Vanguard’s cautionary tale hidden in plain sight

Opening up Vanguard to add £10k of ISA contributions to buy VUSA, I come across this impressive chart of the amount of moolah a punter could accumulate, had they invested in the MCSI World Index since 1999. Nowadays you can do that easily, just go buy an ISA limit of  VWRP on each April 6th, get on with the rest of your life. I don’t think VWRP existed 25 years ago, but this is what would have happened compared to saving it in cash.

What 25 years of shares ISA would have done relative to the same amount in cash ISAs, according to Vanguard

Now I am old enough to know that tax privileged share saving didn’t start with a bang due to Gordon Brown in 1999, there was something called PEPs (Personal Equity Plans), I seem to recall I dumped some Sharesave shares in one of those back in the day. They were also tax-free, I was a tyro in those days, so I didn’t get the sort of wins I am getting now. Vanguard sell this as a good news story, look at that wicked win racing up at the end.

And it’s a good story, say Maya Millennial has just come of age in 1999, born with a silver spoon in her mouth. She loads up her ISA to the max and keeps on going, across 25 years, she’s 43 now and minted, nearly 900k sods. All jolly hockey-sticks, eh? Provided she has accumulated some of the other trappings of a successful middle class career, she’s in line for early retirement.

Wait but what? Valuation matters

Let’s call up VT in the basement and get them to roll the tape back to Maya Millennial’s 31st birthday. In a distant part of this septic isle an exhausted mustelid calls control for the final approach to retire, in 2012.

Maya Millennial pulls up her Vanguard account and takes a butcher’s hook at how’s it all going. Her BFF Candi Cash won’t have any truck with the stock market – “it’s a casino full of the wrong sorts”. She uses a Cash ISA. We compensate for that fact that the Cash ISA allowance started half that of a S&S ISA because Candi is on great terms with her mum who lets her use her cash allowance too. Apologies for the tasteless use of Photoshop, but this is what Maya looks at. I have estimated the £200k position, but to be honest it’s that shape that matters.

OMFG, what a ride

Years and Years

2003 – Maya is 22 and ~30% down

Four years into her journey, Maya’s about a third down compared to Candi. She tells herself fair enough, I am a long term investor, just a blip on the investing horizon. She’s doing a lot better than this mustelid did, I used to have a Virgin CAT FTSE all-share ISA, great values fees at 1% AUM, Monevator’s TA would rugby-tackle you to the ground for putting up with that sort of usury these days

Why should DIY investors flay costs as if they were the tattooed agents of darkness? Because the last thing you need is to leak 1% in management charges.

Gulp. Those were the days, my friend… We got older and wiser. Anyway, I switched to L&G at a slightly lower fees and a slightly more global outlook, but in the end I sold up. Go on, guess when I sold up, round about 2005 ISTR. Mind you I did put that into paying down some of the mortgage which was in the order of 6% I think, so it earned me a real return of 6% in the interest I didn’t have to pay, plus the tax on earning that.

2007 Maya is 26, and about 10% up

Maya’s feeling chipper about her stocks and shares ISA, got about 100k, she can buy a house for that. Not quite ready for that as she’s just split up with her boyf, the mating game is tough in those years. Candi’s starting to think there’s summat in this stock market casino thing and the market is all over the papers like a rash. Her Dad looks up from the paper on one of her rare visits home and says “Whom the gods would destroy, they first make mad”, and Candi sticks with cash, though she enjoys the free drinks at the party Maya throws in a basement bar in the City, full of raucous finance worker  braggarts. Candi does worry about her bestie’s taste in men at times, but you can’t argue with the quality of the champagne.

2009 Maya is 28, and she’s abut 40% down

This is not a good birthday because Maya is nursing a 40% loss, and it takes the edge off being young, beautiful and in love, particularly when both of them are fearful for their jobs. Maya is feeling a chump for 10 years of loading her ISA giving her a 40% loss, and starting to wonder if she should have spent more on Louboutins and lived it up a little bit. YOLO and all that, you only live your twenties once. Candi buys her a few drinks and tries not to say I told you so.

2012 Maya is 31 and breaks even relative to Candi Cash

The good news is that Maya has reached parity with Candi, so they buy their own drinks. Everybody’s scared shitless of the markets, and Maya looks back  at her twenties and wonders where it all went. In the toilets she looks at the crow’s feet starting around her eyes, and the stress of it all makes her break down. Candi comes in and puts her arm round her, but Maya looks at her friend and observes no crow’s feet yet, and great heaving sobs shake her. She collects her thoughts and the two leave the bar together.

Maya had a tough ride and it’s a cautionary tale

Why did Maya have such a rotten ride? She started in 1999, it was the dot-com boom that was about to turn to bust. Go look at UK Dividend Stocks’ CAPE valuation chart. Maya started investing when the SPX CAPE was literally off his chart. The SPX is the largest proportion of world assets, particularly back then, so it did a lot of damage.

You’re a good little passivista and you say Meh, it’s not like Maya inherited a shitload from her grandfather and invested the lot at an all-time high CAPE. And you’d be right. Assuming Vanguard did the analysis competently, Maya dollar cost averaged into the market, and she still needed Candi to put an arm round her on her 31st birthday because of all the stress. DCA is not a panacea for a shitty sequence of returns. What gives you a shitty sequence of returns? Bad luck and high valuations.

At the time of writing, the Shiller CAPE ratio is on the high side, about 34, that’s less than the 44 when Maya started. Seeking Alpha has a chart showing if you buy the US at CAPE >34 you can expect a return of ~4%, over the next 15 years!

Vanguard’s good news story only came good after the halfway mark

and then it hit it out of the park. But Maya Millennial needed a lot of TLC through her twenties before the rocket boosters fired. There’s a cautionary tale, too, for people starting now. Inspect the Shiller CAPE ratio for the SPX over the last 50 years

Shiller CAPE for the SPX

You can take a little bit of solace from the fact Maya Millennial took a couple of years of the CAPE being much higher than now. Perhaps humanity is getting a little bit more efficient in the art of capitalism that might justify the gradual lift in the CAPE over the years, extrapolate that and it is high, but not Maya Startup high.

Is there fire underground, perhaps?

Now ask yourself if you observe anything rotten in the United States, and arguably in the West in general? Do you think that AI will mean that we can happily live inside our smartphones while the shit piles up in our rivers and the doors fall off our aircraft every so often? What say you about president-elect Donald Trump? We should note he wasn’t as terrible for the stock market as you might think, though other shit was going down in the latter part of his reign to muddy the waters. The CAPE on VUSA isn’t astronomically high like it was at the end of 2021, but it’s still running a bit rich.

The trouble with the CAPE expectations is take a look back over 15 years. The Apple Iphone had only just been released two years ago. We were not to know that a rapacious ecosystem was going to grow that meant we could all be rude as hell to the people in front of us in order to live in a simulacrum of the real world in servers owned by the Magnificent Seven, who would track the bejesus out of their punters and lock the suckers in. It’s a step-change as the world of atoms gave way to the world of bits, and in the world of bits scale is everything and marginal costs are low. CAPE is a measure of what people will pay for future earnings flows. Low marginal costs can justify higher valuations.

I detest this ecosystem with a vengeance and don’t carry a mobile phone tracking cattle tag with me in general, but it sure as hell makes money, at scale. I can afford to take the punt on VUSA.

It’s a new ISA year, and I had to make myself lob £10k into my Vanguard ISA to buy VUSA. That’s only half of the ISA and it’s a small part of the whole. I still hate myself a little bit.

I am going to counterbalance that VUSA outside the ISA with non-USA deadbeats, where valuations will be better. I am therefore making a mild bet that the rush of blood to the head that has made us all dive into cyberspace because it’s better than our normal lives justifies the higher valuations, but that is a riff on the deadliest words in stock market investing

it’s all different now

History shows that it never stays all different now 😉  I am doing this because I am starting to struggle with the capital gains allowance on unsheltered VWRL (or currently HMWO.L, which is the same thing).

I’ve split off the US stuff, if it isn’t all different now and VUSA is at 50% then I may get to pay more tax on the non-VUSA part in the GIA. But I’ll take that risk, because when America catches a cold the rest of the world usually does too, which probably gives me time to think. I will lob the other 10k into the iWeb ISA to rebalance some of that.

Framing matters, Vanguard 😉 You wouldn’t have run that story when I retired in 2012, though you chart shows that wouldn’t have been a bad time for Maya to start and Candi to switch. Ain’t hindsight a tremendous thing…

 

How can I buy a Range Rover carrying CC debt? Not even wrong

The cynical bastard Wolfgang Pauli said of a particularly rubbish academic paper that it was so off

its not even wrong

And that can be applied to the Torygraph’s latest personal finance seeker of wisdom/AI clickbait¹, opening with I’m 52 with £13k of credit card debt — how can I buy a Range Rover?

From a twenty or thirty year old, that’s a fair question, though the answer is still the same. You can’t. With the rare exception that buying this Range Rover will return you the capital cost within a year by enabling you to work, or work more, or showcase it on your influencer channel earning loadsamoney. For a 52 year old, it implies you haven’t used your time well in educating yourself about the way of the world², and that’s bad – at least in the case of the young’uns they can say they didn’t know and were ill-prepared for the rapacious power of advertising inserting it’s blood funnel into anything smelling of money. It’s not just Goldman Sachs. It’s capitalism as a whole – like all concentrated forms of energy, it must be handled with care. That takes time to learn.

It’s the juxtaposition of CC debt and the Range Rover which is the epic fail in this 52-year old with no savings or pension. The two wealth managers make all the right noises about savings plans and stuff, but nobody asked the fundamental question. Can this fire be put out, given the questions being asked are of the ‘not even wrong’ sort. Range Rover? Holidays for the kids? There’s the genteel reserved Brit version of what’s wrong here, or the brash American version. Boils down to the same thing. Owe debt on a credit card you are paying interest on? STOP BUYING WANTS FFS. There’s the mustelid flowchart from way back which gives you a handy map in times of weakness

buy-it-or-not flowchart

How come you have got to the ripe old age of 52 spending so incontinently? As for all the motherhood and apple pie claptrap about wanting to spend shitloads on her teenage kids, well, yes, but perhaps you can do something more fundamental for their future happiness and get a grip. I know that the wishful thinking of Rhonda Byrne’s ‘The Secret’ is a great story – ask and you will receive, or you gets what you wants if you wants it hard enough.

Look what happened to many of The Secret’s readers – hosed in the GFC³ flipping houses using Other People’s Money, which is great until it isn’t. Listen to yourself

“I like to spend money on my kids. I grew up thinking money doesn’t grow on trees, and that it’s hard to come by. It’s part of the reason I sometimes struggle with money.

Put the fire out first. My parents summed this up well enough:

Don’t buy shit you can’t afford, son. Save up for it first. There are only two possible exceptions to that in life. Your education and your house, one day.

Did I live that? No. I bought a preamplifier for three month’s gross salary with an interest free loan in my first year of work. But I paid it off in the six months allotted, because I was living at home, and I learned something useful that way, as Mark Twain related the acquisition of empirical knowledge of a feline nature

A person that started in to carry a cat home by the tail was getting knowledge that was always going to be useful to him, and warn’t ever going to grow dim or doubtful

It’s the tragedy of parenting. You cannot forestall the folly of the fruit of your loins. But you can shorten the recovery time by arming them with a roadmap of the way out, just never say I told you so 😉

Capital gains and the US versus the Rest

Monevator has an article for those who are frightened of the frothy US markets (paywall). I got into slight hot water last time by oversharing one of those so I will summarise that if you are frightened that 60% of your world tracker is the US then you can lean against that, unsurprisingly by investing in some ETF ex-US.

At a gut level I have the feeling that the US is way OTT. In the end we can’t all live inside our smartphones which is the inference of the Magnificent Seven, because people do need to eat and have clean water and live somewhere. It’s difficult to see what value most people can add while working in the virtual world, particularly ‘real value’ whatever that may be.

However, I have already given return up post GFC taking a US was overpriced line, and only got myself above the ‘what would have happened if I had gone balls-deep in VWRL, had it been available when I started’ by shorting Covid, so I have become less active since, because a) I have enough and b) I probably got the right answer for the wrong reasons.

I want to abuse the principle of that article in a slightly different manner. I hold a fair amount in a reasonable sized GIA. The ISA has a significant amount of VWRL already, and I accumulated more than a yearly ISA contribution worth of VWRL in the GIA, which has already drifted up by > 10% and is uncomfortably more than the current CGT threshold of 6k, so I want to get rid of it this tax year.

Capital Gains cogitations

Monevator has a new decumulation strategy article (paywall). That is more of a deep dive than the general pack-drill, 100 – your age in bonds. Bonds turned out to have more complexity that most people expected. In particular while you can know what a specific bond pays out if you hold it to maturity, if you hold a bond fund of a similar average maturity it turns out that since these cycle bonds in and out of the fund and don’t hold to maturity so you don’t get the same result, and very much so not the same result, to your detriment, in interest rate hike eras.

I haven’t generally done bonds or bond funds, since I regard my DB pension as close to bonds in its offering. There’s a lot more stuff in Monevator’s article, some of which is above my pay grade and some outside my requirements. However, I did like the deconstruction of equity diversification for decumulators, who are much more sensitive to networth drawdowns. A GFC suckout for accumulators may cause some of them to fall off the passive indexing wagon but for a decumulator means at best switching from Waitrose to Aldi and at worst bankruptcy and ending up on the street.

The general thrust is that you have equities for gain, bonds for security and some commodities including gold for other edge cases. The author clearly doesn’t like gold and looks to run it down early

we can only profit from gold if some greater fool will pay a higher price than we bought it for.

I don’t personally expect to make any real gain on gold, it’s there to get some reprieve against governments devaluing the real value of a currency. Store of wealth, not a replacement for BTC or National Lottery tickets. A whole bunch of other people will spark up at this point and point to times when it hasn’t done that, and another cohort will say ETF gold isn’t real and you really should have sovereigns dug into the garden. Gold is like that, it raises passions in a way other assets don’t, perhaps with the exception of residential property. It’s not just Smeagol who was changed by contemplating the precioussss too much.

The idea is to use gold as ablative armour to absorb any early crisis. Then, once it’s gone, it’s gone.

He’s looking to run it down, roughly at the time of drawing the State Pension (SP). Which is a way into your retirement for you early retirees, indeed, I would be more than fifteen years older than when I left work before I become eligible for the SP.

The article highlighted the difference between the various asset classes, and in particular their different characteristics in terms of income/yield (none in the case of gold)/capital gain – not so much in the case of bonds and so on.

different wrappers for different asset sub-classes

ISA and SIPP wrappers save you from capital gains tax. ISAs save you from income tax too, and this led me to observe that it might be sensible to distribute the various asset classes amongst the various wrappers to reflect the nature of the expected gains.

By their nature, decumulators will normally be at on just after the high-water mark of their capital wealth. Some hold capital outside the tax wrappers; if you have good fortune to need more than those wrappers you get to think about tax and CGT, and it’s not straightforward at all. CGT and the tax you pay on dividend income is at about half the rate of the tax you pay on earned income unless you are a higher rate taxpayer. A SIPP transmogrifies CGT and dividend income into regular income – that’s not a useful thing for me.

Everybody’s tax position is different. I have no basic rate tax allowance left due to pension income. I ran my SIPP out under the personal allowance before I drew the DB pension, then I ran the remaining annual contributions out to hedge the possible instigation of NI¹ on SIPPs.

If you’re earning and have spare for pension savings and can live with the embargo to 55-ish, a SIPP usually gives you most bang for your buck. Particularly as a higher rate tax (HRT) payer, though basic rate tax (BRT) payers do well if they can use salary sacrifice to recover employee NI. The ISA has more tax advantages in is not age-embargoed like a SIPP but since contributions are post-tax and NI it can be hard to use those advantages while working.

wrapper pros and cons

The three wrappers available to me are

ISA: free of CGT and income tax. Rate limited to £20k a year

Good for: things that I expect to appreciate in value, and those that pay a dividend; these are not usually the same things, but generally fall into the equities bracket since I don’t do bonds. At the time that I kicked the gold out of the ISA this logic prevailed

SIPP: free of CGT but not income tax. Rate limited to £3.6k in my case.

It can be free of income tax, I transferred my SIPP into my ISA tax-free while I had a low income after retiring. The SIPP included DC pension savings while I was working (AVCs, most people will use a plain SIPP). I can’t do that again.

However, a SIPP is unattractive for me because a SIPP comes out as income. It is better to pay about 10% tax on capital gains than convert it to income since I pay 20% income tax on income, but for those with some personal allowance to spare this conversion could eliminate CGT. They are still better off at dividend tax rates because these are lower but the calculation is a little bit messy – dividends burn up your personal allowance too though the tax is at a lower rate.

These limitations mean the SIPP is functionally useless to me, apart from the minor benefit of churning £3600 in cash through it, where the 25% tax-free allowance means I get to take away a profit of £180 p.a. I hold just over £1k of VWRL in the account to keep it open, £180 profit on a static £1k deposit is an 18% interest rate, it’s not much but it’s worth the turn, given I already have the account.

GIA: (general investment account) considered unwrapped from tax shelters.

I use this for gold and for shares. Sub-optimally at the moment.

Diversifying deadbeats

Monevator’s article offsets half the world equity tracker with a multifactor fund tilted away from the US Big Fish. The alternative is half the equity allocation with

full-throated allocations to UK shares, the emerging markets, REITs, and small caps.

I have some of this, because I thought I wanted income much earlier than in fact I did. Historically I have some high-yield portfolio, some individual UK shares and a reasonable amount of EM index ETFs which I added for diversification. I have a bit of REITs and a bit of small cap IT too. In retrospect I would have been better off going balls-deep into VWRL in 2012, which is a win for the principle of all you need is a world equity tracker, but I caught up over the Covid period.

Diversification is inherently a question of sub-optimisation, in the interests of reducing the volatility of the whole amount. Which led me to thinking I could distribute my existing assets more intelligently to reduce tax – boot some of these sub-optimal deadbeats into the GIA. In the past the dividend and capital gains allowances were high enough that this didn’t matter so much for my level of GIA, but the reductions in these allowances mean it may be worth using them more intelligently.

Everybody expects US equities to grow into the sky, and say emerging markets to be like De Gaulle’s pithy observation on Brazil – the country of the future, and always will be. We should, however bear Hemingway in mind – how will it go titsup in the United States markets? Two ways – gradually and then suddenly.

Dedollarisation could be a suddenly, given what happened to Russian assets held in dollars, which may makes some countries more circumspect about the security of dollar assets. There is the loose cannon formerly known as the last POTUS sat at the controls from November this year. But until the denouement, the US may still be gangbusters. Half of VWRL is the US, this would support holding VWRL in the ISA. Not so much VFEM.

I hold 25k of VFEM in my ISA and I hold over 40k of VWRL in the GIA, as well as a much larger lump in the ISA. There’s a strong case to kick VFEM into the GIA because it doesn’t produce a lot of income, and doesn’t have the same sort of expected gain as VWRL, Quicken tells me I have eaten a 10% loss on VFEM over the years. Every dog may have its day, but this one has yet to bark.

I could sell the 25k VFEM in the ISA, buy 25k VWRL with the proceeds, buy another 20k VWRL with new ISA cash and sell out all my 40k VWRL in the GIA, perhaps using 20k of the cash to put in the ISA. I can then buy the 25k VFEM in the GIA, retaining the diversification, or perhaps even buying more of it.

Another diversifying deadbeat I could buy in the GIA is a broad commodity fund. I have to first give some thought as to whether TA’s risk tolerance is way down on mine, the DB pension stiffens my spine, and I am closer to getting the SP. He’s not advocating a huge allocation to commodities, and let’s just say I am sorted for gold in the GIA mix.

I am aware this anomaly between earned and investment income may not survive a change in government.

Rich Dad, Poor Dad – tax on cash savings

An indicator that this discrepancy was instigated by the elites against the little people is the higher taxation of the interest on savings compared to investments, little people don’t have real investments, they “invest” in cash as a rule 😉 I was had by this anomaly last year, because I displayed some Poor Dad muppetry as outlined by the book Rich Dad Poor Dad, strapline What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not.

I am a basic rate taxpayer from my pension, so I get the privilege of paying income tax on savings income. It’s not the worst problem to have, given the alternative is sleeping under the railway arches. Everybody has their unique foibles regarding taxes they resent peculiarly, and it turned out tax on cash interest is mine. For rich parents the Room 101 is IHT and they fill up the Telegraph with the evils of inheritance tax, asserting it to be the most hated tax in Britain – which is bonkers, as this bunch of accountants deconstructs.

perhaps an education programme to support a tax that will bring in £15bn a year by 2032 without affecting 96% of the population should be part of the government’s pre-election agenda

My bugbear is paying tax on interest on savings. It appears you can get £5k on savings tax-free if your income is below the personal allowance but for basic rate taxpayers it’s £1000, and just like the thought of paying higher rate tax as a pensioner jars some people off in spades, the thought of paying tax on cash interest hacks me off.

Let’s put the roughly 5% ‘interest’ on savings into perspective. This is a compensation for half the loss in real value due to inflation. If you could buy 100 loaves of bread last year with the cash then you can buy 95 this year with those savings + interest, and then HMRC come along and demand another loaf of bread? Fuck off.

After paying £600 tax on savings last year I transferred most of my cash savings to Mrs Ermine, because I am quite happy to forego the £3k interest to avoid paying £600 in tax, as far as I am concerned Mrs Ermine is a better recipient, and if I can’t have it then HMRC can definitely not have it. Which is, of course, exactly the same sort of thinking as the Telegraph’s IHT whingers who want their wastrel kids to benefit, but I only filled up a couple of paragraphs of this blog post with it rather than years worth of newsprint. And I did something about it after getting had the first year unlike the King Tutankhamuns of the Torygraph IHT grizzlers 😉

Tax on investments – capital gains tax and dividend tax

Both of these are about half the rate for basic rate taxpayers compared to the tax on income. Capital Gains tax is the odd one out of many taxes, because you can usually pick the time of battle, which Sun Tzu approves of

He will win who knows when to fight and when not to fight.

In comparison, income tax you pay as you incur the income, same for dividend income and tax on cash interest. CGT is not always elective, there are some corporate events that mean you crystallise a capital gain. It’s  complex to calculate if you build up a holding over time, and for God’s sake don’t hold accumulation units in an unsheltered investment account because trying to unpick the split between capital gain and interest will take for ever.

There is an asymmetry in capital gains tax between losses and gains. If you declare a loss² in one year, you can roll it forward year on year. If you don’t use the CGT allowance one year, you don’t get to carry it forward.

The CGT allowance has dropped massively, for a long time it was £12k p.a. and it will be a quarter of that next year. Let us assume that you are targeting the typical long run average market gain of 5% and inflation is not running at 10% as it has recently, say you target a nominal 7% return. If you invest in growth stuff that pay hardly any dividends, then back in the day you could target a capital base of 150k before CGT would become a headache, now it’s about 40k.

Shares are volatile, so one question is how should you play your capital gains to pay as little as possible. Because of the shrinking allowances, for last year and this tax year, use as much of this year’s capital gains allowance as you can. I used all my 12k allowance churning my gold holdings, selling SGLP and buying SGLN to crystallise a capital gain on SGLP. There is the cost of the turn there, which is non-trivial on over £100k. I also collected some gain on BP and minor holdings to get the £12k gain.

This year I’ve already collected £1800 gain on PSH H/T Monevator leaving me £4200 space, looking at my holdings I could use that space up by flogging about 30k of VWRL. There’s an HSBC world ETF I could buy if I wanted to stay in the asset class in the GIA. If I am going to move VWRL into the ISA then I don’t need that switcheroo.

From a gut feeling, once the CGT threshold has settled at £3k, it seems that it would make sense to either use up the allowance and not crystallise any losses, or if you are going to crystallise losses save ’em up and roll them forward, and hit all the losses. This does, of course, assume you are in a fungible asset class where one ETF can be swapped for another. Individual shares are sui generis, you can’t really swap AZN for GSK with the same equivalence as VWRL/HMWO. Crystallising a loss does expose you to the anticipated gain on holding the asset, but if you are rolling forward the loss then whenever the gain shows you have a rolled forward loss to offset, which lets you choose the time of battle.

I already have a CGT loss of £10k that I keep rolling forward. You don’t have to offset a roll-forward loss against gains in any one year – last year I could make the £12k gain, declare it against the allowance, but still roll forward the £10k loss. As opposed to burning the 10k loss against most of the 12k gain. The value of the loss falls due to inflation, so bumping a loss on for decades to retain optionality is losing out in a subtly different way.

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1. There is no NI on pensions at the moment, but it would piss me off to pay more tax at 32% than the tax 20% bung on the way in. ↩
2. the loss has to be an aggregate loss. You can’t just say that I will take a £3k capital gain within the limit and oh by the way the 2.5k loss on this other share I want to roll forward. Doesn’t work that way. ↩

Jezza budget special, meh but early retirees watch yer class II NI

Jezza’s at it again. Much is made of a 2pc drop in National Insurance, which is all very well but given the £12570 tax threshold was frozen since 2021 and would now be worth £14874 you’re paying £400 more in tax anyway. Sure, every little helps as they say. You have to be earning £21k¹ before the 2% knocked off NI beats out the increased tax you pay due to fiscal drag.

A gotcha that FI aspirants may be in for is the final abolishment of Class II NI contributions. I had feared this since Nick Clegg’s crew had this in their gunsights pretty much as I retired. The devil is going to be in the detail I don’t have.

If you’re lucky, declaring as self-employed for a year would get you a paid-up year of NI subs for free rather than the £150 I paid, in which case I paid more than I needed to. I had seven years to make up. I can’t argue with that, I got 97% off what an annuity of equivalent value would have cost.

If you’re unlucky, there will be a minimum profit requirement to get those NI credits, in which case you will be SOL unless you meet that profit requirement. This was articulated in 2015.

No more income tax cuts

Many years ago, Thatcher made a big song and dance about wanting to cut the headline rate of income tax, which was 30% at the time. Higher rate tax was at a much higher rate, the Beatles who were so pissed off about it they wrote a song about the taxman. Thatcher was right, a top income tax rate of over 90% was probably too high 😉 Notable about post-war Britain was it was flatter in income than today, a lot of money came in the form of the aristocracy, which is still there but somewhat drowned out by the nouveaux riche in the last 40 years. The aristocracy didn’t have too much problem with income tax because their riches came in the form of capital.

Inocme share over time. The bottom 10% have been mullered, particularly since the GFC. Presumably there were no poor people years ago because they didn’t register in the stats

The grocer’s daughter backfilled the hole in the Government’s finances before launching her tax cuts, largely through the free gift of North Sea oil, and selling off anything publicly owned that wasn’t nailed down. The personal finance motto holds – save before you spend on elective nice-to haves, a gracenote that the Liz Truss “I was right all along” tribute band didn’t find the need to play.

In doing that Thatcher established a shibboleth that income tax is in and of itself wrong. In her time, given where she started and these two free gifts, it probably was higher than it should have been.

The first free gift of North Sea oil revenues we seem to have parked in house prices, imagine what we could have done with that otherwise. The beneficiaries of this are primarily Gen X and Boomers¹, and their legacy to their greedy kids as time goes by. Everybody wants to favour their kids over everybody else, this will lead to feudalism as time goes by, hopefully this is will not happen fast enough to be my problem. See the concept of private schools and the bizarre claims that inheritance tax is the most hated tax in the UK. The torygraph gets its knickers in a twist over IHT all the time and comes to exactly the wrong conclusion after acknowledging the rising amounts of dynastic wealth. As for the journalistic flannel of calling it a tax on the dead, if there’s ever an occasion that you can resolutely tell HMRC to eff right off it’s from six foot under. What are they going to do, put your stiff in prison? There’s not enough place for the living as it is.

A high tax primal scream – it’s what you keep, not what you earn

Over at Monevator, there is a thread on taxation that also holds a primal scream therapy session about the iniquity of taxation of Londoners these days. While I was born in the Great Wen, grew up there, went to university there and started work there, I fear my City of London passport has run out, so I shut my cakehole as far as London taxation was concerned. I am not clever enough to know if Londoners are overtaxed. London has over a tenth of the population of the UK¹, although I suspect most of that population isn’t exercised by the tax issues in that thread. It occurred to me, however, to ask myself how much a lowly London-living mustelid paid in tax, and whether there was the same amount of steam coming out of his ears.

ermine at the BBC

I did try and find a BBC payslip, but it’s nearly 40 years ago, so an annual increment will have to do, £8412 in April 1985, to which we have to add the shift allowance² to make £9352. The Bank of England tell us this is £27022 p.a. in today’s money, considerably below the median wage of £33,280, so this mustelid was obviously sleeping in a curl under Charing Cross railway bridge.

A sleeping mustelid

Not so fast young fellow, bear in mind this is 38 years ago. We were all much poorer then. You may bitch about the cost of living now but 40 years of globalisation and growth did count for something even if we did conclude we don’t need any more of that malarkey in 2016. When I computed the value of my first kitchen portering job it ended up considerably below the current NMW. People in work earn more in real terms than in the 1980s.

BBC TV payslip

The single person’s allowance was £2205 in 1985. The married man’s allowance was 3345, but I got 2205, so right off the bat you can see I was paying 30% (that was the rate!) tax on three-quarters of my pay. NI was 9%³. It’s always the devil’s own job to compute NI, so I am going to approximate this as a combined tax rate of 39% on three-quarters of my pay. That’s 2787, leaving me £6564, a composite tax rate of 29%. Times were tough back in the day, cue the Four Yorkshiremen sketch. If it makes the overtaxed primal screamers feel any better, nowadays you’d have to earn £68000 gross to end up paying a composite tax rate of 29%. That’s over twice the median wage. Even that young Ermine benefited from lower taxes through Thatcher compared to what the Beatles grizzled about in 1966.

No, I couldn’t afford to buy a house in London either, although this was before I thought of such things. I shared, first with ex-university friends, then as they slowly paired off, I ended in a bedsit in Ealing. I had gone up the greasy pole at the BBC, doing an MSc and returning on a higher pay grade at Designs Department. But I had gone down in my housing situation, because I hated paying rent, and I hated having to move because of other people’s changing circumstances. A bedsit with a shared bog is pretty much the last station before the park bench IMO, and this wasn’t because I couldn’t pay. I didn’t want to pay, because rent is throwing money away. Monevator would have approved of my bohemianism, but it was a ‘king miserable way to live.

Be no King Tut

“When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’

Lewis Caroll, Through the Looking Glass

Monevator had a deconstruction of the potential of Jeremy Hunt’s new pension freedoms to knock £360,000 of the aggregate tax in a dynastic bequest. As a virtuoso performance of creative tax planning there was nothing wrong with it, but I venture the title was either provocative or ill-chosen, because the virtuoso performance was drowned out somewhat by the car-crash of multiple readers losing contact with the narrative. Because this was titled Pensions, the LTA, and IHT: how a middle-class couple can bag £360,000 for free and this crew were earning £160k each.

And that wasn’t how most readers defined middle-class, nor indeed how the dictionary defines it. I am at the end of my working life, so my definition of this was probably set two generations ago, and matches the dictionary version. For a more modern take on this let’s take a leaf from FireVLondon’s taxonomy of London salaries and apply a 30k p.a. malus to their £160k salaries to make it 2015 again.

Even in the rarefied air of London salaries they are almost one percenters. There is vigorous support for Monevator’s impoverished middle-class strivers, however, from the Torygraph which is right behind these poor strugglers.

“Very often high earners will be working in highly unequal environments where the people they network with earn about as much or more than they do, so they are likely to think their income is about average.

“People on £125,000 are relatively close to the top 1pc of earners (those on around £180,000 a year) in their workplaces and social networks, but the rungs ahead of them are further and further apart, so they don’t feel especially high up the ladder.

Diddums. For some reason the obsidian Ermine heart fails to bleed… There’s more love from the Torygraph for these dear folk who can find solace in a forthcoming book Uncomfortably Off. Having read the rubric on Amazon I have the feeling that our tragic Rich Kids of London might feel a tad out of place at the book launch in May, and possibly feel that they are surrounded by lefty snowflakes failing to genuflect to their desperate plight.

The Telegraph really ought to hire more competent interns. OTOH if the the byline writer Harry Brennan gets ChatGPT to write his articles then they only have themselves to blame. Or maybe they will spike the article before the end of May 😉

For reference the UK median wage is 33k, though in London the streets are paved with gold so the median is £41800. Before all you country mice hightail it to the Great Wen check out the cost of accommodation first. That ejected a young mustelid from the city thirty years ago.

Don’t let the tax tail wag the investment dog, well, ok, maybe this once…

They say you shouldn’t let the tax tail wag the investment dog, but I would beg to differ in the, er, dog days of the £12300 CGT allowance. It’s probably more important in future as this allowance drops to £3k in a couple of years. Why is this?

First, if you are using your ISA, as I am, then no worries in that particular area. If you aren’t, then Monevator would like to know why the bloody hell not? Only hold investements in an ISA on pension? Stand at ease, as you were.

However, I have concluded that as I can live off my pension then it’s a little bit mad to retain the three years equivalent salary in cash-like savings that was there to prevent me becoming a forced seller into a down market when I was living off savings and then SIPP income with some earnings. The emergency didn’t come, and in Covid that savings crept up to about 5 years, what with spending less, earning a little more. Along with some luck and Covid shorting, so I have unwrapped holdings in a GIA as well as wrapped ISA holdings. It is the holdings in the GIA that exercise me here.

Gold has had a decent run of late.

I decided to give the gold holdings the order of the boot from the ISA, gradually selling them in the ISA, buying some equities in there with the proceeds, mainly VWRL, but at the same time as I sold gold in the ISA I bought that much and a little more in the GIA with some of the cash savings. Gold has had a decent run of late, sufficient that I sold all my SGLP to crystallise about 6k in CGT, to buy SGLN. Slightly over 30 days later I look at the SGLN and observe there’s another 5k in capital gain up for grabs, so I flog that and buy SGLP back. I also collected a profit of £2.7k in BP, which I have decided to get out of now, and find I have gone somewhat OTT on capital gains for this year. Never mind, I am prepared to eat a £500 loss in SMT and a £1k loss on LGEN. LGEN is softened by the £500 dividend paid, but I did time it wrong, never mind. The trend towards a tax free dividend allowance of £500 shows that having a GIA containing dividend payers is not such a good idea in future, but that’s another story.

I liquidated a few minor gains¹ to get as close to the £12300 CGT for this year but just under. Obviously I get to eat the spread in the turn, I am not so sure I can get so excited about the £5 dealing fee in a seven figure total, but the turn is about 10 to 20 pips, and may be wider on actually doing it rather than a soft quote, which is getting on for at least 200 sods, so you don’t want to spin this wheel too often. OTOH the putative CGT saved is 10% of £12300, which is worth getting out of bed for.

Move along now. Nothing to see here, sir. Move along now. Strong and resilient Don’t Panic Capt Mainwaring

Now assuming that the banks really are strong and resilient as they keep telling us, despite SVB, First Republic, Credit Suissethen it’ll all come good. Probably will come good in a couple of years either way. In that scenario I expect that gold to tank, compared to my last purchase price and go down, by about 10k, less some sort of inflation, as equities increase. But in that case, the embodied capital loss is then able to be offset against any gains, so selling it and rebuying now gives me optionality in future. The gold is there as diversification, I don’t want to off it, so the recent gain is purely notional. What the market giveth with one hand, it taketh away with t’other in its own good time. Of course if I knew that ZIRP was going to return again and money would be there for free I would maybe hold off, but you never know. One day the GFC will have to be paid for…

There’s an asymmetry with capital gains, in that losses can be rolled forward for future use, but gains have to be used in the year. This year’s gain was particularly valuable, because it’s more than it will be in future – 6k next year, three after that. A GIA will be much less valuable in future – in a typical scenario of 7% average annual returns (assuming inflation of 2% as it used to be, hahahaha) a £12300 allowance lets you hold £175k before running into CGT on average. In the end scenario of £3k you get to hold about 42k before running into CGT. And, of course, inflation is 10%, though they all say that isn’t going to carry on. We shall see about that.

I will naturally use the £20k ISA allowance coming up, and perhaps the one after that if it’s on offer. After that, well, who knows.

Britain is a poor society with some very rich people in it.

It’s hard to see Keir Starmer weeping too many salty tears about capitalist running-dogs like FI/RE sorts, because as that fellow from the FT said, Britain is a poor society with some very rich people in it. The Atlantic summed it up better in How the UK became One of the poorest Countries in Western Europe

Britain chose finance over industry, austerity over investment, and a closed economy over openness to the world.

There’s a Panorama programme on how the accident happened, although they stop short of asking why it happened ²

the BBC’s Analysis Editor Ros Atkins asks why so many people are feeling so poor.

A: it’s because they are poor, seems to be the conclusion.

And if you think this view is a particularly a lefty wonkery worldview then let’s hear it from the Torygraph – Britain is a poor country pretending to be rich. In particular that fellow wants a word in the shell-like of all you workshy middle aged FI/RE shirkers. So that’ll learn ya.

We have actually seen this movie before, well, those of us of advanced years have. When was that? Way back when, in the early 1970s my German grandmother cam to visit us in London. She was gobsmacked by the number of old bangers on the road then, you could almost see the thought bubble “But I though Britain won the war, what’s up with that”.

I think that sentiment was voiced over a bottle of wine that she had brought with her. Seriously, the 1970s were a terrible time Britain for quality in wine as well as cars, the stuff people drank was revolting. Even Blue Nun is probably better now. My grandmother wouldn’t have tolerated that in the house, never mind brought it over with her own fair hand.

Wonder what else happened around that time, when Britain was known as the sick man of Europe. Ah well, correlation is not causation, so that’s all right then. Like with the banks. Move along now. Nothing to see here at all. Britain is rich enough to laugh off a 4% hit in GDP as a mere trifle.

In particular, since ISAs are a key tool to enable the under 50’s to speed up their retirement then I wonder what the direction of travel will be in a few years’ time?

In the meantime use it or lose it – both your ISA allowance and should you be so fortunate as to have the need and the capability, your CGT allowance!

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1. I was hoping to have enough GIA investment income to defray the increase in power bill but the Buzzard has shat on this idea somewhat with the upcoming £500 tax-free limit on dividends. Though if you are going to pay tax on income dividend income beats earning it or indeed pension income, as dividends are taxed at 8.75% for the lower orders. I was more generally so wrong with that post in its anticipated effect on me :( ↩
2. It seems to be regarded infra dig for the current government to find the BBC asking ‘how did the government fuck this [insert specific aspect of British life] up.’, although asking that specific question used to be the point of the fourth Estate. ↩

Compound Interest spreads its wings only at Dusk

It’s January. The nights are long, and it is cold, and rainy. It’s about this time of year that they always run the articles abut Blue Monday when it’s the most miserable time of the year, because we are done with the Christmas debauchery and it still doesn’t feel light even though the Sun is rising earlier. They are still wittering about the economically inactive. The BBC have at least identified there’s not much chance of getting you FI/RE lot to do your patriotic duty for the economy.

Almost nobody who has retired early says they want to return to work.

A new year, new start

I am old enough to have determined new years resolutions don’t work. I don’t do gyms anyway, but the best way to avoid that sort of resolution is not to pig out to excess extendedly. It’s OK to eat and drink to excess a couple of times in the Christmas period, but debauchery and gluttony are to be avoided in excess.

One thing I am experimenting with is to reduce screens/online. Interesting that Weenie is taking up jigsawing to go in this direction, is it a zeitgeist thing or great minds…

I have already taken step through the end of last year to reduce news consumption. I still remain informed, it’s the time/attention thief I am trying to reduce, rather than to do the full Walden Pond thing. One way is to to act more like it were 1998 on dial-up. As long ago as work I got a win on this with email by not running it all the time, once in the morning and once in the mid-afternoon. I have forgotten what office-worker’s guru put me onto that but it worked. For a wider win I aim to concentrate interwebs in bursts, like it were before the Millennium. GenZ has taken this battle to the enemy with customary panache, at the cost of never clocking off. I wonder if that Zuckerberg isn’t barking up the wrong tree trying to create the metaverse. It’s already here, just unevenly distributed. Poor old Zuck he’s pushing forty, and his younger self called the problem out

Young people are just smarter

I get to listen to a lot more music. Which is more reflective than using t’internet, although when I stream it is from a NAS rather than the likes of Spotify or Apple. I did consider using Tidal but I still can’t bring myself to do subscriptions. It is possible to buy downloads from Qobuz but it’s usually cheaper to get the CD s/h. I listen to music through the electric, instead of on their phones.