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Tax avoidance versus tax evasion versus tax mitigation

Al Capone was eventually done for tax evasion. If only he’d put his vice gains into a pension…

A lot of people confuse tax avoidance and tax evasion. It can be a dangerous mistake to make.

As the former British Chancellor of the Exchequer Denis Healey once said:

“The difference between tax avoidance and tax evasion is the thickness of a prison wall”.

That was why in the original published version of this article I stated:

  • Tax avoidance means using whatever legal means you choose to reduce your current or future tax liabilities.
  • Tax evasion means doing illegal things to avoid paying taxes. It’s the Al Capone path to financial freedom.

However the authorities have taken an increasingly tough line in recent years.

Now the phrase ‘tax avoidance’ may imply something much more questionable, as opposed to simply filling an ISA.

Tax avoidance might not be legal. Depending.

In particular, a General Anti-Abuse Rule (GAAR) was contained within the Finance Act 2013. This sought to counter ‘tax advantages arising from tax arrangements that are abusive’.

You should definitely delve into detailed guidance on GAAR if you’re contemplating doing anything out of the ordinary.

But the most relevant point for our discussion of evasion versus avoidance is that according to the tax planning resource RossMartin.co.uk:

In addition to the legislation, HMRC published guidance in April 2013 which expressly states that the GAAR is an intended departure from the previous situation where routinely cited court decisions such as the judgment of Lord Clyde, ‘every man is entitled if he can to order his affairs so that the tax attracted under the appropriate act is less than it otherwise would be’ are now rejected.

The guidance sets out the Parliamentary intention that the statutory limit on reducing tax liabilities is reached when arrangements are put in place which go ‘beyond anything which could reasonably be regarded as a reasonable course of action’.

And here’s what the Tax Justice Network says about the difference between avoidance and evasion:

Tax avoidance cannot be called ‘legal’ because a lot of what gets called ‘tax avoidance’ falls in a legal grey area. ‘Tax avoidance’ is often incorrectly assumed to refer to ‘legal’ means of underpaying tax (such as using loopholes), while ‘tax evasion’ is understood to refer to illegal means.

In the real world, however, this legal-illegal distinction often falls apart.

Whether an activity is legal or not often does not become clear until it has been challenged in court, and much of what gets called ‘avoidance’ turns out to be more like evasion.

As a result the Tax Justice Network – a lobbying group that focusses on states’ getting their due share of tax receipts – now favours the phrase ‘tax abuse’.

Tax avoidance may not be a criminal act then – depending. But if you’re hit with a big bill and penalties because what you did was deemed by a court to be the unacceptable face of paying less tax – ‘unreasonable’, in other words – then you may wonder if there’s a difference.

Please note I am NOT a tax expert and this article is not tax advice. It is simply the musings of a private investor trying to do the right thing with my own affairs. Consult a specialist and/or HMRC to know exactly where the law and you stand in respect to your taxes.

Tax avoidance out. Tax mitigation in.

For any criminals who Googled ‘tax evasion’, I’m not about to give you a masterclass in laundering cash or doctoring a passport.

I’ve never evaded taxes. I don’t condone it, and I couldn’t tell you how it’s done.

But tax avoidance mitigation – as we should now call it – is another matter.

The previous version of this piece already predicted taxes would rise in the UK over the next few decades. Higher pension costs, public debt, and the ever-rising bill for funding public services made that nailed-on.

Since then though we’ve seen public sector borrowing soar due to the pandemic, pulling forward this pressure. The overall level of taxes is now forecast to hit the highest level since the Second World War:

Our stagnant post-Brexit economy means it’s unlikely faster economic growth will bail us out anytime soon. Living standards will remain moribund, regardless of what party in power.

Meanwhile politicians increasingly talk about closing tax loopholes. In some cases – such as the carried interest enjoyed by private equity that’s now in the crosshairs of shadow chancellor Rachel Reeves – these are not improper, just disagreeable to a State with an insatiable appetite for more revenue.

Against this backdrop, it makes sense for investors to legally do what we reasonably can to reduce our tax burden – without overly compromising on other aspects of our lives, I’d suggest. (As opposed to be following the example of 1970s tax exiles…)

In doing so, we need to be extra careful today to follow the spirit as well as the letter of the law.

Examples of legitimate tax mitigation steps

There’s plenty you can do to reduce your taxes without risking fines or jail time.

ISAs and pensions

Most people can do all their investing entirely within tax shelters such as ISAs and SIPPs. They will not have to worry about further tax mitigation with respect to their investment returns.

VCTs and EIS schemes

These are riskier and (worse) more expensive ways to invest. But they can have a role for wealthy investors who’ve filled their tax shelters and can afford to chance lousy returns. Especially if they particularly enjoy backing new companies.

Think about who owns your assets

If you’re a married high-earner, it may make sense for your lower-earning and more lightly-taxed spouse to own certain assets and book the returns. Make the best of your family’s various personal allowances,  but maybe take advice if you feel you’re contemplating anything unusual.

Consider salary sacrifice and other steps to lower income tax

The aim is to defer paying taxes until you’re earning less in retirement, and thus will be taxed at a lower rate.

Taxing taxes

I’m confident those tax mitigation methods are fully within the spirit of the law. That’s because when you invest in an ISA, say, you are doing exactly what the legislation intended – enjoying a tax break given as an incentive to invest for your future wealth.

But once you – or your advisors – start to get creative, you roll the dice.

When I first wrote about tax avoidance versus tax evasion in 2009, it seemed like a less contentious subject.

Of course, nobody liked a tax evader, then or now.

But over the past decade or so – perhaps spurred by the popular backlash that followed the financial crisis, and boosted by the cost of living crisis more recently – politicians, the media, and the public have cast a harsher eye on even seemingly legitimate tax avoidance, too.

This has made the distinction between evasion and avoidance blurrier than it was.

Yet this is not really a new issue. Writing in the Financial Times in the wake of a controversial craze for tax inversions by US companies, John Kay noted:

It is conventional to distinguish legal tax avoidance from illegal tax evasion. But the reality is that there is a spectrum.

The person who avoids the heavy taxation on cigarettes by giving them up wins our approval; the gangmaster who employs illegal workers off the radar screen of government authorities goes to prison when detected. But most cases lie in-between.

The UK’s HM Revenue & Customs has issued big payments claims to people who invested in highly artificial film finance schemes that did not qualify for the allowances they claimed.

Were they avoiders or evaders? The line between avoidance and evasion would be clear only if the law were clear, and it is not.

Tax law is complex and the legality of particular actions can be firmly established only if there is a decision by a court on the facts of a particular case.

A tax avoidance horror story

The fate of the film financing schemes in the courts since Kay wrote his piece has had as many plot twists as any movie. Like most people not directly involved, I lost track.

I do know though that a Supreme Court ruling in 2017 ultimately found for HMRC – potentially recouping £1 billion for the nation’s coffers, albeit at potential ruin for users of the schemes. Some of them reportedly faced tax bills several times larger than their original investment.

An HMRC spokesperson was quoted as saying:

Avoidance schemes are often highly contrived and almost invariably fall flat when trying to deliver a tax advantage never intended by Parliament.

The fact is the majority of schemes simply don’t work and can put avoidance users in a significantly worse financial position than if they had never used the scheme in the first place.

Even MPs got involved in the drama, pushing back against court rulings – or at least on the penalties imposed.

In a letter to then-chancellor Philip Hammond, Andrew Tyrie, chairman of the Treasury committee, agreed the original film industry tax breaks were arguably “too generous and ill-defined.”

But with respect to rulings against the schemes designed to exploit those breaks, Tyrie added:

An increasing number of representations have been made to me expressing concern that the outcomes are not always fair nor what anyone could have expected.

This has resulted in financial calamity for some of those involved and considerable difficulties for HMRC in bringing a large number of schemes to a close.

The affair was still rumbling through the courts as late as May 2023.

Better know better

These film financing vehicles were marketed some 20 years ago. But the saga illustrates very well that what may seem a clever wheeze one moment can levy a heavy price in time.

Most Monevator readers will have little sympathy with multi-millionaire celebrities apparently going out of their way to avoid paying more taxes to fund schools and hospitals and the rest of the laundry list.

And I am certainly not saying the film schemes were legitimate. The courts have found they were not.

However there’s a bit of going somewhere but for the grace of God about it all.

Those celebrity investors were presumably mostly advised by specialists. I suppose that many just assumed the schemes were above-board.

After all, it took a very long-running court case to prove they weren’t. How was a footballer or a pop star supposed to be able to assess that, when presented with the scheme by a professional person in a suit?

Compensating factors

Consider, by way of comparison, the Payment Protection Insurance mis-selling scandal. By the end the banks had paid out nearly £40 billion in compensation to customers deemed to have been mis-sold PPI.

For these PPI ‘victims’, caveat emptor did not apply. They eventually got their money back.

But for the would-be tax-avoiding film financiers, caveat emptor has bitten them on the bottom line.

How would we feel, if formerly commonplace practices such as pension recycling or bed and ISA-ing were suddenly deemed too aggressive?

And we were then hit with a retrospective tax bill?


I’m just thinking aloud. Again, I’m far from an expert on tax matters. We never give personal advice on Monevator, for both practical and regulatory reasons. But I’m always extra wary when it comes to tax.

The fact is that tax matters are often very complicated. And often dependent on your personal situation.

The letter of the law

Interestingly, in the original version of this article posted in 2009, I quoted evidence of an emerging debate about the terminology as then covered on Wikipedia.

At the time the phrase ‘tax avoidance’ was apparently in dispute in the UK, with ‘tax mitigation’ being suggested as a better term for legal tax reduction.

The Wikipedia article noted, in paragraphs since removed, that:

The United Kingdom and jurisdictions following the UK approach (such as New Zealand) have recently adopted the evasion/avoidance terminology as used in the United States: evasion is a criminal attempt to avoid paying tax owed while avoidance is an attempt to use the law to reduce taxes owed.

There is, however, a further distinction drawn between tax avoidance and tax mitigation.

Tax avoidance is a course of action designed to conflict with or defeat the evident intention of Parliament.

Tax mitigation is conduct which reduces tax liabilities without “tax avoidance” (not contrary to the intention of Parliament), for instance, by gifts to charity or investments in certain assets which qualify for tax relief. This is important for tax provisions which apply in cases of “avoidance”: they are held not to apply in cases of mitigation.

I wrote at the time that: “I suspect this is largely a courtroom debate, caused by the Revenue looking to close down schemes of dubious legality created by planners for wealthy individuals.”

And indeed, that does seem to have been the direction of travel in this area, given that later ruling in the 2013 Finance Act.

Avoid being deemed an overt avoider

So where does this leave us?

As I say I’m no legal expert nor a tax planner. I’m just an everyday bloke who enjoys investing.

So to be absolutely clear, whenever I’m talking about reducing taxes on your investments, I mean by using legal and strictly above board means. Never the dodgy stuff.

But perhaps this isn’t enough anymore? Maybe we should apply the ‘seen on the front of the local newspaper’ test to any decisions we make when reducing our taxes?

In other words, how would you feel if whatever tax mitigation decision you made was splashed on the cover of your local newspaper? For all your friends and neighbours to read?

Saving into a pension? Putting money in an ISA? Making use of capital losses by setting them against capital gains to reduce your total taxable gain?

All very safe.

What about defusing capital gains over the years by making sure you use your capital gains allowance? Or incorporating your business to reduce your income tax bill and national insurance liabilities?

Already in the current climate we can see they seem a bit less safe. I think though they are still firmly on the right side of the spirit and reality of the law, if not always the court of public opinion.

What about offshore vehicles? Or using complicated company structures or loans to avoid payroll taxes or to disguise renumeration?

Hmm. I wouldn’t and HMRC would agree.

And as barrister Patrick Cannon notes on his website:

 …if HMRC investigate and find evidence of dishonesty or cheating then you may be looking at a criminal investigation for tax fraud and prosecution, leading to a prison sentence and a fine.

The sort of behaviour that this might cover includes claiming that genuine loans were made as part of the scheme when they were not genuine; or the writing of fake work diaries showing the taxpayer having spent time in the business when they were elsewhere. In my experience, these fake diaries are often produced by the scheme promoters and sent to the users for signature.

Avoid getting involved in anything dodgy or complicated like the plague. Jail sucks.

In fact, I personally draw the line at the vanilla tax mitigation I mentioned above. Beyond those straightforward measures, pay up and be happy you have the means to do so.

How to spot avoidance in action

In any event, it seems ‘avoidance’ has become a dirty word – at least when applied to contrived arrangements designed simply to reduce your tax bill.

More official advice from HMRC:

How to identify tax avoidance schemes

Here are some of the warning signs that you might be in a tax avoidance scheme or you are being offered to join one.

It sounds too good to be true

It almost certainly is. Some schemes promise to lower your tax bill for little or no real cost, and suggest you do not have to do much more than pay the scheme promoter their fees and sign some papers.

Pay in the form of loans or other untaxed payments

Some schemes designed for contractors, agency workers and other temporary workers or small and medium sized employers, involve giving workers some or all of their payment either as a loan or other payment that they’re not expected to pay back.

The payment may be diverted through a chain of companies, trusts or partnerships often based offshore and received from a third party. Sometimes the payment is received directly from an employer.

Other ways in which these untaxed payments may be described include:

  • grants
  • salary advances
  • capital payments
  • credit facilities
  • annuities
  • shares and bonuses
  • fiduciary receipts

In all cases the schemes promise to put money in a workers pocket without having to pay tax on it. These schemes are often sold by non-compliant umbrella companies.

Huge benefits

The benefits of the scheme seem out of proportion to the money being generated or the cost of the scheme to you. The scheme promoter will claim there’s very little risk to your investment.

Round in circles or artificial arrangements

The scheme involves money going around in a circle back to where it started, or some similar artificial arrangement where transactions are entered into which have no apparent commercial purpose.

Misleading claims

The scheme is advertised using misleading claims. These may include claims suggesting a scheme is endorsed or approved by HMRC or that a scheme can increase your take home pay. For example:

  • ‘HMRC approved’
  • ‘Retain more of your earnings after tax’
  • ‘We ensure you get the highest take home pay’
  • ‘Compliant tax efficient pay’

These statements are likely to be misleading. HMRC does not approve tax avoidance schemes.

HMRC has given it a scheme reference number (SRN)

If HMRC has identified an arrangement as having the hallmarks of tax avoidance and are investigating it, you will receive an SRN by your promoter and you should include this on your tax return.

If an arrangement has an SRN, this does not mean that HMRC has ‘approved’ the scheme. HMRC does not approve any tax avoidance schemes.

If an arrangement does not have an SRN, this does not mean that the arrangement is not tax avoidance and could still be investigated.

Non-compliant umbrella companies

Many umbrella companies operate within the tax rules, however, some umbrella companies promote tax avoidance schemes. These schemes claim to be a ‘legitimate’ or a ‘tax efficient’ way of keeping more of your income by reducing tax liability.

Find out what to do if an umbrella company offers to reduce your tax liability and increase your take home pay in Spotlight 45.

Schemes HMRC has concerns about

You can find examples of tax avoidance schemes HMRC is looking at closely. Even if a scheme is not mentioned, it may still be challenged by HMRC.

You might also find HMRC’s report on the use of marketed tax avoidance schemes worth reading if you have reason to want to know more.

If in doubt, pay the tax

Well, there you have it. I know I haven’t done anything dodgy – my affairs are far too boring, and after years of defusing capital gains, nearly all my investments are these days in tax shelters or else qualify for EIS exemption.

I hope you haven’t strayed either. But the woeful fate of the film financing schemes shows how even wealthy and professionally advised investors need to be careful and remain vigilant.

Thoughts and corrections welcome in the comments, especially from experts.

Let’s be careful out there.


Pension drawdown rules: what are they?

I have always found it hard to keep a grip on the pension drawdown options. There are so many fiddly yet peskily important details to forget about.

So today we’ll try to capture all the crucial drawdown details in one place for future reference.

Let’s take it one step at a time…

What is a drawdown pension?

Going into pension drawdown is one of the options you have when taking money from a defined contribution pension of some description.

Defined contribution pensions have more aliases than a criminal mastermind, including:

  • Personal pension
  • Workplace pension
  • Occupational pension
  • Stakeholder pension
  • SIPP
  • Master trust pension

There’s even more out there if you look for them!

Meanwhile, a defined contribution pension is best described as not a defined benefit pension.

A defined benefit pension offers you a guaranteed income for life.

A defined contribution pension does not, and so is not as good. It is however typically cheaper and less burdensome for a company to offer to its workers than a defined benefit jobbie. Which is why defined benefit pensions are nowadays rarer than unicorn milk in the private sector.

If you’re under 60 and you work in the private sector, you most probably have a defined contribution pension.

This article focuses purely on your options if you hold a defined contribution pension. Mostly because that’s the type I have too – and because I have to draw the line somewhere.

I’m also going to assume that the earliest you can retire is age 55 (going up to 57 from 6 April 2028) and that you don’t have any other pension bells and whistles like lump sum protections and the like.

We can investigate the exceptions and edge cases together in the comments.

Pension drawdown: take a step back to go forward

When you crack open your pension pot, you can take some of your savings as tax-free cash (TFC)1 – which is every bit as good as it sounds.

The rest of your income needs are serviced by taxable cash.

There are three main options for releasing the taxable wedge from your pension, and we’ll come to those in a sec.

How much tax-free cash?

You can take up to 25% of your pension savings as tax-free cash.

That 25% is currently capped at £268,275.2

You can take your entire tax-free cash allowance in one go, or in stages. It’s up to you.

Options for your taxable pension savings

For every £1 you take in tax-free cash, you have six months to decide what to do with the other, potentially taxable £3:

Pension drawdown – you can take a flexible income from your pot while the rest of your funds are typically left invested.

Buy an annuity – you hand over a sizeable chunk of your loot to an insurance company. It then pays you a regular income for as long as you wear this mortal coil.

Cash grab – you can take your entire pension as cash NOW. Or some of it. This is the Lamborghini option. Or a Vauxhall Corsa in my case. HMRC will send you a birthday card if you go down this route. Sorry, that should read enormous tax demand.

Have it your way – mix-and-match the three options above, in any combination you like, Burger King-style.

Your provider may not offer all or even any of these options. In which case you can transfer your pension to someone who will.

Okay, I’d love to talk about pension drawdown now. But, to do that, I’ve gotta get some more confounding terminology out of the way…

Crystallised versus uncrystallised pension

There’s no escaping this.

Your pension stands astride a boundary. Not the line betwixt good and evil but between uncrystallised and crystallised.

Uncrystallised pension savings refer to pension assets that are not ‘in play’. They remain invested in your pension pot, poised in a superposition. All options are still on the table, because you haven’t yet entangled them in a withdrawal event. [Editor’s note: Great thinking @TA – using a quantum mechanics metaphor to simplify pension chat!]

Crystallised pension savings are assets that are ‘in play’ because you’ve withdrawn money.

For example imagine you withdraw 10% of your £500,000 pension as tax-free cash.

This crystallises £200,000 like so:

  • £50,000 in tax-free cash
  • A further £150,000 of pension savings that require you to select from the options described in the previous section. (This is the taxable £3 bound up with every £1 of tax-free cash you took).

To recap: your remaining £150,000 of crystallised funds can be put into drawdown, some portion can be used to buy an annuity, or you can stuff the lot into a holdall before going on the run from HMRC.

All that means that £300,000 of our original £500,000 pension is still uncrystallised. And 25% of that £300,000 can still hatch as tax-free cash.

Crystal clear-ish

Perhaps the best way to think of the metamorphosis between uncrystallised and crystallised pension is that income is taken from the crystallised portion and may be subject to income tax at your marginal rate.

A diagram showing how the pension drawdown rules work

Lots of sources describe crystallising pension assets as ‘cashing in’ your pension. This doesn’t make sense to me. You can leave crystallised funds invested and untouched for the rest of your life if you want.

Importantly, when you crystallise an amount, you lose your right to its associated 25% tax-free cash if you don’t take it at the time.

Incidentally, your pension is not subject to Inheritance Tax – no matter which state it’s in.

Pension drawdown rules

At last! With that foundation course out of the way, we can move on to the actual pension drawdown rules.

Pension drawdown is extremely flexible, subject to the confines of your provider’s scheme.

If you take 25% of your pension pot as tax-free cash then the remaining 75% can be put into drawdown as discussed.

From there, you can start taking an income from these crystallised funds. As frequently as monthly if your broker’s particular platform is game.

That’s one way of doing it.

However a better way for many people is to periodically take tax-free cash in chunks. For example, in amounts that don’t exceed your annual ISA allowance, so you can then tuck the cash away in an ISA where it can continue to grow tax-free.

This approach is known as phased drawdown or partial drawdown, because every tax-free withdrawal also crystallises additional assets in the 3:1 ratio described above.

Phased or partial drawdown

Phased drawdown isn’t a special pension drawdown mode you need to unlock. It’s just a name given to drawing down in stages, as opposed to taking all of your tax-free cash in a one-er.

Here’s an example of phased drawdown:

A table showing how the pension drawdown rules work

I’ve streamlined this example. There’s no need to crystallise the same amount every year with phased drawdown.

I’ve not stuck to my sustainable withdrawal rate in this example either. And it illustrates a mild investing nightmare, as the portfolio has gone sideways for two years on the trot.

Remember that any amount of the £30,000 crystallised segment can be taken as income too (or none of it), but these withdrawals are subject to income tax once you’ve smashed through your personal allowances.

Phased drawdown has two advantages versus the other method of withdrawing from your pension in stages: the uncrystallised funds pension lump sum (UFPLS).

Firstly, phased drawdown doesn’t trigger the Money Purchase Annual Allowance (MPAA) rules. Just so long as you don’t take an income from your crystallised funds.

In other words, you won’t limit tax-relief on your future pension contributions if you can live off your tax-free cash and/or other income sources for a time.

Secondly, tax-free cash from drawdown isn’t restricted to 25% of the standard limit if you have pension protections that exceed that limit.

Capped drawdown

Capped drawdown was a more restrictive set of pension drawdown rules that applied before the shackles were loosened.

You can’t choose capped drawdown as an option anymore. You can decide to remain on it though.

Pension drawdown tax

Any money withdrawn from your pension drawdown assets (aside from your tax-free cash) is subject to income tax as normal.

These withdrawals count as non-savings income that is taxed in the same way as wages from a job.3

The first £12,570 taken from your pension drawdown balance is tax-free due to the personal allowance. All the usual tax bands and rules apply thereafter.

Treat the family by dying before age 75

If you die before age 75 then any beneficiary can withdraw cash from your drawdown pension tax-free.

After age 75, drawdown payments are made at the beneficiary’s marginal income tax rate. The same is true for annuity payments.

Obscure exception 1: Income tax is payable at the beneficiary’s rate if you die before age 75, and payments are taken from uncrystallised funds that are not designated for drawdown within two years of the scheme administrator knowing about your death.

Obscure exception 2: Income tax is payable at the beneficiary’s rate if you die before age 75, and a lump sum is taken beyond two years of the scheme administrator knowing about your death.

Another obscure exception – number 3: It’s not clear how lump sums from uncrystallised funds in excess of the old Lifetime Allowance will be taxed, if you die before age 75.

Obscure exception 4: Income tax is payable at 45% on lump sums paid into a trust, if you die after age 75.

Note: Taking income from an inherited pension does not trigger the Money Purchase Annual Allowance.

Emergency tax on pension drawdown payments

Tax on pension withdrawals is deducted by your broker/scheme provider using PAYE.

Your first drawdown payment (or any that are deemed to be ad hoc) is likely to be taxed using an emergency tax code rather than your actual rate.

The emergency tax rate assumes you’ll receive the same amount of income every month.

For instance if you take £20,000 (above and beyond your tax-free cash) to cover the year, HMRC will assume you’re living it large on a £240,000 annual income.

Obviously paying tax at that rate is going to take a massive bite out of your £20,000 income apple. It could be months before you’re refunded by HMRC.

It’s a patently ludicrous situation.


I’d recommend having a conversation with your broker about how you can duck the emergency tax bullet – but I have a feeling it’s unavoidable.

Plenty of providers offer material on how to reclaim overpaid tax. But they’re more or less silent on how to prevent the whole palaver in the first place.

Perhaps some Monevator readers have ideas? Because I’ve only come across a couple of useful tips:

  • If you plan to take a regular drawdown income (I think regular means monthly in this context) then ensure your first taxable payment is only for a small amount – such as £100. The emergency tax rate will apply to this amount and HMRC will then issue updated tax codes that adjust for your subsequent, larger payments throughout the tax year.

This way, HMRC is effectively reclaiming the correct amount of tax from you. There’s lovely!

  • If you’ve been issued a P45 for the same tax year as your first drawdown payment then ask your broker if that will enable them to apply an accurate tax code from the start.

Personally, I planned to withdraw once a year rather than monthly but I’m doing a rapid rethink in the face of this PAYE nonsense. By the looks of things, I’d have to reclaim tax every time for this kind of ‘ad hoc’ payment.

I think what I’ll do is sell down enough bonds and equities to cover myself for a year. I’ll park the cash in my SIPP – possibly using a money market fund if my broker’s interest rate is rubbish. Then I’ll take 12 equal monthly payments from that cash balance.

Uneven or additional payments can be dealt with by HMRC adjusting the tax code from time-to-time.

Reclaiming tax

Just for fun, HMRC have three different tax forms on the go for reclaiming tax on pension withdrawals. Choose from:

  • P55 – if your withdrawal hasn’t emptied this particular pension and you don’t intend to take any more payments from it this tax year
  • P50Z – if you’ve drained this pension dry and aren’t working
  • P53Z – you’ve tapped out this pension and are still working

When you plan to take multiple withdrawals from a pension then HMRC will revise your tax code later in the year for under/overpayments. Thus we’re spared another tax form.

Pension drawdown charges

You shouldn’t have to pay anything for drawdown services these days.

See the SIPP row / Fee notes column of the Monevator broker table to find drawdown and UFPLS fees.

Fidelity, AJ Bell, Aviva, and Hargreaves Lansdown all charge nothing for drawdown. And they cap their platform charges at a reasonable rate if you choose an ETF-only portfolio.

Small pots

The small pots rule enables you to empty three defined contribution pensions worth up to £10,000 each without triggering the MPAA limit that caps tax relief on future pension contributions.

Otherwise, the small pots rule works exactly like the cash grab option we described earlier:

  • You can withdraw all the cash from any of your pensions in one go
  • Up to 25% is available as tax-free cash, so long as you don’t break through your total lifetime tax-free cash ceiling
  • The remaining funds are subject to income tax as usual

Check with your pension provider to ensure your scheme is eligible for the small pots rule.

Because this is an ad hoc payment, you may well pay the wrong amount of tax initially, as described in the emergency tax section.

Pension Wise

Finally, if you would welcome advice on how to make the most of your pension then know that you are entitled to a free Pension Wise advice session.

Doubtless even grizzled Monevator mavens would benefit from the chance to clarify things. You can also attend an appointment on behalf of a family member or a friend.

Given the life-changing nature of these decisions, I’m very glad that Pension Wise exists to offer a guiding hand. Even if only for 60 minutes.

As for us, that’s it for our tour of the pension drawdown rules.

Complexity seems to be the necessary by-product of the UK’s flexible pension system. I hope this piece goes some way to clearing up the fug surrounding it.

But let us know what we’ve missed in the comments below.

Take it steady,

The Accumulator

  1. Also known as the pension commencement lump sum or PCLS. []
  2. Unless you’ve already locked-in a higher lump sum or lifetime allowance limit. []
  3. Though pension withdrawals do not count as earnings that determine how much you can contribute towards a pension. []

Weekend reading: five graphs that justify the gloom

Our Weekend Reading logo

What caught my eye this week.

I have often been chided for being too negative over the past few years – both in comments on Monevator and elsewhere.

Just last week, regular reader SLG asked:

It might just be that my complainy pants news filter is set too high to assess the state of the nation but are you sure you’re getting a balanced reading breakfast to keep your glass topped half way up @TI?

That was in response to a post where I was indeed being negative about the returns from investing lately – once you excluded the big gains from the so-called ‘Magnificent Seven’ US tech giants.

Well, investing returns – equities and bonds alike – have been mediocre-to-bad since I first got negative in late 2021 and then more so. Especially once you adjust for inflation.

I do understand this is in on top of my multi-year negativity about the rubbish results from Brexit, though.

Eeyore stories

Let’s be clear. I wholeheartedly agree there’s plenty of great stuff going on in the world, from new vaccines to the renewable energy cost collapse to the ongoing joys of K-Dramas.

But (geo) politically and economically it’s been rough sledding. Better, in some respects, than it might have been, especially when it comes to the US economy. But thin gruel elsewhere at best, and war at worst.

Here are five fairly random graphs I came across just this week that shine light on the gloom.

Graph #1 from: Britain has been reduced to Trabant-status among the West

In this Telegraph article the author rightly accuses the British State of self-harm against its own economy and citizens, but studiously avoids mentioning Brexit as one of the causes. (See Goldman’s latest estimate on the damage from Brexit in the links below).

Anyway his graph illustrates why workers feel they’ve not gotten any richer for many years.

It’s because they haven’t. That’s a fact, not me being negative.

Graph #2 from: UK economy falls into recession

Here we see the UK economy has stagnated for two years – and was in recession for the second half of 2023.

That’s a fact, not me being negative.

Graph #3 from: What is the UK inflation rate and how does it affect me?

Households are living through the worst inflation shock for generations. January inflation unexpectedly held steady – a small rise was forecast – which was welcome. But inflation is still double the official target rate.

Inflation should fall fast from here (more global strife notwithstanding).

But the pain is real and it will have lasting consequences.

Graph #4 from Where UK house prices officially fell the most in 2023

Falling house prices are good news from the personal perspective of priced out would-be buyers. You can argue too that a permanently lower level of prices would help the economy, by aiding mobility or redirecting investment to more productive areas.

Nevertheless, their own home is many people’s biggest investment and asset. Lower prices make them and the country poorer.

Property prices fell in 2023 as mortgage rates leapt higher.

That’s a fact, not me being negative.

Graph #5 from Decarbonsation, an annually-updated presentation by analyst Nat Bullard

You may be a Blimp-ish climate change denier – aka scientifically wrong – but for the rest of us, this is grim viewing.

Happily there’s far more positive visuals showing progress in the fight to curb carbon emissions if you click through the rest of Nat’s presentation.

But that’s for the future. Right now things are bleak.

When the facts change I’ll change my mind

I’m not having a go at any reader who feels Monevator has been a bit morose in recent years. Reader SLG above was perfectly civil about it – and I appreciated their nice words about the effort that goes into compiling these weekly links, too.

I am fed up with the negativity myself. The difference is I believe it is out in the world, and that noticing it is warranted.

Putting your fingers in your ears doesn’t make it go away.

Coming out of the financial crisis Monevator was sometimes accused of being a haven for happy-clappy permabulls. I look forward to getting there again.

And as I’ve already said, it’s true things could be worse.

The greatest architects of Britain’s self-harm – among the worst set of politicians we’ve seen in power in the UK for hundreds of years – are no longer fully in charge. The virus that was responsible for even more of the recent misery is a fading memory. Wars lamentably rage on, but so far they’ve not metastasised a into wider conflict.

Oh and at least it’s not the 1970s, as a wonderful series of podcasts from The Rest Is History this week reminded me. Start with that first podcast covering 1974 and work your way through the darkly comic chaos.

We survived the 1970s and we will get through this. Poorer, but who knows maybe wiser for the journey.

Have a great weekend.

[continue reading…]


FIRE-side chat: why escape from work you enjoy?

Our regular FIRE-side chat image shows a crackling wood fire

Long-time Monevator reader @old_eyes has enjoyed a stimulating career and a healthy income. Sound investing decisions have put his household on a firm footing as he and his wife enter their 70s. The challenge though is that they need to support TWO households. Please enjoy the latest in our series of real-life FIRE profiles.

A place by the FIRE

Hello! How do you feel about taking stock of your financial life today?

I feel that I have reached a good place, with financial independence reasonably secure. There is always the risk of some left-field catastrophe, but if the world continues its journey with a recognisable financial system, we should be okay. So now is a good time to look back on the journey and ask how we got here.

Whether there are any messages for other members of the Monevator community seeking FIRE, I don’t know. I was a late starter with serious saving and investing, didn’t really retire early, and I have not done anything clever or special.

I am also acutely aware how lucky I have been, not only in having a good and satisfying career, but also in being born at the right time. A time when defined benefit pensions were the norm, student debt was unknown (apart from sometimes having to grovel for a tiny, tiny overdraft), and homes were an understandable multiple of earnings.

It is a very different world for the next generation.

How old are you?

I am 69 and my wife 70. We have been together for 46 years and married for 40. (It’s a shock to write those four numbers down!)

Do you have any dependents?

We have two sons. The older is 37 and on the autistic spectrum, the younger 34.

Our older son is totally dependent on us. He has never worked and is extremely unlikely to ever work. He also has some health issues arising from an auto-immune disease.

We have been able to buy him a house in the centre of Liverpool. There he can live independently, something that would be impossible in our rural location. We cover all his bills as the state is unable/unwilling to do very much for him. So, we are effectively running two households. It is better for him to be where he can walk or get public transport to wherever he wants to go, and where there are accessible services and amenities. However, it does increase the costs.

His situation has a big influence on how we think about our savings and investments. They must support him after our deaths for the rest of his life. It is not just financial independence for us, it is lifetime financial independence for him. We can’t see the state becoming more generous to the unfortunate in the foreseeable future. Ours does not feel like a very caring society, and with fewer working people available to support those retired on unable to work, it is hard to see that changing.

Our younger son is married to an American and lives in the Bay Area with their young daughter. He works in marketing and communications for the tech industry. We have had to get used to the ferocious turnover rate that characterises that sector. From one call to the next we are never sure who he is currently working for – or whether he is currently working at all.

Where do you live?

We live in North Wales in a very rural area. It sounds out of the way, but we are an hour from Liverpool, an hour from Manchester and an hour from Snowdonia (Eryri). Unfortunately, rural transport is dire, so we are a two-car family.

When do you consider you achieved Financial Independence?

In 2016 at 62, the job I was then doing vanished out from under me. We looked at the numbers and realised that we had enough for financial independence now, and with a good chance of meeting our remaining financial goal of leaving a legacy for our autistic spectrum son.

I wasn’t aiming at a particular number. I knew I didn’t really want to go on until state retirement age, and the restructuring at work provided the incentive to consider whether I had reached FI. It looked okay so I pulled the trigger. Now I did not need to work anymore.

What about Retired Early?

I ran my own consulting company from 2001-2012. It was quiet across 2012-2016, whilst I was doing a last corporate stint, but picked up again after 2016. Now I have achieved FI, I am much more selective about who I work with. It is now almost entirely not-for-profits working in areas I think are important.

I try not to work more than a couple of days a week, but there are occasional intense bursts of activity. 

I am still enjoying the work and will stop when I have had enough. Unlike @ermine, I never had a burning desire to get the hell out of it. My career was pretty pleasant, and although I suffered under stupid management from time to time, I always felt the work itself was satisfying.

It would be nice and neat to carry on to 2026, the 25th anniversary of founding my consultancy, but I am not sure I am motivated enough. I expect to quietly fade from view.

Assets: definitely maybe 

What’s your current net worth?

I always find net worth a tricky question to answer.

Well, what are the main assets that make up your net worth?

We have £630,000 in cash and investments (with currently about £64,000 in cash-like assets). Almost all now in ISAs and a small SIPP for my wife.

If I closed my company down today, there is probably about £110,000 that could be taken out (after corporation taxes, but before personal taxes).

I have two defined benefit pensions, a full UK state pension, and a small Dutch state pension (I spent five years in the Netherlands working for a multinational). They currently total £96,000 p.a., so applying the 20x rule for Lifetime Allowance calculations, they are worth £1.92 million. 

Is that part of net worth? I can’t do anything else with it except to take the income. If I still had a regular paying job, I would not multiply my salary by 20 and call that the cash equivalent. It would just be income.

Our house has not been on the market since 1986, so current value is a guess. Conservatively, £400,000. It’s a large house, but in a cheap part of the country.

My wife owns the house in Liverpool where our autistic son lives, bought with a legacy from her deceased father. She has about £80,000 in cash savings left over from that legacy, plus a full UK state pension and the same small Dutch state pension. The house will be passed onto our son. We are currently working out how best to do that.

We try to keep her pension and cash savings out of our thinking. It is her ‘mad money’ for when she wants to run away and join a circus. If we had to dip into it, I’d want to replace it as soon as possible.

What’s your main residence like?

We live in what was a two-up, two-down 17th Century stone farmhouse, that has been extended over the years. It once had stone shippons on each side – cow or animal barns, beudy in Welsh – and we still have some of those heavy stone walls inside the house. We added our own extension when I started working from a home base in 1998, and then a couple of heated conservatories for the gardener, my wife.

Some land also came with the house, and we manage that for wildlife. It was an accidental purchase, we were not looking for a smallholding, but it came with the house we loved. We have had fun digging ponds, planting trees and trying to keep back the blackthorn.

We own the house and land outright, having finally paid off the mortgage in 2010.

Do you consider your home an asset, an investment, or something else?

I’ve never been able to think of our home as an asset or an investment. It clearly is the first and probably the second, but it is not an asset I can use except to live in or borrow against. If I sell, I must replace it with something equivalent. We may downsize later, but that would likely be at a point where we need better access to urban areas and public transport. Such a property would be higher cost per m2.

Judging by the prices of comfortable and conveniently placed bungalows in our area, we would release very little by ‘downsizing’. Yes, I know there are imputed rent savings and all the rest, but I don’t think working that out would help me decide how to save, invest and spend.

Earning: good chemistry

What’s your line of work?

I never had a clearly defined career path. I was always envious (perhaps wrongly) of friends who knew exactly what job they were after, and how they expected their working life to play out.

What I did have was a passion for chemistry. I don’t know where from, but at a very young age (about seven) I was playing ‘chemistry’ with food dyes, water, and various glass bottles in a plastic washing up bowl. By 12 I had a modest chemical laboratory in my bedroom. I think it was the atavistic thrill of creating dramatic colour changes, setting fire to things, and making them go bang.

The passion stayed with me, and I studied chemistry at university without much idea what I would do with such a degree. Finding out that corporates wanted a PhD if you were going to lead research, I started one. Somewhere in the next three years, I decided I really wanted to be an academic, and – PhD in hand – I got a post as a lecturer at my local university.

That was in 1980, just at the start of the Thatcher cuts. (Starting salary £11,000.) A torrid time to be trying to build a reputation and career but I was fairly successful, and by 1986 I had a research group of 12. Unfortunately it was costing me two days a week hustling for money to feed them. I wasn’t sure I could make the impact I wanted staying there.

So, in 1986, I took a senior job with the corporate research group of a multinational. (Starting salary £24,000). I was still spending a couple of days a week on admin, politics, and pitching for budgets, but now I had a team of over 100, more capital to spend, and some really juicy problems to tackle.

In academia, you are often wandering around with a solution asking: “does anyone have a problem that matches this?” And if the problem you are working on is too difficult, you just redefine it. In industry, the problems are real, and will not go away. I liked that.

In 1993 I got a job as R&D director for one of the multinational’s subsidiaries in Europe. (Base salary £99,000). I thought it would be an extension of what I had already been doing, but it was not. Now I was sharing responsibility for the profitability of the company with a whole board of very business-focused people. They taught me a huge amount about what does and does not work in business. I learned that corporate R&D is not the real world. You are still insulated from day-to-day decisions.

In 1998, M&A activity saw the subsidiary I was in transferred to a new owner. There was a lot of fascinating work looking at the jigsaw pieces we had once the dust had settled, wondering what business configurations could be viable. As we sorted it out, I returned to the UK to become Director of Sustainability, working out how we would adapt to the net zero future that was already on the horizon.

Despite this very interesting work, major reorganisation was looming. The acquirer had overstretched themselves and needed to cut costs. As the focus shifted relentlessly to the short-term there was no interest in the longer-term strategies I was promoting. Job satisfaction ebbed away and in 2001 I accepted an offer of voluntary redundancy. (Base salary at that point £89,000).

Now I had to work out what to do next.

Did you leap straight into business for yourself?

My father was a serially unsuccessful businessman. He was okay at the technical side, but hopeless financially. He became a very unhappy man, and I had a very fraught childhood as a result. I swore I would never subject any family I had to the same stresses.

So my first thought was to get back on the corporate horse, but some very senior mentors told me that although I could easily go straight back into another corporate job, it would not make me happy. I was best at starting things, not at running them operationally. In five years’ time, I would be facing the same situation. Why not use everything I had learned about R&D, innovation, and sustainability as a consultant?

It took a lot of people a lot of time to persuade me that I was not my father, and that I could succeed. My wife had stopped working when we had children, so financial stability rested on me. I found that scary, but with a redundancy cheque in my back pocket we agreed to give it a go. Fortunately, some colleagues who had passed this way before told me it would be a year before I got new clients without the help of previous networks, so I did not panic when that turned out to be true. On 11th September 2001 I was on my way to a meeting with my first potential client, when I noticed people crowding around a shop window. TVs were showing planes crashing into skyscrapers. My meeting was cancelled, and nobody answered the phone for the next six months.

Despite my caution, within a year I started a second business with an ex-colleague targeting a different consulting market. That went reasonably well, but we both had other companies and in the end could not give it the time it needed. In 2009 we stopped.

But my own business grew. The first target was to rebuild the redundancy payment I had started with as a cash buffer. I always felt in the early days that I would be rumbled as a fraud and the work would melt away. The second task was to overpay the mortgage. We had previously experienced two bouts of very high mortgage rates with a new house and a new family. I wanted to reduce outgoings where I could.

I discovered a lot of business problems look the same, no matter the sector, so I found myself working with different organisations, both private and public. One was a government department setting up a new arms-length body. That body started off as a client, became a major client, and ultimately my only client. I did point out that paying a daily rate did not make sense when they had an insatiable appetite for my time. Their response was they liked the flexibility, and probably wouldn’t need me next month. They always did. 

This went on for a couple of years until, in 2012, the government had one of its regular spasms about the number of consultants and contractors they used. I had to choose between becoming full-time staff or stopping work with them altogether. I thought the work was important and worthwhile, and the pay was acceptable (£85,000), so I took the job. I expected to do it for a few years until I had achieved my goals. In the end it was four years, and I left in 2016 to pick up the threads of my consultancy work again.

Since then, I’ve been working with a small number of clients. All in the public sector or not-for-profits.

One of my bosses described my career as “zig-zagging its way to success”, and that is what it felt like. I always felt that each career decision was the last one I would need to make – and I was always wrong.

What is your annual income now?

My current income is £96,000 in various pensions, plus a small salary and dividends from my consulting company. This is right up against the £100,000 tax trap where the marginal rate jumps to 60%. I try and keep to that figure as a limit, but I’m usually a bit over. I would prefer a more logical and progressive tax system – bring the 45% rate down to £100,000 if we must – but I’m not going to complain too loudly. It is a nice problem to have, and we all should contribute.

I may take advantage of the relaxation of the Lifetime Allowance for pensions next year to increase savings a bit further.

How did your salary progress over the years?

Over my career, my salary started at £11,000, peaked at £99,000, and by early retirement in 2016 it was £91,000. These are base salary numbers, excluding any benefits packages or bonuses.

From 2003- 2012 I was taking what I needed from my business as a salary, adjusted to provide roughly £4,000 a month after tax into my bank.

I was also taking the maximum amount of dividends that were tax-free, and from 2010 paying into a private pension.

When did you first start thinking seriously about money and investing?

In 2001 I left the corporate world, and realised that I was now responsible for delivering a sustainable financial future for my family. Up to that point I had always had a ‘regular’ job and assumed that the company pension would meet our future needs.

I had a deferred pension, which provided a base from which to build, but I realised I would probably need more. The first few years of running my own company were just scrabbling to keep all the plates spinning and learning how to be a consultant.

Was pursuing financial independence part of your career plans?

There was no thought of FIRE until I left the corporate world in 2001. In each job I thought that was me sorted until retirement. I had always relied on the prospect of a corporate pension.

I learned about ‘drop-dead’ money from James Clavell’s Noble House in the 1980s. It stayed a dream in the back of my mind, but I did no serious thinking until about 2010.

Did you learn anything about building your career that you wished you’d known earlier?

Understanding that I was not my father much earlier could have helped me. I could have been more flexible in my career if I had more confidence. But my terror of not having a steady income kept me around large corporates.

On the other hand, working in those large corporates taught me so much of what I have used since. I wasn’t unhappy, and I might not have been ready to branch out earlier.

Saving and spending matters

What is your annual spending and how has this changed over time?

I find it easier to think on a monthly basis. After tax I have £6,200 hitting my bank account each month. About £4,000 goes straight back out in the costs of running two households. So £2,200 a month, or £26,000 a year, in discretionary spending. That goes on major holidays, like visiting our son’s family on the West Coast, our hobbies, repairs and upgrades to the homes (recently a new heating system, PV and battery for our main home, and air-con for the Liverpool house), and savings and investments.

Looking back to when the whole family were living together, the equivalent numbers were £3,000 in regular monthly outgoings and £1,000 as discretionary spend. That included school fees for the younger son and private tutoring for our autistic son.

Income has increased, but although some costs have dropped out as one son left home and education came to an end, inflation and the costs of running two household have pushed up monthly outgoings. We definitely have more headroom now, but we have delayed some spending on the house and travel.

Do you stick to a budget?

We don’t have a budget. Instead, I keep an eye on what is going out monthly in immediate and repeating costs. Things like energy, water, food, telecoms, insurance, council tax, cleaner, gardeners, support for our autistic son, and additional carer costs for my 95-year-old mother.

If it starts drifting up, I check whether it is inflation we will have to live with, or whether we are changing our purchasing habits. That means I know how much headroom there is each month for additional saving and investment or building up the kitty for the next big purchase.

What percentage of your gross income did you save?

I never had a fixed saving percentage. By the time I knew about savings rates, I was running my own business and either taking the minimum I needed each month, or taking chunks as dividends and increasing the pension pot.

Do you have any hints about saving and spending?

For us, saving and spending less come to the same thing. There are two keys – knowing where the money goes, and spending with purpose. We have always had a pretty good idea of what is going out on a monthly basis, and how much headroom we have. A lot of friends and colleagues have very little idea the basic dynamics of their regular expenditure.

We spend intentionally, and I hope thoughtfully, on things that matter to us. When we first married, we made do with a mattress on the floor, but had a very expensive SLR camera and lenses. This shocked our parents, who thought we were not behaving appropriately, but we wanted the camera more than we cared about not having a bed. The important thing was not to try to buy both.

Pay for the needs first and then think hard about your wants. Don’t confuse needs and wants.

Do you have any passion, hobbies, or vices that eat up your income?

Astrophotography is my passion and vice. My pride and joy is an automated observatory I built on our land. It was a cool retirement project. I am also part of a syndicate that rents three scopes at an observatory in Spain that we operate over the internet. Astrophotography is like normal photography but much more expensive.

My wife is a keen gardener, with a very large garden and a small nature reserve. She also holds one of the national plant collections. What with acquiring plants, hiring contractors, and getting help with the heavier garden maintenance, costs of heating conservatories and endless bags of peat-free compost, she probably spends about as much on that as I do on astrophotography.

We spend freely on these activities that bring us joy, but not excessively (at least that is our excuse). As is usually the case, to outsiders it looks like we spend a great deal on these hobbies, but we both know people in our respective communities that spend many multiples of that.

That’s how we work it, one major vice each.

A galactic budget: The Orion Nebula, as captured by @old_eyes.

Investing: passive all the way

What kind of investor are you?

My first steps into investing were rather unguided. In 2010 my business was stable enough to give me a good cash buffer and something left over to invest. I went to an IFA for guidance and started a pension, and an ISA for both of us.

I was aware enough to pay for his advice, rather than allow him to manage my funds, but I did no thinking about where the money was going. In particular, I had no idea what the private pension was invested in, it was just a package from Scottish Widows. There were also a couple of individual shares. (Standard Life demutualisation in 2006, and Royal Mail in 2013).

After that initial phase I just kept paying what I could into the pension pot and added a little to the ISAs. Then I discovered the FIRE community, Monevator and other blogs, and began to think more carefully about where I was investing and reorganising things. I read Rowland and Lawson’s The Permanent Portfolio and based some of my thinking on that.

I ended up with something very similar to The Accumulator’s Slow and Steady portfolio. Initially it was 50:50 growth and defensive (all in funds), but I upped it to 60:40 because of my strong pension position. A rational analysis says I should go further still into equities, but 60:40 is far enough.

But passive. Passive all the way. I have no illusions that I have the time, interest, or expertise for active investment. I don’t think I can beat the market.

Right now, I am simplifying the portfolio as it has become untidy over time with funds from different providers that do the same thing. Rationalising funds, switching to simple global equities and so on.

My wife is very intelligent, but not remotely interested in the mechanics of investment. I need create something that requires the minimum of attention and maintenance, with operational instructions that fit on one side of A4. This is all part of building a ‘dying tidy’ file in case I die first. Something that will tell her or her agents everything they need to know about where the money is and where it gets spent.

What was your best investment?

It is a disappointing answer, but when I rejoined the conventional world of work in 2012, I had the opportunity of transferring the private pension I had built up into the civil service defined benefit scheme.

I had previously been stuffing money into the private pension from the profits of my consulting company. I transferred £177,000 into the civil service scheme and that bought me an index-linked pension of £12,000 p.a. with widow’s benefits.

Given my risk aversion, that was probably the best decision I made.

Did you make any big mistakes on your investing journey?

Most of the apparent mistakes are only visible with hindsight. Why was I in bonds in 2022-23? Answer, because I couldn’t have predicted what happened, and the reasons for investing in bonds are always the same and always valid. It’s part of being a passive investor dummy!

My two mortgages were endowment mortgages, and that caused me considerable heartache. But they were very common at the time, almost the default. I did not know enough to check the assumptions the brokers were making, and they were the only products that were offered to me.

What has been your overall return?

I don’t have much idea for the earlier phase of my investment journey, but I did keep records from 2015 onwards. So I can say that annual return (including fees) was:

Tax YearReturn

I have been putting in and taking out money on a regular basis for chunky outlays: work on our house and the house where my autistic son lives, and various ‘bank of mum and dad’ stuff helping our younger son.

Since 2015 the net contribution to the portfolio is only £8,000, yet the pot has grown by 67% from £374,000 to £629,000. Time in the market counts for a lot.

How much have you maximised your ISA and pension contributions?

From about 2010 to 2016 I was using all our ISA allowances and putting money into pensions.

Changes in the pension Lifetime Allowance pushed me to start taking my first corporate pension in 2013. I took a much smaller lump sum because I wanted to get the maximum regular income coming in. Signs of my continued aversion to risk. That meant I could afford to maximise pension and ISA contributions during the time I was working for a salary again.

Since 2016 there have been modest ISA contributions, as and when the cash buffer was full and there were no big expenditures on the horizon.

To what extent did tax incentives and shelters influence your strategy?

I have tried to make good use of ISAs and pension saving without getting silly. In one purple patch of business, I had more money coming in than I could put into a pension or ISA, so I had a largish slug of bare investments. Conversely, in years when I could not use all our ISA allowances, I moved investments into the sheltered accounts.

Now, apart from the cash buffer, we are entirely in tax sheltered accounts. About 86%.

How often do you check or tweak your portfolio?

I routinely check once a month, but that is really for information only. I don’t rebalance within the portfolio. Only when I am adding or removing money or simplifying.

Wealth: flexible finances

We know how you made your money, but how did you keep it?

Running your own micro-company, earnings are episodic. There is not much opportunity for regular savings and investment. So it was always in lumps. A good quarter or a bonus.

Investment was always into funds and pensions. Funds investment was intended to be buy and hold when possible. We have never invested in property. Too much like hard work.

Which is more important, saving or investing?

I think saving is the beginning of financial independence. That cash buffer is critical for lean periods and big ticket items. Once you have a cash buffer you are comfortable with, investment is possible.

Only you know how big a cash buffer makes you feel secure. 

Investment grows your wealth, but savings help you sleep at night. Apart from a mortgage, we have been debt-free since around 1990. All the major one-off items, from holidays to home extensions and heating systems have come out of the cash buffer. And we always rebuild it as quickly as possible.

We know we are not maximising our investments and growing our pot as fast as we could, but it is comfortable. As for leveraged investments – we leave that to people with much better maths and a much stronger stomach. 

When did you think you’d achieve financial freedom?

I wanted financial freedom, not to retire early but to work in whatever way suited me. I hoped I would reach that point before normal retirement age, but I didn’t have any specific timeline or plan until FI was already in sight. Perhaps around 58. Then I started thinking that 60-62 might be possible.

Are you still growing your pot?

I am still putting modest amounts into our investment pot. As and when cash is available.

So far, our needs can be met with the pensions, and we have only taken money from the investment pot for ‘bank of mum and dad’ stuff.

Do you have any further financial goals?

I have three goals: to leave a sufficient legacy to support our autistic son, to have enough money for quality care if we need it later, and to enable my wife to continue to live comfortably, should I die first (pension income would more than halve, and her costs would not).

How much do we need for that? I don’t know. My gut and back of the envelope sums say I can hit two out of three with the current pot, and when I stop consulting and close the company there should be another injection of cash. If the investments keep pace with inflation, I think we are okay.

What would you say to Monevator readers pursuing financial freedom?

I have three messages, none of them original.

Time matters, but it is never too late to start. I did not start seriously saving and investing until 2010 at age 56. Yes, I had great ‘floor’ in a decent pension, but I also need to leave a very substantial legacy. The pot to provide that has been built over 14 years. In the last eight years it has grown by 67% with only a tiny net cash investment, and a very conservative asset allocation.

Think hard about what you want to do with financial freedom. Running towards something is always better than running from something. I have seen many people stick at a job they dislike until they make their number, leave with a fanfare, and then rapidly decline in mental or physical health because they had nothing else. “I want to achieve FI so that I can…” is a better story than “I want to achieve FI because I hate my boss”.

‘One more year’ is a real and dangerous way of thinking. At every major event in your working life, check whether you have achieved FI and if one more year is really necessary. Too many people shift the goalposts as they get close, partly out of fear of some unknown catastrophe and partly from the absence of a plan for what next. 

You can accuse me of hypocrisy because I have kept on working. Am I not guilty of ‘one more year’? Not really. I sought FI to have the freedom to do what I am doing now. To have the choice. Even if I had a much bigger pot than I need for my financial objectives, I would still be doing the work I am because I enjoy it and I think it does some good.

Any other business

Did any particular individuals inspire you to become financially free?

I had many good mentors and bosses in my career (as well as a couple of real shockers). Each added something particular to my philosophy.

Perhaps the most important influence was a main board director of the multinational I worked for. He was an active mentor from 1990 – 2001. He taught me many things over those years, but the critical intervention was when I was agreeing redundancy in 2001. He took me to lunch, and over a couple of hours gave me a clear-eyed analysis of my strengths and weaknesses, possible future, and introduced the idea of setting up as a consultant.

He also suggested an outplacement agency who would ask the question “what do you want to be when you grow up?”, rather than stuffing me into the first executive position they could find and taking their fee. Without him, the second half of my career would have been very different.

The person who drove my desire for financial independence (safety, in effect) was my father. I saw what living on the edge looked like and wanted out. I saw freedom from want as a solid salary, rather than true FI, and I had modest ambitions, but I wanted ‘enough’ so that I did not have to worry every month.

Can you recommend your favourite resources?

Monevator is always where I start on the web. The mix of learning resources, news, and pointers to interesting things makes it essential. It was the resource that got me organised with a clear plan. I am in ‘maintenance’ mode now, but I still read every post and comments – sometimes in wonder and sometimes confusion.

The only other website I check regularly for updates is Simple Living In Somerset (and before that Simple Living In Suffolk). The grumpy mustelid is a brilliant writer, and their thoughts on living in retirement are entertaining and insightful. Like the IgNobel prizes they make me laugh and then think.

Two books have helped me to understand what I am doing in pursuit of FI, what risks I am taking and why. The first is Daniel Kahneman’s Thinking, Fast and Slow. This has a lot to say about how we make decisions, how prejudices and biases get in the way, and how we convince ourselves we are being logical when we are not. It is a book I return to often. 

A much more recent book is Morgan Housel’s The Psychology of Money. It came out after I had reached FI and semi-retired, but it was a great distillation of some of my own conflicts over money and security. It helped me to understand my own psychology a bit better, and hopefully improve my decision making.

What are your thoughts around charity and inheritance?

We give regular moderate amounts to environmental and conservation charities, one-off sums to disaster relief appeals, and intend to leave a bequest in our wills to a conservation charity we have worked with for many years.

In an ideal world we are not great fans of inheritance. Wealth ‘cascading down the generations’ does as much harm as good.

In practice our attitude is dominated by the need to secure the future for our autistic son. Once we accept that, we feel we should make some provision for our younger son to avoid family feuds. We have both seen those in action and they are ugly.

Our younger son knows that he is second in the queue and accepts it (I hope!). And with a bit of luck any inheritance will be so far down the line that it will be of more value to his children.

What will your finances ideally look like towards the end of your life?

For all the reasons given, we hope to die with a big enough stash to provide a 40 year FIRE for our older son and a nice surprise for our younger son.

Nothing super-remarkable in this story, as @old_eyes himself says. And yet also once again entirely personal and full of interesting insights – as well as unique challenges. Questions and reflections welcome, but please remember @old_eyes is just a reader, sharing his story, not a battle-hardened blogger like me. Constructive feedback welcome. Personal attacks will be deleted. See the rest of our FIRE studies.