is too much of the other way at the mo for my taste.
As time goes by perhaps when I get to SP age I may turn it over to an IFA as a hedge against decline and screwing up, and also because I learned the trade in the post GFC years when money was free to borrow, there may be a secular change in the investment space which could make me struggle with the assumptions built up over that time. If they say go for a PLA then so be it.
Still, even as an ‘old timer at the back’ I took some more of those infra ITs today. Sure, they’ll probably get cheaper later this year, but none of the alternatives look great, and building up the potential income gives me space to move. I haven’t drawn an income from the ISA yet, but I am a decade closer to the final approach than when I started, so that’s how I will fight falling living standards in the longer run. I am getting somewhat more conservative in terms of favouring income and building up the VWRL index part in roughly equal measure. In the GIA I favour income, because paying 20% tax on the lousy ‘interest’ on cash defraying some of the 10% inflation pissed me right off this year. I’d rather build up an asset that I get to pay 8.75% on dividend income and take a risk on some capital loss than eat the guaranteed loss on cash.
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Thanks for your thoughts.
Nice that you can live on your DB – I am not yet sure where we sit with this (as it is still very early days) and there are some other events still to fully play out; however I strongly suspect we may well have too much cash
Some Q’s/thoughts:
a) how much cash is enough; e.g. one years spending, plus keep any ILSC’s, plus earmarked amounts too, etc, etc;
b) spending cash to top up SP is a no-brainer;
c) do you feel you are on schedule to sufficiently reduce your cash prior to commencing your SP. I ask as you have been drawing your DB for a while now and once your SP starts you may face a cash rising scenario;
d) do you feel you can diversify sufficiently from DB et al to somehow side-step any market correction or are you really trying to pick winners
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> a) how much cash is enough; e.g. one years spending
Three year’s basic spending IMO. Not because of the previous reason to take out a stock market correction, but against unforeseen health issues, the NHS is functionally titsup for elective improvement of life things (joints, cataract ops, that sort of thing)
> do you feel you are on schedule to sufficiently reduce your cash prior to commencing your SP.
No. It would take me 10 years to boot the GIA into an ISA, and I will aim cash into that first until I get to the three years cap spend. Labour may decide 20k p.a. is over-generous, so the 10y is not guaranteed.
> do you feel you can diversify sufficiently from DB et al to somehow side-step any market correction
Haha, I am large, I contain multitudes. A 50% fall would piss me off, but that’s the value of having annuity income 😉 Great Depression, I would probably cock up. Nobody’s rich enough the hedge the war of all against all, if these guys aren’t I’m definitely not. The trick is to accept there are things you can’t fight and let the buggers go. You’ve got to go of something, I found it more rewarding to reflect on what living well looks like than on what I want to be able to shoot. That could be a mistake, only the paranoid survive because the buggers really are out to get you. But it’s a tough way to live.
> or are you really trying to pick winners
Yes, in the half outside the index stuff. No, in the half that is VWRL, VFEM, RICA, CGT, gold, ILSCs, premium bonds. It’s complicated in the HYP, that was to favour income in the fearful early days when I may have had to draw the DB pension early, and before Osborne changed SIPPs. I have built on it in anticipation the DB pension falls below my spending, but that’s arguably a misallocation of capital since the SP will probably come over the hill before the low-water mark is breached.
So although the passive and spine stiffening part is increasing the rest is a jumble of different aims. Mind you, seeing TLI’s ten, count ’em, ten ITs in his income section alone makes me wonder if my lousy four is insufficient, though I have individual companies in the HYP section which probably helps. His spread is very much more the sort of this an IFA would do. I always wondered if IFA portfolios have such a mahoosive number of instruments to make it look more like a really complex thing that only an IFA could do, but I am probably becoming more cynical in my old age.
So yeah. Walt’s right, I contradict myself, I contain multitudes. I am easy with that. Is it optimal – definitely not. Is optimality knowable? Probably not. Good enough is good enough. Many of the wins are outside the financial space – having paid my dues to the Moloch that is UK residential property, decent health so far touch wood, decent relationships. Possibly not fearing the hostage to fortune that is featherbedding children who seem to fly the nest later, if at all these days, simplifies post-work financial planning.
There’s a lot of legacy junk in a portfolio one has had for a decade and a bit.
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Thanks.
Very interesting view on ‘enough’ cash in presence of [currently] sufficient DB, and in due course SP, income. Would I be correct in assuming this is probably the largest planned emergency fund you have ever held?
ISA’s will hopefully stick around without too many tweaks. But, ….
Approximately 50/50 split of non-cash assets into:
a) passive/index/IT’s/Au and
b) other views (aka punts)
has a certain attraction.
Is it correct to say your model does not consider premium bonds or ILSC’s to be cash or cash like?
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> Would I be correct in assuming this is probably the largest planned emergency fund you have ever held?
I was always a three year emergency fund sort of guy (penultimate para) once I cleared work. Hindsight shows I gave up performance, but my risk profile was bad, particularly at the beginning, a long way from pension income. I don’t regret it.
I don’t need to cover a stock market suckout now, it just so happens the three years living expenses roughly matches being able to pay for some of those elective things the NHS doesn’t functionally do any more, but add to quality of life, should one be unfortunate enough to run into them. So it was easy to leave it be, and just retarget the weapon to a different hazard.
I have a lot more than that as cash at the mo, and plan to invest it over time.
> Is it correct to say your model does not consider premium bonds or ILSC’s to be cash or cash like?
I would consider PBZ as cash, and indeed the ILSCs as backstop emergency fund. So far I have been graced with fortune, since leaving work the emergency never came. I also have NS&I Direct saver. I have some love for Raisin, where the FSCS applies per sub-account, and you don’t have to keep on signing up with banks and go through KYC cobblers. Sort of like an GIA for bank accounts. And they give you a consolidated tax certificate rather than one per account.
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> I have a lot more than that as cash at the mo, and plan to invest it over time.
That’s the challenge I foresee in a nutshell. Also, I am concerned that it is not achievable in a fairly timely manner if I restrict myself to tax efficient vehicles.
Have you made any substantial progress since you started your DB, or has it been a case of something like one step forward, one step backward?
With the benefit of hindsight I sat on most of my [budgeted for but unspent] cash through the Gap (between jumping ship and commencing my DB) and that now looks to have been possibly a bit daft. Having said that, investing with no regular income was scary – or maybe that was just a narrative that I grew too fond of. Or perhaps focusing on running down my DC/SIPP into ISAs across the Gap was distracting. I guess I have now missed out forever on what GIA’s really had to offer, but at least I am not stuck with an over-sized GIA today.
Clearly this is far from the worst problem to have, but my desire to not pay tax again at HR has probably got in the way!
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> Also, I am concerned that it is not achievable in a fairly timely manner if I restrict myself to tax efficient vehicles.
Yup. I had to give up that fight. That partly inspired be no King Tut 😉 And why I have a GIA nowadays.
> Have you made any substantial progress since you started your DB, or has it been a case of something like one step forward, one step backward?
Difficult to say. If you look at my networth since retiring I wouldn’t say I am losing the fight, though it’s not inflation-adjusted so it’s a lot less IRL – the currency depreciated in value by 30% over this period. I use R to extract prices from Yahoo to feed into Quicken 2004 but I do that sporadically, so month on month detail is inaccurate, though it catches up when refreshed.
Disclosure: I did take out the windfall from around the shorting Covid time, because it’s embarrassing in the relative size of the uplift, I don’t want to be a bad example, I came to the conclusion I didn’t really want to be doing this any more. I accept Monevator’s formal bollocking for taking that view, but it worked OK for me. Eliminating the specific uplift, the increased base capital probably improves my apparent results. This is investable assets. I do not count housing as networth and simply don’t allocate it in Quicken. I have no capital representation of the DB pension other than as monthly income.
Anyway, you see first a gradual slow surrender out of work, offset by the lifting stock market out of the GFC to about 2015, and some income from sporadic working ,though I never really earned a significant proportion of what I did at The Firm. The fight is gradually lost in nominal terms until 2019 – the obvious suckout is bridging two houses with a loan.
Then there is the initial uplift from the PCLS, it was nowhere near the 25% allowable, which perhaps was a mistake given the overtopping inflation rate starting early, but there you go. I did get a similar size windfall later on from a relative passing which is a step in Q3 2020. The pension takes the load of my spending off the investment capital, which
I did ask the question is the chance simply due to the DB pension, but the rate of change (subtracting the PCLS and windfall) is significantly higher than the added gross value of the pension, so I am still getting ahead.
But I expect to give some of that uplift back over the next few years, because that’s what investing is like, and I suspect the next decade will be payback time for 10 years of free money. It’s a different exposition of the potential negative equity problem, and if inflation remains high, without the potential NE offsetting win of the value of OPM capital being depreciated. I know, tiny violins and cry me a river, eh?
> I sat on most of my [budgeted for but unspent] cash through the Gap (between jumping ship and commencing my DB) and that now looks to have been possibly a bit daft
Probably OK in the past, though an opportunity cost, but seriously dangerous now 😦
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The pension takes the load of my spending off the investment capital, which
is free to get ahead.
“is the change”
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Looks like you have stormed ahead since drawing your DB; especially seeing as the graph has been moderated to remove your shorting windfall. Nice!
For completeness I would have been tempted to not adjust for the windfall.
OOI, does your shorting good luck not in some way help square away your negative NE experience?
A few thoughts/Q’s about the graph:
a) it charts your networth (NW) since you pulled the plug i.e. throughout your Gap and since you started your DB. Do you have your NW data prior to pulling the plug (from at least when you began your AVC’s, etc) as this would allow calculation of gradients for three distinct phases and that analysis might be instructive. FWIW, I would suspect the first phase (AVC’s, etc) may have the steepest gradient.
b) is the NW value plotted before or after tax. I think this may be of more significance since you started your DB and have most effect on your GIA valuation although any residual SIPP could no longer be viewed as effectively ‘tax free’ as previously discussed
c) did you get any redundancy payment(s) when you jumped ship
d) the effect of inflation can be post-processed using ONS published monthly index data, and this may also be informative
> Probably OK in the past, though an opportunity cost, but seriously dangerous now 😦
Yup.
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> OOI, does your shorting good luck not in some way help square away your negative NE experience?
Queensbury rules, even in the extended Ghost of Negative Equity rant I acknowledged that
The housing market pole-axed me at the start of my working life, when a fellow is at his weakest, no savings to bridge the gap, and the start of any leveraged journey is the point of maximum risk. That is why I hate the asset class with such a vengeance, because it kicked me when I was down. It’s why whatever Monevator says I do not include housing in networth, I accept the position is irrational but I just don’t want to know, because value in a house can disappear like summer rain.
The stock market has been far kinder to me than than housing, even omitting the shorting, despite its many pathologies. OTOH much may be luck, after all I invested straight out of the gate of the low-water mark of the GFC, at the peak earning power of my life and having gotten most of the mortgage monkey off my back, and money has been almost free for ten years. There is correlation inasmuch as the reason I started from the GFC was my job went bad, as a result of the financial pressures on The Firm.
> FWIW, I would suspect the first phase (AVC’s, etc) may have the steepest gradient.
It does seem to, but I don’t really have faith in the data quality, since I initially tracked equities with a spreadsheet, before I discovered how to extract price data and inject it into Quicken semi-automatically.
So there’s much noise in that early period, the chart is zero-referenced, BTW. What I do see in Quicken is pretty much a grind out of a zero Hello World position.
That wasn’t strictly true, as I had been using AVCs before 2009 to clip paying HRT once I jumped to that, I didn’t track that until I started to think I would need it. Plus I had focused on flattening out my offset mortgage to all but £1k because fearful people do stupid things like that because they can’t qualify risk properly. That was probably not the biggest fire to fight then, ain’t hindsight a wonderful thing. So it wasn’t that I was not saving, but I was “saving” in reducing the negative balance, before lifting the positive, to get rid of the hateful residential property exposure, because the ghost of negative equity stalked my thinking ever after…
> did you get any redundancy payment(s) when you jumped ship
I did get redundancy pay which I managed to avoid paying tax on by dumping the excess over 30k into AVCs. I did well out of the last Sharesave, because the option price was at a low-water-mark of the SP hit hard by the GFC, and my runout of three years matched the period of the Sharesave contract.
> is the NW value plotted before or after tax.
Quicken’s main aim is to track balances, so there will be an accumulation before tax and an expense lowering the NW as I pay tax. The DB pension is PAYE so the tax is prepaid (so tax on that never appears in Quicken), though in practice I pay a little bit more tax due to interest and eventually dividend income in the GIA. I don’t have a way to know the tax on the GIA because it’s only incurred when you do something, and so far I have managed to stay inside the CGT limit and roll forward losses of about 15k in total which I will use at a time of my choosing, perhaps when CGT allowance becomes the vestigial £3k. I ought to knock of 20% (less 6.25% ISTR for the PCLS) off the SIPP valuation I suppose. The SIPP is only 13k now.
> the effect of inflation can be post-processed using ONS published monthly index data, and this may also be informative
this is Quicken 2004, it doesn’t have that sort of smarts 😉 I could probably do it in R, but here I am after seeing the general shape of the road curving way in the rear-view mirror. I need to keep a watch because everybody tells me non-passive investors statistically get killed with a vengeance. I need to keep an eye out against becoming one of the sheeple, particularly as the investment environment seems to be changing. For example, a long, slow, bear market like the runout after the dotcom bust would be dangerous to me, because while I can make myself buy into bear markets as they continue to fall, doing that for a year is OK, five, not so much, I’m not 20 any more 😉
I am fond of Quicken, because it was developed before Agile Development infected IT (move fast and break things, quick-release MVP, customers will do unpaid testing for you) made it such that no piece of software works properly now but they may fix it sometime. While Quicken has quirks, it nearly all works properly.
I do wonder if some of the apparent lift at the end is not investment performance but the fact that inflation is just making it look bigger. Most of the BofE cited 30% inflation malus 2012-2023 happened in the last two years
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> It does seem to, but I don’t really have faith in the data quality
I only suggested this because I drew up such a graph recently as one possible way to visualise what may happen now I have started my DB. I guessed the gradient for my new [post DB] phase would be somewhere between that of the two preceding phases (AVC’s etc, & the Gap). I also have data from before my ‘AVC’s, etc’ phase and I found the overall graph to be quite informative.
> Plus I had focused on flattening out my offset mortgage to all but ….
Ditto; I just don’t think this was ever a silly thing to do.
>I did get redundancy pay
Which I assume helped you fund your Gap phase?
> I don’t have a way to know the tax on the GIA because it’s only incurred when you do something
As is the case with your SIPP too. I would be tempted to apply a 10% to 20% reduction based on how close you are to the HR tax threshold especially if inflation stays high and stealth tax remains in vogue.
> Most of the BofE cited 30% inflation malus 2012-2023 happened in the last two years
Agree entirely, and in my case the effect on NW data is very clear when graphed. To paraphrase @TI’s memorable phrase it looks a bit like the impact of an uninvited drunken guest at a party.
Does quicken allow you to export CSV data, which you could then pull into excel along with the ONS inflation data?
> particularly as the investment environment seems to be changing
And that is the biggest worry/residual fear. I know pretty much what opportunity cost I have forsaken over the last 6.5 years holding excess cash, but just how likely is it that the markets will continue to broadly behave similarly going forwards?
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> I only suggested this because I drew up such a graph recently as one possible way to visualise what may happen now I have started my DB.
Again, sans the stuff that happened around the shorting. I am a bad enough example as it is – started late, I had virtually zero pension savings from my 20s other than some SP NI accrual and some SERPS which I think you informed me was burned to the ground in the New Pension reforms. I’m not having some young pup’s losses on my conscience.
But the early data quality is marginal, it shows the tail end of mortgage debt but possibly not the AVCs, which I started before the GFC to avoid HRT. So it’s there FWIW.
> Ditto; I just don’t think this [discharging mortgage] was ever a silly thing to do.
I believe you had a more controlled exit from the workplace than I had. I was ever fearful of getting iced and seriously depressed, because once the mainspring fails under load it is never the same again. The GFC and watching the market lift out of it helped, but I was always allocating to divided loyalties, building the emergency fund in a Cash ISA for God’s sake, the other half going to the stock market ISA, although I was also putting more money in the AVCs which were FTSE100:Global 50:50. But I believed I would have to draw the DB pension early as the low water mark was breached, and use that to buy an annuity to top up the actuarial reduction. I owe George Osborne a beer for his pension freedoms, which I think I used reasonably sensibly.
I failed to spot that carrying the mortgage to term would have enabled me to do more of this in the early days. However, I obviously didn’t know we were going to have a decade of free money 😉
> Which I assume helped you fund your Gap phase?
Yes, you can see the uplift of the 30k part and the sharesave in a heft around 2012. I don’t think I tracked the AVCs which took the balance of the redundancy over 30k but they appeared in Quicken over time as they were gradually turned into income under the personal allowance which went into the ISA.
> Does quicken allow you to export CSV data
It will export the entire database and I’d have to build a version of quicken in R to munge that, because absolutely everything depends on what went before. It will also export the graph 100 data points at a time. But I’m targeting my energy on defending the future, I am OK with the past. I need to optimise the tax position of that GIA, get some more of the cash into it and the ISA, and keep some eye to the changing Overton window.
> just how likely is it that the markets will continue to broadly behave similarly going forwards?
Depends on your time horizon I guess, and you fears for the future. One can take heart from the long run track of the markets. It’s not impossible to imagine serious advances – AI if you believe in it, though I am disturbed by what many people call intelligence, it would seem that standards are falling. But it will make a lot of things cheaper. Changes in energy generation also seem to be on a roll.
I do feel a secular investment environment change in the air, it’s some of the reason for the increase in goldbuggery and passive elements for me. Harry Browne would probably have me holding a lot of cash, but I can’t do it. The markets have been kind to me, I don’t need to hit it out of the park again. I looked at some of the thinking on Are You Rich Enough and thought bloody hell, I don’t want to be like that. At the cost of being somewhat woo, when you gaze into the abyss, the abyss gazes into you. Money has a flow and an energy all of its own, and when you are hoarding to hedge those sort of edge cases it changes you, and not for the better. That’s why I gift some of out of the ordinary windfalls, there’s a Gollum in all of us wanting to get out and it’s not a pretty look.
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Continuing the thread from this comment – it’s hard to stay with a thread on WP 😉
> FWIW, until nine months ago I was always ahead of inflation on my passage through my Gap; then that blooxx drunk turned up!
You did very well, I was clearly losing the fight towards the end. It could be argued that the house purchase moving from semi to detached has sucked out some networth and put it into the Schrodinger’s box that is the marked to market value of a house. I prefer just to consider the cat is dead and ignore the asset class, other than for its usufruct which is non-financial. How long was your Gap – mine was seven years, albeit part-softened by running down the SIPP post 55.
> I suspect we may well end up there – but not because of Harry Browne, but for other reasons: only a subset of which I can control and the balance I have limited influence over (some battles are just not worth fighting!)
Harmony is good 😉 Coffee for the things you can control, red wine for the others… Scott Peck said in In Search of Stones that getting older is a process of letting go. The chimera of control is one of them. I have come to realise I have less control of things than my younger self thought he had – though chastening to acknowledge the misplaced beliefs there’s a certain peace to the realisation 😉
> But having said that I quietly suspect that you may well be asking yourself in not too many years just what are you going to do with all your dosh?
The grizzled IFA that inspired the King Tut post surprised me, though you see the same thinking in the are you rich enough thread. I guess it’s the analogue of ERE’s One More Year for comfort
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> How long was your Gap?
I planned for a Gap of some ten years using a Floor and Upside approach. It turned out that my planning was rather conservative. I chose to “lock in” about 85% of the total estimated flooring required at the outset. In the end (for a variety of reasons, some of which I explained earlier see: https://simplelivingsomerset.wordpress.com/2023/03/21/dont-let-the-tax-tail-wag-the-investment-dog-well-ok-maybe-this-once/#comment-40630) I drew my DB a couple of months ago, about six and a half years after jumping ship.
Drawing the DB earlier than originally planned partly explains our excess cash; the rest is largely down to me initially somewhat over-estimating what enough is! My baseline planning foresaw the nominal Pot decreasing across the Gap, whereas in reality it grew. Having said that, the Pot in reals did decrease by a few percent across the six and a half year Gap.
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> the rest is largely down to me initially somewhat over-estimating what enough is!
Seems a common theme between our experiences. I do more UK travel and less foreign travel than I anticipated. I grew to really hate the experience of flying, l’enfer c’est les autres etc.
There isn’t much commentary from UK FI/RE sorts who have passed/are going through the Gap. I’m not sure whether it is because they are all now putting their feet up on deckchairs on a cruise liner sipping margaritas, or there is sample bias from those who ran short not reporting because they are back at work.
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> Seems a common theme [over-estimating what enough is] between our experiences.
Yes, and according to the literature it is far from unusual. IMO it would take a brave man to bake this in from the outset as it is probably not unreasonable to consider the day you pull the plug as the riskiest day of the journey.
> There isn’t much commentary from UK FI/RE sorts who have passed/are going through the Gap.
Totally agree. It may be because the destination DB pension is relatively rare these days. Having said that most, if not all folks, will be entitled to some form of SP in due course.
In any case, I have enjoyed all our chats on the subject over the last few years and have definitely learned a lot from them. Hopefully, those chats have not been too boring for your other readers?
My monthly pension pay cheque landed in my bank account this morning and it just feels good to have some regular income coming in again. An interesting feature of my DB is that it is paid in advance, which I guess is fair after all those years of having a salary paid in arrears.
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> I did get redundancy pay which I managed to avoid paying tax on by dumping the excess over 30k into AVCs.
My workplace got so toxic due to a corporate restucture that I just FIRE’d without a redundancy payment. I was so tired and weary to the bones with it all and I was out of the required grit to raise the necessary formal grievances to get it.
I just looked at my porfolio and thought that’s big enough, so just jumped. I would like to say I never looked back, but I have occassions when I think I should have stayed and fought. Although when it gets that bad, it really is time to get the hell out.
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Al Cam: >I drew my DB a couple of months ago, about six and a half years after jumping ship.
Very interesting to read. I am about 6.5 years from my DB scheme’s normal retirement date. I have thought about taking it earlier. The calculations on actuarial reductions and in payment up lifts are fiendish though.
I seem to have enough to get me through the gap to the NRD, with some room to spare, having somewhat overestimated what I will need and also having had a good sequence of returns (so far).
Trying to stand back and get a wider picture though means that I feel some what like if I take it earlier that will leave more in my SIPP, one option for this excess could be to buy an annuity. So, it feels a little like I would be gaining something on the slides to what I loose on the roundabouts if I did that.
I do have a good matheatical brain, but feel any calculation would be wrong (or perfectly imperfect) as there are so many imponderables. They can give a bit of a feel, but not much accuracy as I don’t think this can be reduced to simple mathematics.
Did you withdraw early on the basis of gut feel informed by your calculations? Or how did you arrive at your decsision to withdraw you DB pension early? I would be interested to hear a little more. It might help my deliberations – thanks.
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@Jam > Although when it gets that bad, it really is time to get the hell out.
Good for you. I agree. The runout was three years of shit and three years in decent health that I won’t live again. I was lucky enough to get away with it, and it got better when I swing a shift in a specialism out of Toxic Lead manager.
But I hadn’t really prepared right, and so that was as long as it had to take, else I would be stacking boxes for much of the last few years.
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I just noticed that if you add together the duration of your run out and your Gap this comes to about ten years. In my case this sum also comes to around ten years; albeit I had a slightly shorter Gap. Probably just a coincidence, but who knows?
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> My monthly pension pay cheque landed in my bank account this morning and it just feels good to have some regular income coming in again.
I never really learned to trust investment income so I felt this too. Thirty years means I was too long an employee, I guess. Conversely, it raised my risk tolerance, actually feeling the floor. I do take ZXSpectrum48k’s exhortations to note that if general wage rises are faster than inflation, even an inflation-linked pension will leave you feeling poorer over decades. And of course, the cap on mine means its entire future lifetime real value is being eroded as we speak.
Having said that, I am not sure that wage rises will be faster than inflation in the near future – I don’t think they have been for the last ten years. Of course, that may lead to different pathologies. We were much poorer decades ago and it would take a long time to fall to that, but secular decline is a much worse collective experience than the generally increasing standards of living I have lived through.
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> Conversely, it raised my risk tolerance, actually feeling the floor.
IMO this is absolutely 100% a key benefit of taking on the “Gap”.
Knowing what you can get by on for about a decade (see above) and not just one year – which is not really such a big ask, as I ‘discovered’ when I had a year plus out between jobs earlier in my career. A real lived experience of forewarned is forearmed, etc, etc.
Reading between the lines, I have formed an impression that your spending [ceteris paribus – which of course they may well not be] has crept up (in real terms) since you drew your DB – would that be about fair?
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> I have formed an impression that your spending has crept up (in real terms) since you drew your DB – would that be about fair?
Can’t really argue with that, because:
I have a definitive statement of what overspending looks like, the DB pension as a baseline
the lobster won’t pay for itself
you can’t take it with you
And I have seen a few people go, which is not outside the normal way of things but is a memento mori
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> I have a definitive statement of what overspending looks like …..
Makes sense, and would seem rather rude to not spend it!
Having said that, it is apparently not unknown for retirees to save from their pensions and not just at advanced years either.
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> it is apparently not unknown for retirees to save from their pensions and not just at advanced years either.
I think where people have kids and don’t feel these kids have the competence/ life skills to make it as they did, that may be a rational response. Although the hoarding mentality observed by the grizzled IFA of the King Tut comment, perhaps not so much. They can’t take it with them either 😉
If the DB pension were my only assets I might have some reservations pushing it to the wire too. After all, I did learn in my decades of being employed that you shouldn’t necessarily spend all of your income, keep some in hand. However, the reduced risk profile of DB income compared with employment income makes it easier. The risk is more of the erosion of value over the years, rather than the sudden hit of losing a job.
ZXSpectrum48k makes the case that historically wages have appreciated ahead of inflation, but I am a fair bit older than him, so I will probably see less of that differential. And I am of the view that the UK is in secular decline, I am not sure that wages have kept up with inflation over the last ten years. It’s not too bad if you apply a datum of 2012 to figure 3 here but it’s not really advantage labour.
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My own view for our own circumstances (two of us with no kids) is given below in my comment to Jam. Essentially, if you do not spend your pension income you run a real risk of owning an ever growing Pot – even in the presence of higher inflation too. And beyond a certain level (insurance, if you like) that just seems rather silly to me. Apparently, there are no pockets in shrouds!
Having said that, we may need to up our spending a bit to get there – hence my previous question to you. However, this will only become clear once some on-going developments play out.
I understand but disagree with ZX’s view. Principally because things do look different once you have pulled the plug and what data there is seems to support a [real] declining spend arc as we age further. But, ZX could be correct. In which case, the SP triple lock (assuming it survives) would assist a bit.
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OOI, this recent comment from ZX (see https://monevator.com/weekend-reading-spelling-be/#comment-1681538) may IMO explain some of where he is coming from re future spending. Looks like a text book example of the folly of trying to describe any particular case directly from the general sample statistics, or possibly even vice versa.
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re ZX – yeah, he is a clear outlier. In some ways people with kids have a good option to a die with zero fail, as the default option goes to a good cause in their view. And props to him in forestalling King Tut. But he is in a different league and at a different stage of life.
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Like @Al Cam, I too bought my first house in 1987 with a 95% mortgage (yikes!) after graduating from redbrick in 1986. It most definitely leaves it’s mark!
Only a very quick reverse ferret, due to a job move down south at the end of 1987, where I couldn’t afford to buy (and ened up renting again) saved me from massive negative equity, but I feel your pain and know how bad it was.
I would make a terrible academic, not because I don’t read or find the subject of finance interesting, but because I can never remember where I read things so cannot point to sources.
Anyway, I do remember reading that over the course of a civilisation, interest rates start out very high. People want the money they lend back in a year or two, since no one has much faith in the future.
As civilisations progress, interest rates fall, due to improved laws, armies to keep the barbarians from the gates, etc. They never really go much below 4% if memory serves and that is in any civilisation at any time. As civilisations decline, mad emporors, invading hordes, etc. the rates go back up again.
So smile shaped with a minimum of 4%. I recall Venetian prestiti got as low as 4% in their hayday.
I think it has been my own experience combined with a reading of some history that has always made me highly suspicious of the easy money and ultra low interest rate environment since the GFC. I always thought the bubbles produced would eventually have to go pop one day.
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Yup, 95% mortgages were popular back then too!
That [lack of] affordability allowed you to dodge the NE bullet when you moved south is an interesting take. I’ll bet it didn’t initially feel like a good thing at the time of your move though?
For info, there was also some good luck in my passage through the nineties NE debacle.
OOI, when, and why, did you jump back in again – presuming that you did?
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No it felt pretty awful to be honest. House prices down here were twice the price as the one I sold. It was only the total impossibility of being able to afford even a studio flat that saved me.
The house up north went up 12% in the brief time I owned it, which was mad, but leverage worked in my favour, by pure dumb luck.
The highly abridged version is that I ended up renting a room in a very large 6 bedroomed house. I had my own room and shower room, but shared kitchen. I was saving like crazy and high interest helped the saving, but kept looking at houses. There were some price falls, but the market seemed stuck with fewer and fewer transactions. The live-in landlord benefitted from the introduction of community charge/poll tax, which saw the old rates abolished so I ended up paying as much as he did although I owned nothing.
I jumped back in in 1991, after interest rates had just peaked. The house I bought had gone down roughly 15% from the price the previous owners paid a few years earlier. That didn’t stop it going down some 15% more based on neighbouring sales. Fortunately, I managed to keep my job despite a restucturing at work, which I put down to being cheap and recently graduated. Anyway, I muddled though and still live in the same house now!
Some 10 years after buying it, I remember my late mum saying she thought I had bitten off a massive amount and was worried for me at the time.
Fun time that leave a deep impression!
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Thanks for the further details.
Strange how often things appear rather different when seen in the rear view mirror!
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@Jam ‘My workplace got so toxic due to a corporate restucture that I just FIRE’d without a redundancy payment.’
I can relate to that for sure, but there’s something to be said for leaving well. It can be much more harmful drawing it out, even if one is compensated at the end. A few years in and its all a distant memory.
I am taking my DB pension this year, but it was an easy decision to delay till after reaching NRD due to the better inflation increases as a result of the way revaluation works, smoothing out increases over the years. Like others, my DB pension once in payment is subject to capped indexation.
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@JP
> but it was an easy decision to delay till after reaching NRD due ….
I think I can see what you are getting at.
Having said that, and IIRC, Ermines DB pension had zero uplifts for late payment!
Thus, in the general case, it is usually worth doing a deep dive into your specific DB scheme’s terms & conditions. Alternatively, you may wish to discuss such matters with the scheme administrators. However, it is not unknown that scheme administrators do not fully understand the scheme(s) they administer. DB schemes are notoriously complex and whilst they all appear superficially similar, the devil is absolutely in the subtle details of each individual scheme.
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Thanks for the extended graph – the general shape/ ratio of gradients of your “AVC’s, etc” and “Gap” phases are not too dissimilar to mine. I will try to remember and check in again in three or so years to advise you how my “post DB” phase went. I suspect I would be more than content if it follows a similar path to yours in nominals – irrespective of what inflation does!
> I am a bad enough example as it is …
Maybe, but it has worked out alright, has it not
> because once the mainspring fails under load it is never the same again.
Blimey, Young’s modulus, that brings back some memories …
> It will export the entire database and I’d have to build a version of quicken in R to munge that, … But I’m targeting my energy on defending the future, I am OK with the past. I need to optimise the tax position of that GIA, get some more of the cash into it and the ISA, and keep some eye to the changing Overton window.
Seems perfectly sensible – I had just thought that it might be fairly easy to generate an inflation adjusted historical view. FWIW, until nine months ago I was always ahead of inflation on my passage through my Gap; then that blooxx drunk turned up!
> Harry Browne would probably have me holding a lot of cash, but I can’t do it
I suspect we may well end up there – but not because of Harry Browne, but for other reasons: only a subset of which I can control and the balance I have limited influence over (some battles are just not worth fighting!)
> I looked at some of the thinking on Are You Rich Enough and thought bloody hell, I don’t want to be like that.
Indeed!
> That’s why I gift some of out of the ordinary windfalls, …
A good answer to the following question I posed to you a few years back (see https://simplelivingsomerset.wordpress.com/2020/08/20/winter-is-coming/)
“But having said that I quietly suspect that you may well be asking yourself in not too many years just what are you going to do with all your dosh?”
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apologies, I inadvertently replied to the wrong comment!!
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@Al Cam ‘Thus, in the general case, it is usually worth doing a deep dive into your specific DB scheme’
Yes, a good point. I worked out that if I delayed post NRD the uplift was about the same as Id earn in interest if I placed the funds on deposit. May be I am missing something here though? However, I’m also aware that if anything were to happen to me my OH would receive significantly less survivor’s pension if I had not yet taken mine and was still in deferral. This was an important factor in my decision making too. There also comes a point when one just wants to enjoy the security that comes from regular income coming in, without always weighing up the financials to the nth degree!
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@JP:
Yes, survivor details often vary between DB schemes and can contain wrinkles (no pun intended) too. My DB scheme seemed punitive (beyond a certain age) to the spouse of a deceased deferred member vs a retired member. I had always assumed my scheme was an outlier in this respect – but it seems not.
> There also comes a point when one just wants to enjoy the security …
Yup, with you there.
The comments about “doing a bit of a deep dive into DB inflation protection” at the following link may be of some use to you:
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@JP> I can relate to that for sure, but there’s something to be said for leaving well. It can be much more harmful drawing it out, even if one is compensated at the end. A few years in and its all a distant memory.
Leaving well is important. I always thought about behaving in a dignified manner. I just made my very polite excuses, saying I was taking a sabbatical from work and left.
It does still irk me though sometimes, how bad it got. It would nice to have the counterfactual, to confirm I did the right thing, but when I think about what that would entail I think I made the right call even if it sometimes doesn’t feel like it.
My last day, with my old team and other teams, was a good one. Bought in the usual food – hot sausage rolls, cakes and bananas for anyone trying to be healthy; had the presentation from my old manager and we all headed down the pub! That was a good day.
Monday morning when the alarm went off and I just rolled over in bed with a smile, hit snooze, thinking I don’t have to go back, was good too.
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I recall in the early 90s being horrified when new neighbours from London moved in and informed us they had £15000 of negative equity (around £30,000 now) when they sold up. While the property market suffered up north too, it wasnt nearly as bad as in London. Properties stuck on the market a long time, and people were frightened to buy first. It took a few years (may be 3 or more) for some confidence to be restored, but it was a slow process. The younger generation can’t quite take in that this is possible!
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Yes. I got pushed into buying in the late eighties by my well meaning but financially unsophisticated parents. Quite a lesson that was.
I really dislike owning property, we would have moved several times since I bought my current house 30 years ago if it wasn’t such an ordeal. I won’t though because the UK rental market is so dysfunctional.
We could do with a greater push towards institutional landlords rather than individuals. They would be somewhat easier to regulate and you wouldn’t have the problem of getting kicked out because the landlord’s son has just returned from his backpacking adventure (that you funded).
Ultimately though I think Singapore has the best idea, the state should own most property.
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We are all paying for electing govts that made the basic need of accommodation a commodity, for at least the last 30 years. Making the dystopian experience of renting so vile that people will stretch risk they don’t understand in buying, guarantees that they are shackled by excessive debt for life, tying them down in employment, investment opportunities & personal development. Only the <1% benefit from this, protected by owning their nice homes outright, like the millionaires in govt liesplaining to us why they have to wreck our lives to save the economy to save our way of life.
Most people, including those on the previously untouched rungs of the middle classes on the housing ladder, will now be impaled on at least one spike of the pitchfork they are facing. Inflation is going nowhere, because none of the brexit, lockdown supply chain disruption, or cheap Russian gas self-sanctions have changed, while the UK earns ever less to afford it's current national bills.
Jobs are going to disappear at a significant rate once all the asset bubbles deflate, wiping out years of accumulated zombie companies, before even counting personal debt levels as individuals.
House prices will correct when people can't pay either the mortgages or rent, so crowd into extended family homes as happened throughout most of our history. Then when the govt use more newly printed money to bail out the rich by maintaining house prices, the currency will just tank instead giving us more inflation in this dead-end of the road, whack-a-mole game of inflation.
With young buyers unable to buy, new immigrants discouraged by lack of jobs and the other aspects of hostile environment policy and selling second-rate shoe-boxes or vertical rabbit hutch towers as accommodation units to global tax avoiders as an investment not so easy, given increasing bad publicity, this ponzi scheme looks out of road. Reality eventually bites, ask Lizzie Holmes innit.
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The normal process with central bank tightening cycles is that the keep hiking until they break something. People will moan when they break that something but, frankly, that is often a feature, not a bug. Embedded inflation is the enemy. A recession is a price worth paying.
I’d like to say that I find it unbelievable that the govt is already intervening to save mortgage holders. Allowing them to take mortgage holidays, move to IO, and kick the can. Except I’m not at all surprised. This UK has a chronic illness (or is that an addiction?) called property. Lower house prices would be a good thing. Yes, a crash might kill the patient given it’s dependence on property and rentier capitalism. Nonetheless, the govt doesn’t want to even see the smallest withdrawal symptom.
Instead we subsidize the rich mortage holder. Reduce the impact of BoE tightening, needing higher rates for longer. Hurting the broader population. Meanwhile, young renters can go f**k themselves. No help for them. They are just plebs anyway.
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Agree, the worsening plight of renters has been ignored for too long, but I can only assume neither of the main parties care to woo them as there are not enough of them in marginal seats. No doubt there will be an election within the next 12 months, before lenders start taking action at the end of this grace period and things start to look very bad.
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The first baby boomers were born in 1946. They are now 77 and will be falling off their perches at an accelerating rate. Their assets will be passed to their children – many in their fifties – or their children – presumably mostly in their twenties. So it wouldn’t surprise me if many people of house-buying age get large windfalls in the next few years. And yet I don’t think I’ve seen a single newspaper article make this point. But I’d guess that it might have some effect on house prices, house-buying habits, and whatnot.
Meantime the government, presumably under the sway of the sort of drivelly economics espoused by the Guardian, is going to make life tougher for would-be renters by arranging that many rental houses will be sold into the owner-occupied sector. I suppose that will mop up some of the inheritances. It’s a bit bloody hard on the aforesaid would-be tenants, though.
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> is going to make life tougher for would-be renters by arranging that many rental houses will be sold into the owner-occupied sector.
These are the houses that have been front-run in front of would be first-time housebuyers since the cancerous growth of BTL mortgages. Once upon a time a landlord was lord of their land, ie they owned it. IMO the sooner debt-fuelled BTL is destroyed the better, though I accept there will be a an intermediate-term hit on the rental market until some of those professional build-to-rent operations pick up the slack, using equity, not debt. BTL debt is why renters are exposed to interest rates so quickly, this was not a feature of the early 1990s because BTL mortgages had only just been launched.
I don’t hate BTL because I occasionally read the Guardian and am probably left-of FI/RE centre economically. I hate BTLers because I was a renter in my twenties and the rotten-ness of the experience is still with me several decades on, and I know people who are shat on by BTLers now. That’s not to say that people didn’t moan about council housing and councils perpetrated some sink estates, but at my school it was not uncommon for white collar parents to live in council houses that didn’t have the issues of BTL scumlord, nor of the sort of nasty rabbit-hutch housebuilding perpetrated in the 1980s onwards. I have never bought a new house (after that first screw-up which was also not new) not because I couldn’t afford it but because the proposition looked so shitty. How the hell the new-build-only Help to Buy was ever allowed beats me, I would classify that as government-sponsored mis-selling. You nearly always get better value secondhand, and it’s not like houses decay like fresh fish.
So yeah. Debt-fuelled BTL – this idea must die. On its own it ain’t gonna stop landlords being evil, Peter Rachman owned his hovels, but it’ll get the buggers out of the mortgage market.
Dunno about the population pyramid and all that. I can already see the tapering off for my own age, and I think the spread in age at death will smear the peak out muchly. Sure, a fair few better off kids will inherit, hopefully no benighted government will push through the rule that care costs aren’t capped at the taxpayer’s expense to preserve these pampered blighters’ inheritance.
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I suspect that inheritances from boomers could be so large in many (100,000 per annum) cases that the recipients will have no financial worries once they get their hands on the money.
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I’m surprised that no-one seems to be talking of raising VAT next rather than Interest Rates.
For a large chunk of people interest rates changes don’t affect them at all or much or not for a while.
We fixed our rate (for 5 years) last year for a house purchase in Jan. These changes to the interest rate aren’t going to touch us in the slightest. We have plenty of older people around us who’ve paid off their mortgage, they won’t be affected either.
If the govt wants to reduce our consumption, VAT seems a far more effective choice. Won’t affect the poor as badly as a far large proportion of their spending isn’t impacted by VAT (food, energy is less affected). VAT changes would also give the govt some more income to redistribute (Laffer curve excepted.)
Current interest rates rises have normalised the values which seems ok to me but it seems that raising further just won’t achieve the desired effect.
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> Won’t affect the poor as badly as a far large proportion of their spending isn’t impacted by VAT
While there are some that will argue tax rises are the right solution Tax Research says VAT is quite regressive, because poor people spend a much higher proportion of their income on the essentials of living, not all of which are VAT-exempt. After all, just how many cans of Coke and burgers can Warren Buffett eat, VAT of 100% isn’t going to make him break a sweat, where it could be a serious hit to a single mum living in a trailer.
> These changes to the interest rate aren’t going to touch us in the slightest.
I wish you well, but it’s not the interest rates that are the hazard, hence the title of this piece. It also depends where you are in the mortgage journey, someone a third of the way in is better off than someone at the start. With perhaps the exception of myself at that stage 😉
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We are old enough to die in this house 🙂
But that’s the point, the single mum living in a trailer isn’t going to be impacted by increasing vat, cause a bag of oven chips and nuggets isn’t going to change in price. A nice new TV and garden plants for me will do. Seems fairer.
I can’t imagine that a vat increase to 25 or 30% will impact a single mum as much as it would me (or rather, a typical consumer type person,ie not me:))
Fundamentally, I think that the people of the UK will just take any increase in income and waste it bidding up the price of houses. I now think we are just better off confiscating it and improving lives elsewhere. More money into education to start with, more to health perhaps, fix some potholes!!
Anything but riding house prices
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Thanks for this – I suspect you’re right that even if history isn’t repeating itself exactly, it certainly rhymes.
As people who bought our first house in 2020, I think we’re squarely in the crosshairs this time round. I’m very grateful that we fixed for 5 years and didn’t borrow anywhere near as much as we could have done (moved out of London to do that), but even so the next decade could be painful.
Personally I’d be supportive of a land value tax which would 1) suck a lot of money out of the economy and so bring down spending/inflation via a means other than pure interest rate rises, 2) spread the pain around a bit more evenly rather than lumping it all on people with mortgages/renters, and 3) keep a lid on house prices in the longer term so we can find better things to do with our money, but I suspect the chances of that happening are approximately zero.
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> I’m very grateful that we fixed for 5 years
Congratulations on your wisdom – the first years are the greatest hazard and that fix gets you a way out of the gate. You have the advantage there, I was exposed to the interest rates because the SVR was the norm back in the day. Although serial fixes are the norm now, and yours is worth having, I suspect the move to serial fixes is so that mortgage brokers can collect more fees.
An advantage you have over my younger self is the very high rate of inflation that is depreciating the real value of the money you have borrowed, arguably you are winning by (inflation – your fixed rate) for those first five years. Your hope, and my suspicion, is that they will struggle to bring it down as fast as they believe. It took Paul Volcker three years and a minor recession and then a harrowing one to halve inflation, Rish! doing that in six months is for the birds IMO.
You’re never going to get a land value tax in the UK while the aristocracy hide their dynastic wealth in agricultural land. About 15% of the land in England is unregistered, these are extremely wealthy families and they will oppose a LVT with extreme prejudice. The idea’s been mooted for decades but never had traction.
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Great Post and timely too!
The absurdity of the BTL racket (summed up in your post) and how it creates both a mirage of wealth and concentrates (intergenerational) inequality.
I’ve managed to avoid the mistakes my peers made and was spared the skewering you got of double digit IRs and negative equity.
But I suspect that I’m no better off than if houses prices were lower.
It’s maybe an intergenerational/demographic thing. I started working in 2005 and bought a flat in 2006.
If I had been a few years younger, I’d graduate into the GFC.
A few years older and I’d have bought before the boom and I’d be richer now.
I also got a DB pension, (which are now like hen’s teeth) for almost 10 years which will pay a bit over £1,000 a month from 60.
Add on the SIPP, State Pension, LISAs, (a small) inheritance, and we’re set for, maybe not north Cornwall lobster, but smokies!
Our 20 year bridge looks uncertain though – making the RE part tougher than it could be – but compared to 95% of 40 year olds, we are much better off.
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What struck me most about your comment is I did not know any of these details when I was forty. If anything, at that age I was focussed on clearing the mortgage. IIRC, I was doing this because a) it seemed like a good idea, and b) I had knocked up a spreadsheet that showed the possible savings. FI/RE, etc came later and to some extent as a consequence of clearing the mortgage and trying to flush out a vague thought that retiring around fifty sounded interesting. Events then conspired such that I did start to plan more seriously for [early] retirement. So, if awareness is an important part of the battle, then you may be further ahead than you think.
FYI, by my late forties I had concluded that bridging a Gap of less than two decades to NRA was not achievable for us. On this basis [contemplating a 20 year bridge] you may well already be ahead.
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The benefits of a poverty mindset and also realising on day 1 in a graduate job that working until I’m old and gray was not for me.
A wealth mindset and career/life advice would have me thrust through my limitations, have me sitting in the C-suite and loving life living huge paycheck to paycheck.
I did get some good advice from the greyhairs who remembered passed booms and crashes – so much so that I’ve missed 5 out of the last 3 booms!
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The recession seems to have begun in the tech industry this year. Some high profile layoffs, and a much wider and less noticed hiring freeze. Tech barely noticed the 2008 recession but is getting it in the neck this time.
I’ve been looking for a new job for 6 months and had a single interview in that time (~20 years experience). That 6-month cash emergency fund is not looking quite as secure as I had thought!
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Keep swimming faster!
Tech recession could be the canary in the coal mine.
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Sorry to hear that – hope the situation improves! I guess tech may be more exposed ot the rising cost of money, because it’s a bit more speculative in nature
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Well depressing thoughts on the inevitable stock market crash you’ve prophesised.
Given its generally accepted we’re not smarter than the market how do you square those thoughts of imminent catastrophe with the global stock market being up 10 to 13% since the start of the year?
Care to speculate on the glass half full version of your ‘we’re all doomed’ prophecy? 🙂
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> inevitable stock market crash you’ve prophesised
It was the hazard of negative equity in the housing market I was grousing about.
I do think that things may be changing relative to the stock market of the last ten years. Given most of my gains in the stock market have been over that period, I conclude I may not be able to take the same approach in future. I am not sure that = stock market crash, though a period of sideways movement wouldn’t be that surprising given that the cost of capital is rising.
> Care to speculate on the glass half full version of your ‘we’re all doomed’ prophecy?
this, perhaps? 😉
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Every investment is effectively a bet, though people are not comfortable seeing it that way, but if I have to bet, then I wouldn’t do it on brexit britin:-
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Sobering. So much short termism and blinkered thinking over the last few decades. Its difficult to see a way out of this mess.
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Although I haven’t watched the lot, and Tullet Prebon got there first, you cannae trust a fellow who uses a robo-voice to push their YT rabble-rousing even if I wouldn’t necessarily disagree with what I did see 😉 A robo-voice shows bad faith to my cynical ears, it’s not as if voiceovers aren’t hard to hire.
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Well, AI is all the rage these days, so there’s a lot of bland, mechanical voice-overs in quite a few types of presentations creeping in, like when a long time ago yank readers were used because people aspired to the American Way, conflating it with prosperity. So maybe today’s fad is to use robo-voice to insinuate you’re au fait with the modernest of technological achievements, or the cynic might think it’s also a good way to disguise an unappealing voice and/or your identity 🙂
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> it’s also a good way to disguise an unappealing voice and/or your identity
Mebbe, but an implicit dissembler’s still not worth my time 😉 Don’t get me wrong, I ran Tullet Prebon getting on for 10 years ago so I’m not inimical to what seemed to be the concept, but Youtube is full of talking heads spitting bricks about this that and the other. It’s like so much about social media, may be fun in the moment but life is short
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You have a point – at some level I did kind of clock the voiceover didnt sound quite right, more noticeable the longer it went on. Quite a doom-laden piece!
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Yeah, after all, it seems that AI can do a half competent job of robo-voices so that dude didn’t shell out, and if he can’t be arsed to invest in his message then I can’t be arsed to hear what he says. Mind you, I shoot every track that has a hint of Auto-Tune on it which is leaving me with a very small pool of new material to listen to, so perhaps I’m just ornery like that.
the bear case always sounds smarter. I am definitely one of the 50-sth males identified
but I got less so as time went on, at least to the extent that it would probably see me out. There are cases to be made that Britain has some extremely serious problems in governance and expectations, but it has some advantages against some possible future hazards too.
The information space is changing rapidly, and probably not for the better. At the beginning Ai will eat what humans wrote and peddles, and God knows that was dire enough. It will soon start to eat its own tail, since it scales better than people, and the result will be a sea of plausible sounding white noise.
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@ermine, well, if you’re still in the mood for a punt on optimism via the stockmarket, go on Sir, snap up some Thames Water shares, they’ll go up on the govt. bailout coming soon, given they’re too big to fail and then surely there’ll be juicy, regular dividends as good as guaranteed again Sir. (though it might be renamed something different by then, just to throw off any whiff of corruption, Southern Sewage perhaps? 🙂 )
Obviously, that’s not investment advice, just morbid humour at the interesting times we inhabit
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Tis indeed a gloomy account, but pretty much summarises the 3-4 decades of economic vandalism I’ve had the misfortune to coincide my adult life with in the UK, so I can’t fault the facts presented. And those younger than me are already having it worse and can testify that it’s no exaggeration.
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@Jam:
> I would be interested to hear a little more.
The link I gave above to a comment in Ermines post about the tax tail wagging the dog gives a summary, see: https://simplelivingsomerset.wordpress.com/2023/03/21/dont-let-the-tax-tail-wag-the-investment-dog-well-ok-maybe-this-once/#comment-40630
There is also another comment at the end of that [tax tail] post that might resonate with you.
For more details: I jumped ship around the start of 2017 and I first posted a comment to this blog [SLS] in April 2019 – so already two plus years into my journey through “the Gap”.
My baseline plan on jumping ship was to draw my DB at NRA; however from fairly early on in the journey I began to question that strategy. Principally because I had seemingly over-estimated what was enough, so – at least in theory – we seemingly could live with taking an actuarially reduced DB earlier than NRA. I had also done enough work on UK inflation to understand why [and accept] that RPI is a flawed measure. As Ermine pointed out above there is very little chatter in the UK PF space about “the Gap”, so most of my thoughts are contained here at SLS – albeit they are scattered across many posts over four plus years and are mostly in discussions/chatter with Ermine, which incidentally I always found very useful.
One other thing I learned over the last few years is that covering all your spending needs with pension income (DB and in due course SP too) could be considered somewhat wasteful. In such circumstances what exactly is your Pot for? That is, the concept of flooring just your essential needs actually makes sense; albeit hard to define what ‘essential’ means!
Trust this is of some use?
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ps – not sure why this comment to Jam ended up here, but may be because I swapped away from this page to check something then came back to it …. ho hum
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@Jam
A couple of other important things I should have mentioned above are survivor scenarios and your view on the likelihood of your DB scheme failing into the PPF.
At the risk of stating the blooming obvious, it will be a few years before I can assess if I got this decision more right than wrong and a lot could happen in the interim too. But I guess you know all of that, so I would suggest that you take your time and not rush into making a decision about taking your DB early.
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Don’t joke about DB schemes going Kaput! That will make all my spreadsheets go up in smoke!
Somewhat ironically, you can save up for a comfortable retirement relatively easily (if you count on the old State Pension), but you are left to fund the gap (or bridge to retirement) with money earned from work whilst paying for everything else in life (education, childcare, housing – rents plus capital plus interest – courting, weddings, career building, paying Your bills, living your life and paying your taxes, staying one step ahead of culls at your work, or recession in the economy)
You just need 20x your annual expenses to fund it (after investment/income tax and fees).
Easy peasy
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@Al Cam > Trust this is of some use?
Yes, thank you.
I too am thinking about what is enough. Also it is good to hear the thoughts of someone who took the DB pension early. All my work colleagues who are around my age seem determined to hang on to their NRD’s befor drawing their pensions. That despite, as far as I can work out, there not being much in it either way. So your thoughts help and a counter example of it working out well is good to know.
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As I said to @JP above I would also suggest that you do a deep dive into your specific DB scheme’s terms & conditions. The minimum set of issues I would suggest you look deeply at are:
a) revaluation vs indexation including which inflation indices are used and any caps, collars, etc
b) survivor terms (if applicable),
c) early retirement factors and late payment uplifts
d) your freedom to select your retirement date, including any notice period, documentation, etc
e) PCLS terms
f) how the above interact with different inflation scenario
Another list of suggestions is given at the ermine post that begins “bear-markets-are-a-bastxxx ” And I am sure there are more scattered about various SLS posts.
However, these can only ever be suggestions and IMO “there may be dragons” anywhere in a schemes governing documents.
Former colleagues are sometimes a good source of info, but can be subject to group think, unconscious biases, etc. In my experience even former employee trustees are not always that well informed.
In my case, amongst lots of nitty gritty details my key findings were:
1) there were asymmetries in revaluation vs indexation and they matter depending on the inflation scenario, see e.g. the chatter that starts
“Thanks for that.
I completely agree that you made the correct choice!
at:
I only came to this conclusion (as it relates to inflation) relatively recently, as until a few years ago we basked in a low inflation environment. I may not be the only person to have overlooked the subtle point that: for my scheme in a relatively high inflation scenario beyond a certain age indexation was less bad than revaluation.
2) beyond a certain age, survivor terms seemed to be punitive for the spouse of a deferred member vs a retired member, see above chatter with @JP, and that a survivor pension was not altered if a PCLS was taken
3) my scheme service comprises multiple tranches with different NRA’s, etc and both ERF’s & LPF’s applied and they seemed IMO fair. I am still slightly amazed that LPF’s do not apply to Ermines scheme – but that is just a good example of the sorts of “dragons” I refer to above.
4) to claim my pension I needed to produce some original documents that I could not lay my hands on so had to set about getting those from national records – and that took a bit of a time. I almost left sorting out the low level stuff until too late!
As you may have guessed it took a while to gather all of this info, and on more than one occasion I was misled by the scheme administrators. A copy of the prevailing rules may be a good place to start. I was initially horrified when I saw, years ago, that these ran to many pages of legal speak for my scheme!!
Forming a view on your probable longevity might be useful; in the worst case – and it happens – delaying too long might cause you to miss the boat!
Lastly – and putting to one side GFF’s comment above – I would strongly suggest you also form an informed view on the likelihood of your DB scheme failing into the PPF. The “strength of the covenant” probably matters more than the headline level of funding. I say this as IMO in some circumstances, this view might shape your planning more than anything else discussed above and may, in an extreme case, imply exploring the CETV route.
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> I would also suggest that you do a deep dive into your specific DB scheme’s terms & conditions.
For mine, The Firm provided a neat online retirement planner where you could track the results of the various options. You used to only be able to use this on the intranet, so I had many prints of the various options, but they drifted off track across eight years or so, so I was chuffed when they made it available on the general pensions portal.
My pension was predicated on NRA 60 and a small section at 65. with no bonus for late starts the malus on the 65 (which devalued it by 25% given the usual 20 year expected retirement period assumption) was outweighed by the opportunity cost.
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@Al Cam, @ermine & @Jam,
Thank you for this discussion and those preceding it (in particular https://simplelivingsomerset.wordpress.com/2022/05/16/fear-and-loathing-in-the-markets-again). It’s prompted a deep dive into my own (and my OH’s) small DB pensions with regard to revaluation vs indexation among other things. I have found it difficult to reconcile the current rules of our schemes because of the numerous amendments, consultations and statutory revisions since we first joined the schemes. I intend to request a ‘fresh’ set of documentation of the current rules from the administrators but I’m a little nervous for the following reason, excuse the explanation.
Our pensions are not in payment but are deferred, i.e. each year they are revalued (Sep-Sep). Each year we request updated valuations to track the revaluation % per annum because it appears that neither scheme publish the figures. Both of our schemes (unrelated companies), to the best of my knowledge/research, are capped at 5% CPI. However, both of our revaluations for the proceeding year were 10.1%, i.e. CPI at Sep 2022. I understand that trustees have an element of discretion but this appears to be a coincidence too far hence my nervousness (I don’t want to draw attention to last years revaluation but equally I don’t want a shock in the future).
On PPF – worth considering the likelihood or not of your scheme being taken over by an insurer via a buy-in buy-out process (I can see the upsides because I trust insurers more than previous employers but not aware of the potential downsides, of which I’m sure there are several!).
Thanks again for your collective musings.
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@D:
I can think of a couple of possible explanations.
Essentially, revaluation is usually a compounding calculation – see “fear and loathing” post and what is described as ‘revaluation credits’.
You do not say when you became deferred and that is often critical to working out what may be going on. Also, what period of service do the pensions cover as that may have an effect too via what is called the GMP part.
Please confirm these are not public sector DB’s?
Do you know if your increases (Sept to Sept) are applied in April?
Was your revaluation the previous year 3.1%?
Lastly, I also used your tracking mechanism – and IMO you can learn a lot from it.
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@Al Cam,
Thanks to your questions I believe that I at last understand compounding, English not being my favoured subject!
To add some meat to the bones by answering your questions:
– Deferred 5 years ago
– No GMP element (service post Apr 1997)
– Private sector
– Revaluation applied in April
– Previous year revaluation 3.1%, year prior 0.5%
I had assumed the 5% cap was applied each year to the Sep-Sep CPI figure, and that was compounded. In terms of maths (well, code I guess), and taking the previous 3 years as an example, each £1 is revalued as:
£1 x [1+min(CPI0,5%)] x [(1+min(CPI1,5%)] x [(1+min(CPI2,5%)]
where, CPI0=0.5%, CPI1=3.1%, and CPI2=10.1%
i.e. compounded to 8.8%
Whereas, if I understand your ‘revaluation credits’ correctly, each £1 should be revalued as:
£1 x min[(1+CPI0) x (1+CPI1) x (1+CPI2),(1+5%)^3]
i.e. compounding to 14.1%
The ‘revaluation credit’ being 15.8% (that is, (1+5%)^3).
Assuming that I’m not barking up the wrong tree, I finally “get” the comments regarding revaluation vs indexation in timing when to start drawing your pension. It’s fiendishly complicated when you add early/late drawing (commutation factors?), tax, dependants pension, and potential ill health into the equation.
Thank you!
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Yes, its certainly worth doing a lot of research into all these factors before making a decision. I found some of the threads on revaluation on the MSE site quite helpful. In my case, I was lucky the way my birthday fell (reaching NRD), after the start of the current calendar year, as I was able to gain from the high inflation figure in September (which fed into the statutory revaluation order issued around November, used by the scheme). Post NRD, I was weighing up late retirement factors while in deferment, capped indexation increases once pension in payment, and a recent change to the lump sum commutation factors, all against a backdrop of likely sticky inflation, and improving interest rates for money on deposit. Its all quite a minefield. One can understand why many people resort to an adviser to look at all this for them.
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@D:
Yup, IMO you have got the correct formulation now. And your example nicely shows just how important that one little word ‘compound’ is!
Apologies if my wording in the “fear and loathing” post was confusing but I think we are on the same page now. Hopefully, this chatter will help others too.
By “revaluation credit” I meant the difference between CPI and, in your case, 5%PA compound; so 15.8% minus 14.1% in the example you give above. Which would mean for the next year provided CPI is approx no greater than 5% plus 1.7% your revaluation would not be capped.
IMO you should consider yourself fortunate to have 5%PA compound for revaluation because the statutory minimum for the scenario you described above is 2.5%PA compound.
Indexation is generally not a compounding calculation, but I would check your rules to be sure.
Also, in my experience in any given year indexation can never be negative, however revaluation can be. But again this is worth checking in your rules. The normal reasoning is that an “increase” by definition can never be negative – again highlighting the importance of individual words in a legal text.
> It’s fiendishly complicated ….
I agree that it is not the easiest of sums. But it is all tractable and you do not have any GMP issues to worry about.
The commutation factor (CF) is the amount of regular pension you give up in exchange for a lump sum payment. That is, a CF of 20 would mean £1.5k less regular pension PA in exchange for a PCLS of £30k. NB CF figures are gross – ie they measure what it costs the scheme. To work out what it costs you you must apply your marginal tax rate. The higher your marginal rate the better the value. Please also note that ERF’s/LPF’s and CF’s are subject to review and do change from time to time. In my experience the CF’s change more frequently – but that could be wrong generally.
Having said all of that, you do have the advantage of knowing from mid/late year X what is coming in year X+1. That is, by around mid Oct of this year (when Sept 2023 CPI is published by the ONS) you will have a good idea what your revaluation will be next year.
@JP mentions the annual statutory revaluation order for occupational pensions, see e.g. https://www.legislation.gov.uk/uksi/2022/1229/article/2/made
for the 2022 data applied in 2023
AFAICT, the left hand column (aka column 2 Higher revaluation percentage) maps well to your schemes approach – but this may be a coincidence. Column 3 (Lower revaluation percentage) gives 2.5% PA compound information. You may find this annual document informative. It contains examples of most of the things I have mentioned above.
Trust this is some use?
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@D:
> On PPF – worth considering the likelihood or not of your scheme being taken over by an insurer via a buy-in buy-out process (I can see the upsides because I trust insurers more than previous employers but not aware of the potential downsides, of which I’m sure there are several!).
My initial thoughts on potential downsides go as follows:
a) not sure if insurer would ever award discretionary uprates;
b) what other [possibly unknown] benefits might get lost (either deliberately or unintentionally) on the transfer to an individual contract with the insurer;
c) the insurer is in this to make a profit so are there any conflicts of interest from the outset;
d) what is really in it for the employer;
I would love to hear your or any other folks thoughts on this.
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I have reflected on this a tad more overnight and ….
> I trust insurers more than previous employers
Not sure that I agree with you on this. IMO insurers are experts at not paying out and have unrivalled experience in perfecting the associated tools and techniques
Insurers may just be desperate to grow their annuity business post the Osborne changes and BPA is definitely a time limited business opportunity – as DB schemes mature and decline.
BPA looks like the latest ‘thing’ being advised to DB pensions trustees; and such things (think scheme mergers, CARE, leveraged LDI, etc) have always worked out well have they not?
In my experience, things generally move at a glacial pace in the DB world. BPA proposals seems to put an emphasis on urgency. Looks like another possible area of mismatch to me.
Lastly, my reading of this is that the BoE seems worried, see:
https://www.bankofengland.co.uk/speech/2023/april/charlotte-gerken-speech-bulk-annuities-conference
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That BoE report look quite dark IMO. There are any number of examples where regulation has failed in service (trains, water, power) and history shows that highly paid financial wizardry will always be nimbler on its feet and end-run regulation, this looks like an issue of when, not if, the BPA craze goes wrong somewhere.
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@ermine:
Any signs of your DB scheme following the BPA trend?
I ask as IIRC they were well into leveraged LDI.
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@JP – Thanks for the info on revaluation threads on MSE. I’ve not delved into the pensions board before.
@Al Cam – Thanks for confirming. I don’t recall my scheme booklet referring to ‘compound’ but I guess I could have inferred it from ‘p.a.’.
This discussion has been invaluable to my own understanding and I do hope it will help others. Sometimes I find it difficult to use the correct language (in terms of pension speak) hence resorting to pseudo-code which has the benefit of being unambiguous. It’s a shame these calculations aren’t provided by scheme administrators, or at least examples, but I guess they would raise more queries than they would address.
I do feel fortunate to have this small DB pension full stop. It will in effect be the floor in a floor and upside strategy which will allow me to take greater risk. I hope the 5% CPI is sufficient to maintain buying power but only time will tell. It was previously 5% RPI but I’m not sure if the change was statutorily mandated or imposed by the trustees (the former I guess, I can’t face wading through the documentation at this time).
Thanks for the correction on the CF. I’ve not delved into CF nor early/late retirement factors.
I’ve not see the statutory revaluation order before. It matches my calculation of what I refer to as the index ratio (notation as per linkers) perfectly. It adds context to my paragraph above.
It is indeed of use. Thank you again.
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> Any signs of your DB scheme following the BPA trend?
Not so far. Well, as fa as they have officially declared, that is.
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I rented for about 10 years, living in 5 or 6 different places during that time, and never had any issues with landlords, they always seemed reasonable to me. Maybe I just got lucky.
I’ve invested in BTL and see it just like any other investment, of course I’m trying to make money so some will see me as a money grabbing scumbag but I don’t see why really. I see it on Twitter some of the hatred towards landlords is quite visceral, but the way I see it it’s a fairly competitive market and the incentive is there for landlords to provide a good service and good accomodation to attract good tenants and make money – and I am taking the risk in putting a lot of money into a house that could go down in value or need major repairs or whatever.
I saw one video of a renter having a go at a landlord who put their rents up even though they were mortgage free, because the market rent had increased. But that is how markets work, demand and supply. It’s just economics. If one supermarket has managed to source cheaper products then yes they could reduce their price to attract more customers, or they could charge the same price as other supermarkets and make more profit. To get upset with the supermarket for making more profit is to misunderstand the basic principles of capitalism, in my view.
Of course there will be landlords who are more unscrupulous than others. But at least you can choose to move somewhere else, indeed I have friends who’ve done just that.
I notice in the social housing sector standards have really dropped, presumably because of Austerity. It’s sad that some have no choice of where to live. I do think the government should invest in more social housing and shouldn’t sell it off. I guess I’m just saying in my view there is space for social and private housing.
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@Al Cam, as far as I am aware legislation requires buy outs to be on a like for like basis, so the insurer has to match the terms. Agree though that the risk just moves to the insurer, but at least the member is not relying on the employer propping up the scheme if it falls into deficit. Bulk by outs are certainly on the increase, staged or otherwise, as employers/schemes are finding it less expensive to transfer their liabilities in the current climate. I am aware my scheme has been doing this and In expect its just a matter of time before I get that letter telling me my pension is now moving to x insurer!
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I have personal [less than satisfactory*] experience of a “like for like” basis transfer with an insurer. Not a DB scheme, but rather a employer sponsored DC to insurer income drawdown scheme. I will not bore you with the details, but IMO insurers can be expert in dodging their written contractual liabilities if it suits them. And, just in case you did not know, they pay for the ombudsman too – who in my experience is slow, uncommunicative, opaque, and to top it all, at best, incompetent.
Having said that, the safety net for insurer failure apparently pays out 100% of your pension and not a trimmed and [possibly capped too] amount like the PPF. But I do wonder if that is just an attention grabbing headline from the BPA team. Did you know that the PPF compensation level is not under-written by anybody and they could reduce it further too?
In the round I fear I agree with ermine as to this being a case of “when, not if, the BPA craze goes wrong somewhere”. Equitable Life, endowment mis-selling, etc the list is long and not something that should be over-looked. But, trust us, this time it will be different – indeed???
* to be entirely fair I did not really lose out financially – due to compensation paid to me – but I could have suffered significant loss had I actually believed their “like for like promise” [and not checked it after the event only to discover it was not “like for like”] and acted further upon their apparent promise – which was a real possibility at that time
Have you read the BOE link I gave above?
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Thanks Al Cam. Yes, had a quick scan and it doesn’t look very reassuring to say the least! Every way one turns there seems to be worrying risks. I wouldnt be too happy if my pension ended up in the PPF, given its limited indexation, and I have always had a concern it could be subject to political manoeuvres to change the basis of protection when it suited.
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OTOH, the PPF/insurers could become quite wealthy on the back of all of this. IMO, an individual has little if any chance of benefiting from such an outcome via the BPA route, whereas such good fortune should (in theory at least) be visible via the PPF’s annual accounts/reports.
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IMO it all boils down to a matter of trust between employer, PPF and insurer. To that end I would surmise your opinion on the matter may be driven by the view of your former employer.
Perhaps I’m jaundiced by my time served but I’d rather get The Man to dig into their pocket and pay the funding shortfall while they’re still in a position to do so in order to offload the scheme to an insurer. But, yes, I should be careful what I wish for.
I don’t know enough of the workings and guarantees of the PPF should my former employer fail and what would happen if the PPF itself is no longer viable/affordable?
I also perceive the risk in your employer scheme to be dependent on your age relative to other members. Being a relatively young pup I should be one of the last to benefit but what does that mean in terms of viability of the scheme in my advanced years… were I to get there? I’d feel a great deal more comfortable if I was already in retirement knowing there was a good rump of active members propping up the scheme for a couple of decades to come.
It is perhaps a moot point given I’ll have little or no say/influence over the decision but as ever being forwarned is being forearmed.
I’ve opened up a can of worms with regards to understanding my own pension but a deep dive will have to be deferred (!) until the weather turns.
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> To that end I would surmise your opinion on the matter may be driven by the view of your former employer
Fair point; but in my case this is probably outweighed by my view of insurers!
> I also perceive the risk in your employer scheme to be dependent on your age
Amongst other things e.g. it may also depends on whether or not you take a PCLS and how big it is, as some folks view taking the PCLS as a risk reduction measure.
AFAICT, BPA requires the DB scheme to be closed to further accruals.
> I’ve opened up a can of worms with regards to understanding my own pension …
Yup, it took me some time (years) and I still am not always sure I fully understand it! Anyway, each step forward is IMO good news, even if it reveals worries, etc. Have a good summer!
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My DB pension has been in payment for about four and a half years now and was subject to a buyout by an insurer over two years ago. I admit that on balance I was reassured by this development.
The DB scheme’s original sponsoring employer was a large industrial conglomerate. A series of de-mergers in the industry, coupled with a final act of business mismanagement, left a still large pension scheme with a small sponsoring employer attached. When the scheme funding situation improved to the point where a buyout was possible, this removed the considerable risk of the scheme eventually falling into the PPF. I must admit I would have been rather more reassured if the insurer was one that I had previously heard of! They assure us they are one of the largest players in this market – does this help?
I don’t expect any discretionary benefits, but neither did I expect any before the buyout. As my pension was already in payment, all the details were already nailed down and I don’t have any dependants to receive survivor benefits. I can’t fault the admin of the insurer – the money appears in my bank account on schedule, payslips arrive whenever there is non-trivial change to the amount, the RPI increase capped at 5% occurs on schedule and a P60 appears each year. That’s all I need from them.
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@DavidV,
Good to know and thanks for letting us all know.
OOI, how do you think these two hypotheticals might play out:
a) your former employer has made an error in calculating your DB entitlement such that you have been underpaid since it came into payment;
b) your former employer has made an error in calculating your DB entitlement such that you have been overpaid since it came into payment
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@AlCam (I assume it is you that I’m replying to – for some reason all names are showing as [1] at the moment!) Yes I agree that in either of these scenarios I am pretty well stuffed. In the first it is doubtful that the insurer has the historical records to rectify the situation. This may play to my advantage in the second scenario, but ultimately lack of access to historical salary records would not be good in either situation. OTOH I could provide them with all the information they need!
As with my SP and SERPS/S2P entitlement, I tracked my DB entitlement over the years so have reasonably high confidence it was correctly calculated at the time I started taking it.
Ultimately, my reassurance on the scheme being subject to a buyout was only on balance. The risk of the scheme falling into the PPF vs risk of failure of the insurer and reliance on the FSCS, together with other factors such as you identify.
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@DavidV,
I do not know nor have I witnessed or been subject to [as yet] a BPA process. However, I did suspect that the individual contract between you and the insurer may well become the governing document with all DB scheme history effectively discarded and the insurers [commercially driven] attitude being key too. After all, why do such [individualised] documents need to exist?
Exactly what this will mean for current, IMO, unresolved issues like GMP is not at all clear to me. Likewise, I am sure there have been several examples of court cases about DB scheme A that are applicable more widely, and, of course, nobody can foretell the future.
OOI and assuming you are happy to share such info is your individual document with
your insurer:
a lengthy tome;
free from references to your predecessor DB scheme rules;
contain minimum legislation references (eg RPI, etc)
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DavidV here. @AlCam I think you are pretty well spot on with your observations on the individual contract with the insurer. However, it is not a weighty tome at all. Ignoring the covering letter, the glossary and a one-page annex about Expression of Wishes (my pension has a five year payment guarantee), the policy is a mere seven pages of fairly large print with a lot of white space. There was a glossy brochure as well, but this did not form part of the policy – just an introduction to the insurer and information of what will happen with the pension after the transfer.
As you correctly surmise there is no mention of the previous scheme rules, but it does reference the previous scheme name. The policy basically states the annual payment at policy outset, the dates of payment, the rules for annual increase (RPI capped at 0% and 5%) and when the increase is applied, what happens on death and the inability to convert benefits in payment to a lump sum unless the insurer were to offer to change the policy to allow this. I take it from this that the opportunity for either party to dispute the payment amount has long passed.
You may recall from previous discussions that my DB pension scheme was not contracted out. Therefore there are no GMP complications to consider.
Your other comment where you ask whether it is me you are replying to – the answer is no, the previous comment was not mine. I’ll answer your first question though in respect of myself – I did not take my DB pension early. I waited until the scheme NRA of 65. Unlike ermine’s scheme, there would have been an uplift for later payment and, of course, a reduction for earlier payment.
For completeness, I took all my AVC as a PCLS but did not commute any of my annual pension payment for a lump sum. I also rejected the facility offered to trade annual increases of my pre-1997 earned benefits for an increased pension.
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@DavidV,
Thanks for the details.
Does RPI capped at 0% apply to your pre 1997 service?
I am familiar with the 5 year payment guarantee.
Interesting to note how slim your individual contract (aka policy document, or similar I guess) is.
Was there anything else notable/memorable about the buy-in/buy-out process that you recall, for example, did your BPA also cover deferred members? And if not, do you know what happened to them? I assume any remaining active members of your former DB scheme were moved to some form of DC plan.
In summary, post a BPA you are just a.n.other customer of an insurer. I guess your former DB scheme, along with its trustees (inc employee representatives), etc has probably been wound up now too.
Maybe this ‘parting of the ways’ explains some of the attractiveness to employers?
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@DavidV
Thinking a bit more about what you said, perhaps the 0% acts as a collar on the RPI?
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@AlCam Sorry, in the interest of brevity I was perhaps unclear. Increases are RPI, capped at 5%, which is not unusual. In the event of deflation, my pension does not decrease, hence the 0%.
This applies to the whole pension. Pre-97 was only relevant to the offer to trade RPI increases for a higher pension (I believe legislation then mandated some sort of increase for post-97 benefits). As I did not take up this offer it is no longer relevant, and was not part of the scheme rules.
I became a deferred member in 2003 a year after my employer was sold to another group. Unfortunately continuity of employment rights does not extend to pension arrangements. The scheme remained active for employees of the extremely small company that was left as the sponsoring employer. I think it then closed to new members and eventually all members became deferred before the buyout occurred.
I have a friend and former colleague who is a bit younger than me and did not take his pension until after the buyout. I don’t think the process was very different from when I took my pension. I don’t know whether he was also offered the facility to trade increases of pre-97 benefits for a higher pension.
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DavidV,
Yup a collar (minimum) of 0% for indexation.
Thanks for the additional details re the BPA process.
If I understand them correctly your buy-in/buy-out process applied to both retired and deferred members. And those members who were active at the time of the buy-in largely became deferred or retired as and when the DB scheme was closed to further accruals. The reason I asked is that some BPA’s only cover retired members; presumably because that is what annuities cover. AFAICT, you can not actually buy a deferred annuity in the UK – which is what deferred members of the DB scheme presumably get plus revaluation of their pension rights up to the date of purchase of their annuity. In which case, their individual policies (with the insurer) must (I assume) also specify the revaluation method, etc.
Thanks again.
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@AlCam I think your conclusions are correct. I would only point out that I think there ceased to be any active members several years before the buyout, so there were only deferreds and retireds remaining. I assume the individual policies for the deferreds included the basis for revaluation, but as I was retired at the buyout I have no first-hand knowledge.
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@DavidV
Thanks for the info.
Presumably, a BPA policy document for a deferred member must also include the terms applicable for taking a [tax free] lump sum, as well as: early/late retirement terms, death in deferral conditions, etc. So, not such a well bounded proposition for the insurer.
> I would only point out that I think there ceased to be any active members several years before the buyout
I wonder if that was that a chicken or egg situation? As far as I can tell, BPA has never included active members, so I assume the scheme being closed to further accruals is a necessary precursor for a BPA process.
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@AlCam Your thoughts raise some interesting questions that I don’t know the answer to. The original scheme rules provided for the trustees being able to periodically adjust the early retirement factors depending on prevailing market conditions. I don’t know whether the buyout insurer’s policies for the deferred members allow themselves the same flexibility.
As I’ve already mentioned what remained of the sponsoring employer was very small compared to the pension scheme that once was that of a very large industrial group. It would have been in no position to make any serious contribution to the scheme’s funding situation. I assumed that the removal of actives from the mix was just part of the trend to minimise any possible worsening of the funding situation. Post-2003 the trustees never made any secret of their desire for an insurer buyout if ever the funding situation allowed – which eventually it did.
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@DavidV,
> The original scheme rules provided for …
Indeed.
Your comment also made me wonder if any of the new policy document t’s & c’s re the [soon to defunct] lifetime allowance (LTA) have any unintended consequences/difficulties.
> Post-2003 the trustees never made any secret of their desire …
OK, but I suspect this may not generally be the case.
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@David >I’ve opened up a can of worms with regards to understanding my own pension but a deep dive will have to be deferred (!) until the weather turns.
Indeed I have found it very useful too, so thanks for everyone’s thoughts.
I will also do a much deeper dive into my own scheme when the weather has turned and I feel up for the intellectual exercise/challenge. (I have GMP issues to consider which seem to make it more complicated than the ‘simpler’ examples here.) Maybe after stocking up on strong coffee. Either that or I will have to bribe @Al Cam to look at this for me 😉
The only problem I see is that even if I ever do get my brain fully wrapped round this subject is that I will never know for sure which decsion (draw early or at NRD) was the optimum one until I am lying on my death bed. I am a unique instance and a sample size of one, not a population. Randomness can fool us all.
In the meantime, I hope inflation falls everyone would be better off, especially anyone retired with limited protection against it.
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@ Al Cam here
The [1] problem seems to be persisting.
Not sure who I am replying to but I suspect it may be @DavidV:
A couple of Q’s if I may:
a) Did you draw your DB early?
b) And just to possibly confuse things even more, can you ever really define ‘optimum’?
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Not sure what’s up with the [1] problem. I outsource the coding work to wordpress.com rather than self-hosting. They are hopefully bears of larger brain than I, but it limits what I can change. I have looked for updates and all seems as it should be. Apologies for the interruption and hopefully normal service will resume. I have observed the problem on at least two other wordpress.com sites with varying themes.
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I think the ‘[1]’ problem is fixed. Horray!
@Al Cam, it was me, Jam.
Whether I should draw it early is the problem I am trying to optimise, but agree, defining what is optimum can never be known in advance, only with hindsight.
Thanks for all your and everyone else’s help here it has given me a lot of useful information to think about, even if I shudder at the thought of getting into the weeds of my own schemes details.
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> Thanks for all your and everyone else’s help here …
No worries – it has been a sort of hobby for a good few years now.
I have no idea if your scheme has jumped on the BPA bus, but if it has anything DavidV can tell us about his buy-in/buy-out experience and in particular what happened to deferred members may be of interest to.
> I am a unique instance and a sample size of one, not a population. Randomness can fool us all.
absolutely, and even more so if key relevant facts are absent – which is getting a bit Rumsfeldian (incidentally this is apparently a real word – until I googled it I thought I had created something!)
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