calling all late 40s+ wannabe early retirees – your ship’s come in…

Martin Lewis, he of moneysavingexpert fame, considered the pension changes “both wonderful and horrid“.  Wonderful, because you now can take it all in one go subject to normal income tax rules, without all sorts of restrictions that mean you have to drip out the money over 20 years or so. And horrid – because you now can take it all in one go, so people may blow it all on this sort of thing

That'll be a nice Lamborghini, and to hell with the money
That’ll be a nice Lamborghini, and to hell with the money

as the pensions minister quipped.

Extreme wealth warning – everything to do with pensions is hard, counterintuitive and needs careful consideration

You’re on here because you have an interest in personal finance, right? Most people consider it dull as ditchwater – indeed I only sharpened up my act when I realised that getting my skull round this would enable me to quit an increasingly toxic workplace. Before then I was happy to rock up and work, do a reasonably interesting stuff  in return for beer and toy tokens. The Grauniad delivered this quite astonishing piece by Joanna Moorhead saying

When it comes to pensions, choice is not necessarily desirable – especially for those of us burnt by endowment mortgages

WTF? It is precisely because I was burnt by endowment mortgages (though reinstated) that I don’t trust insurance and life companies and was grateful that in pension provision I never had to think about them. If I had to manage a DC pot I would now be deeply grateful to Osborne for letting me escape the clutches of this dodgy bunch of charlatans.

Of course, there are people who enjoy the personal finance sections of newspapers, and who love nothing more than poring over the small print of different finance options on offer, but I’m not one of them. I’m the woman looking for the switch for “financial autopilot”, and right now, with the changes to annuities, that looks suspiciously as though it might have disappeared from my dashboard.

Money is crystallised power, a claim over human work. All power stores are dangerous if you don’t think about them. It’s why people don’t carry petrol around in open buckets and you learn something unique and instructive if you drop a spanner across a car battery. Endowments were the autopilot choice for a young ermine and it appears a young Joanna. The older ermine learned from that when his career flicked out of autopilot, and so should you, Ms Moorhead. ‘Cos the ground is never far away, and it has an unhealthy attraction for things above it.If you fail to plan, you plan to fail.

Thinking is about ten times as hard with pensions than ISAs because of the decades it takes to get into them, and the hopefully over decades they will serve you. The Grauniad seems to be in jealousy mode all round at the moment, as they are bitching that you need a salary of £125,000 to make any use of the the New ISAs. FFS people – I have never, ever, earned anywhere near that much and I have zero income at the moment but I am damn well planning on using my full NISA allowance over the next few years. Dear Guardian, have you ever heard of that antiquated notion, spending less than you earn and saving money? You guys should try it sometime, instead of sipping your cappucinos and griping. No, if you spend your nice Guardian salary on consumer shit then a NISA is no use to you, but you get lots of lovely toys. Each to their own.

small changes make big differences

You don’t see an awful lot about pensions on PF sites because they’re hard, they are built up over secular[ref]in finance secular means over periods longer than the typical boom/bust business cycle of about five to ten years[/ref] timescales in general and small changes can make mahoosive differences. Let me illustrate this with an example. In 1988 I joined The Firm’s final salary pension scheme. It had a simple proposition – every year you accumulated entitlement to 1/60th of final salary, with a normal retirement age of 60. In practice than meant if you worked for The Firm for 30 years you would get half your final salary as a pension. The Firm expected pensioners to die at 80 on average, thus paying out for 20 years. You could retire at 50, in which case they would pay out over 30 years, 10 years longer than planned so they would actuarially reduce your pension by 50% – you lose roughly 5% for every year drawn before normal retirement age (NRA) of 60.

The Firm decided it wanted to reduce costs, so it closed this scheme to new entrants in 2001. In 2009 it decided it wanted to save even more money.  It appears UK law doesn’t permit firms to claw back pension entitlements already earned because they are part of your pay so they have to contractually honour previous years agreements. But they can change things going forward. So The Firm changed three things, and very few people spotted how much damage was done to their pensions. The Firm

  • changed the NRA from 60 to 65
  • changed the accrual from 1/60th to 1/80th
  • changed the accrual from final salary to career average (each year’s entitlement is based on the inflation adjusted salary for that year)

Three small changes – HR obviously wept the usual crocodile tears and said it won’t make much difference for people retiring soon, and allowed people leaving up to three years from 2009 (just excluding an ermine – I was six months out of the grandfathered rights date 😦 ) to leave under the original terms. Now who is most interested in pensions? Old gits, who are about to leave. So HR shut them up by grandfathering them.

Let’s take a look at what that did to me

how the the changes affected my pension
how the the changes affected my pension (rebased to 60 and a nominal 10k final salary)

Now I obviously surrendered some pension accrual leaving 8 years early, but the changes made that easier to do – I was giving up less. It’s also relatively simple to see that the total change is about 25%, which coincidentally happens to be the amount I was able to save in AVCs and will take tax-free as a pension commencement lump sum and invest myself in my ISA, effectively creating a tax-free DC pension to compensate for the loss due to retiring early. I will still have less because I will draw the pension a little early, though part of the reason for writing this is that has changed with Osborne’s changes. I may defer it for another year or so and use a personal pension, because as a non-taxpayer I can get a free 20% bump up on £2880 or ~£5700 and getting a 10-20% ROI on cash is difficult to ignore in a ZIRP environment 🙂 It isn’t a lot of money, but it’s worth thinking about.

Now imagine a 10 year younger ermine, entering The Firm just before the portcullis closes on the final salary scheme.

The younger ermine eats a much greater hit
The younger ermine eats a much greater hit

The poor bastard takes the same hit as the old Ermine, but he has to suck it up to 60 to get the same amount as the old Ermine who pulled the big red ejector handle it in his early fifties! Now the younger ermine probably takes an even greater hit because of the career average change, which reduces the base salary on which the pension is calculated. And The Firm was craftily shifting more and more pay from consolidated rises to bigger bonuses, and bonuses weren’t pensionable.

Now the proposition of a final salary pension scheme is simple, so if small changes can make that sort of effect, the sort of thing the Chancellor has done can make even more effect on a DC pension. Let’s take a look.

Osborne’s Budget changes

To a first approximation, he’s lifted the restrictions on what you do with the money once you reach 55. The Government’s own summary is pretty good. People younger than  42 should beware that this age will be dragged up

this consultation also includes a proposal to raise the age at which an individual can take their private pension savings under the tax rules from 55 to 57 in 2028, at the point that the State Pension age increases to 67.

so if you are younger than 42 be careful. If you are much younger then expect this to be drifted up to 60. That is the evil heart of pensions – governments can change the rules after you have locked the cash away. If I personally were younger than 42 than from a purely financial POV I wouldn’t touch pensions with a bargepole, except enough to get any employer match, and perhaps to lose any 40% tax. But that’s me – YMMV. That’s not saying I wouldn’t save for retirement, but I’d use ISAs for that. However –

There are some things only pensions can do

1403_avoverThis judgement isn’t as simple as it seems, however, because one of the advantages of a pension is that it can’t be seized by most creditors or held against you for many benefit claims. You may be doing fine and swimmingly at the moment, but globalization and technology are shifting the balance towards capital and away from labour. Pensions help you build capital safe from the backdraft of this. If I were a younger Ermine in my 20s but with the older head of now, from what I have seen I would not expect even a good job to last for 30 never mind 40 years. The power is shifting away from workers, the pace of change is too high and increasing, and the winner-takes-all effect is too high. Tyler Cowen’s Average is Over shows the way – reveiwed in The Economist. I would place greater effort on escaping the rat-race earlier and owning capital rather than relying on my rapidly depreciating labour. The time for consumer frippery and shitloads of debt is over. I have no desire to live like a Transnational – I am not ambitious enough and probably not bright enough.

Many people my age have been caught on the hop by this – the increasing routine and rottenness of my job, and the micromanaged incentives are the first reaches of this shift of labour to capital. When I see a business card that says ‘Consultant’ and I see grey flecks in the hair of the holder I mentally translate into ‘Unemployed’ – because so often it’s true 😉 It heartens me to see that in the UK PF community there are more and more people who are looking for financial independence at much younger ages than I am. I think these are cleverer people than I was, who are picking up the straws in the wind of the incoming shitstorm for jobs. Get on the side of Capital, because Labour is losing the fight, unless you can get on the side of the 1%, and let’s face it, the odds aren’t great 😉

Society will eventually have to shift. Look at some of the changes coming – the increase in the personal allowances, meaning an increasing number of voters will not be taxpayers. They will, of course, vote for jam today and for somebody else to pay. Look at the stats on tax income – over two thirds of the income tax take comes from people earning 32,000 and above. These are people who individually earn more than the median net household income for families with dependent children[ref]ONS Statistics on the average family income, UK [/ref] in the UK

Pensions can help you with this, basically by locking up money against the incoming shitstorm and throwing the key out to your future self many years in the future. You can hitch a ride for your future self  on the side of Capital (if you use equities rather than cash) that, in current legislation, can’t be taken away from you[ref]Divorce is one exception to this[/ref] and it doesn’t impair your ability to claim benefits[ref]I believe this was not necessarily the case for Universal Credit. However, it looks like Hell will freeze over and the devil will learn to dance before Universal Credit is launched, so I’d lump that in with the general uncharaterised risk of Government Fiddling[/ref]. Whether that is attractive to you depends on your view of the world and where it’s going, and to some extent your rate of discount of jam tomorrow compared to jam today.

So what did Osborne change?

There’s a common belief that you had to purchase an annuity with a define contribution pension but that was never true until you reached 75. Those with £20,000 of guaranteed pension income could take any amount of their money subject to tax and those with less than that amount of guaranteed income could draw down their money at a rate determined by annuity rates in capped drawdown. What he’s essentially changed is that anyone over 55 can take as much of their pension capital as cash, subject to normal income tax as opposed to the punitive 55% rate it used to be. But if you are taking £150,000 from your pension for that Lamborghini then you’re paying 45% tax on all of it, bud, so you better strike a deal for no more than £82,500. Previously it would have been 55% taxed, so you’ve have got 67,500. Put that way it isn’t such a stupendous change for high-rollers, though £15k probably gets you the walnut trim or the gold-plated gearshift knob.

The rate you get for an annuity rises as you get older – annuity rates for people at 75 are much better than for those at 60 or 65 because they’ll be paid for less time. There is much to be said for starting off in drawdown and switching to an annuity later on. Most people haven’t saved enough into a DC pension, and this gives you a better chance of a decent lifestyle even now – the annuity is not dead at all. Once the annuity return beats out the return you get on equity investment it makes sense to switch[ref]as is usual with pensions there is a whole shedload of issues that complicate this in favour of annuitising earlier, in particular your attitude to risk and your health[/ref].

People hate annuities because they can’t leave them to their kids among other reasons…

But you don’t get to leave it to your kids. What seems to be behind a lot of the rumbling about annuities is that they die with you (they can look after a partner at some cost but that’s it). So the children get n’owt. Now the whole issue of capital and inheritance needs sorting out by some future British government, and it won’t be pretty. I’m personally of the opinion that inheritance is an abomination in a notionally democratic and meritocratic society. It harks back to older societies where capital accumulated very slowly so it was the only way to build a business – over generations, and it all smacks of the privilege of kings and nobles. There were no startups before fossil fuels. It may be the most natural thing in the world for parents to want to favour their children, but IMO a 100% inheritance tax where the entire estate escheats would be an incentive for those parents to sort their shit out while they are alive, and it would go some way to not embedding privilege. But I can say that because I am child-free, if that weren’t the case I would probably line up right behind the old buffers of the Torygraph who think that inheritance tax is a terrible thing, because having children does that to you 😉 Somehow society needs to sort this out in a world where it is increasingly difficult to make your fortune in a working life, because increasing inequality lets the 1% bid up the price of essentials like housing. God knows what the right answer to that looks like, but it doesn’t seem to me to be the direction we are going. History shows that aristocracy does work, but needs a lot of serfs…

It’s important to note that one of the reasons annuities looked such horrible value in the last five years is that the Government’s policy of printing money and keeping low interest rates meant annuity providers couldn’t offer decent rates – the underlying gilts just didn’t give people the returns they wanted at 55 or 60. Osborne’s been a good guy in not forcing you to take an annuity, though remember you didn’t have to do that anyway. But he hasn’t improved your ability to get a low-risk income at a price you want to pay. You can stay in equities, as you always could with drawdown. But you are still SOL if you want to avoid the volatility of equities. You are going to run out of money if you didn’t like the annuity rates on offer when you retired and you can’t stomach the rollercoaster of the stock market. There ain’t anything better on offer at the moment[ref]You need to learn or take advice about getting the mix of asset classes right because the volatility of a 100% equity allocation is probably bad for the old ticker of a retiree 🙂 Although mathematically it gives you the best chance giving some of that up with a stocks:bond mix for a smoother ride is probably called for.[/ref] – as a cautious saver you have to do Your Bit to pay off the National Debt.

NASA tells us we are doomed

There’s a NASA report that paints a bigger picture, basically they are of the view we are Doomed

…. appears to be on a sustainable path for quite a long time, but even using an optimal depletion rate and starting with a very small number of Elites, the Elites eventually consume too much, resulting in a famine among Commoners that eventually causes the collapse of society. It is important to note that this Type-L collapse is due to an inequality-induced famine that causes a loss of workers, rather than a collapse of Nature

The bit they seem to be missing is that the Elites are busy eliminating the need for a lot of the workers… The Ermine is not an optimist by nature, but I have learned that the bear case always sounds smarter. This is because things go titsup in a big way, and they can be imagined – at the moment it’s robots and globalisation stealing out jobs, climate change, it’s easy to picture them. What is harder to see is that people chisel away continually at improving the upside. 99% of them fail, but the incremental up-shifts add up, but they fly below the radar because they individually don’t look that much. Who would have guessed that improved computer networking would spawn whole new industries like web designers and security experts and MOOCs and improved living standards for what we used to call the third world by letting them work for us[ref]that’s hellaciously First-World centric, and it’s transiting to we will all work for our Transnational Corporate Overlords, since the erstwhile Third World is busy taking the fruits of their labour and turning into Big Capital. The First World’s first-out-the-gate advantage is being competitively thinned out.[/ref], and high-frequency trading etc? After all, we had networking before – I recall Novell Netware, where the piss-taking bastards at Novell would charge you a licence per connection[ref]or you could be fleeced per server. Either way they had you by the short and curlies and needed to be destroyed by the Invisible Hand[/ref], and added a piece of code to explicitly kick people off if more people connected to a server. Then TCP-IP came along, eliminated such monopolistic gouging and ate their lunch. Then in ’94 Berners-Lee developed the WWW and here we all are. None of those developments looked earth-shattering at the time.

At the moment the Chinese are working on thorium nuclear reactors that address many of the the hazards associated with nuclear power, though they will no doubt have problems of their own.It may or may not go somewhere, but if it does, then it will be a win for energy and for knocking back global warming, simply by taking out a lot of China’s coal-fired power generation. In general, positive change comes in small chunks that steadily mesh together and add up, whereas things that go wrong come in great big unexpected lumps that generally give us the feeling of OMG we’re all going to DIE. And the atavistic caveman in us looks at the great big shadows of our fears cast against the wall and it makes better copy. Bad news sells, and nobody’s managed to ever sell a good-newspaper yet.

Pensions get a lot more interesting when you get past 45

One of the primary risks younger people face in using pensions is that they’re saving a lot of wealth is a locked-up place that Governments can easily target, since Government sets the rules. A future Labour government could go back to annuities – I’m not saying they have thought of it, but them might. There is a general downdrift of the amount you can contribute to a pension (£40k if you earn more than that) and there is also a general downdrift of the total amount you can save in a pension and get tax relief, the Lifetime Amount which is currently £1.25 million. That sounds a lot, and I, for instance have nowhere near that much but for someone in their 30s now it’s not unreasonable to aim for, because the value of money roughly halves every 15 years. In thirty years’ time that would be worth about £312500, at a 5% withdrawal rate that would be a pension of £15625 p.a.

You can see the direction of travel of pension allowances at HMRC, and it’s not positive. A whole lot of these problems go away as you get closer to drawing the pension, because, recognising that people can’t take money out of a pension to conform to changing legislation, they often let you protect your savings against changes. The quid pro quo for that is that you stop saving into a pension. Totally and for the rest of your life. That’s not so bad if you are in your late 40s or fifties and drawing at 55, after all HMRC indicate you are limited to a pension of about 56k at 65 so you are hardly on the breadline, you just have to stop paying into your pension for a few years, pay a bit more tax and use ISAs but if you are a young buck at the top of some financial institution, Doing God’s work, say, then your dreams of retiring to round the world yachting and golfing will need you to find some other way of saving for retirement. If you are that rich you’re not reading this, and anyway, you can afford to pay for the relevant financial advice on what to do.

taxpaying wannabe early retiree old gits, your boat’s come in

If you are a taxpaying old git, however, you are all of a sudden much better off, particularly if you have savings or are prepared to borrow money. Drive your salary down to the personal allowance by putting everything above that into a personal pension. Do that for a couple of years, and then when you stop work extract this money but leave your main pension deferred (ie still in accumulate mode) – the first £13k a year is tax-free[ref]That’s £10,000 personal allowance plus ~£3k tax-free PCLS[/ref]. Obviously you need a big spreadsheet and do a lot of what-iffery to play off any loan/mortgage not paid off against the tax bung, and it only works if you can slow your rate of withdrawal to less than the personal allowance. There’s no point in saving 20% tax to pay it again later.

ageing 40% taxpayers and child benefistas – this one’s for you

However, if you are a 40 or 45% taxpayer than you can make out like bandits  – squeeze yourself down to the 40% tax threshold and accept you pay 20% tax on the way out. It’s free money 🙂 Well, it isn’t, it’s a way to stop the Government stealing your money, and I wish I’d had this available to me. Fill your boots, and if you are a child benefista than you can go get that too. It’s welfare for the better off…

one of the obvious things for a non-taxpaying old git to do

Is save £2880 into a personal pension, saved as cash. In a curious fit of minor generosity, HMRC then up this to £3600. In my book that’s a profit of 25%. Do a couple or three of years of that and you end up with a profit of about 10%, because inflation will knock off about 5% of the return. And my DB pension gets 5% bigger because I draw it less early. I initially started looking at this to see if I should do some of that this tax year, but there isn’t enough time to see what exit charges are like – all the pension providers’ websites seem to be based on annuities and the like. So I will forego my free bung of £720 for this year from HMRC because a few days isn’t long enough to get this right.

I researched pension costs at Cavendish Online which seemed to be an often suggested good value broker on MSE. For a simple and quick in-out you will probably favour a stakeholder rather than a personal pension, because costs appear to be lower, and non-taxpayers are going to be playing with £3600 a year at most. A personal pension gives you some more flexibility of investment choices, and a SIPP is the most flexible. You pay more charges are you go up the hierarchy. What I couldn’t determine was the exit charges.

There is still a while till I get to 55. After than an immediately vesting pension plan (IVPP) seems explicitly designed for non-taxpayers, and hopefully by then these will return 75% of the capital as cash, rather than as an annuity. To be honest I would expect some future Chancellor to block that particular loophole. Unless they take pity on all us impoverished non-earners on the assumption that we are all poor, rather than enterprising – once I discovered how much income was taxed turning it into wealth before it got stolen became a priority.

I don’t have enough expertise to know much about the issues for younger folk – the big risks of Government fiddling are high, but on the other hand the protection from creditors is a great plus point. Shit happens in a working life – the big ones of Redundancy, Divorce, Disease are always with us. Death hopefully less so – one of the reasons the retirement age is drifting up is because you young’uns will live 10 years longer than me, and probably in better health.

These pension changes are particularly transformational to wannabe early retirees – ie those who want to retire in their mid-fifties rather than at 60 or 65, and particularly those who are paying 40% tax. If this includes you, you would do well to try and look at these changes from every angle to see how they could help you reduce your tax bill or delay the point at which you take you main DC pension. I haven’t had time to give this enough thought. Unlike Joanna Moorhead, I’m prepared to put some thought into how to make this work for me.

What about those Lamborghinis and BTL sky-rocketing house prices then?

There are two dark fears raised. One is that people will blow their money on frippery, and the other is that people will charge into BTL and jack up the price of houses again.

Lamborghinis, cruises, consumerism gone wild

Guess it’ll help the economy in the short-term ;). I’ve always been puzzled by how people go mad when they retire normally (60/65) and spend on a big blowout holiday. Your capital is at its highest potential at the point of retirement, a lot is going to change and you don’t know how it will feel to live off capital. That 25% PCLS is part of your overall wealth – it isn’t ringfenced for stupid spending. It’s a very, very different feeling to living off income. Blowing a lot of it at that point always struck me as a really strange thing to do – if you wait a year then you will have chilled, plus you’ll actually know whether you really want to spend a lot of money on the extravagant dreams of a cubicle slave thinking ‘Anything but this’. Booking the cruise while you’re still working seems odd. But I am different from other people. According to the BBC it appears not to be too bad a problem in Australia where they have this sort of thing already

Hordes of greying BTL investors jacking up house prices.

The average DC pension amount at the moment is £17,700 and about 320,000 people a year currently start drawing DC pensions. It’s probably not enough to seriously shift the needle on the dial, compared to daftness like Help To Buy

Final wealth warning

I’m not a pensions expert, and indeed had to research all this about DC pensions since the Budget because there seemed to be an opportunity. I can afford to screw up there, because this is only a small piece of my retirement planning to try and bag some free money. This post is tossing out some ides. Some may turn out to be hogwash. For God’s sake take advice if changing anything about pensions, or very, very seriously DYOR. After all, I bottled on £500 of potentially free money because I came to the conclusion I don’t understand the opportunities yet. That’s okay. It’s hardly a life-changing sum and it’s better to get it right that save £500 and pay £600 in charges! Be careful out there.  I am sure that somewhere in this septic isle there is a bunch of ne’erdowells crafting a website with a dodgy proposition to separate these newly freed pension amounts from their rightful owners…


why is the ISA season now, and what’s with the new 15k limit then?

Hooray for an increased ISA allowance of £15,000. Now to be honest, through most of my working life, saving that sort of cash each year wasn’t really on the cards – more pressing forms of savings, in terms of paying off the mortgage, and in later years pension AVCs came to the fore. However, I have to do something with my AVC fund when I get a hold of it, and a few years of £15k allowance gets the job done a little faster. I’m kinda puzzled by the July start – does that mean I have to avoid contributing in April, but I’m sure that’ll get clearer in due course. The increased personal allowance is always welcome.

And it seems that the artificial division ‘twixt cash and share ISAs will be abolished. Which is great – after all I want to hold a single ISA without buggering about shifting my old Cash ISA into my Shares ISA. The cash ISA is only a small rump from back in the day when I was trying to hedge against being ejected from The Firm in short order.  I’ve thought often enough about combining it into by Shares ISA, since I can’t get excited about 1% interest in a 3% inflation world, but an early retiree has to carry a large cash float. Plus there are reasons to worry about holding a lot of cash with a S&S nominee provider.

Why do people use ISAs in such an odd way?

Go on. Try getting one of these in London, or anywhere else, for less than £1. It was easy 30 years ago. That's how well cash holds its value!
Go on. Try getting one of these in London, or anywhere else, for less than £1. It was easy 30 years ago. That’s how well cash holds its value!

Four out of five ISA savers use only cash accounts. WTF is up with that? Cash is the most tedious, evil asset class, with its mendacious promise that it’ll never go down. Well, duh, yes, the number at the end doesn’t go down, but the real value decays like fresh fish. Cash dies at about 4% a year, presumably because they print that much more than the increase in goods and services that the cash is chasing. Particularly in troubled times like the seven lean years we’ve gone through.  They added insult to injury by devaluing the currency making everythign foreign dearer – from shares to iPads, though this seems to be starting to recover of late. In short, as a long-term asset class, cash stinks IMO. As an example of just how much, when I started work you could get a pint of beer in London for less than a pound. You try doing that now. As a rough rule of thumb, the value of cash halves every ten to fifteen years. This is not an asset class you can trust. The shocking volatility of stocks makes them look less trustworthy, but in the long run (>5-10 year mark) they tend to drift up in real terms, if you include dividend income. Whereas I have never known a ten year period where the value of £100 at the end has been anywhere near as much as it was at the start. The interest you’re paid on cash is an attempt to make you feel better about that bad behaviour – and then they bloody well tax you on the compensation for the loss of value due to Government behaviour, just because they can. All a cash ISA does is stop the tax bit, but time and time again I hear people say they prefer cash ISAs because they are risk-averse. Bollocks. It’s just a different kind of risk, a disguised one when the number at the bottom doesn’t fall by the value of each unit does. That’s still risk in my book, and a dishonest underhand one at that.

Savers will be able to shield almost three times as much money from tax without taking the risk of buying shares


Nary a whisper about the risk of it almost guaranteed to be worth less as time goes by unless interest rates exceed inflation, been a long while, that… My pension AVCs, held in cash since I left work, will have decayed in real value by 10%. Now I can’t honestly ask for people to play the violins in the background because I saved 42% tax on that and got a 20% bung from buying in a mix of FTSE100:global stocks in ’09 while the pound was being devalued by 25%, so the ermine is okay with leaving 10%+ on the table. But I do that because I have to, it’s definitely a bad idea to hold that much in cash, so exactly why 80% of ISA savers  electively hold such a rotten depreciating asset beats the hell out of me. The one thing cash gives you is optionality, but in return for the favour it leaks through your fingers over the years. I have never, ever, known any way of saving cash[ref]a historical exception was in the good old days when you could borrow money from a credit card at 0% without any fees, but then any interest you can get on somebody else’s money is a good rate :)[/ref] where I could even match inflation, with the one exception of my NS&I Index-linked savings certificates, which I loaded up on just before they withdrew the blighters.

The other area where it seems my fellow-citizens are mad is what the hell is with this Torschlusspanik about ISAs now? You’ve had eleven flippin’ months to use your ISA allowance! For starters if you are saving cash from earnings, why save it elsewhere and then into an ISA in the last three weeks, though retaining optionality and the fact you can get a better interest rate outside an ISA has something to be said for it. But for an S&S ISA? Okay, so I stiffed myself this year and last by filling up the ISA early in the year so I had to sell some of The Firm to make space for opportunities as they came up – Direct Line last year and Royal Mail this year, so you want to pace yourself. Steady as she goes monthly S&S ISA saving as you earn the money is a match made in heaven for dollar-cost-averaging – particularly if you are investing in something that’s going down the toilet. Emerging markets spring to mind at the moment 🙂 Contrary to popular belief buying when things look bad is often good for your wealth, provided you have the required intestinal fortitude,  here, here, and here 🙂

So, ISA savers of Britain, when you get your grubby mitts on the new 15k allowance, it’s time to slap yourselves around the collective chops with a wet fish, and ask yourselves some searching questions, like

  • why are y’all[ref]okay, four fifths of you all[/ref] saving cash, in a ZIRP environment?
  • why do you leave it to the last minute? Why isn’t the ISA season in April, when you have a year ahead of you and can take advantage of saving the money as you earn it[ref]obviously if you earn £200k+ you can load up your ISA in the first month, but most of us struggle to fill an ISA in a year 🙂 Steady as she goes seems to obvious way to go in that case[/ref],  rather than March? Particularly the 20% that use S&S ISAs – you might as well get, your money working for you six months earlier on average.

There’s n’owt as queer as folk, eh? Are we all such well-trained little consumers that we are suckers for the ‘closing down sale – everything must go‘ pitch rather than actually working out what we want an ISA to do for us? Let’s get our money put to work and gainfully employed sooner rather than later 😉

Osborne – workers of the world unite – and take the shaft?

Wow, ain’t he generous? When I was a young Ermine, one of the principles I was taught was that the whole point of the rule of law meant there was one law applying across the land. Okay, as I got older I realised that often money and influence could tarnish the ideal, but here’s George on the TV offering people nothing for something:

George, me old mucker, there was a story on some old book years ago about some fellow selling his birthright for a mess of pottage. You read that and figured it sounded great. Let’s take a butcher’s hook at this deal for new workers:

Here you are, £2000 to £50,000 worth of shares in your future employer, in return for losing most of the the expectation you used to have of remaining an employee or at least there being some warning of getting the hoof, and your overall employment security. There is already a well-established and equitable way of companies getting a flexible workforce.

Contractors sell security of employment – for extra pay, not a one-off bung!

Hang on, didn’t that used to be called contracting? I once saw a spreadsheet of departmental salaries where they had us permies and the salaries of the contractors. The contractors were typically on three times the gross salary of permies.  They have no employment rights, no pension, no statutory sick pay, they get to pay their own employer NI. That’s why they earned so much more! If they had any brains they’s use some of that excess to stick into a pension,  insure against sickness, and build up an emergency fund. Oh and pay NI to HMRC under IR35. All that probably took up half the excess, and the rest was compensation for being more entrepreneurial and the fact that the company could hire and fire at short term notice.

Not a bad deal at all. Boy George wants firms to get that on the cheap. Here’s an Ermine’s word in the shell-like of putative employees that are tempted. Just Say No. Want £2000 worth of shares in the company you are about to join absolutely tax free? Here’s how to get the gain without the pain.

Save up £2000, open up a stocks and shares ISA, instruct broker to purchase £2000 worth of Company of your choice, sit back, job done. No CGT to pay in future either! No need to sell your employment rights for that.

There are other ways to build up a stake like that, for instance join Sharesave, on maturity you can transfer up to £10k worth of shares to a S&S ISA, job also done but you are also protected against share price movement downside!

Boy George’s offer is a bum deal. Do yourselves a favour. Just Say No to the Osborne pottage. If you like the firm’s prospects that much, contract for them, and use an ISA to save some of your contractor’s premium, in shares of the firm. Each and every year you work for them!

As of the end of this year, I will own about an equivalent value of shares in my former employer as my take-home pay would have been, purchased in employee shares and Sharesave. That’s a damn sight more that the one-off £2000 Osborne’s offering for your surrender of your employment rights, and that is about half the extra amount firms have to pay contractors to accept for not having any – each and every year. I don’t particularly consider myself an ‘owner’ of The Firm. I get some satisfaction from the fact my ex-employer has to pay me about a month’s take home every year in dividends, but it’s a bigger stake than Osborne’s offering people to sell their legal rights for. Your pissant stake in the company is going to do diddly-squat to influence the direction of the firm. The interests of shareholders are to some extent diametrically opposed to the interests of the employees. I don’t hold this stake in my ex-employer just because Neil Woodford owns a big slug of it in Invesco Perpetual’s high income fund; some of the reason for holding the shares in The Firm were some of the reasons that made it a worse place to work in the end.

Free shares for your employment rights –  Snog, Marry, Avoid?

She’d say Avoid to Osborne’s deal 🙂

Know a bad deal when you see it. This one’s definitely Avoid. Unfortunately, it looks like employment law is going to be rewritten to allow for new hires to be only offered second-rate employment rights, rather than having a genuine choice. You may not have the option to avoid, and contractors may also get the shaft, as the flexibility they offered at a price is going to be undercut somewhat. Heck, as an employer I’d rather offer an Osborne hire and fire ’em contract at permie salary with a bung at the beginning for any role where the extra cost of NI, NIST pension + £2000 share bung is less than the contractor premium over the expected life of the job. Yes, the range is £2000 to £50,000 worth of shares, but somehow I get the feeling £2000 is going to be the thick end of the distribution 😉 The £50k will be at the board level end, and these don’t usually have to worry about getting the push unexpectedly…

Osborne’s not offering you anything of significant value compared to what you have to surrender, and what he is offering is pretty cheap to buy on the open market along with the much vaunted CGT tax advantage carrot he’s dangling. He could have done so much better – how about vesting a six months to a year’s salary worth of share options at the start, to mature after five years or when you are terminated, if the latter is earlier? He could sweeten the deal for companies by foregoing NI until the vesting period ends, the saving in unemployment benefit would probably make this revenue neutral.

Try harder next time, George.

Bad Moon Rising

It does, indeed seem to be a bad moon rising. The real moon was at its closest to us for a while on the 19th, this was taken at 8:15pm lazily from my front door… it is about 50,000 km closer to us and about 30% brighter than it is at its furthest distance. I’m not blaming it, and it was a remarkable sight, but a lot of bad crap has been happening of late, so the old Creedence Clearwater Revival song kind of fits the mood.

There’s obviously the tragedy in Japan, though all the papers seem to focus on the issues at the nuclear plant the plight of the survivors of the tidal wave seems really dire. More recently, we seem to have got ourselves into yet another oil war. I mean, yes, Gaddafi was reputed to have sponsored the IRA in the 1980s and Reagan was right when he named him mad dog but there are enough other mad dogs around the world that we are happy to leave be. Still puzzles me how the army of an small island nation can fight on three fronts at once, but so be it. I hope we won’t still be engaged there this time next year, and definitely hope not this time a decade hence…

Closer to home it’s coming up to the end of the financial year, and that’s when the portcullis is going to come down on a lot of government spending. The Grauniad has been having a bleeding-hearts fest on this, cue the violins in the background, photo of pained looking young mum with a couple of kids who seems to be losing some sort of childcare, though the article failed to tell her story. Then we have the loss of the NI Music Therapy Trust. WTF is music therapy? And why does it need to be fancy instruments, if it’s about the kids ‘expressing themselves’ then can’t we substitute the percussion instruments with dustbin lids and the like? It was good enough for me as a kid, you know, the tin cans or the more advanced version with bottles filled with varying amounts of water. This is one of those things that is undoubtedly nice if you have the spare money, but we don’t now. Let’s face it, kids playing any sort of musical instruments sounds pretty ropey unless you happen to be the doting parents, so this isn’t about sophistication and tone colour, it’s about them having a good time. As the outgoing Labour Liam Byrne said, “I’m afraid to tell you there’s no money left”. But with a bit of enterprise I’m sure we could find something for the kids to play with and make a racket for an awful lot less money, and no expensive musical instruments to break, either!

Then there was the Budget, and unlike it seems everyone else I see this one as a mean and chiseling sort of job. The tax rises are achieved through underhand methods like fiscal drag and rescaling indexation to the duplicitous Consumer Prices Index that excludes housing costs, for the very good reason that we all know Britons don’t like to spend a lot of money on bricks and mortar so there’s no point in including that. Of course Tories can’t be seen to be raising the headline rate of tax, so they grub about and frig with the tax thresholds, so you get to pay more tax anyway.

Well, Georgie babe me old mucker, I’m not paying any of your stinkin’ 40% tax, even if you bring the threshold down to 25k, as I’ve pushed my costs down well below needing that part of my salary, so I’ll be saving that in AVCs so I get to retire earlier or have more when I do retire. There’s no bloody incentive to work for tax at 42%, because I am shorter of time on this earth than I am of money. After I saved my ISA last year I’ve been building up a war chest for this year, as I could see taxes were going to go up this year.

So I could push my salary below my running costs and claw back even more tax from you this year, George. Nasty nickel-and-diming budgets like this one makes it more worth my while to do that, and indeed the increased personal allowance helps a tad. I wasn’t part of creating the credit crunch and I’m not aiming to get soaked for clearing it up, chum. But what I will be having from you, buddy, is some of those nice National Savings certificates that you cancelled last year. About £10k’s worth, actually, because then I can transfer the contents of my Cash ISA into my shares ISA and get my emergency fund inflation-proofed to real inflation, i.e. RPI, and tax-free too. I always thought it’s so rude to tax me for the paltry returns on cash that don’t even match inflation. Tax the amount over RPI, fair enough, but not the return needed to compensate for the Government’s fiscal mismanagement, that’s plain cheeky.

Monevator and his buddies are greedy tykes wanting RPI plus something in my view 😉 Living in these desperate times financially RPI and tax-free is just fine with me. I don’t ask my cash to make money for me, but what I would like it to do is sit there and stay the same value over the years, and at the moment my 3.2% Cash ISA in gently losing the fight year on year. This is my emergency fund, so it doesn’t have to try and get bigger every year, staying the same is quite okay, and RPI matches my experience of inflation in the UK. For me CPI is away with the fairies, because I don’t buy iFads which are getting cheaper, depressing the CPI.

The Creedence Clearwater Revival track I pinched the title from ain’t bad, either, I think it was the first record I ever got to play.

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Winter of Discontent battle lines being drawn

Well, Gideon’s had his say yesterday. I figured I’d wait around for the churnalists to go through the fine print before taking the opportunity to shoot my mouth off, or perhaps to bleat that it’s unfair, because middle class me is taking the bullet in some way akin to our army of fragrant Guardian-reading SAHMs.

Well, they’ve failed me dismally, or perhaps as a homeowner in the sense of being the party on the deeds without sharing it with a bank and part of a child-free couple, there is compensation for ten years of not getting any free gravy from Labour. Not getting any in the first place means Gideon doesn’t get to take it away. Obviously there are the macroeconomic hazards in future rang out by distant bells tolling but I didn’t take it straight between the eyes yesterday. That I’m aware of so far, anyway.

That’s not to say that I’m unaffected. If I were to want to go somewhere by train, the original small mortgage I’d need to raise for the ticket is likely to go up to a mid-sized mortgage as a result of the subsidy change. Obviously VAT is going to go up. But the place I am going to take it is in the back, in a mightly subtle way.

Gideon’s taken out an awful lot of money from the British economy. If he were flying a plane he’s kicked the throttle back from Gordon Brown’s full bore to about half. He has to avoid a stall.

What he will probably do is get the Bank of England to hit the old QE button and create money. That’s the nice thing about being the government, you can make money. If you or I did that in our garages we’d get nicked for it, because it creates inflation. But when Mervyn King does it, it’s a good thing, and it compensates for all that wedge the government isn’t spending, and gives us something to pay unemployment benefit to the half-a-million people who will lose their jobs.

Merv doesn’t have to make money in his garage, he has a computer to do it, and if he has to get physical then he has those nice chaps at the Royal Mint to do it. Lately even they have been complaining about inflation, as it is costing too much money to make money, particularly those danged 5p and 10p coins.

Last time that happened we made the buggers smaller, but there a limit to how far that can go before we can’t see them any more. The problem is the copper price has gone up so much the copper in the cupro-nickel now costs more than the coin it’s made of. Maybe I should stockpile some of these, and heat them up in a metal bucket over the fire in the desperate times to come, so I can release them onto the London Metal Exchange when Peak Copper has happened. Anyway, for some reason Merv doesn’t think this is a problem, he’ll simply get them to make the 5 and 10ps out of pressed steel, like they did with the coppers a while ago. So your silver coins will become magnetic for the first time. The need to continually debase the coins of the realm is not usually an indication of fastidious economic management.

Inflation will destroy chunks of my wealth held in financial instruments of all sorts, though this will particularly affect cash holdings like my cash ISA which is worth about 2% less this year than last.

Wealth held in non-financial instruments like Real Stuff will probably weather the storm better, though I’d draw the line at claiming that my house will be a hedge against inflation (the inflation hedge rationale behind that article applies equally to a property bought at home).

So the places I will take the bullet aren’t as explicit as the places many people will be taking it. But take it I will. I will concentrate my energy on adjusting my risk profile and asset class spread to minimize the damage, but I won’t bother writing into the Guardian about how dreadful it all is. I don’t think Patrick Colllinson will be as nice about people like me as he was about hard-done-by SAHMs that everybody was so mean about.

If they have got any brains, the Argies are likely to have another bash at taking over the Falklands in the next ten years as we launch our shiny new aircraft carriers, without any aircraft on ’em. I guess that indirectly affects me as there is oil there which will be kind of handy in a post-peak world and so the punch-up is more likely, and actually about something real rather than the need to get Thatcher re-elected. I don’t normally have much time for the old goat Norman Tebbit but I can’t help agreeing with him that you need planes on an aircraft carrier in the same way as beer is rather useful in a pub. Part of the problem here is there is no sense of competence or personal responsibility in people who draft the byzantine contracts in these things.There’s apparently some wizard wheeze about using giant rubber bands to launch paper aircraft later on.

Before someone takes me to task for being a warmongering SOB I really ought to say that it is way beyond my competence to know whether or not Britain needs aircraft carriers and a blue water navy in the 21st century. That’s why we have guys with gold braid on their shoulder pads and handlebar moustaches to think about stuff like that. But this much I do know – if we do need aircraft carriers then we need aircraft on the darned things and not just a few choppers to break up the stark expanse of the landing deck a little bit. It’s not like we’re going to use the pointy bit as a battering ram are we 😉

It seems to be part of a general disease, this casual approach to dotting the Is and crossing the Ts. I suppose I didn’t specify that I’d like to have the wheels and the engine when I bought my last car, but I’d have been mighty pissed off if they hadn’t come with it, as well as looking a bit silly when I got in the thing to drive it away. It isn’t the sort of minor detail that escapes you in buying something.

It’s not just the MOD, it appears that our fine friends over the pond have been getting a bit slap-happy with the paperwork in issuing mortgages, and as a result they can’t really work out who a house belongs to, which at least is giving some people a break by freezing foreclosures for a while. Sometimes I wonder about our American friends. The rule of law and secure property rights are meant to be axiomatic to human freedom, and I am suprised at the casual approach to this in the US, this will cause endless pain in future if the property registration system ends up subject to undisclosed future claims and liabilities.

It was not until researching this observation about the rule of law, which I had been taught at school, that I realised that it was quite so right-wing in its derivation 🙂 Anything which needs references from the Adam Smith Institute and where the wikipedia article cites Hayek and the Austrian School is usually the signature of a community that considers Genghis Khan as a bleeding-heart liberal, but in this area I’m with them.

The half-million souls hammering the public sector is due to take is asking for a fight, we only have to look over the Channel to see some of the brouhaha we could be in for. As a gratuitious aside, I love the comment that after years of continual man-eating, Carla Bruni supposedly said that she graduated to marrying Sarkozy because she wanted a “man with nuclear power“. There’s no way up for her afterwards, so Sarko has gotta smash the unions. I don’t know if SamCam feels the same. And no, I have no explanation for Thatcher’s behaviour on that line of reasoning at all 😉

Some events mark generations, and one of those was the Winter of Discontent, a punch-up between the unions and the Labour administration of James Callaghan. Well, it looks like the brothers are getting ready for another rumble, along similar battle lines.

Some things are different, of course, gone are the days of Scargill’s flying thugs pickets, and the time may yet come again when taxi drivers have to look nervously at motorway bridges for the descendants of Art’s enforcers innocent hot-headed boys with concrete blocks that just happened to be in their hands when they accidentally let go of them into the traffic.

Part of the problem is that many people just don’t get it. We have been living beyond our means. Michael Lewis put his finger on it in his Vanity Fair article about the astonishing carry-on in Greece.

The tsunami of cheap credit that rolled across the planet between 2002 and 2007 has just now created a new opportunity for travel: financial-disaster tourism. The credit wasn’t just money, it was temptation. It offered entire societies the chance to reveal aspects of their characters they could not normally afford to indulge. Entire countries were told, “The lights are out, you can do whatever you want to do and no one will ever know.”

What did we Brits want to do when the lights were out, I wonder? We wanted to inflate the price of our houses, and feel rich that way. Oh and we preferred not to get round to the tedious business of paying down the mortgages that went with them, preferring to stick with paying the interest only.

Of course, our inflated house prices made us feel rich, so we liked to take that money out and fritter it away on holidays and trinkets for the kids. All the while telling ourselves that our houses were making us more money than our jobs were, and never asking ourselves where did all this money come from?

Then some bugger turned on the lights, somewhere in late 2007, and we’re now spitting bricks, because they also seem to have turned off the free money tap. The trouble is, many of us also seem to have got infantilised at the cheap credit teat, and now it is gone we don’t seem to get it.

Living standards are going to fall. If we’re lucky, they will only fall to where they should have been without the sugar rush of almost free credit. If we’re unlucky, we will get to find that they fall further as we share the world’s resources with a burgeoning middle class elsewhere.

We’re also going to find out that we were carrying a lot of passengers. In the good times we had money to spare for all sorts of frippery. There’s nothing wrong with that, if you have the money then why not spend it to make a prettier world.

This save the arts video strikes me as a classic case of self-interested bleating. The trouble with ‘funding’ is it allows people to go right up their own backsides. At least when the King sponsored art the artist had to please him. Mozart, Beethoven and Michaelangelo didn’t get government funding. The very fact that the arts need funding means that they don’t speak to enough people to pay their way.They need to do better now.

Some of those passengers are also an awful lot of these unions’ members. It will be interesting to see how this pans out. Some of the cuts will be way over the top. Some will be cutting stuff that we can’t afford to do any more, like buying aircraft. There’s an awesome special interest pleading that these cuts will hit the poor hardest. It really isn’t that hard to understand. The poor have been the major beneficiaries of the benefits culture. Any attempt to roll that back is gonna hit the poorest hardest. They can’t hit me with benefit cuts because I don’t get any. The only way the poor can not be hit hardest if for taxes to go up. I think some of that was discussed at the election, though I am not sure the Lib Dems are exactly delivering what their voters expected.

UK Budget June 2010 ruminations, thoughts and rants

Gideon’s just announced his budget, and I’ve reflected upon it. This one was dreaded by lots of people, and having digested it, I am surprised. Although I am a higher tax payer, I can avoid that part of it quite easily, by continuing to save AVCs to my pension, such that I get a tax-free lump sum from that. Having paid off my mortgage and living simply, I don’t need anywhere near half my salary, but I do need early retirement. Match made in heaven. So while Gideon thinks I am on the right hand side of this chart,

June 2010 budget impact estimate
What George Osborne, a.k.a. Gideon, thinks he'll get out of us

I can swing myself to slot 4-5 without breaking a sweat, and indeed without changing anything. So thanks, buddy, for the extra £1k personal allowance, much appreciated!

Note that the higher tax threshold is being brought down by £1500 when the personal allowance rises next year, so people who are currently just below it need to think about how to use salary sacrifice or other wheezes from April if they don’t want to suck it up. I’ve never liked working nearly half for the Government, I think that’s downright rude, and have used all the HMRC approved scams to dodge that. I’m writing this on a laptop purchased under the now deceased Home Computing Initiative, taken extra holiday paid with salary sacrifice, and bought employee shares tax-free.

Of course, to take advantage of these you have to live below your means… If you can’t do that on an income that is in the top 10% of UK incomes and there isn’t an unusual essential cost in your life then you really ought to take a long hard look at your personal finances. Don’t be suckered by the hype in the Torygraph and the right-wing press – under no reasonable definition of the term can higher-rate taxpayers be defined as middle class by income.

One subtle stiffing that I may take from the budget is outlined in this document, is that the government is well aware of my sort, those at the end of their careers. We tend to have a large disposable income due to paid off mortgages, and often empty nests. We have a healthy interest in getting the taxman’s sweaty mitts off it, pumping money into our pensions with the hope of getting 25% of our total pension pot out tax-free in a few years, which obviously beats 42% tax & NI. The headline is that there would be a lowered annual limit for pension contributions of 30-45k which could be an issue for me at the lower end.

Simple living means I won’t be hit too hard by the 2.5% VAT hike. I won’t be buying items of male jewellery like an iPad, though I will get hit on fuel, insurance tax and the like. I will ask Quicken to tell me how much I spent on stuff last year, and take 2.5% to see if it is more than £6800, which would be the breakeven point for the tax break. I don’t think it was that much last year. Benefit cuts? I don’t get no stinkin’ benefits, so no worries on that score. Half of nowt is still nothing!

However, seeing how little this affects me makes me absolutely furious. Not with Gideon, but with Gordon Brown! Why? Because of this:

Public spending relative to income
Public spending relative to income

Observe the fact that we were running a loss ever since 2002, even while  the economy was steaming ahead in the years running up to 2007. What’s was he on? Just as I am saving now, when I am in the peak of my earning power, for leaner times in future when I will be earning less, so should a Government be putting money aside in booms, so that it has some to counter recessions with. At least it shouldn’t be ramping up the national debt!

Not only that, let’s hear which are the constituencies of the disadvantaged. Oh dear, child tax credits dropped for households > 40k?  FFS, why was I subsidising my colleagues’ children?

Housing benefit for people with a four bedroomed house? I’ve never lived in a four bedroomed house, why am I paying tax so others can? (that’s 1.102 of this)

and restricting Housing Benefit for working age claimants in the social rented sector who are occupying a larger property than their household size warrants.

Now I know that it is in the ConDem’s interest to stitch Labour’s record up as much as possible, so not all may be as it seems. And Gideon’s instincts in the teeth of the credit crunch scare me. Here is not a guy who can hold his head in a crisis, like Alistair Darling was.

If Gideon were the pilot of an airliner that loses all four engines in a bird strike, there’s no Chesley Sullenberger calm in the face of adversity. Osborne’s first instinct was to shove the stick forward and enter a nosedive. But now he has the benefit of a little bit of time to assimilate things, and it appears he has the cojones to carry it through.

So if these moves really can make as much saving as he claims, then Britain was carrying an awful lot of passengers.

One area where I feel Osborne failed dismally is in not tackling or even acknowledging the spectre of youth unemployment. According to the Daily Mail, 1 in 10 18 year olds are neither in work nor in employment. The problem, fundamentally, is that there are too many people in the world, and too many of those are prepared to work for less than the UK minimum wage. This means work that can be relocated will be – to outside the UK. This unfortunately also includes a lot of white collar knowledge work too, which is often eminently relocatable using the Internet.

Colin Wilson, The Outsider
Colin Wilson, The Outsider

I grew up in a world were many things were made in the UK – things like TVs and cars used to be made here. They were unreliable as hell, some of this was the technology of the time, some of it was due to poor industrial practices from management and unions alike. But there was unskilled work. Read something like Colin Wilson’s The Outsider which is set in the 1950s and his description of the ease at which jobs could be got and turned over sounds amazing to me and would be positively alien to an 18-year old today. Many of these “NEETS” aren’t unemployed because they are feckless, they are unemployed because capitalism has failed to create useful roles for them in society in a globalised economy.

Somewhere we need to make a call – do we concentrate our resources on the people with greatest potential, or do we seek equality that we can’t afford. Tony Blair’s idea of sending 50% of 18 year olds to university sounded great, until we realise that to do so means we have to cripple them with debt at the worst point, right at the outset of their careers.

We need to find an answer to this, I don’t know if it is in Osborne’s power, but we need to have started yesterday, because unemployment early in one’s career hampers those early stages where much of the direction and confidence is gained. Conversely, the blight of youth unemployment leads to stories like this, as people with delicate and growing self-images at the beginning of their adult careers get shattered by the tragedy of rejections because of too many people chasing too few places.

I don’t know the answers, but this will be a shocking waste of human potential and a source of misery for more than the next five years if it is ignored.