George Osborne may help me to live intentionally and spend more

By his pension changes, that is. Sadly the exact mechanics wont be of much use to young’uns but for for some modestly old gits (45 plus) who have accrued a defined-benefit (DB) pension where you can buy  additional voluntary contributions (AVCs). Since there are a number of readers who work(ed) for The Firm that employed me for many years I’m throwing it out there.

The philosophy of how difficult it is to qualify living off savings may be of more general interest. It’s heavy on pensions, which seem to be the Cinderella of the PF world, because most PF bloggers are younger than me and Monevator’s Greybeard seems to be off on a cruise. However, hopefully you’ll all get old enough to be interested in pensions one day, and if you can learn from my mortgage screw-up then so be it 😉

Some pension and early retirement orientation

One of the big challenges facing early retirees is how to fund the pre 55 early part of their early retirement. The part before 55 has to be something other than pensions because you can’t get hold of pensions before getting to 55. The goto place for this is ISA income and cash savings, though not paying your mortgage off early is a great way to have more cash savings in the pre-55 period, because you can use the pension commencement lump sum to save to pay off your mortgage from pre-tax income.

don't automatically pay off your mortgage early if you are retiring before 55
don’t automatically pay off your mortgage early if you are retiring before 55

I didn’t get the mortgage wheeze right. In threading your way through the myriad paths to early retirement you are always going to get something or other wrong, that was my big mistake. I don’t have housing costs other than council tax and the 1% or so house purchase price depreciation fund, but having the borrowed capital to run down now would be useful. I could then use my AVC fund to pay off the mortgage tax-free at 60. Pretty much any time I go anywhere near anything to do with housing I screw it up royally. Why break the habit, eh?

Because I drove my spending down to be able to quit early I have been able to string out my savings for twice the amount of time I anticipated. But it’s probably fair to say I haven’t lived large like like mistersquirrel and theFIREstarter 😉 I don’t have any complaints – freedom from The Man and being able to pursue my own interests is more than adequate compensation. For much of the first couple of years it was a process of recovery from the experience – and it’s respite that matters, not consumer goods and services. But I am also mindful that time is also ticking away, so if I could smooth my income I could do more in the near future rather than back-loading it. I’ve noticed the birds are starting to sing and maybe they call to me, get out there, travel more.

I have no income – one of the primary navigational aids of personal finance spins and knows no North

Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness.

Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Wilkins Micawber

I never understood how to manage finances without having a number I could allocate on the Annual Income side. Without a figure for income, I could never qualify the Micawber question. It has made me fearful and over-conservative in spending. This has worked out okay for me till now – it is how I got to this point and having the choice to take Osborne up on his alternative offer of getting my AVC out tax-free but earlier. If I had favoured spending I would have drawn my pension short by now.

or, as da yoof sez, YOLO
or, as da yoof sez, YOLO

Some readers will wonder WTF? The income computation is easy. Take current age of Ermine, subtract from 60 which is how long it needs to last till a good alternative, then divide total amount of cash savings by years and you have the income level. Maybe knock off about a year’s savings to cover emergencies then run the calculation.

Not so fast. If you have no income, you will find it the devil’s own job to borrow money which is a perfectly reasonable way of leveraging your emergency fund. A year’s worth of low-ish running costs as  savings is not enough to hedge some kinds of risks. Lucy Mangan charges us that If you don’t understand how people fall into poverty, you’re probably a sociopath  – probably correctly. I didn’t want that to happen to me, so I have used a much smaller percentage of my non-pension cash savings than that cash÷(60+1-current age) calculation would give. At least half of them are with those NS&I people so they aren’t being killed by inflation, unlike my cash ISA and cash balances. I really, really hate cash as an asset class, and never expect a return on it. At least inflation is surprisingly low given all the QE money that has been  pumped out – it seems to have gone in inflating the stock market and the housing market.

The logical thing to to with a cash ISA these days is to switch the damn thing into S&S ISA but I can’t bring myself to do that, because of the fears of some of Lucy Mangan’s demons catching up with me, or needing to pay for an operation[ref]the NHS does fine with big stuff and with chronic stuff, but elective quality of life interventions it does poorly now the Tories have been at it.[/ref], or something like that. And as a result, the fearful me jams my spending. I err in the opposite way to mistersquirrel and theFIREstarter but error it still is.

TEA calls this out well in The Pyramid and the Oxygen Mask – to wit

If you are one of those people and you carry on working in your all consuming City or Corporate job, then you are wasting your life.

This is more frequent than you might think. The most common motivation for this behaviour is fear  – fear of change, (irrational) fear of poverty, fear of loss of status, fear of their spouse’s reaction etc.  Its not enough just to make a life-changing amount of money, you still have to change your life.  Don’t just load the gun, pull the trigger.

Apply own mask first…
We owe it to ourselves and our families and friends to start by getting our own shit together.  Think about the airline safety briefing : always apply your own oxygen mask before helping others.  This initially sounds a bit counter-intuitive and even selfish to some people. 

I have overcome most of that. I changed my life, and I qualified what Enough looked like to me. But I am still on his Level 2.

These people understand the power of money and have mastered some of their emotional weaknesses re money. Paradoxically, they are seeking to get to a point (see level 1 below) where they think much less about money.

I am not sure I can do that until Mr Micawber’s compass begins to respond and the questing needle shows which way is North. After a certain level personal finance is much more about the personal than it is about the finance. My fears of Lucy Mangan’s demons are part of the emotional weaknesses re money. Possibly I have some of the elements of her sociopath. I just didn’t want to depend on other people’s grace for dealing with the demons and so I spent less so I could buy my way out of certain kinds of misfortune. But I take TEA’s point. This is a question of balance and I haven’t got that right. A clawed hand remains frozen on the controls set to dead slow because the broken compass shows no signal I feel I can trust. There is still work to do on that intentional living thing.

It has been five, getting on for six years since that fateful day in February 2009 when a jumped up punk of a manager squeezed an Ermine, intimated TINA and I realised I was all out of options and didn’t want to kiss The Man’s ass, and I locked down spending and took a three-year holiday from the middle class in the name of Freedom. I would do the same again. I have become even more ornery, awkward and unemployable since then. Work is not the point of Life[ref]with the obvious rider ‘for me’. If Work is the point of Life for you then knock yourself out[/ref]. This much I know.

I would soon have access to a DC pension

Now if I had a DC pension I would soon be able to draw it. As a brutal simplification that everyone should qualify for their own circumstances, it makes sense to draw a DC pension as soon as possible, all other things being equal. By drawing it early, you stretch out the time over which the money is extracted, and you get a personal allowance for each of the years over which you take it. If you don’t need all the money that year , reinvest it in an ISA in the same sort of thing the pension was invested, and you shift the pension capital from being taxable to being sheltered from tax. If you still have more than 15k left over each year I suggest you need to spend more, unless you are looking to mollycoddle your kids in which case leave it in the pension since they can inherit that at their marginal tax rate it seems. The converse is that if you are so bloody stupid as to take your DC pension out in one lump then you deserve to pay a shitload of tax because such arrant stupidity should be taxed out of existence.

But I don’t have a DC pension. So I can’t do that. Don’t get me wrong – I am deeply grateful that I started work at a time when there was a better balance between labour and capital and The Firm actually wanted people to work for them so they offered good benefits, the original DB pension being one of them. However, a DB pension is less flexible than a DC about the retirement date – draw it earlier than normal retirement age (60 in my case) and it is reduced by roughly 5% per year drawn short. If you are in decent health you really don’t want to do that. The actuarial reductions usually favour those who follow the norm rather than the early retirees. In itself that’s not a big deal, because I saved a quarter of my DB pension capital[ref]computed by taking the gross paid at NRA and multiplying by 20[/ref] in AVCs.

the original plan – invest the 25% tax-free PCLS in the market in a couple of years time

The original plan was to run off the SIPP I took out earlier this year when Osborne changed things, after another two years worth of contributions which I can get in by May 2015 (this year and next tax year), and then to draw my main pension a bit early and eat the actuarial reduction. I would then get the AVC tax free, which I would then shovel into ISAs over a few years, getting more ISA income to top up the actuarially reduced pension.

Note the correct way to have done this job would have been to keep my mortgage at the level of the PCLS and live off the money I paid my mortgage off with until at 60 I take the PCLS tax-free and pay off the mortgage. The general cocked up the tactics there, even before the battle plan made contact with the enemy.

the new plan – invest the AVC in deferring my main pension

It appears I can shift the AVC into a SIPP without taking the main pension, as it is considered a DC independent saving. All of a sudden I lose the whole point of the AVC, which is to get 25% of my DB pension capital free of tax. I now only get 25% of 25% or a sixteenth of the capital tax free. However, I have discharged my mortgage and don’t have a particular need for a shedload of cash, other than as investment capital to make up for the actuarial reduction.

From some time after this April, I can draw down the SIPP tax-free, as long as I stay below the income tax threshold. There is also some hazard of work income over the coming years[ref]there is some research work I want to do. In the end even an ermine can’t outrun the W word forever…[/ref]. Indeed, it seems I can contribute to a SIPP up to £10k p.a. while drawing from it, so I can lose any earned income into the SIPP, which is a good way of spreading out earnings to minimise tax – I don’t aim to give up much time to the filthy W word, so 10k will probably do 🙂

Each year I live off the AVC fuelled SIPP and the dividend income of my ISA, my deferred DB pension increases by roughly 5%. Effectively I get a return on my AVC funds in terms of that permanently increased DB pension, and at current stock market valuations that looks a higher return and lower risk than I could win from adding to my ISA. Of course that is a return on capital, the return of capital is consumed as income. Normally if you want a return on capital you need to retain the capital and not spend it, this is one of the few exceptions[ref]it isn’t a true exception, it is the interaction with life-expectancy figures that gives an appearance of a return on capital.[/ref]. When I get to 60 I will probably stop drawing down the divi from my ISA unless I think of something to spend it on. Running down the AVC + ISA income is roughly equal to the value of the DB pension at NRA, so I smooth my income. I will get two smaller bump-ups, one at 60 when the ISA dividend income becomes superfluous to requirements, and one in the distant time at 67 when and if I get the State pension.

I get the same general effect as if I hadn’t made a cod’s of the mortgage/PCLS thing, subject to the limitation of being limited to the tax threshold + the income from my ISA each year. I’m easy with that, big spenders may not be.

An annual income, and an answer to the Micawber question

Obviously there’s the benefit of getting this AVC cash into use rather than depreciating for another six years. More importantly, however, I get an income for the first time in about three years. So I could return to that middle-class sort of spending if I wanted to. They say that it takes a month to break a habit, so six years should be plenty. I can’t unsee the wanton waste I discovered in some of the empty dreams of the middle class cubicle slave I was. I am no longer a cubicle slave, but some of the dreams still seem empty. I found freedom in the open spaces, in the sound of birdsong, in places like this

1501_wolves_P1000135rather than places like this

Westfield, London
Westfield, London

I am in no hurry to spend more, but I do need to release the dead hand of the fearful non-spender who felt adrift in a pathless land without the compass of Wilkins Micawber to guide the way. Unusually among consumers, possibly I am consuming at too low a rate. I can easily live well on the personal allowance plus £5000 tax-free from my ISA, maybe I will have to consult with good people like mistersquirrel and theFIREstarter as to how to inflate my outgoings on fine living. On the other hand I don’t have to spend all of it every year. My ISA will thank me for continued reinvestment. I now have a high-water-mark for annual spending, which I can exchange for the dead-hand’s ‘as little as possible’. The tide is a long, long, way out.

the tide is out there somewhere
the Wash – the tide is out there somewhere

There’s no rush – one of the arts of pension planning seems to be keep as many options open, and then opportunistically close them off at the eleventh hour in whatever way is most advantageous at the time.

Ed Miliband could destroy this plan

…in May. In which case it’s back to plan A. There’s nothing I can do about that, it’s the usual mantra – coffee for the things I can do something about, red wine for what I can’t change. It’s the problem with pension savings all round – government meddling can screw up the best laid plans. In fairness to governments, it is only government meddling that has made this alternative a possibility. It wasn’t a possibility when I left work in 2012.

of market crashes, and excitement, and foolishness

All this will take a few years, should there be a market crash I can rethink, draw my DB pension a little earlier, eat some actuarial reduction and seize the opportunity to invest the SIPP. Assuming, that is, I have the cojones to do that – such a market crash could be the trumpet at dawn of the great unwinding. Or maybe I lack the taste for the ride. Finding myself unable to to determine a reasonable spending rate without having an annual income shows that perhaps I am not the Wolf of Wall Street. I should heed the words of Warren Buffett…

To make the money they didn’t have and they didn’t need, they risked what they did have and did need–that’s foolish, that’s just plain foolish.

…and at most half-split this if the denouement comes this year. At the moment an increase in DB pension looks lower risk than the known risk of the market[ref]I am casually interchanging risk and volatility of the short-term price levels which I really shouldn’t do[/ref]. It’s taken me a long time to realise that I had this opportunity, because my original plan was built when Osborne’s changes hadn’t happened. However, the job of any chief executive is to adapt to changing circumstances

no plan survives contact with the enemy

von Moltke

Pension planning is a bastard for complexity and counterintuitive wrinkles and changing rules. I’m generally of Monevator’s opinion when it comes to financial advisers, but I wonder if pension planning might not be an exception. Certainly for those working at The Firm, take up the offer of the Wealth at Work seminars, since you don’t pay for the advice and they have knowledge of your specific environment. Just don’t hire W@W to run your investment portfolio, which is what they’d like you to do afterwards 😉

My pension will eventually be a combination of the DB pension with about 2/3 of the target time accrued, and my ISA to make up the difference, tax-free. But as an early retiree I could have 30 years ahead – possibly more. It would be unwise to ignore the tail risks that affect both types of pension, though differently. The world will change over that sort of timescale. Just to remind ourselves of the scale of those sorts of changes, we were listening to this on the radio 30 years ago

Only one guy in Britain had a mobile phone, though the first had been demonstrated in 1973 in the US. Those 1970s analogue devices were not cellular like TACS was, so the number of channels was very low and prices were astronomical.

Motorola's Martin Cooper, April 1973
Motorola’s Martin Cooper, handset first used in April 1973

Nobody much had the Internet. I was using a VAX with green-screen text terminal and 9600 baud serial connectors to do circuit simulation. 30 years is one hell of a long time for things to change. It’s plenty of time for tail risks to show up. But it’s also plenty of time for nimbler, younger minds to invent good stuff that people want to pay for. Assuming, of course, that the work of humans is not done here – in which case the spoils will accrue to patrimonial capital as Piketty told us it would.

What’s a worse investment than Cash? Standard Life Managed cash!

Tax is a right bastard and hammers your investment returns, so I saved money into pension AVCs while working. For most people a stakeholder or a SIPP is a better way than additional volutary contributions (AVCs) but in my specific case AVCs are the way to go. I saved pretty much exactly the amount of the 25% pension commencement lump sum (PCLS) in AVCs, at the time in L&G FTSE100:Global 50:50, starting April 2009 after reading this spine stiffening article and figuring I had little to lose anyway.

SP of L&G Gbl Eq Idx FxdWt 50:50 LP Pn (fund 50:50 FTSE AS/Global Eq index)

As a fund that one pretty much matched my investment beliefs at the time

To capture the sterling total returns of the UK and overseas equity markets as represented by the FTSE All-Share Index in the UK and appropriate subdivisions of the FTSE World Index overseas, with fixed asset allocation between the UK (50%) and overseas (50%). The overseas exposure of 50% is divided 17.5% in Europe (excluding UK), 17.5% in North America, 8.75% in Japan and 6.25% in Asia Pacific (excluding Japan).

Although I started with a good chunk in 2009 I believed I would have to liquidate and retire in March 2012  so I switched to cash in the AVCs. Switching doesn’t incur costs, and purely by damn good luck March 2012 was the high-water mark to date.

My retirement date was opportunistic, depending on when a voluntary redundancy package would become available. For someone with a known retirement date, it makes sense to liquidate one’s share holdings 20% each year over the last five years running up to retirement, if you have to turn it into cash to take a PCLS, or are liquidating a SIPP to take an annuity of < 20,000 p.a. FWIW different rules apply if you have a SIPP that would yield an annuity of > 20,000 a year but none of that applies to me.

Now I hate cash as a store of value, but the one thing you do know about cash is that it sits there and doesn’t get numerically any smaller. It’s value seeps away into the night as governments print money and increase the amount of cash competing with your stash to buy the goods and services in the economy, but the number in your account doesn’t go down.

Until, that is, the Pension Trustees in their wisdom decide that the Standard Life Managed Cash Fund is what the cash part looks like.

Pricing Data for Managed Cash G4 Pn S4 (CWR0) – on a bid to bid basis

Now the scale on the LHS is pretty microscopic, nevertheless if I’d taken this out in the blue funk of April 2009 I figure I’d be down 2%. When you compare it against the FTAS it is clearly still a steady pair of hands

comapred to the wild ride of the FTAS

I didn’t get all the benefit of the rise because I didn’t buy my AVCs all in one go in April 2009, though I started then. Nevertheless, I got a 20% leg-up which wasn’t bad for sitting on my backside for three years. You can see that the Managed cash fund is steady as she goes.

Curiously enough, the vast majority of my colleagues, if they are doing AVCs, save in the cash find, because you know where you are 😉 To some extent it makes sense because AVC savers are older geezers within 10 years of retirement. The Ermine felt in 2009 a mix favouring shares was worth a go.

Nevertheless, it looks like some rum deal is going on here. I took a look at my Nat West Cash ISA in Quicken.

Bog standard Cash ISA

The key thing to look for is that the trend (numerically rather than in real value) is up. For the simple reason that each month Nat West add a little bit to the account each month; I’ve never taken anything out of this ISA because you shouldn’t ever take anything out of an ISA unless you’re skint. This is still worth less now than when I started in 2009 but life is sometimes just like that, cash is a bear.

Now if Nat West can manage to make the numbers go up a little bit each month, why can’t Standard Life FFS? It isn’t hard, and a gradual downdrift is not right with cash. I don’t have any choice with the AVCs if I want to hold cash, though I may switch about 20% of this to the FTAS L&G index fund. Since there is an uncertain period between 3 and 8 years before I liquidate the AVC, what I’d really like to do is switch into the FTAS fund a bit each month till the halfway point, and switch out from then on. However, as an ex-employee that is a grievous process involving sending letters and stuff, compared to the online switching process while still working. I can probably only make one move every six months…

I still want to know who at Standard Chartered Life,[ref]my bad, Standard Life thx to Ted for picking that up:)[/ref]has got his hands in the till. Managed Cash is not the way I’d want them to manage the cash!


New Year’s Resolution 2011 – I want to pay less tax

Losing weight, getting fit – it’s all so passé IMO. What I want to change in 2011 is to reduce the amount of income that HMRC steal from me. I haven’t lived beyond my means over the last ten years and I’m damned if I want Hector the Taxman to swipe my cash to keep the bankers in champagne and dancing girls, or indeed the feckless to sit on their butts and breed us into Idiocracy.

Don’t get me wrong, I’m all for bankers, booze and birds as long as it’s not on my dime. I do think a pair of housebricks applied sharply to the offending organs might address Keith McDonald’s animal instincts but if he manned up and turned up for work to pay for them then 15 kids mightn’t be so bad. Either way, there’s enough that I seem to end up paying for, and I don’t want to pay for them any more, along these lines, though my bugbears are subtly different.

So how do you avoid tax, legally?

For wage-slaves like me on PAYE, there are only three easy ways to reduce one’s tax bill.

  1. Earn Less
  2. Spend Less
  3. Shelter taxable income in tax shelters like ISAs

1 and 2, the earns less/spend less do the heavy lifting here for wage slaves. If 3 is doing a lot for you you’re probably not on PAYE. What that means is to get a win here you have to be prepared to change your lifestyle. That’s why the taxman can raise enough money to waste on the aforementioned fripperies – because most people want to spend all they earn as they earn it.

Earn less, you might say, well, that’s like cutting off your nose to spite your face. However, there are ways you can reduce your taxable earnings while keeping hold of the money for deferred usage – things like pension AVCs (provided you can convert the saved money into a tax-free lump sum), some employee share plans and similar things like salary-sacrifice childcare schemes are ways to do that.

Of these, my weapon of choice is pension AVCs. Previously I have had a moderately successful run with employee share schemes, but you can only shelter £1500 a year that way and you take stock market risk. You can accept a lot of stock market risk in return for removing the risk of the taxman stealing 41% at source mind you.

AVCs are an easy win for me as I am probably within five years of drawing a pension. For younger people or those my age and not preparing to retire early the choice is harder, since a desperate government can change the rules at whim. At the moment one can draw 25% of a pension pot as a tax-free lump sum, and since I don’t want to draw this from the pension pot itself it makes perfect sense to save up 25% of my nominal pension pot on top in the form of AVCs, to withdraw tax-free rather than paying 40% tax on it. However I wouldn’t bet on that possibility remaining for ever…

I plan to use the £1000 extra tax allowance in 2011/12 that is one of the few useful outputs of the Lib Dem part of the Coalition. By controlling my taxable income I can avoid getting hit by the reduction in higher tax threshold and the increase in National Insurance to keep the money in my pocket, rather than Hector the Taxman’s. Incidentally, the same techique would enable Britain’s hard pressed ranks of impecunious middle-class parents to avoid the higher-rate tax child tax credit hoo-hah quite legitimately. Don’t want to lose your child tax credit? Don’t pay HRT. Simples. I think you have until 2013 to get ready for that change, so you can warm Tarquin and Jemima up to the fact they may have to share the iPad next  Christmas rather than get one each…

Reducing tax by reducing taxable income is easy enough to understand, though harder for some people to implement that others. However, the the gains to be had by spending less is due to a nasty hidden tax bomb that people often miss. Say you choose to live in Hastings and work in London, so your train season ticket costs £5192. For sure, Hastings is probably cheaper to live in, but you are losing £6800 of gross salary each and every year for the enjoyment of being packed in like sardines every working day, since you have to pay 20%tax, 12% NI on the money earned to pay that season ticket. The taxman also gets 20% of the ticket price as VAT (no he doesn’t, thanks to Ken below for setting me right on that) , so in total you are paying 50% tax for the privilege of going to work. Or if you are on higher rate tax then 60-70% of what you had to earn to pay the ticket goes to the government. I am assuming that if you earn over £100,000 and work in London you probably don’t live in Hastings 😉 If you did then you are being rushed even more.

Live below your means to get the flexibility to pay less tax

So the way to pay less tax is to spend less and do more for yourself. You have to have space in your budget to be able to do that, ie live below your means. If you spend out every penny you earn, you have no room for manoeuvre. The Government is smart this way and knows that most people in a consumer society end up living at, or above their means. As far as consumption taxes go, Governments pump up taxes on two classes of consumables – things people can’t easily eliminate from their lives, and wants that people can eliminate from their lives.

Fuel duty is one example of the former – over 60% of what you pay at the pump goes into the Government’s hands (and remember you’ve already paid about 30% tax on that money before it got into your wallet). Eliminating this sort of cost is difficult in the UK. For all the greenwash, public transport is a joke in the UK. I live 6.5 miles from work and the cost of the bus round trip is over £5 which is way more than twice the cost of the fuel. I actually have a choice here, and have driven down the annual cost of fuel considerably by cycling to work. That’s obviously not an option for our Hastings dwelling London commuter, and it highlights one of the issues about living below your means. You have to gain flexibility and control in your budget, and that means be very careful about picking up ongoing commitments.

Ruthlessly eliminate fixed costs from your lifestyle, consistent with your values.

These come with alls sorts of price tags and timescales. They’re bad because they suck flexibility out of your life, flexibility you could use to bust sociopathic managers and bad employers out of your way. On the upside, these fixed costs make a lot of good stuff happen for you life keeping the rain off your head, and reality TV to deaden the pain of your existence as a wage slave.

Commuting is a big fixed cost with a timescale matching how long you want to do the job/live where you do. An iPhone is a fixed cost, but at least it is a smaller cost that you can get out of after two years. Sky TV is a fixed cost to keep you from doing something else with your time, and a way to amplify your need for thneeds that you didn’t realise you thneed.

Taking financial responsibility for something that eats is a fixed cost that tends to be associated with a long timescale of about two decades, be it a kitten or a child 🙂 The costs, and rewards, are different for the kitten and the child, but they are fixed costs, and because the cost and the commitment duration are both high, it pays to be sure that’s what you want to do. Unfortunately for the country’s population of songbirds, and fortunately for the continuation of the human race both seem to find wide favour.

A mortgage is a high fixed cost, possibly one of the highest most people will take on, and it also has a long duration. It is crazy to take on a mortgage without a reasonable expectation that you will service it to the end (though accepted, not necessarily in the same house) since it hamstrings your flexibility and you lose so much on repossession.

Fixed costs are budget-killers because they are inflexible, though they are often associated with the greatest rewards. If you fall on hard times then you can switch from Waitrose organic salmon to ramen in a week, and you can forego the purchase of Manolo Blahniks and the spa session.

Reducing the mortgage, or the cost of your children’s clothes or kitty food are a whole different ballgame. Hence the personal finance stalwart of having an emergency fund of three to six month’s essential running costs in savings. Most of that emergency fund is there to address the fixed costs. My view is that three months is far too short. Take a look at this graph of the percentage of the unemployed who have been unemployed for more than 12 months

Percentage of unemployed who are long-term unemployed for over a year

The data is taken from the ONS. Now you have to ask yourself, with 12-month unemployment being the experience of a third of the unemployed, how good do you feel about a 3-month emergency fund? Now, granted, that 12-month statistic does include chavs like Keith McDonald so perhaps the odds aren’t so greatly stacked against people who actually want to work. However, if we assume the feckless are represented by the 20% figure in the boom times of the mid-2000s, the current 15% excess are probably real people, and look where that graph is heading.

It wasn’t meant to be like this – in the 1970s we were promised more leisure time. Capitalism delivered on part of the deal, though its dark, evil Calvinist heart hates increased leisure time for its workers, because that increases switching time and management costs. Materially, if you want the basics that so enthralled people in the 1950s, you can have that, but nowadays you only need to work half the time to pay for it.

You could argue we sort of have that now – Keith McDonald has worked out how. All he needs is a mug working full-time to sponsor his lifestyle of 100% leisure. I have realised that I can’t have the job I was promised, a 20-hour week paying me half my gross salary.

I am closer to that 1950s lifestyle than many as  I don’t have:

  • an iPhone
  • an iPad
  • an i-anything
  • a mobile (other than the work-provided one I use only for work)
  • a flat screen TV (I am toying with outing my TV this year anyway as I don’t watch it enough)
  • a wii/games console
  • Sky/cable TV subscription

By storing the excess half of my income, preferably keeping as much of it out of the hands of the Government as I can, I can quit working about fifteen years earlier than my Dad could. I was slow on the uptake – other people like Dreamer and ERE have managed a lot earlier in their lives than me.

My extra time working hasn’t been totally wasted – I have more stuff than Jacob including a house, and living in a motorhome is not totally my idea of good living, and the harsh exercise regimen is also not to my taste, I’d rather not prolong life by hating a lot of it… Each to their own, however, Jacob will live longer than me 😉

Sin taxes on elective wants

How about taxes that the Government puts on wants, that people can eliminate from their lives? The classic sin taxes on cigarettes and alcohol are examples of that, but there are others more nuanced, such as air passenger duty.

Although you wouldn’t think it from the way some people carry on, you don’t actually need to go on holiday, and even if you did, you don’t need to fly there. As for all that BS about air travel being good for people, well, it’s noisy for the rest of us on the ground, pollutes our air and buggers up our sleep. For the travellers, it is nasty, stressful and demeaning nowadays. If 80% of the travellers could be priced out of the sky I’d be all for it, I’d much rather save up and fly once a decade in comfort than once a year in a seething morass of humanity. Unfortunately, saving up to go business class wouldn’t help me, since it is the security theatre and airport experience which is the ugly part. I haven’t flown anywhere since a 2007 work trip which reminded me just how unpleasant air travel has become. Jean-Paul Sartre was spot-on, L’enfer, c’est les autres.

Warren Buffett has the right idea, if you want to do air travel, get a private jet. Since Warren is ever so slightly richer than me, I do without. By the way, if you really find the extra £100 APD an unbearable imposition then for heaven’s sake use your brains, APD is levied on flights from UK airports. Travel to Amsterdam-Schipol to start your long-haul flight, tax avoided, job done. Less racket in the skies for the rest of us above the UK too, what’s not to like?

Smoking. I don’t smoke, but if I smoked 40 a day it would cost me about £4380 a year according to the NHS. If I were a basic rate taxpayer I would have to find a job paying me £5840 a year more gross, to take into account the tax and NI I would pay before spending £4380. According to these guys, the cigarette duty on that hypothetical habit is £3942, so the total tax and duty in £5402.

Sin taxes are easy to avoid, don’t do the sin. I save myself nearly £4000 in tax by not smoking 40 a day. It’s kind of difficult to get a buzz out of the saving since I’ve never smoked 40 a day, but it’s there. There are also ways round some of that – if you have the capital to buy 7000 cigs every 6 months a regular trip to France may be in order, and indeed even pay for the holiday including APD…

Alcohol is the other biggie in sin taxes, and I get hit with £2 per bottle of wine roughly. So I know what to do if I want to reduce this 😉

A New Year’s resolution that’s actionable and not too hard to do

Easy and fun is my approach to New Year’s resolutions, none of this cold showers and swimming in the sea. My aim is for the amount of tax taken in the 2012 P60 form to be less than the one in this year’s April form. That means I have to understand Osborne’s shenanigans in changing the basic rate and HRT thresholds. The first time I tackled this, in 2009, my aim was to pay no tax at all so I forced my pay down to close to the £6,500 p.a. that matched the tax threshold.

Athough I could live on this, I found it massively got in my way as far as investing in the business and funding my ISA so I became less hard-line on tax reduction. It was, however, good in the first six months to see a monthly tax of £8.70 rather than the figure I had been used to.

Now I probably need about £15000, to be able to fund my ISA and maintain running costs. Unfortunately I can’t see a way of funding the ISA without paying £3,000 tax on the money earned to go into it.

Everybody wants to pay less tax. And it can be done – but not while spending everything you earn. Therein lies the secret…