Good reads from around the Web.

Despite protesting that my allergy to office life meant I was the last person they should be asking, I found myself given career advice to young people this week.

They were all inspiring, even in their silliness, and it would make for good blog fodder (and I’m sure they felt the same, though sarcastic Twitter hashtags might be more their style. Alas I don’t think I am Instagram worthy.)

One of my top suggestions is to try to not to want to do something everyone else wants to do, but instead find something you like or even love doing – and that preferably you’re good at – that everyone else hates.

This isn’t always a route to riches or satisfaction (just ask a lavatory cleaner on the minimum wage) but I think it’s a better starting point than joining the other 50,000 hopefuls heading off to study fashion, photography, or marine biology.

Friends from my previous professional life look at me like I’m a dog they know has to be put down when I tell them what I’m doing these days.

Me? I can’t believe I’m getting paid for it.

Webb of intrigue

In some small way, I try to follow this principle with Monevator.

I believe most people should invest passively but I have little passion for the details, which is why we’re all lucky to have The Accumulator doing the heavy lifting. Same deal with The Greybeard and pensions and deaccumulation.

That leaves me free to wax lyrical about the philosophical aspects of investing and financial independence, and to write the occasional article about some lunatic active investing experiment that you probably shouldn’t try at home.

In a similar vein, if I had an unlimited budget then FT columnist and MoneyWeek editor Merryn Somerset Webb would be my go-to writer on debunking the intersect between financial hype and the official line, especially when it comes to government policy.

For instance, reader David pointed me towards the great job Merryn did in the FT this week with the flat rate pension top-ups being loudly trumpeted across the press as super-cheap annuities.

I’d already decided that my mum would probably be better off holding on to her cash as opposed to topping up and doubling down on living into her late 90s, but Merryn went wider [search result]:

The key here is that if you have £22,250 sitting around it is capital. Capital on which no tax is due.

If you turn it into state pension it becomes income. Income subject to income tax.

So let’s say you are a 65-year-old male 20 per cent taxpayer. You hand over the cash for £25 extra a week. With no tax it would take 17 years for the state to return to you the money that was yours anyway (£22,250/£1,300). You’ll need to live to 82 to break even.

At 20 per cent it is 21 years (breaking even at 86). At 45 per cent it is nearly 30 years (95).

Not looking such a good deal now, is it? More like a totally rubbish one (unless you happen to be married to someone who might live 20-odd years longer than you and keep trousering the 50 per cent payout).

The truth is that even if you can’t make a post-tax return greater than inflation on keeping your capital in the bank account, hanging on to your capital (and putting it into an Isa as and when you can) has got to be a better bet for taxpayers than turning it into income.

This isn’t to say these top-ups (or Class 3a Voluntary National Insurance Contributions) aren’t a good deal for anyone. I’m sure they are for some.

But it is to confess that you’re never going to find out from me.

[continue reading…]

For a throwaway remark, it’s achieved remarkable longevity. Indeed, when his obituary is written, no doubt former Lib Dem pensions minister Steve Webb’s off-the-cuff observation about Lamborghinis will once again be taken out for a spin.

That said, the 2015 pension freedoms have surely impelled some people to withdraw the lot from their pension pot and buy a Lamborghini – or if not a Lamborghini, then perhaps a speedboat, yacht or similar indulgence.

The Association of British Insurers, for instance, reckons that pension savers withdrew £2.4bn from pension pots in the first three months of the new pensions freedoms, although a survey by insurer Royal London found that most were intent on sticking the money in a bank or building society ISA account, or paying off debts or a mortgage.

On the other hand, the average size of the pension pots withdrawn by Royal London customers was just over £14,000.

That won’t buy much of a Lamborghini, anyway.

There’s always the State to fall back on…

Might Mr Webb have been wrong when he famously said that the government was “relaxed” about how people spent their retirement savings?

Given the passage of time – and bearing in mind that some Monevator readers, just like your humble scribe, are memory-wise no longer in the first flush of youth – it’s worth reminding ourselves of his words:

“One of the reasons we can be more relaxed about how people use their own money – and as a Liberal Democrat I want to give people those sorts of freedoms – is that with the State Pension coming in, the State Pension takes people above those sorts of means tests.

So actually, if people do get a Lamborghini and end up on the State Pension, the State is much less concerned about that, and that is their choice.”

In other words, elderly people will always have a safety net to fall back on, even if they spend the majority of their savings.

…or perhaps there isn’t

Yet if the government was relaxed back in 2014 about retirees winding up on State benefits after blowing their savings on sports cars, it seems less sanguine now.

In fact, a paper put out by the Department of Work & Pensions in March – which appears to have had remarkably little press coverage – makes it very clear that the government reserves the right to review how individual retirees have treated their pension savings in any subsequent consideration of those retirees’ eligibility for State benefits.

In doing so, it is aligning itself with the more widely-known ‘deprivation of assets’ test that local authorities can apply when evaluating individuals’ eligibility for local authority-funded care home provision.

So here’s what the Department of Work & Pensions actually has to say on the Lamborghini issue, in a factsheet entitled Pension flexibilities and DWP benefits:

Deprivation rule: If you spend, transfer or give away any money that you take from your pension pot, [the] DWP will consider whether you have deliberately deprived yourself of that money in order to secure (or increase) your entitlement to benefits.

If it is decided that you have deliberately deprived yourself, you will be treated as still having that money, and it will be taken into account as income or capital when your benefit entitlement is worked out.

Maybe buying that Lamborghini isn’t such a smart move, after all.

Canny Scots

Savings and ISA provider Scottish Friendly, to its credit, is at least sounding a warning about the deprivation of assets pitfall.

“There’s a misconception that if an individual cashes in their pension and proceeds to spend it in its entirety, they will at least be able to fall back on the safety net of a State Pension – but this is not the case,” says Calum Bennie, a savings spokesperson at Scottish Friendly.

“The ‘Deprivation of Capital’ rule means that if you simply spend your retirement fund, give it away or lose all of your money and end up needing to rely on the State for support, you will only be allowed to do so if the Government agrees with your financial decisions.

“The Government is trying to protect the taxpayer from having to pay twice to support pensioners who misuse their pension pot, but it remains unclear how the DWP will identify what will and will not be accepted as depriving yourself of capital and it gives no guidance as to how people will be allowed to spend their pensions.”

Problems ahead

To me, there are three issues with this.

First, that while Mr Webb’s ‘Lamborghini’ remark has sunk into the popular consciousness, the reality of the rule regarding deprivation of capital is much less widely known. Buy that retirement toy at your peril.

Second, there’s the potential for well-meaning but unlucky, unfortunate, or simply naïve retirees to be retrospectively caught out by this.

Suppose that in all good faith, someone withdraws their savings and places them in whatever is tomorrow’s equivalent of Barlow Clowes, spilt-capital trusts, or Bernie Madoff’s Ponzi fund. At which point, a spotty oik down the local DWP office reduces their entitlement to State benefits, saying that they’ve been reckless.

Clarity about what exactly counts as ‘deprivation of assets’ is sorely needed.

Thirdly, the government itself is guilty of double counting, here. Withdraw a Lamborghini-sized sum of money from your pension, and you’ll promptly pay a large dollop of it in tax, potentially at your highest marginal rate. Yet the Department of Work & Pensions, in its own words, intends to treat you as though you still possessed that full, gross, amount—rather than the amount after tax.

Reader reaction

So what’s your take on it all, dear reader?

Comments, as usual, are welcome – so feel free to make a knowledge contribution to the wider Monevator community.

But please don’t forget that I’m not a ‘pension professional’, but simply an ordinary private pension investor, just like you. So I won’t respond to intemperate attacks, or posters with a penchant for elaborate ambushes.

Let’s all just try to educate each other.

• Read more of The Greybeard’s articles on pensions and deaccumulation.

I have plenty of friends who are bad with money.

Despite decent salaries and barely-there responsibilities, they’ve little to show for 20 years of work but memories and wrinkles.

Some have allowed hundreds of thousands of pounds to trickle through their fingers.

Others bought their first property long ago thanks to parental urging (and in part with parental cash) and it is the London house price boom alone that has salvaged their net worth – at the cost of retarding their financial education.

Incidentally, if you’re thinking that having me as a friend has clearly made little impression on my friends’ finances…you’re right!

It’s not that I haven’t tried.

But I’ve learned it’s a bad idea to bring up money with people who’ve been careless with it, especially if it’s one of your favourite topics.

They get defensive or alienated or worse.

And I’m sure I’ve been unbearably preachy at times, especially in my 20s.

A lot to learn about money

In the past few years though, it’s been a slightly different story.

Friends who’ve noticed my obscure passion for investing will sometimes ask off-hand about ISAs, or pensions, or their daughter’s university fund.

And while I’m not the world’s most empathetic person, I’ve discovered this is their cue for a chat.

They finally feel ready to “be sensible” with their money, as they put it, and they want to know what to do next.

Of course, what they should do is a big subject – it’s the subject of an entire blog about managing money!

When it comes to investing, I usually suggest they start simple with a cash and tracker split across ISAs or perhaps a Vanguard LifeStrategy fund, although there are lots of variables, such as whether they have a workplace pension or big obligations.

That’s even more true with personal finance, where different approaches work better for different people.

I’m a simple Micawber man myself, but others such as my co-blogger swear by tracking and budgeting to the last penny.

Finally, I stress to them that I am not their financial adviser, and that these are just ideas for further research.

This isn’t just because it’s true – I’m not their adviser, I don’t have all the information required to be their adviser, and I’m not qualified to be, anyway – but also because the whole point is they need to learn the basics for themselves.

People ask me “What is a hot stock to put my money into?” or “Should I put this £10,000 redundancy into a wine fund?” or similar.

(Really, they do).

They have a lot to learn about investing, and more to learn about themselves.

You are what you bleat

For my part, I get to hear them justify what took them so long:

• “I don’t have the time to win big on the stock market.”

• “There’s no money at the end of the month for saving.”

• “I’ll think about investing when I’m not in debt.”

• “When I’ve got more money, I’ll start to get serious about it.”

This is all terrible thinking, if also terribly common.

Many people wonder why lottery winners often end up broke.

Not me. Time and time again, I’ve seen people believe that thinking follows facts:

“When I’ve got out of debt and I have more money, THEN I’ll start taking all this seriously.”

In reality, the facts follow the thinking:

“When I start taking all this seriously, THEN I’ll get out of debt and have more money.”

If you want to make money your tool – an asset, rather than a liability – start behaving now like the rich person you’re going to be:

• You don’t have non-mortgage debts as a rich person, so get out of debt.

• You think positively about money, so think long-term.

• You’re already living the plan for how you’ll retire early.

• You save money, time, and energy by investing with index funds.

• You get paid what you’re worth.

• Young? You’re richer than I’ll ever be again. Compound your money rather than buying clothes you don’t need.

Start today

Here’s some advice I once heard1 on being the person you want to be.

It’s not about money, and it’s all the more powerful for that:

I finally reached a decision a few years ago when I was deeply into an ‘I’m ugly and I always will be’ phase.

I sat down and made a list of all the things I would do if I were ‘beautiful’.

For example: I’d feel confident in a room full of beautiful people, I’d wear great, well-fitted clothes, I’d walk with my head up, wear make up and do my hair properly, buy and wear high heels, and so on.

Then I decided to do it anyway. I only have one life, and not enough money for the surgery required to meet my mental image of perfection.

I’m damned if I’m going to let that stop me from having the life that I want.

Amen to that.

From now on, you’re good with money.

1. Tweaked for privacy. [↩]