I am sure we’ve all (at least around these rarefied parts) at some time asked ourselves: “Am I saving enough for retirement?”
For years, it’s been a boringly predictable question that has been used to frighten people into upping the amount that they put into their pensions.
Towards the end of every tax year, for instance, the usual scare-story projections are trotted out by lazy journalists looking to file a feature on SIPPs or Additional Voluntary Contributions.
IFAs – those fine, upstanding members of the community – are also keen advocates of the ‘are you saving enough for retirement’ question.
(You’re not? Well, they have just the product for you.)
Most Monevator readers, I’d guess, will have long since learned to switch off when they see the words. Broadly speaking, we will have decided years ago what level of saving was appropriate for our circumstances, and proceeded accordingly.
The savings vehicle of choice might have differed – one man’s SIPP is another woman’s ISA, and all that – but there would be no denying the commitment to serious saving and investing.
Miserly returns
Up until recently, I’d have put myself very firmly in that camp, too.
Now, I’m not so sure.
Take a look at the UK’s latest historic equity returns, as published in the prestigious Barclays Equity Gilt Study 2016, released in March.
Continuously published since 1956, the Barclays study tracks the real (after inflation) returns on cash, equities, and bonds, all the way back to 1899.
Here are the real returns (% per annum) for UK equities, gilts, and cash:
| 2015 | 10 years | 20 years | 50 years | 116 years | |
| Equities (shares) | -0.1 | 2.3 | 3.7 | 5.6 | 5.0 |
| Government bonds (gilts) | -0.6 | 3.0 | 4.3 | 2.9 | 1.3 |
| Cash | -0.7 | -1.1 | 0.9 | 1.4 | 0.8 |
Source: Barclays Capital Equity Gilt Study 2016.
No surprises there, perhaps. 2015 was a dud, and real returns from equities over the past ten years were just 2.3% a year. Only over the past 20 and 50 years do we see serious returns being achieved.
The only consolation is that cash and bonds didn’t do much better, either, although gilts have fractionally outperformed equities over ten and 20 years.
So much for the risk premium, Mr Ross Goobey1.
Rear view vision
Now let’s turn the clock back ten years, and look at the 2006 edition of the Barclays Equity Gilt Study.
UK equity real returns (% per annum) as per a decade ago:
| 2005 | 10 years | 20 years | 50 years | 106 years | |
| Equities | 18.9 | 5.0 | 7.4 | 6.6 | 5.2 |
Source: Barclays Capital Equity Gilt Study 2005.
You don’t need to have made a recent visit to Specsavers to see the difference.
Ten years ago, the expectations of equity returns, based on past returns, were very different from those of today – and much, much, higher.
And that, what’s more, was in 2006 – in other words, a time when the UK’s stock markets were well into the post-dotcom ‘lost decade’.
Take the equity returns you’d have been looking at in 2005 as having been accrued over the previous 20 years, for instance: 7.4% a year. Incredibly, that’s twice the return of 3.7% seen in our latest figures.
The past ten years? 5.0% a year in 2005 – just over twice the return seen in the latest figures.
Flawed assumption?
All of which matters – at least to many Monevator readers – because the mid-2000s was when many of us were formulating our retirement plans.
Looking back at my own spreadsheets, for instance, I see that I was pumping £530 a month into various retirement-related investment vehicles, by way of regular monthly savings.
That’s net of any tax relief, and also excludes any end-of-year lump sum investments made for tax purposes.
Small beer to some, perhaps. But, totaling it all up, I was probably putting aside £9,000-£10,000 a year.
Again, small beer to some. But significant enough at the time, and especially so given my own circumstances, with one child still in primary school, and one just started in secondary school.
Save more! Save more!
The point is this: doing those same sort of calculations today, and looking at today’s expected investing returns, those Barclays Equity Gilt Study figures suggest that I would need to be putting aside considerably more.
And I’m not at all sure that would be possible, for someone at a similar stage of life, and with similar financial circumstances.
Heck, even though I’m in the fortunate position of being able to invest considerably more these days, it’s still a pinch at times – even though one child has left home, and the other is at university.
What to make of it all?
For me, the bottom line is that even though I was aware – on an intellectual level – that returns over the past few years had been lower, I was unprepared for how much lower they appear to have been.
Or that even though 2015 saw the FTSE 100 finally surpass its dotcom peak – some 15 years afterwards – the intervening years were so dismal as to still halve the long-term returns compared to 2006.
Am I saving enough for retirement? Possibly so. Just.
But I bet many others aren’t, even though they thought that they were.
Note: You might want read all Greybeard’s previous posts about deaccumulation and retirement.
- George Ross Goobey was the fund manager who in the late 1940s and 1950s famously persuaded pension funds to invest in equities, not just gilts. [↩]
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There’s been no escaping these facts for quite some time
You have to squeeze more juice out of the lemon:
– savings vehicles with income tax advantages (SIPPs>VCTs>ISAs etc.)
– reducing annual fund management and custodian fees
Just with the latter there is the opportunity to get back more than 1% a year in annual gains
Still the income you are projected to get from a defined contribution pension pot has been going relentlessly down over the past 25 years
Can I sing my usual song regards the “2015 saw the FTSE 100 finally surpass its dotcom peak – some 15 years afterwards” bit?
Dec30 1999, FTSE 100=6930, FTSE 100 TR=3141
Jan30 2006, FTSE 100=5780, FTSE 100 TR=3141
Feb27 2015, FTSE 100=6947, FTSE 100 TR=5269
So, the Total Return index got back to the dotcom peak in 2006. Byt the time the FTSE 100 managed the same trick, the Total Return was well ahead, even allowing for inflation.
OK, not massively impressive, but 1999 valuations were (frankly) silly.
Perhaps the next generation will have a different problem. Low returns in recent years may drive them into either riskier assets if they still want 5% real returns, or perhaps many will give up and decide that the distant rewards of saving are not worth the concrete spending sacrifice today.
Both would probably be a mistake as historically low returns (as per the last decade or two) are typically followed by high returns, and vice versa.
The real problem is timescale. Over a decade or two returns can be wildly different to their long-term average. It can take many decades for a portfolio’s returns to get close to the expected long-term return (e.g. the 5% real return cited by Barclays), by which point most investors will already be dead.
So uncertain returns that do not look like the expected long-term return are just something that investors have to learn to live with.
That’s true about total returns and the FTSE 100 (and I’m prone to bursting into that song myself! 🙂 ) but to be fair it’s really just shorthand, and to be clear the Barclays after-inflation returns tabled include dividends.
My contrary view has been that this long period of poor equity returns would be followed by a long period of above average returns. (Perhaps in a high inflation environment that reverses the bond anomaly?)
Must admit it’s taking it’s time to get going though, and as I’m into my second decade of waiting for London house prices to mean revert to earnings, perhaps I ought to reevaluate… 😉
Some really good data in article and comments above, esp re the FTSE total and real returns.
Can get confusing with real and nominal returns sometimes both in play in discussions, but fortunately all is quite clear above.
The world of total return generally involves the passage of some time.
But for this retired investor (less so for those not yet retired), we live more in today’s world and thus without the benefit so much of time?
So if time (and total returns) are temporarily put to one side, then a sample of investments currently available for the world of retirement income, and their real yields; might look something like :-
UK Stocks 3.5% real
US Stocks 2.11% real
Private Equity 4% real
Infrastructure 4% real
Gilts (10 year) 0.93% – infl = real
Treasuries (10 year) 1.56% – infl = real
Cash 1.5% ?- infl = real
Real Estate 4% real +
If, as for some, the retiree’s intent is to live within the ‘natural yield’ of a portfolio, things could be a whole lot worse?
But let’s hope things do not get worse!
This analysis does seem to boil down to effectively saying that the performance of the last 10 years should considerably change our expectations on market performance based on a decade long period.
I doubt anyone was predicting the market performance would be this dismal a decade ago, whose to say in a decade we won’t be talking about no one predicting such good performance over the following decade or such terrible performance again?
Crunching my numbers into a spreadsheet for a 30 year-old who wants to retire at 68 on 2/3rd of his salary and I reckon at 7.4% real return they probably would have been ok with saving around 5% of his income. With 3% returns they would probably need to save 15%.
If you drop returns to zero(which is basically what long term bonds yield) then they need to save 40% of your salary – which does rather indicate why final salary pension schemes are so valuable. And maybe the state pension too!
@Dave
Gee, pretty frightening! That said I think forces are at work that will change these rates. The forces of the 2008 recession and globalisation are changing. If Trump gets in protectionism will become steadfast. Who knows if that will occur, my [lack of] intellectual capital was on remain opposed to exit. I see Trump playing the same [excuse the pun] trump cards as Brexit and could well get in. I sincerely hope he has a plan if he gets in, and it’s not just playing golf the next day.
Why do I say all the above. I think the last 10 years is not a good barometer for the future 10 because politicians (via the will of the voted electorate) can put their size 10’s in and screw it up – thus worldwide ETF’s are desirable and I thank this website for making that compelling argument.
Of note Greybeard links to TI’s UK Asset Class, which in turn links to TI’s US Asset Class. The latter has similar tables albeit published in 2014 instead of 2015 which shows a marked contrast between the two and worth taking a look. And of course if you’d shoved your hard earned cash into the US as if by magic you’d be enjoying a nice 15% return since Feb 2016 when the referendum was announced if viewing as pounds. Sleight of hand I know, but still. Gee I wish I had a time machine 🙂
I tend to think that investors may need to lower their expectations of real returns, at least over the next 10-20 years. McKinsey produced a note on this, http://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/why-investors-may-need-to-lower-their-sights. If growth, inflation and rates normalize, Mckinsey see real returns in the 3-4.5% territory for a 50:50 portfolio (however, short-term there might be pain as the PV impact of ultra-low risk-free yields reverses, hitting capital values for many assets)
The alternative is the purgatory of a “secular stagnation/Japan-type” scenario with real returns in the 2-3% territory. A 2% real return is a killer because, once you take off fees and tax, you’re staring at 1.25%-1.5%. Post Brexit, it still looks like purgatory is more likely than the short-trip to hell before reaching heaven again.
Ok enough with the perma-bear thoughts. I’m off to fritter away the retirement fund on an over-priced latte!
The rate in the study shown for cash of -0.7% is based on a closed Nationwide InvestDirect account now paying 0.5% gross. My Santander 123 gives around 2.75% after fees so if I assume across all my cash accounts (including ISAs) I am getting around 2% then my real rate would not be -0.7% but +1.3% – beating all other sectors hands down. Cash is King ……… this year.
Or is it much more complicated than that?
I seem to recall that the Monkey with a Pin book did an excellent analysis of the Barclays Gilt study
@Ian: Here is what the Equity/ Gilt Study’s compilers say about how cash returns are calculated:
“In previous editions of this study we have included indices of the value of £100 invested in a building society at the end of 1945. We originally used the average interest rate on an ordinary share account. In the mid-1980s many building societies introduced new tiered interest rate accounts, which provided a higher rate of interest while still allowing instant access. In response to this we have been tracking both types of account, but as time progressed the old style “ordinary share accounts” became less and less representative and by the mid-1990s had been completely superseded by the new accounts. From 1986 the Barclays Index follows the Halifax Liquid Gold Account (formerly called the Halifax Instant Xtra) as a representative of the newer tiered interest rate-style accounts. The Halifax is no longer a building society, having converted to a bank, so from 1998 we follow the Nationwide Invest Direct Account. This is the closest equivalent account offered by the Nationwide Building Society (which is now the largest remaining building society in the UK); the difference is that it is operated by post. We consider this type of postal account to be more representative of building society returns than the branch operated passbook accounts, which are more in the nature of a cash-based transaction account.”
I guess like many other regular readers of Monevator I spend far too much time tweaking values in spreadsheets hoping to discern how my future finances will unfold. It really is remarkable how transformative projections based on a 5% real return are compared to a 2.5% one. Unfortunately projected figures can’t be banked on, literally, and so eventually one has to come to terms with the inherent uncertainty in investments, but I have found that is very difficult. I think the fundamental maxim that past returns are not a guide to future ones has to genuinely be taken to heart as a first step. The only counter to this is that we expect those engaged in developing public companies to be trying to maximize their value, so on average global wealth should tend to increase, and as investors we anticipate some share in this (unless it all gets nicked by the management, as we’ve seen in recent news). Even then changes of global and historical magnitude may work against this basic tendency to growth, and there is no way of knowing if the world has already moved permanently into some new and less productive era. Let’s hope not, but who knows?
The outlook I’m trying to develop in myself is to neither look too far back or too far ahead, and instead concentrate on the current environment and the next best step to take. On this basis if you are currently accumulating it makes sense to keep on with it, and take all the advice available to optimise the chances for a good outcome, and to be conservative in forecasting future growth in investment returns. Same if you are deaccumulating I guess. Most of my crystal ball gazing currently revolves around expecting 2% return over inflation over a 30 year horizon; anything less makes the outcomes seem too gloomy to contemplate. And maybe this is the way to look at it. Dial down long-term expectations to the point where you would have to be looking at a totally different and significantly more unpalatable plan, but act in the short term based on current facts to move the needle in the opposite direction.
The recent article by Paul Lewis provides an interesting perspective on cash savings over recent timeframe
‘Cash beats shares!’ BBC journalist Paul Lewis challenges conventional investing wisdom in study covering 21 years
Read more: http://www.thisismoney.co.uk/money/diyinvesting/article-3641234/Cash-beats-shares-BBC-s-Paul-Lewis-challenges-conventional-investing-wisdom.html#ixzz4FWu4Yd9S
I’ve always found the “am I saving enough?” articles to be rather depressing, mainly due to the answer being, in my case, “probably not”.
I have thus taken a slightly different approach.
Firstly I work out how much I can save. Not how much I “should” but how much I can (without living below a level I find “comfortable”). In recent years I’ve spent anywhere between £10k and £25k a year.
I then look at real returns on equity after fees. Somewhere between 2.5% and 4.0% might be the consensus range assuming I’ll live for another 20 – 40 years.
Same for cash – I use a straight 0% real for ease.
I then look at my accumulated state and defined benefit pensions. These will/should pay £15k a year from my mid-60s (assuming I pay top-ups to get the full state pension).
When running financial models I’m always prudent and always report in “today’s money”. So I use bottom end 2.5% real return on equities and 0% on cash. I assume I spend top end £25k a year from my date of retirement to mid-60s and then generate £10k a year from my funds from then on to top up my pensions.
Working back I need a pot of £400k at mid-60s to generate £10k pa at 2.5% real.
Every year in early retirement, but before my mid-60s, I need £25k pa.
I know how much I can save each year and simply solve the equation to find out when I can retire per this model. In about 5 years’ time.
With different assumptions I could retire today, but I never want to retire and then regret it (from a financial perspective).
Using real equity returns at the low end of the scale and expenditure at the high end of the scale should give me two layers of safety. Being able to live on my pensions if I had to (excluding care costs, which would be funded by the sale of my house) puts in a third layer of safety. Finally a fourth layer of safety is that the model assumes that I live off the dividends/interest and preserve the capital that remains when I start to draw my pensions. I think any one (or two?) of my assumptions could be severely wrong and I’d still be okay.
So for me the one variable is when I can retire, not how much to save. Given how rapidly time flies this seems much less onerous than wondering if I can shave another £1,000 off my annual spending or putting in a more hopeful equity % return value.
I suspect this hugely conservative model will mean that I will retire 5 years later than I could have. So slightly more than the One More Year syndrome. On the plus side, when I do pull the trigger I should be very confident that things will work out. For me, that’s a perfectly acceptable trade off. (I read RIT’s recent post and the “I’ve made it!…or have I?” is just the sort of position I don’t want to be in. For me the FI in FIRE comes well ahead of the RE. Perhaps I’m not man enough to be reading and posting on early retirement blogs?
Sounds like a good approach A Different Richard. Conservative assumptions plus flexibility plus back up plan = likely success.
FWIW, I think RIT’s self-questioning is a product of his rigour and meticulous planning. I think he’s more than covered himself from the calculations I’ve read on his blog.
A questions for you: do you feel less need to retire, knowing you probably could retire at anytime, or does being close to the tape make you more eager to get there?
On the premise of the article, lots of commentators warning investors to save more given high valuations for equities (US mainly) pumped on QE and poor outlook for bonds in rising interest rate environment (might not have to worry about that for a while).
I’ve long thought that your future self will only thank you if you overcompensate earlier in life, but the alternative is to work a bit longer or live on less. Increasingly I think pensioners will top up with part-time work. It’s all the rage in Japan.
Don’t worry too much if you are saving for retirement, you’ll get there !
No 1 You can invest outside the FTSE All Share, it only represents around 8% of the “All World Market”, you could have and probably did make better real returns than 2.3% and 3.7% over the last 10 and 20 years respectively.
No 2 Gilts outperforming equities over the next 20 years is unlikely, as the long term returns of Gilts can be estimated from the present yield.
N0 3 Do not underestimate the ‘snowball’ effect ( compound interest)
It took me 8 years to reach £X, I retired after another 8 years or so and in the subsequent and last 8 years (being retired) , I averaged about £X increase in capital after living expenses each year.
No 4 X is about 4 times my annual spending, it probably won’t last but clearly my margin of safety in retirement is far better than in November 2007 when I retired, given the dire warnings given about sequence of returns it need not be so, if you are able to sit it out and take advantage of opportunities that may present themselves.
No 5 I am a terrible stock picker, but I can select low cost funds/trusts/trackers and sit out poor performance. (I’d have done even better if I had realised earlier that I was a terrible stock picker! The only consolation was the amount of money wasted now seems quite small, but so much wasted effort….)
I struggle a bit with the “past performance is not a guide to future performance” maxim. It is sound for some values of short term, say the past 10 years, but then we use the past 50-100 years as a reasonable forecast for the future.
At what past range of time does the performance become predictive of the future? A 20 year suck out may be abnormal on a 50 year scale but it’s sufficient to do permanent damage to someone using 20th century norms for their forward planning.
@L yes, I too have wondered about exactly that. Its the paradox at the heart of passive investing. At the end of the day we are most definitely all taking a punt on the fact that past performance *is* a guide to future performance. I’m happy to take that punt, but part of me wouldn’t be at all surprised if it didn’t work out as planned.
I should have added: considering more than just equities and other markets, wage growth assumptions for instance:
http://im.ft-static.com/content/images/bfbad0da-484f-11e6-b387-64ab0a67014c.img
I’ve been thinking along similar lines to A Different Richard. “Hope for the best, plan for the worst”.
Remember that when you’re getting into the long 50-100 years range, you’re really looking at capitalism, macro-economic growth cycles, and getting your share of United Kingdom PLC’s growth. Or Planet Earth PLC’s growth for that matter. 🙂
One thing passive investors can perhaps become somewhat detached from — rather like stereotypical inner city kids who drink milkshakes and couldn’t identify a cow — is that your returns are not generated by ‘an index’, which doesn’t consistent of anything in and of itself, but in your passive fund owning* hundreds/thousands of tiny slices of productive and typically profitable companies of myriad different sizes operating in many different sectors of industry.
For capitalism to work, these companies must be expected to generate profits/economic growth — otherwise neither capitalists nor societies would put up with them.
When you look at the long-term returns of various countries around the world, the ones which truly failed to deliver any sort of return are the ones where capitalism failed / was routed by revolution or war.
See this article: http://monevator.com/world-stock-markets-data/
Does this mean that a global index tracker — diversified around the world to immunize it from local failure — is guaranteed to deliver long-run returns in line with history?
No, the returns will certainly be at least somewhat different, because history rhymes rather than repeats itself (or a more complicated answer involving demographics, who gains excess returns in a capitalist society, debt cycles etc, if you prefer…)
Also, who knows what might happen if we have a global economic disruption to *global* capitalism from say global warming, a thermo-nuclear war of almost any size, anti-globalization, or some other sort of counter-capitalism revolution?
But the point is investing in a tracker is more than just a bet on some numbers in articles like this one.
As a passive investor, you’re a business person investing in slews of the most successful and profitable public companies around the world.
(The unsuccessful, unprofitable ones go bust and leave the index!)
There’s solid reasons to expect that over the very long term (50-100 years, and very likely many fewer decades than that) these businesses you own in aggregate should generate an economic return for you and their other owners. 🙂
(*I appreciate not all trackers actually own shares but rather are synthetic trackers etc. But the argument holds for most passive funds, and it’s obviously true for derivative products too that they rely on those underlying business fundamentals.)
@TI…thanks for the last comment ! The comments below your last article, and this article / comments in general have been thoroughly depressing 😉
Maybe we will live a working life of self imposed penury in order to buy ourselves a retirement of penury…but bit of luck owning our slice of theworld.PLC will lead to decent outcomes…
…if not, all things being equal if left invested I guess a shares fund will at least provide a decent sum to those left behind if they leave it until their retirement 😉
@TA
Well, I’ve never been ecstatic about working for a living but – with a few very rare exceptions – I’ve never hated what I’m doing.
Having worked full time ever since leaving university my life has settled around non-work things being fitted in around work (which for me has generally been vanilla 9-5). As such I don’t have a huge list of things I’d like to do if I “had more time”. I have a great work/life balance, good friends and colleagues, live in a lovely part of the world and have enough money to do what I currently wish to do (much of which doesn’t require much money at all).
I will need to think hard about what I want to do in retirement, well before I retire.
I’ve never been ambitious/greedy/envious and most parts of my life have turned out much better than expected. Some haven’t, but I’d rate my life so far as 7/10. Which is pretty good from where I’m sitting and very much better than a lot of people out there. Be grateful for what you have. I’ve never been an “anything less than 10/10 is failure” sort of person.
As such I suppose I’m in a bit of a rut. A velvet-lined rut, admittedly.
Heading towards FI gives me a lot of psychological comfort, which I find very valuable. In my younger days there were too many opportunities. Too many potentially open doors. Too much choice. I found it all a bit bewildering.
As time has gone on my life has settled – it’s fairly clear what I have/will achieve and, equally, those things that I’m unlikely to achieve are also fairly clearly signposted. Out of all the possible futures my younger self could have had, I’ve no real complaints about this one. And as the (ever-shortening) future comes into clearer focus I feel much happier / less anxious. At least about money. The “ever-shortening” bit sometimes worries me!
Part of that – but only a part – is impending FI. FI for me is not so much about having money to do lots of new things, but having a financial security blanket to avoid (financial-related) bad things. Not having to “worry about money” is / will be a huge weight off my mind. Realistically, and especially with hindsight, I’ve never had to worry about money, but having the money in the bank is a lot better than telling yourself “you’ll be fine, you’ll always have a job”.
So, to answer your question. I’m not desperate to stop working but I’m very keen to achieve FI – I don’t actually see the two as synonymous. As you’ll gather from the above, FI for me is about removing a significant weight from my mind. My intention is to retire (or at least go part-time) when I reach my – very conservative – FI. But when I get there if I can’t think of anything better to do I’ll keep working…
There is a danger that to become FI, you become more obsessed with money, not less. You focus on frugality and checking the markets, and not accept that with income greater than expenditure you can just sweep the excess from your current account once a year. FI is also about the mid-life crisis, is this where I wanted to be, have I sacrificed too much for material comfort, is retirement what I want, or just a different job? I’m FI, but can’t decide what I want to do instead of my job.
@JohnB – “There is a danger that to become FI, you become more obsessed with money, not less. ”
You say this like it’s a bad thing!
The future is unknowable although it is human to want to crystal ball gaze. My concerns are that demographics will work against those of my generation (X). As I move into the period of my life when I am going to be most dependent on decent returns the big boomer generation before me will be needing to sell down their investments to fund their retirement. Since the following generations are smaller that will mean that asset prices will drop. This might prove to be the salvation of Millennials though.
Flaws in the way that capitalism has become to be practiced in most of the West also point towards lower investment, lower productivity, wages, demand and so on. All a self defeating vicious circle that will suppress returns.
However I might be wrong and also there is nothing that I can do about it. Under those circumstances the simplest and most prudent course is to keep on saving and investing combined with developing careful and frugal spending and being thoughtful and well organised living your life to the full in a non materialistic way.
H
An observation on savings for retirement.
One of the inherent benefits of putting money aside for later is that is then money you are not spending today from your income/salary – so it means that the ‘lifestyle expectations’ you need to support on retirement is lower. (Assuming your expectations don’t increase)
My feeling is that the old “2/3 salary” thing is a red herring that is not helpful in todays world. You really do need to look at actual net cash flows in/out to work out what you will need – and understand how your major expenses in life (typically kids and mortgages – but perhaps expensive hobbies too) will change as you age.
Also note that salary income is subject to NI – and income tax allowances and rates are not linear – so the relationship between salary and net cash is also not linear – cut your salary by half and your net income is probably not halved (unless you are earning vast amounts).
My 2nd biggest expense at the moment is saving for retirement/investment in various forms – I suppose I could have flashier holidays and a much newer car and blow the lot now – but then I might get to like that, and expect it to continue when I retire – which it certainly won’t, unless I work until I’m 99
Well as someone within a couple of years of retirement can I suggest that it is difficult anticipating or assuming what your future self will want or be capable of ? My financial calculations are heavily influenced by what I may need to do to support my children. The concept of financial independence isn’t of much value as there is no upper limit where I can say phew.
The state of the world is such that I can’t see much point running a quantitative model over 30 plus years. A bigger risk to your future than equity return is geopolitical and UK government behaviour. The state will adjust taxation and benefits to prevent widespread hardship: they need the votes. So what if inflation is allowed to run ( goodbye debt) or taxes are changed to penalise unearned income (as it used to be) and the state pension becomes means tested ? Oh, and exchange controls are introduced, and rent controls?
So maybe have a 10 year plan and ‘rebalance’ every now and again, especially if you get some children
I don’t expect to model the world as it will turn out or to anticipate every possibility. But using some reasonable assumptions I can build a framework that gives me a decent chance of FI with enough flexibility built in to weather some shocks.
It’s like building a house. Would it be reasonable to look at past weather conditions to decide what conditions my house should be able to cope with? Yes. Is that a guarantee that future weather patterns will be the same or there won’t be the occasional freak storm? No.
@ A Different Richard – thank you for sharing. Sounds like you’re in a wonderful place (rutty feelings notwithstanding) with plenty of options and support around you. A happy tale.
@John B @gadgetmind
I think there’s a certain danger of people on the journey of FI or gathering wealth to be overly obsessed with money and lose sight of the goal if a overly microscopic view is taken.
Ultimately as A Different Richard put it, FI is to be at a state where you don’t feel shackled by the financial burdens of living. I like reading MMM, Madfientist and other FI bloggers as they figure out their other worldly hobbies and take up new projects and enjoy their relationships and side projects. That’s why it’s important to develop side interests and engage in new experiences as well that has the potential to develop into something bigger post FI, when job is an option.
@The Investor:”My contrary view has been that this long period of poor equity returns would be followed by a long period of above average returns.”
Sounds like the Gambler’s Fallacy to me!
@Brendan
You say: “Sounds like the Gambler’s Fallacy to me!”
In fact, Warren Buffett spoke of 18-year cycles back in the very very early 2000s or late 1990s, and pretty much predicted what followed, returns-wise. He’s also on record as saying that after about 18 years, he expects an uptick in returns.
You can read the article in the Fortune archive somewhere — I haven’t read it in years, although I sometimes dig it out. I have a feeling, too, that it’s in the “Tap Dancing To Work” book by Carol Loomis (which is essentially a compendium of those same Fortune articles — Loomis is a friend and bridge partner of Buffett.
So I’m with The Investor on this one.
@Accumulator
I don’t think its building a house; its like building a house to rent it out
You might not get the rent you hoped you might get
The tenants might get behind on the rent and you have to evict them
The you find they had fitted your place out as a pot farm leaving you with a big electricity bill
Best not to buy such an investment with a mortgage; better yet to have a few houses to rent out to spread the risk
Personally I’d like a bit better than a “decent chance” of a sustainable retirement income when I push the button
Investing in productive companies in capitalist economies is a very different proposition from gambling. As I said above, you would expect (all things being equal) such companies to generate/gain a portion of the economic wealth generated over the period.
What mostly drives the big multi-year swings you see in returns is shifts in valuation multiples. (i.e. What investors are prepared to pay for the earnings power of the companies).
So we saw, for example, the FTSE 100 from memory trading on a P/E near 30 and a dividend yield below 2% at the time of the dotcom boom, compared to say a P/E of 15 and a near-4% yield today (very roughly, I am on the phone and can’t check the latest figures).
The point is as investor mood (and the economic reality, including interest rates) shifts, investors reappraise the multiples they’re prepared to pay, which can lead to a reversion of the mean.
Not a perfect science at all, and a fairly useless metric to try to apply to short or even medium-term forecasting. But rooted in reality and in the long-term history of the markets, and very different from expecting, say, a heads because you’ve tossed five tails in a row. 🙂
Hello Everyone, new poster here looking for some help in ‘designing’ my FIRE.
Details= workplace combined DB/DC pension about 15 years away, a small endowment policy 5 years away and some savings in high street BS….no dependents and so no plan to leave inheritance.
First some questions, as I have done so much reading from various sources it is all getting a bit jumbled/overwhelming!…
1. I am a bit confused about ISA’s…I have a cash one but would I be better to have a S+S and should I be doing this through the high street BS/banks or elsewhere?
2. SIPP’s – can I have one of these as well as my workplace provision mentioned above AND same questions as in Q1 above.
3. I have read that the greatest savings can be made in maximising Tax and avoiding fees (what is reasonable?). My understanding is that Tax savings that can be made are as follows:-
a) Personal allowance (£11k pa)
b) ISA allowance (£15k pa)
c) Savings allowance (£1k pa)
d) Dividend allowance (£5k pa)
and
e) 25% Tax-free pension lump sum (best to maximise this by additional pension contributions?)
Am I missing anything?
Thanks for your comments, and yes, I plan to DMOR 🙂
In addition to my post above, some comments on the above:-
@A Different Richard – I see things very much as you commented on in your 27 July post…my only concern (?) is that I do not want to ‘waste’ those years that I have left and so being an unknown quantity think I should now start to think seriously about them…I have now just about passed the ‘but look at how much £ I would lose retiring early’ and appreciate that an extra year enjoyed is priceless.
@ John B – Yes, I empathise with the FI/money obsessed…but my ‘worry’ (?) is that at the moment what savings I have could be working harder for me and so I am missing an opportunity
@ The Investor – Your point about the Index linked investments is a good one (‘The unsuccessful, unprofitable ones go bust and leave the index!’); I assume you mean a fund that tracks, say something like the FTSE 100?…OK, if I understand this correctly (please confirm anyone) these funds ‘smooth’ out the gains/losses, with a slight bias towards helping the gains (the point TI was making)…These are the suited to passive investors (?), whereas an active investor may be able to get much better gains, depending on their skills they may also en up being burnt by losses.
@The Investor and @TheGreybeard:
Those are fine arguments. Suggesting that market returns are predictably correlated with respect to previous time periods is very much against the philosophy underpinning passive investing. I hope you’re right; most of my investment has been during this period of poor returns. I’d certainly like the over-performing years to come at the end of my investing period.
@Teddy @Brendan — I am simply replying to comments #18, #19 and #20 above, where a couple of readers were talking generally about putting faith in long-term returns from historical studies.
I was pointing out that these returns are correlated with capitalism / long-term economic growth, rather than just index mechanics or whatnot.
It wasn’t really a point above active vs passive or a call for market timing based on mean reversion or cycles or anything like that.
The reason for choosing passive is simply most active money underperforms, after costs. (Many of the the 1000+ posts on this site deal with the nuance. 🙂 )
These two articles may be of interest (to be read in this order):
http://monevator.com/is-investing-a-zero-sum-game/
http://monevator.com/is-active-investing-a-zero-sum-game/
@Brendan: The Gambler fallacy is specifically about expecting odds to be influenced by unrelated events (the tossing of one coin being influenced by the previous). This isn’t the case with the stock market as the price of the stock market on one day clearly has a huge influence on the price the next day and so on and so forth. Greybeard seems to be arguing for the assumption that we will see regression towards the mean.
@Teddy
You have to find a path that makes you comfortable. A cash ISA will probably give you a zero/slightly negative real return (at the moment), but with no volatility. A S&S ISA should (over time, but no guarantees) give you a positive real return but with significant volatility.
You’re right about the allowances, although the savings allowance is £500 if you’re a higher-rate taxpayer. Which you use will be dependent on what investments/savings you have and which are tax-sheltered. (There’s also a £5k Savings Allowance – Nil-Rate Band but that gets eroded quite quickly.)
Tax and fees are important. Tax relief gives you a large one-off boost, whereas lower fees give you a sliver extra that compounds nicely over time. Don’t pay silly fees (say, over 1% in total) but don’t obsess too much about a basis point here or there.
If you’re a higher-rate taxpayer then you’ll get 40% pension tax relief at present. But you’ll have to wait until 55 to get your hands on the money. Only you can know whether that’s a trade off that you’re happy to take. The closer you are to 55 now, the easier the decision will be, I presume.
You can have a SIPP as well as whatever other pensions you have. However there is an annual cap and a lifetime limit. How you can utilise these depends very much on your current pension situation and contributions. If you’re in a live DB scheme then the calculations can be a bit complex. If you’re only in DC scheme(s) it’s easier.
The general advice would be to have a cash buffer. Some people recommend 3 to 6 months. Me? I want 5 years of my “minimum” spend (£10k). You could put this in a Cash ISA should you wish. The interest benefit will be small at the moment but the ISA allowance is “use it or lose it” in a given financial year. You can transfer the funds to a S&S ISA later. You can have a Cash ISA and a S&S ISA in each financial year.
Then you may wish to approach the stock market. You can argue that both bonds and equities are currently over-valued. But people argued that a year ago (and two, and…) and prices went up. If you’re investing for the long-term (10+ years?) starting here is not ideal but (hopefully) these prices will look cheap when looking back from 2026. If you’re investing in a SIPP then HMRC will contribute 20%/40%, so that lowers your downside risk considerably. You could, of course, invest into an ISA and/or SIPP and leave the funds as cash, wait for the next crash and fill your boots then. You would, however, lose the dividends that you would have received if you invested now, and timing the market is difficult. I think the market is a bit towards the top end, but I’m still regularly investing. Generally, over a long time period, it’s the dividends that give you the most return, rather than the capital appreciation. On that basis, invest now.
Decide how much you wish to invest and then use a low-cost all world tracker. I use the Vanguard LifeStrategy 100% Equity Accumulation fund via Hargreaves Lansdown. Annual fees are 0.24% for the fund and 0.45% to HL. It has a UK bias. Others might argue that you go down the ETF route or a tracker that more accurately reflects all-world capitalisation. Some would argue you should have a bond component (so the Vanguard LifeStrategy 60% Equity Accumulation fund (the other 40% being bonds) or some other ratio that suits you).
I’d argue that if you’re starting out it’s better to get started than worry too much about nuances. But if the stock market tanks tomorrow, please don’t blame me. (Although if it does – buy some more!)
So – cash fund of x months/years; monthly drip feed of your spare cash into either a SIPP or S&S ISA depending on your time horizon and attitude to having your money locked up. Use an all-world tracker with or without a bond component.
Finally – do knock up a spreadsheet so you can do a bit of analysis. Not only will it give you indicative numbers but it will crystalise questions such as I posed in previous posts about how much of a safety net I want, etc. Bear in mind that the outcomes are only as good as the assumptions you make. I’m cautious – you saw my four levels of safety – but you might be a bit less so. Especially if you really have things you’d like to be doing other than work…
There are plenty of knowledgeable people on here – ask away. Chances are also that there’s been a Monevator post covering each element that you’re asking about.
My experience is quite different – graduated into the recession and the local stockmarket has had a bumper few years since I started investing. I’ve had a really good run and I know it won’t last forever.
@John: I appreciate that’s what the Gambler’s Fallacy is about. The counter-argument to the claim that stock price moves are correlated over time is probably most well known in the book A Random Walk Down Wall Street.
Of course there are probably correlations sometimes. Momentum investing is one particular way of exploiting that. Expecting above average returns because of previously poor returns is maybe well founded on economic cycle theory or whatever. I was just remarking (mostly in jest to The Investor; obviously he knows enough not to fall for basic errors in probabilistic reasoning) that if don’t have such economic theory underpinning your beliefs, it certainly sounds along those lines.
Equity bull markets can be earnings-driven, not only multiple-driven:
http://www.rbadvisors.com/images/pdfs/Earnings-driven_bull_markets.pdf
@NZ Muse: well done. NZ can be tough, particularly without a parental boost to get into housing and no tax-sheltered ISA style wrappers (besides Kiwisaver which is a mixed bag).
Hi Folks,
rather than double post my post I would be interested if member gave me some thoughts on SIPP’s vs ISA on a recent post (http://monevator.com/sipps-vs-isas-best-pension-vehicle/).
In addition, thanks ‘A Different Richard’ for your contribution above (I would value you comments/thoughts on my other post), may I ask for some additional clarification?
1. Am I correct in my belief that the ISA allowance of £15,250 can be split between CASH ISA and S&S ISA BUT is not £15k for each?
2. Can currently accrued CASH ISA from previous years be ‘transferred’ across to S&S ISA without losing their tax-status?
You also mention above about investing in Equities/Bonds OR S&S ISA, with the benefit of the former being the dividend (and growth..hopefully!), whereas the latter only gets capital growth.
3. If one is a passive investor (which I would be), rather than buying individual equities as an active investor, is it better to buy indices (is this an ETF) such as one that tracks the FTSE 100 AND I assume that these operate in the same way i.e. you would get a yearly dividend and capital growth (hopefully!).
4. Is this not what the DC part of my current pension offers (see other thread mentioned above for documentation) by allowing me to choose my investment profile AND how does it compare to current ‘external’ pensions/SIPP’s (i.e. costs etc)…if not that different would I be better just contributing additional salary to the DC part and managing it this way?
5. To set-up one of these ‘external’ SIPP’s mentioned above, what is the procedure i.e. do you ask your employer to transfer a % of your salary OR do you approach a company such as HL and they do the administration/contacting your employer?
Sorry for so many questions but its a) important for me to know that my basic/’new’ understanding is correct AND b) get a ‘feel’/a datum for what is good value’ in the market..this coming from those of you who have much more experience.
Thanks (in advance) everyone for your contributions.
@ Teddy
You’re welcome.
1. Yes, it’s £15,240 in total between all ISAs in a given year. (There’s a couple of odd ISAs other than Cash and S&S, but let’s keep it simple.)
2. Yes, but you must get the receiving ISA provider to do a “proper” transfer. This keeps your tax-free status. If you close your ISA and then try to transfer those funds into another ISA that transfer will count as using your current year’s allowance.
2b. If you invest in equities (either directly or through a fund) you should (in time) get capital growth and dividends. If you invest in equities directly or an “Inc”-type fund (short for income, but not to be confused with a fund that has Income in its title) you get the dividends as a separate income stream. If you invest in an “Acc”-type fund (short for accumulation) the dividends are rolled up into the price. However you still have to account for the (potential) tax on dividends, and there’s no difference in total return (capital growth and dividends) between the two types. This applies whether you tax-shelter the equities (in an ISA or SIPP) or not. Bonds get you capital growth and interest rather than dividends, but the principle is the same-ish.
3. You can passively track a given stock market index either through “funds” or “ETFs”. The former are priced once per day. ETFs can be bought anytime (like shares). There are quite a number of differences between the two in terms of costs of buying and holding, as well as how the underlying assets are costed. Essentially ETFs are bought like shares but can be priced at a premium or a discount. If you buy funds you will get dividends either separately (“Inc”-type) or rolled-up (“Acc”-type). ETFs give dividends just like shares, I think – I don’t use them.
4. I’ve not read your other post yet. If the DC scheme is run by your employer and they match your contributions I’d go that route, unless you have doubts about the scheme’s viability, charges, or choice of investments. Ditto whether that scheme offers the current flexibilities at 55. Otherwise you might wish to diversify by having a separate SIPP. I have a company DC scheme and a SIPP. HL is 0.45% per year (plus the underlying cost of the funds). They have a different charging structure for ETFs and individual shares.
5. If you wish to divert your current employee (and employer?) contributions from your employer’s DC scheme to a HL SIPP (for example) you’ll need to set up the HL SIPP and then ask your employer to divert the contributions (if they will). If you wish to transfer the total pot currently in your employer’s scheme then the contact will come via HL, but you’ll still have to divert your, and your employer’s, contributions. Be careful about other benefits – e.g. I only get life assurance with my firm if I’m in the firm’s DC scheme. You may find that your employer matches your contributions only if you use their scheme.
Very few employers will pay into any DC scheme other than the one they provide as the admin is a nightmare. Paying into one from your own pocket is cost neutral from a tax POV but you’ll be paying 2% NI (perhaps more for some) that salary sacrifice could avoid.
Thanks Both,
yes Gadgetmind, my employer does do salary sacrifice and so I would save not only the tax but the NI contribution as well (is it not more than 2%..I thought NI was 12%?)…I hadn’t though about this and so if I did an ‘external’ SIPP I assume that I wouldn’t get this…is that understanding correct?
I dispute the returns for “cash”. I have been invested in cash since 1998 and have consistently returned about 5%, much more than bonds.
Hello Brian.
You’ll see that I have explained above how the study estimates cash returns. It’s not the best savings account in the world, to be sure. Nor is it necessarily where you’d put large cash amounts, eg tens of thousands.
Just to be clear, then, let me stress (as the the article says) that these are real returns, ie adjusted for inflation.
So you’re consistently getting 5% real returns, then? In other words, about 6.6% nominal, using the June 2016 RPI figures?
As an investor with some cash to invest myself, I’d like to know where you obtain these returns. Perhaps you could share?
@Teddy
From the other thread (ISA vs SIPP) I see you are a member of USS.
Employee NI is dependent on taxable gross salary and for you, there are 3 bands:
£0-£8,060 = 0%
£8,060 – £43,000 = 12%
£43,000 + = 2%
(see: https://www.gov.uk/guidance/rates-and-thresholds-for-employers-2016-to-2017)
It sounds like you are on at least a mix of 0% NI and 12% NI, the question is if you are on 2% NI as you earn more than £43,000 (you’ve already confirmed you earn less than the £55K salary cap). Plus, for you, it will be £43,000 of gross taxable pay in the 206/17 tax year AFTER the 8% deduction via salary sacrfice for the Defined Benefit section of USS.
When you salary sacrifice, you save both Income Tax and Employee NI, since the employer contributes directly to the pension and you reduce your gross salary.
None of this matters for the salary sacrifice for the Defined Benefit portion of your pension, since the tax relief obtained makes no difference to you, you get a defined benefit based on pensionable salary (up to the £55K cap).
Where it most definitely does matter is in the Defined Contribution scheme (USS Investment Builder).
Whilst saving 12% Employee NI sounds better than 2% Employee NI, you are only getting 20% Income Tax relief if paying 12% Employee NI, since you only pay 20% income tax below £43,000. From your persepctive it really is 42% or 32% tax relief via salary sacrifice, depending on whether the money is being sacrified above or below £43,000 (and remember this is gross salary level AFTER the 8% deduction for the defined benefit portion of USS).
Any contributions to another SIPP provider are highly likely to have to be made as a personal pension contribution (unless your employer confirms they are happy to make direct employer contributions to it via salary sacrifice). For personal contributions, you get income tax relief only and if you pay 40% income tax, you get 20% tax relief in the pension, then you usually fill in a tax return to get the additional 20% as a rebate against income tax you have already paid. So, the loss (or leakage in tax) in being denied salary sacrifice, is either 12% or 2% Employee NI, depending on whether you are above or below the £43,000 threshold.
If your salary sacrifice for USS Investment Builder starts above £43,000 and then takes you below £43,000, then you have a mix of 42% tax relief and 32% tax relief.
Some points to consider:
– The 1% employer match can’t really be beaten (in terms of other pensions). You will be getting at least 32% tax relief on your 1% contribution, then a free 1% of gross salary from your employer.
– I’m pretty sure the fees for the actively managed USS funds (after the subsidy) are cheaper than anyone else can get in a low cost SIPP for passive funds + platforms fees. For example, the USS Emerging Markets Fund has an annual management charge after subsidy of 0.15%.
– The major downside to USS is that it is restricted to 10 funds, they are actively managed and you have no control over the underlying managers (so you will not get a market return, it will be above or below).
– USS has said you can take the benefits from USS Investment Builder flexibly, so you should be able to take the 25% tax free lump sum at 55 from USS Investment Builder, but leave the Defined Benefit until State Pension Age (sounds like this is 67 in your case).
Thanks JonWB,
thats really clear and has helped clarify things greatly. There is only one thing, your third point:-
“– The major downside to USS is that it is restricted to 10 funds, they are actively managed and you have no control over the underlying managers (so you will not get a market return, it will be above or below).”
I appreciate the first part (i.e. other providers [brokers] have access to a wealth of different funds, and funds being managed by a manager) but by the second part do you mean that you would not get what you would get in an ‘open’ market i.e. wins (and losses) would be lower?
As an aside to this (a thought that you prompted…and hopefully I wont upset anybody here…its not a political opinion just a statement of facts)…high rate tax payers have always been portrayed by our politicians as contributing a greater amount to ‘the system’, especially the super, super taxed (i.e. footballers, popstars..oh, and bankers!) BUT if they managed their financial affairs properly (especially via investments/pensions that they could contribute to more easily than ‘the common man’), they can actually end up paying far less tax….is my understanding correct here?
@Teddy – I’ll use the USS Emerging Markets Fund as an example and explain what happens if you put some of your money in that fund.
USS is acting as what is called a fund of funds. This means the USS Emerging Markets Fund is actually placing your money, on your behalf, with one or more underlying fund managers who run their own Emerging Markets Fund. Usually, funds of funds are bad because the fund of funds charges a management fee, in addition to the underlying manager! This is not the case for USS, as they don’t charge a management fee for their fund of funds, they provide a subsidy for members to reduce the overall annual management charge.
If you logon to USS and go through the options to manage contributions, you can see the fund factsheets which disclose the underlying fund managers in each USS fund.
You don’t get to choose these underlying fund managers and USS can change them at any stage without your consent.
Those who have a low cost SIPP would be able to invest in the same underlying fund managers directly as USS, but they will pay much higher fees, so regardless of the underlying funds doing well (outperformance) or badly (underperformance) compared to the benchmark you would still outperform the person with the low cost SIPP who held the same underlying funds (simply due to the lower fees you pay). What they can do (which you can’t in USS) is switch for another Emerging Markets fund manager if they wanted to or initially choose one that you don’t have access to. In USS, you can switch from say the USS Emerging Markets Fund to the USS Cash Fund or vice versa, but you can’t switch underlying managers in the Emerging Markets Sector.
If you come to the conclusion that USS Investment Builder (because of salary sacrifice – particularly with the 12%/2% Employee NI saving and 1% Employer Match) is by far the best pension option available to you, then I think this is all largely background noise in terms of active funds vs passive funds. Plus, if you don’t like the restriction in choice of USS funds in years to come, you almost certainly can transfer the money out of USS Investment Builder to a SIPP at a later date and before 55 (having locked in the benefit of Salary Sacrifice on the way in).
In terms of tax and contributing to ‘the sytem’, broadly speaking, I think you are close. The real crux is the difference between absolute levels of tax and overall tax percentage paid by the (super) wealthy, who can have an army of professional advisors to structure their financial affairs to minimise tax. So, the (super) wealthy who are tax resident and are paid via PAYE undoubtedly pay more actual tax in pounds and pence than the common folk, it’s just usually, once investments and increase in net worth are included in the equation, they tend to pay significantly lower percentages of tax.
There is some evidence to suggest that legal, behavioural action is taken to mitigate some tax changes (e.g. 50% income tax vs 45% income tax and suppression of income for some taxpayers). This is also something that is only really available at the upper levels of the earnings scale – those on lower earnings can’t adjust easily, it is largely outside of their control and so they are stuck with changes thrust upon them.
We are lucky in this country as ISAs and SIPPs allow us lower (but decent) earning mortals to do similar sorts of things, just on a smaller scale (but even more tax efficiently and with no reporting requirements), all without having to take professional advice (although we can do so if we feel we need it).
However, for those on lower wages, ISAs are in effect inaccessible, since unfortunately, those people are in a position where all of their income (and more) goes on day to day living costs.
Thanks JonWB,
so in essence in a ‘Funds of funds’ you are paying an extra ‘middle man’ between you and the person managing the suite of equities. So for example does HL ‘play’ a similar role as USS in this instance liaising with a fund manager OR is HL directly employing the fund managers?
You seem quite knowledgeable regarding USS, do you have a connection?
As for the other comment (and highlighted by another above regarding New Zealand), I just assumed that all countries had their version of tax efficient savings like ISA…so how unique are we in the UK having this provision?
Not sure if I have taken this thread off track, so if others feel that this is the case please ‘correct’ me.
I’ve had some queries about advice et cetera recently, partly related to this thread, and I want to just share a general reminder to all readers of this article/thread or anything else on Monevator (or most other websites for that matter).
Please remember that nobody — including me and any of the commentators on this site or any other — can give you personal financial advice.
You are reading a free site where total strangers (including me!) are giving their opinions about stuff.
We are none of us legally allowed to or professionally qualified to give personal advice, however. No personal finance advice is being offered by anyone here — either in the articles or in the comments — and everyone must do their own research and reach their own conclusions.
All we can do is share our own understandings and then each reach personal conclusions.
But if you do anything on account of anything anyone says here and lose all your money, it’s your responsibility.
As everyone will hopefully understand, if you want personal financial advice and the safeguards that might come with it, you need to go to a professional independent financial provider. (Ideally a flat hourly fee charging one that has been recommending by people you know and trust).
Online communities like this one work because — to the world’s general betterment, in my view — knowledgeable people are happy to share their knowledge for the common good. But they don’t work if readers expect more than just the exchange of ideas and avenues for further research.
This is not only a legal thing, it’s also a practical reality if you think about it.
Nobody online knows you, your specific circumstances etc. Even if one gives a certain amount of info, none of us share everything online (not least for security reasons) so one could easily omit mentioning something like a dependent parent or an inheritance or an upcoming liability or similar. An IFA can and should tease all that out in extended consultation etc.
In my view it’s always best where possible not to talk about specifics to your situation, but rather try to understand the wider issues relating from products, strategies etc.
This is a great thread, with lots of excellent information being shared — so please don’t think I’m posting this because I’m unhappy to see it.
Quite the opposite — this discussion is an online community at its best! 🙂
But to stress again, we are not sharing personal advice here and everyone must ultimately go off and do further research to reach their own personal conclusions.
Here ends the public service announcement. 🙂
@Teddy
> I would save not only the tax but the NI contribution as well (is it not more than 2%..I thought NI was 12%?)
NI has many bands and previous comments from you made me suspect that your salary sacrifice would just be from income subject to 2% NI. However, I wasn’t sure to added the “perhaps more” wording.
Note that there is also employer’s NI at a heavy 13.8%. Salary sacrifice means employers don’t nee to pay this, and some give the employee’s contribution a boost by way of thanks. Mine boost our contributions by 10% and I don’t begrudge them the rest as the scheme does take a lot of admin,
“I just assumed that all countries had their version of tax efficient savings like ISA…so how unique are we in the UK having this provision?”
@Teddy I think most do, but the efficiency varies. Some are fully sheltered from tax (except at funding/withdrawal time) while others have a system of tax credits which may or may not completely offset any taxes while held. Definitely research this rather than assume.
(Semi-related, it seems the freedom to transfer a UK pension to an overseas QROP is seriously limited in practice. For example nearly all NZ QROPS were deregistered recently and the US QROPS list appears to consist solely of specific employer pensions. Again, research required.)
I often chat to people in different countries (US, Canada, Australia, NZ, China, various bits of Europe) about their pension and investment rules. They are always keen to tell me how complicated they are, and how restricted in many ways. Some bits of what they describe sound great, some total pants, and yes, everyone is faced with a sea of ever-changing rules.
We have every right to complain about the UK system (particularly the constant meddling with private pensions) but globally speaking, we’re got some pretty handy breaks.