what happened to the middle class in the UK?

Reading the Daily Torygraph ranting about how higher earners would be £18000 a year worse off as a result of various dastardly tax changes  I was struck yet again by the Telegraph’s curious concept of middle class. Don’t get me wrong, I’m all for people avoiding tax as long as they keep it legal, but it was this quote

said that the changes would be significant for many people. “£175,000 is a good salary, but it’s not one of those banker salaries that makes people horrified,” said Jane Beverley, its head of research. “These people will be losing 16 per cent of their take-home pay, and that’s not money that can easily be replaced.”

Diddums. My heart bleeds. Really it does. The Telegraph generally carries on as if a six-figure  salary is a typical middle class salary. They need to take a reality check. I have swiped this image from this TUC report on the income distribution in the UK. Okay, so they have an axe to grind, but this wikipedia article corroborates it. You can find your own place in the pecking order/rich list at the Institute of Fiscal Studies Where Do You Fit In page.

Income distribution in the UK
Income distribution in the UK

Let’s just say that these poor saps who are only earning £175k aren’t middle class, certainly if income is used to define middle. They’re perfectly entitled to be hacked off at losing 18k, and they might like to know that there is an election on if they want to push their views 🙂 The real middle class in Britain seems to be running on the 20-30k p.a. mark.

The TUC report does show what happened since the 1960’s  however.

The six decades since the Second World War have brought dramatic changes in the social and class structure, resulting from the process of de-industrialisation and the emergence of a service economy. Thus the proportion of people working in manufacturing fell from 25 per cent in 1971 to 11 per cent in 2006. The effect has been an upward drift in the class classification of households, with a steady fall in the size of the traditional manual working class and a steady transfer from factory jobs to clerical and white-collar jobs.

which explains why so many people are described as middle class now – we held on to the job classification description, and outsourced most of our working class jobs to India and China. The Americans, with some of their delightfully straightforward honesty, follow the money, and as a result they don’t screw up like this when thinking of the middle class.

Figure 1, however, based on income rather than class, points to a very different interpretation of the shape of modern Britain. It shows that households are heavily concentrated within a narrow range of incomes in the bottom half of the distribution. Indeed, almost two thirds (65 per cent) have an income that is less than the national mean. […] Indeed, one group of academics describes Britain as ‘onion-shaped’ – with a few at the top, a bulge of people below the middle and fewer at the bottom, though more than in the diamond shape.

So it follows that a middle class salary isn’t what it used to be in the pecking order.

On the other hand, those moving up the class ladder have not progressed to income levels enjoyed by the middle class. Instead there has been a rise in the proportion of the population living on incomes below the mean. Those who have risen through the class hierarchy to swell the ranks of the ‘lower middle class’ (clerical and administration workers, supervisors, lower-tier managers, owners of small establishments such as corner shops), have mostly ended up in a lower position by income distribution than where they would have been as members of the skilled working class a generation earlier.

Thus the explanation of the Telegraph’s position is that they are adopting the 1960s job position definitions and applying it to the current position, ie defining middle class by where those jobs would now be. We’d now call them upper middle class.

I observed this first-hand. When I started work, the relative living standards of people who were working at the level I am now were much higher compared to others than I would say I am now. I’m not asking anybody’s heart to bleed for me, because the absolute living standard I have is considerably higher than they had, with the possible exception of housing because I chose to pay my house off rather than run a larger mortgage for a longer term.

What has changed dramatically, however, is the work environment. Efficiency in using capital is bought at the cost of a certain degree of relentless inhumanity.  The power balance between capital and labour has shifted towards capital and away from labour, resulting in a polarisation to the top of the wage scale, the fat cats, heads of pretty much any organisation etc, and low-end jobs which can’t be outsourced (cleaning, care, etc)

change in availability of jobs at income points - middle ones have dropped between '79 and '99

In the 1970s wages were 65% of GDP, whereas in 2007 it is 53% according to page 25 of the TUC report. This represents a shift of over 10% in favour of capital. And capital is even more unevenly distributed than income, a net worth (including unmortgaged house equity) of more than 270k puts you in the top 5%. So the power shift from labour to capital, the increased concentration of income around the lower end to compensate for astronomical salaries of fat cats and the low net worth of people in Britain point to Danger Ahead, Hard Times coming.

I predict a riot at some point…


trying it on with the car insurance company after they tried it on with me

It’s one of the sad facts of modern life that companies fight like cats in a sack to win new business, then treat existing customers like crap.  So you have to keep on chopping and changing.

The AA tried this on with me, car insurance goes up from £220 to £300. Necky so-and-sos, so I ring them up and tell them they have to do better. The first customer service droid hemms and haws and gets it down to £250, but with strings attached like having to join the AA for an extra £26. I don’t want extra breakdown insurance, so I tell him to try again, maybe see if third party fire and theft is better.

That was to prove their undoing, as he comes back saying that third party is more expensive. This tells me two things – one is that they are lying sacks, as there is no earthly reason why covering less risk should cost more. And that they are overpriced too 🙂

So I tell him I’ll walk, and now I get all sorts of stuff about the retention team, and can I tell them what I’ve been quoted. I figure that last year’s price isn’t so bad, I haven’t had any accidents, so why should it change?

Well blow me down with a feather – the retention team quote me £213 for exactly the same insurance. Next time I must remember to take a debit not credit card as I get soaked 1.5% extra for the privilege of using a credit card, but the total is still a tad less than last year.

So the AA may be a comparative site for new custom, but they were prepared to try it on and overcharge me £80. Well, two can play at that game. Next year I’ll see if I can get them below £210 fully comp. £80 isn’t bad for half an hour’s work.

Interest only mortgage – Do you feel lucky, punk? Well, do you?

Monevator has a good post about using an interest-only mortgage as an investment tool. You have to live somewhere, and if you have the discipline then it’s a great way to build up an investment portfolio over the term of the mortgage which will pay off the capital.

Hey, where did I hear that before? Ah yes, as a late-twenties starry-eyed young pup in the market for his first mortgage. Abbey National’s estate agents at the time, Cornerstone, sold me a mortgage. I went in wanting a repayment mortgage, like my Mum and Dad used to have. Lovely LAUTRO saleswoman, Sue she was called, gorgeous green eyes…

“You can do better than that. with an endowment you just pay the interest, but look at this Friends Provident with profits fund. Look at these lovely growth figures. At the end of your 25 years you’ll have twice as much in the endowment as you’ll need to pay off the capital”

Sucker. I was had. These were the years of Gordon Gekko, Greed is Good. Beware pretty saleswomen promising the earth. I was single, so the one benefit of an endowment, the life insurance part, was worthless to me or anyone I cared about. But 100% profit in 25 years, well, that had me. That’s the takeaway message I got, I am sure somewhere in the fine print there was the usual past history is no guarantee yadda yadda. But I was lost to the green eyes and the promise of lots of moolah. I hope it was the moolah that swung it rather than the eyes…

A few years later, the house underwater on the mortgage, Friends Provident demutualised and I got seven grand. Which, having gotten wiser, I paid down to the capital. On the principle that there were now nasty shareholders rather than cuddly mutuals so I would be ripped off and enjoy poorer with profits performance, so I better at least use it to reduce my interest payments.

Then the letters came saying “sorry old chap, but we were a tad overoptimistic in our predictions it seems. You, mate, will be lucky to get half towards your capital, so you better raise the amount you’re putting into our rotten with profits fund to catch up. Ta-ra”. Or words to that effect. I saw red and wrote the MD of Friends Provident a stinking letter telling him their salesperson had promised me a guaranteed return. He, or rather some lowly grunt on his behalf, wrote back after a while saying “no we didn’t, but you can moan to us, then the Ombudsman if you like”

So it was that after moving I ended up with an interest only flexible mortgage from those nice people at Birmingham Midshires. Nobody wanted to sell me a repayment mortgage in those heady days of the dotcom boom.Every year I’d pay off a lump I’d saved to reduce the capital.

Some lengthy time later, Friends Provident settled with me to put me back in the position I would have been had if I’d taken a repayment mortgage, which was sixteen big ones they’d lost me in ten years. I paid this towards the capital of the new house. No foreign holidays, kitchen refits or cars were involved here 🙂 Having screwed up royally in the dotcom boom I learned, do not churn, sit on your hands, and continued to pay down the mortgage. From 2003 I changed tack, and started investing in a dead boring Legal & General tracker fund, using some of the money I’d otherwise be putting into the mortgage capital repayments. That did help me steal a march on the mortgage, and it 2006 I reduced the mortgage to the minimum BM would allow me to have. This was a flexible mortgage, so I could ring them up, and they would transfer to me any amount from 10k up to my overpayment into my bank account by BACS.

People often advocate an offset mortgage, where your savings with an institution are offset against your mortgage, so if you have a mortgage of 100k and savings of 50k you only pay interest on 50k. That sounds great, except in the credit crunch. Because the small print says they can forcibly use your savings to pay down some of the mortgage. So the general rule is never hold your stash of cash with the same organisation or banking group that holds your mortgage. This happened to someone I know, which screwed them royally.

I liked the disconnect of the flexible mortgage. Although I used shares ISAs to save my capital (effectively doing myself what Friends Provident had so miserably failed to do on my behalf) I never tackled this with the intent and savvy that Monevator proposes. But I can vouch that it works, I paid my mortgage down with about 10 years left to run. And paid the mortgage company  less than a tenner a month while I mulled over whether I wanted to discharge it. Monevator would make a good case that I shouldn’t have, I could have invested in 2008 and made a mint, and indeed could have had 11 years more use of this cash, currently at rock-bottom rates. But I don’t have his edge and ambition, and in the end I wanted my house to be truly mine.

2007 mortgage  statement.
2007 mortgage statement. BM didn’t get fat off my back that year 🙂

the pros and cons of cycling to work

It’s easy enough to calculate how much money cycling to work saves me. I’m a civilian cyclist, not one of the hard nuts in Lycra and sinews like steel cables. It’s apparently called utility cycling.

Biking to work scores as an experience compared to driving if it isn’t raining, particularly at this time of year.  I get to hear the birds, indeed cycling regularly I get to even know some of them blackbirds individually by song.

I hear the high-pitched excitement of the nestlings as Dad comes to the nest bearing food, and the sparrows get up a racket in the hedge because it’s just what they do at this time of year.

Another plus is that a bike journey is very repeatable in duration. My journey time varies by less than a couple of minutes a day, probably from the one set of lights.

I had hoped that cycling might help me lose weight. I am someone who hated sports at school, and despise exercise unless it does something useful for me. Walking for the sake of it? Nah. Walking a few miles to go see something interesting or to shoot pictures in an interesting landscape, now we’re talking… Thus working out how to avoid the cost of a gym subscription has never been a problem for me. I don’t see the difficulty, pay good money to smell stale sweat and ache afterwards, what’s to like about that 🙂

The nasty little secret is that biking doesn’t do that much in terms of calorie consumption. Not the way I do it. I average 8-10 mph over a distance of 13 miles round trip. These guys reckon I use about 260 calories each way with leisure cycling, which I find hard to believe. That’s about a Mars bar a day each way, not that I eat rubbish like that any more. However, according to this post, I would use somewhat less than half that just sitting at my office desk, so the difference is a marginal 300 calories.

Whatever the reason, leisure cycling makes precious little difference. There’s only one way to lose weight and we all know what it is. You don’t need to pay anybody for a fancy diet plan or crap like that, just knuckle down and eat less. It works well enough for me but it takes months.

There’s no point in cycling like a nutcase because the time I save en route would be wiped out and then some by the time it takes to shower and change at work, and the experience would be worse so I wouldn’t keep it up.

For the keener cyclist there’s another financial incentive. It costs an outrageous amount of money to knock a couple of pounds in weight off a bike, going to titanium bits and bobs. Knock a couple of pounds off the rider does the same thing to your ride, costs nothing and won’t get nicked with the bike either!

That’s not to say cycling has no physical benefits. It does improve my fitness and stamina, and makes hiking easier.

Somewhere it all went wrong. We was robbed – you and me and everyone else

A last look at our unscarred friendly skies before flights resume

The recent hoo-hah over the flight ban caused by Eyjafjallajökull makes me wonder. As a kid in the 1970s I remember being told that the future would be a relaxed one of more leisure time, a three or four day work week and the chance to pursue our visions and dreams. The grunt work of keeping the economy going would be done by robots doing our every whim. It all seemed possible then, that the advances in technology would serve us all.

Somewhere along the way we all took a left when we should have taken a right. Why exactly is it that so many of us are working in crap jobs, in hock to the Man for our mortgages and dreams, and we live for two weeks abroad? Two weeks of escape, versus forty weeks of quiet desperation. Where did we sign on for that, how can we get off? In the past it was possible to raise a family with the income from one man’s wage. Now a typical family needs both adults working to service the mortgage. What happened to the promise of a shorter working week? The current two day weekend was only introduced in the 20th century, a change from the old Sunday off pattern for agricultural workers. Imagine the bleating from the ‘business community’ if we tried to take out another day.

I feel for all the poor folk stiffed by Fate this last few days. But isn’t this all a wake-up call, is it really worth packing ourselves like sardines to be abused by so-called low cost airlines for 10 days of escapism which doesn’t always turn out all it’s cracked up to be? Travelling is rarely improved by haste.

What I want is more time, to travel slowly and overland, not have to pack my experience of other worlds into two weeks mandated by the desires of some corporation. I want to taste the food and feel the plains of Europe slowly give way to the mountain ranges, to follow great rivers from the sea to the source. I want to do it over weeks, not hours, and do it well.

Somewhere in the three decades since that dream of a longer weekend was sold me and now, something went wrong. We collectively bought into the false dream that Stuff would give our world meaning, and joined the wild merry-go-round of buying more and more of less and less.

Somewhere in these friendly skies unscarred by the vapour trails there is a reminder that it doesn’t have to be this way. We’ve done without air travel for a few days. Nobody has died, and all the inconvenience has been because of the unexpected nature of the shutdown. Air travel is nice, but it isn’t essential.

Maybe it’s time to charge it for the external costs it imposes on the rest of us. Tax fuel at the same rate as other transportation. Charge it for the loss of the quiet times and the uglification of our soundscape and our skies. Ban all night flights between 11pm and 6am, so that the Many can get some sleep at the expense of the Few that are in such a damned hurry. Air travel has gotten away with too much for too long, externalising its costs in terms of noise and nastiness. But most of all, perhaps we should ask ourselves why it is that we put up with this enervating haste, for so little return in terms of quality of life? Why are we rushing around so much, if it doesn’t seem to make us happier?

Dogs of the FTSE 100 – chasing yield

miscellaneous mutt image
Not this sort of dog!

As someone looking for an income from my capital assets, I am going for dividend yield in my shareholdings. There’s no rule that I have to get an income from dividends rather than growth, but realising an income from growth means selling itsy-bitsy numbers of shares.

The majority of my holdings are in the L&G Global 50:50 fund because that’s one of the three funds I can save AVCs in and I was able to save half last year’s salary tax free in it.

The principle behind Dogs is to look for stocks that are currently unloved (the share price is low) and have high dividend yields. Select the 10 highest yielding stocks of the FTSE 100 every March, buy an even cash amount of each, then leave for a year and re-evaluate the next year. Sell the ones that aren’t dogs any more, (hopefully at a profit 🙂 ) and purchase the new Dogs, keeping the per-Dog amount around 10%. An analysis of the results of this approach is available here.

The risks are clear – though companies in the FTSE 100 don’t usually go bust a high yield usually indicates there’s trouble in Paradise. Either the company has fallen out of favour and the price has tanked, or a share split has happened, which means you are looking at the dividend which came from a share that is now represented by 10 shares. In that case you’re not comparing like with like (Cable and Wireless seem to be like this now). You need to screen the candidate Dogs against this sort of thing, and eliminate any which state future dividends will be slashed.

My ISA is small – I could only fund it with £3600 last year as my cash ISA emergency fund blocked half my ISA allocation. So my opportunity to get into the Dogs was limited. However, in my search for yield, I ended up with two Dogs already – BP and National Grid. I work for another Dog (have just checked and its recent share price appreciation means it is Dog no more), and through the  employee share purchase plans I have more than enough exposure to that Dog.

There’s something disturbing about inadvertently setting up a Dog fund in my quest for yield. Having read this Money Observer article on the Dogs strategy, this year I may look for Dogs with intent. After all, it seems to align with my values, so I will use my ISA allocation to load up with the remaining 7 Dogs next Feb/March.

how much is it costing you to get to work

petrol at 101.9 ppl
This photo was taken less than a year ago and is already obviously out of date

You generally think of work as one of the things that puts money into your bank account, but working does also cost you. Getting there and back is a hit, as is the cost of coffee, lunch, and any socialising you do. If you walk to work then getting there is free, of course, but many people have a significant journey to work and back. This is easy enough to work out if you use public transport, but it is one of those nasty little creeping expenses that mounts up stealthily over the years if you drive to work.

In my attempts of purge life of some of these costs, I am cycling to work. When I moved here I made sure that I did not live too far away from work – my London commute was 1 1/2 hours each way for a journey of 15 miles, and I knew that I didn’t want to live like that in future. I live about 6 miles from work, which is far enough away to not see it on the weekend and close enough to bike. In the interests of getting visibility I figured I should change my drop-handlebar bike for something more upright, so I wanted to evaluate the business case. I’d have a car anyway, so I will stick with simple fuel costs for calculating my savings. The results were interesting – the following Javascript calculator is preloaded with my costs, but it will let you work out your own costs if you put in your own distance, MPG and petrol costs.
[iframe http://simple-living-in-suffolk.co.uk/mine/1004_mpgcalc.html 500 200]

It surprised me – a classic old personal finance saw is that the cost of a daily skinny latte mounts up over a year, and here I was paying about the cost of a latte just to get to work and back. It validates my viewpoint on the bus service, which would cost me over twice the cost of driving. And it does add something to think I am saving £1.64 on a bike day, which adds up to about £300 a year, allowing for the fact that I don’t bike every workday, particularly in winter.

The bus service is a non-starter for two reasons. One is that due to my company’s decision to outsource a lot of the work, the outsourcing company brings people in from India on temporary 3 to 6-month contracts. Their employees aren’t here long enough to get their own cars, so they naturally use the bus. As a result it’s hard to get on the bus unless you join at the starting bus station in town. Secondly the bus service is a ripoff, £2.50 each way!

Running a car is one of the big hits in personal finance. There’s already the big one-off hit of buying it, plus the fixed costs of running a car – tax, servicing and insurance. All of these things are part of the decision whether to get a(nother) car in the first place. The utility of having a car is pretty clear in most people’s cases, unless you live in the centre of London or New York. When I living in London I got a car just before leaving the city, and I had to park it about 200 yards away!

I was surprised at the cost of what is a pretty short commute. People don’t often factor in the cost of going to work in their decision of where to live, it is usually mainly the amenities of the area and the practicality of of the commute in terms of time.  As an example, many colleagues come in from 20+ miles away, and these guys are effectively taking a £1k a year pay cut every year compared to me, and the guys doing this with Land Rovers (assuming 25mpg for the LR) are eating a £2000 pay cut.

It also meant in about seven months I’d recover the cost of the bike. I don’t cycle in December of Jan/Feb and I don’t do it if rain is forecast so I’m only halfway there so far. As petrol costs rise the case for cycling gets stronger.