What caught my eye this week.

Twas the night before the budget – give or take – and nothing was stirring, not even a mouse to move a pointer over the button to CALCULATE whether you’d be a winner or loser from the forecast tax changes to come on 26 November.

Everyone was exhausted from months of animal-spirits-sapping speculation. So they tried to rest before the shouting began.

Only Tiny Accumulator was awake. He sat by the empty fireplace in his insulated fat-suit, singing a lament:

“On the fifth day before the budget, the chancellor gave to me…

12. Salary sacrifice curbed.

11. Council tax hiked.

10. Will-she-won’t-she income tax rises.

9. Stamp duty changes.

8. A cut to the cash ISA allowance.

7. No more tax relief for bicycles.

6. Slashed tax-free pension lump sums.

5. Investors thwacked with capital gains and dividend tax rises.

4. NI on pensioner and landlord income.

3. Deeper income tax threshold freezes.

2. A mansion tax.

1. And a black hole for all to see.”

Of course nobody expected to get everything that they didn’t want in the budget. Experts had vied for months on exactly which proposals would make it.

There had been nothing else to do except to prevaricate, to cut spending, hiring, or moving house, and to generally hunker down until the faff-fest passed.

TA knew there’d be business measures in the budget too – bank levies and the like, hopefully offset by more growth initiatives for housebuilding and corporate investment – but all that was above his head.

So he just quietly said again a prayer for his tax-free pension lump sum and for a ​drawdown​ unmolested by national insurance charges.

A lump of coal

The truth was even chancellor Rachel Reeves’ own backbenchers wouldn’t be satisfied come budget day. That’s because the pips were already squeezed and squeaking:

Source: Financial Times

Of course there were two ways to read this graph. One, that the rich were hard-suffering in the UK. Another, that the average person wasn’t making enough money to move the dial anymore.

Only one thing was certain: nobody would be very happy on Thursday morning.

At best you’d be relieved. At worst relieved of more of your hard-earned.

Have a great weekend!

[continue reading…]

New contributor Longshore Drift is back to explain how having a Flexible ISA in his armoury enabled his family to secure their dream home.

After years of vaguely searching, my wife and I suddenly found the house we wanted.

A big garden to swap for our terrace with its five metre square yard in London. An unlikely place – tired, but surrounded by beautiful tall trees. “A single story home of unique design,” according to the agent.

In other words: a 1950s bungalow with a demented layout.

Two hours from London, this bungalow had plenty of space for us, our stuff, the kids, and the dog. Decent schools. A garage that might become a gym and a workshop. Walking distance from a big river.

All of a sudden the abstract notion of moving became real and it required an action plan.

The sellers of the house, like so many since the pandemic, were only interested in engaging with buyers who were, in estate agent jargon, ‘proceedable’.

A second visit confirmed our interest. But were we just wasting everybody’s time? Turning the aimless Rightmove scroll into a real-life experience that was still somehow no closer to happening?

Find funds fast

Our own house was not on the market and not ready to be sold. But we needed to move quickly.

Suddenly all the little jobs around the place that I’d put off for years had to be done. However it was our finances that were in most immediate need of work.

To get this house – the first one we had seriously pursued in more than five years of on-off searching – we’d have to demonstrate that we had the means to buy it. We needed to show that the purchase was not contingent on the sale of our house. That we were serious people. That we had the money. 

We were faced with two unpalatable options:

1. Get a colossal white-knuckle mortgage, and try to suppress all thoughts of Liz Truss-style fiscal events.
2. Get just a very large mortgage while also taking the beloved and hard-won ISAs that we had carefully accumulated for years out back and quietly liquidating them.

The horror!

ISA reluctant withdrawer

I was slow to take pensions seriously. As a consequence, ISAs are a big part of how I plan to keep the lights on when I’m no longer seen as economically viable in the Logan’s Run world of work.

And that could be sooner than I hope. The fear is real.

Yes, dear reader, I am over-45.

Hence I was haunted by the prospect of losing my ISAs – or more particularly the large tax-sheltering capacity that I’d built up over years of diligently using my annual ISA allowance. Decades of future precious compounding lost in an instant. My DIY pension plans unravelled.

After digging around, however, I learned of an exotic variant of the ISA. Something called a Flexible ISA. Created by government mandate in 2016, a Flexible ISA allows ISA funds to be removed and repaid, retaining their tax-free status as long as the money is returned within the same financial year.

This is the closest thing to Johnsonian magical economics I’ve seen in the real world. We could have our cake and eat it – just so long as we promptly coughed it all back up by year’s end.

It could be done! You can’t invest your pension funds in your own house, but you can give yourself a bridging loan from your Flexible ISA.

Now find your flex

‘Mandated by government’ does not mean ‘offered by every ISA supplier’. Banks are not required to offer this ISA flexibility. Most don’t.

My existing ISAs were inflexible: money exiting to the real world would be banished from the tax shelter for all eternity.

So I went on the hunt. After getting a flat “no” from Interactive Investor, Hargreaves Lansdown, Smile, and Starling, I found one with Yorkshire Building Society and promptly opened an account.

This facility could enable us to secure our new home despite the UK’s notoriously protracted house buying process. If we timed our transaction for just after the new financial year starting 6 April, we would have up to 12 months to sell our house and shepherd the cash released back into our flexible ISAs.

We made our offer in January. A transaction early in the new financial year was a realistic prospect. By combining this DIY financial engineering with an offset mortgage (another rare beast) we could do it.

True, if the sale of our house hit problems and things got strung out then it could get a bit hairy. Cash Cinderella must be back home in the ISA by midnight before the tax year ends on 5 April!

Rachel Reeves is not the Wicked Witch, but she’s no Fairy Godmother, either. 

Fortune favours

It’s difficult to overstate the importance of our discovering this option, psychologically.

Instead of having to swap one dream for another – a decent retirement for a family home – we could achieve both. The plan gave us the courage to make an offer.

We proved our funds in our existing ISAs, showing the current holdings. After a bit of haggling we agreed a price, secured the house, and got it off the market.

It was the flexible ISAs at our backs that made the stretch a real, practical prospect. 

Our Bridge-o-Matic manoeuvre in summary:

Bridge lending plan	New house cost (inc. Stamp Duty)	Mortgage debt (Offset)	Flexible ISA funds	Old house yield (after fees)
Purchase	-£1,200,000	£800,000	£400,000
Sale		-£800,000		£800,000
End state	£1,200,000	-£400,000	£400,000

So that was the roadmap. Long story short though: we got lucky.

We were able to sell our house very quickly, and so we did not actually need to release the ISA cash.

Still, without this flexible flex as an option we might never have had the confidence to act. We would have missed the house and we’d probably still be aimlessly thumbing our way through Rightmove.

The plan: using a flexible ISA as a bridging loan

Here’s a recap:

• Take statements or screenshots of your ISAs, demonstrate their chunky dimensions to your sceptical seller, be seen as serious people, and have your offer accepted. 
• You may now PROCEED!
• Liquidate your ISA investments. A great opportunity to test those – ahem – unfailing instincts for perfect market timing. (Only kidding – indeed being out of the market for a spell is a downside.)
• Use your flexible ISA to spit out the necessary cash – or transfer your existing ISAs to a flexible one that will. The sooner you do it after 6 April, the more time you have to use the money and refund it.
• Buy the house with a mortgage that is now slightly less terrifying.
• Sell your old house and send a chunk of cash back into your flexible ISA, before the tax year taps out.
• Reinvest the ISA money in the happy bag of meme stocks and crypto ETPs low-cost global trackers that filled your ISA in the first place.
• Set any leftover cash against your offset mortgage.

…and start breathing normally again.

Net, flex and chill

Some providers offer flexible ISAs as standard. Many others do not offer them at all.

Given my investment platform declined to offer one, the most practical way for me to use this flexible approach was to sell my investments in my inflexible ISA, transfer the cash to my new flexible ISA provider, and then withdraw the cash.

Again, if you are planning to do this and want the best chance of getting your ISA money back to safety in time, then withdrawing not long after 6 April is your best option. (Another reason for people to pile back into the housing market in the new year?)

While still not widely available today, perhaps there will be more competition for flexible ISAs in the future.

I know that Starling, for one, has begun quietly offering them to some existing customers, though there is nothing on the website right now.

Gimme shelter

You may find your existing ISA already has these magical bridging, property-acquiring properties. If not then it’s worth considering opening one that does with at least some of your ISA allowance – just in case you need the flexibility someday.

You could turn out to be the most generous lender you can find.

Our own flexible accounts are still there, ready to go if we need a chunk of cash.

But please don’t tell any estate agents. We’ve only just finished unpacking from this last move.

Further reading:

• How The Investor demonstrated the value of his investments to secure a big mortgage and hence retain his precious ISAs.

There’s a tipping point in your investment life when you realise you’ve got a lot of portfolio to protect. Going to the moon is yesterday’s game. Derisking your portfolio is the order of the day.

It’s not purely a rational shift – like reaching a certain number on a spreadsheet. There’s an emotional phase change, too.

You’re no longer that carefree youngster who could cheerfully stomach 100% stocks. You can no longer easily makeup for losses with fresh contributions. You don’t have decades of investing ahead of you anymore.

You might have less than ten years until retirement, say. If you play your cards right. 

The question is: how do you play your cards right? What asset allocation glide path should you take that keeps your portfolio powering towards the finish line? While also reducing the risk of blowing up the engine before you cruise home? 

A number of readers have asked about this tricky problem recently. And though I’ve been through it myself, I see now it’s quite a dark area on the DIY investment map. 

Your mileage may vary

There are lots of rules-of-thumb you can follow – and also contradictory viewpoints aplenty. It’s hard to find a comprehensive guide that clearly discusses the many levers you can pull. 

Late-stage accumulation is almost as difficult as the thorny subject of decumulation because:

• There are lots of moving parts.
• You’re exposed to many of the same risks as a retiree.
• There are trade-offs to make, and the ones you choose will likely depend on both your financial situation and your unique (read ‘utterly freaky’) psychology.
• There isn’t a single, optimal, battle-tested strategy to suit everyone.  

It’s hard! So I’ve decided to write another 500 words on the magic of compound interest instead. 

Not really. The world doesn’t need that! What the world needs – surely – is a Monevator mini-series on derisking your portfolio before retirement. 

This first instalment will be a bit groundworky. We’ll survey the landscape so you can place yourself on it. 

Then later, when we walk-through the strategies you might adopt in forthcoming episodes, you’ll hopefully then have a clearer idea of whether this or that one is for you.

Let’s roll up our sleeves and get into it.

The central dilemma

Late-stage accumulation presents wannabe retirees with a predicament: the larger your portfolio, the more investment losses (and gains) affect the pound value of your retirement pot. 

Say your financial independence target is £600,000 and your portfolio balance stands at £500,000. 

In the retirement game of Snakes and Ladders, a 20% gain sends you shooting up the ladder to the final square!

Now you can declare victory! Direct ‘Loser’ signs at your boss. Enjoy a template email thanking you for your many years of service, whoever you are [insert name here].

Not so fast…! What if a 20% loss sends you slithering back down to the £400,000 square?

AAARGH!

In this way gains and losses can dwarf your annual contributions in the final years of accumulation, adding or subtracting years from your journey on a roll of the market dice. 

The limits to the old slice and dice

The existence of sequence of returns risk helps explain why optimal glide paths don’t really exist. 

Firstly, your path to glory is incredibly sensitive to late-stage market returns – in other words, you’re in the sequence of return risk zone-of-much peril. Equities are so volatile over short periods that it becomes meaningless to run the numbers and apply the law of averages to your situation. 

Your returns – in the final handful of years that count the most towards your end result – are unlikely to be average. (As investment writer Ben Carlson has noted, few years are.)

It just doesn’t make any sense to me to take comfort in the mean result generated by 5,000 spins of a Monte Carlo simulation or even one hundred years of historical data. Though I will link you towards the research that’s out there in case you disagree.

Secondly, our individual attitudes to risk vary almost as wildly as stock market returns. What’s more, there’s reason to believe that disparities in risk tolerance not only exist between people but also between different versions of our discrete self. 

As in, I know for a fact that the older me is more risk averse than the younger model. Not just financially but athletically, too. I also drive more slowly than I used to and no longer accept Dolly Mixtures from strangers.

Moreover, I’ve read articles suggesting people are more risk tolerant during bull markets than bears. That’s the investing equivalent of: “You only sing when you’re winning!” 

And, well, that’s no great surprise, is it?

If you’re concerned for your portfolio now, then how would you feel when the market is 42% down? When you are two years out from retirement?

What’s that Mike Tyson quote again? 

Would you like to play a game of Risk?

The problem with the standard rules of thumb is they take a simplistic view of risk. 

By their lights, the only risk is a hoofing great stock market reversal – and the answer is a featherbed of bonds and cash. 

But this ignores the fact that 2022 showed us that bonds can be hit hard by rising interest rates and inflation. 

Cash is highly susceptible to inflation too, though that’s often overlooked. 

Hence a well thought-through derisking strategy must also address interest rate risk and inflation risk. 

Beyond that, there’s a panoply of risk modifiers that turn on your ability to handle setbacks. In short, the greater your flexibility, the more risk you can afford to take.

The more risk you’re willing to bear, the more equities you can hold in a bid for a faster retirement check-out – or fatter cheque.

But it’s no good just saying “give me more risk then” and making like Indiana Jones in a dash for the exit.

You have to be able to carry that risk – and to sleep at night.

This is not only about sucking down a red day on the stock market. Handling risk also reflects your capacity to cope if the dice do go against you and your retirement is indeed set back – whether by delaying its start or in the living standards you enjoy.

Retirement date  

If you can delay your F.U. day by a few years then you can take more risk because you can wait for the market to recover should it cut-up rough.

Additionally, working on reduces the length of your retirement (because, alas, mortality is real) and so the overall amount of pension you need. 

Pension contributions  

If you have a high savings rate (or your contributions are high relative to your portfolio size) then you’re less reliant on investment growth to hit your target. You can shoulder more risk because – like a younger investor – you can better fill the holes opened up by portfolio losses. 

Intriguingly, you could also view this as a reason to take less risk. If you just want to be done with it all, and are less concerned with pushing your pot beyond your number, then you could let your cash money contributions do the work.

In other words you don’t need to max out on equities. So trim back to lower the impact of a stock market bomb that would otherwise blow-up your plans. 

Retirement income

It’s one of life’s ironies that the less you need money, the more risk you can accept in pursuit of the stuff. Should the risk fail to pay off – and you still want to retire on time – then no biggie. You can just take less from your portfolio.

You still get the cake. Just not the icing or the cherry you were hoping for.

This option is also super-powerful if you’re happy to work part-time for a spell in retirement. You’re far less reliant on a market outcome delivering to your schedule. 

Risk aversion  

The more galled you are by market knock backs, the more seriously you should consider the fact that equities could deal you a sickening blow.

Potentially this is the one factor to rule them all. The size of your portfolio contributions doesn’t matter much if a 30% market drop feels like agony to you. The only solution to that is to reduce the risk of it happening. 

Watch out for signs that your risk tolerance is in decline. If you’re sweating over small dips or bubble talk then turn down the heat on your portfolio. 

Valuations 

Stock market valuation signals are like motorway overhead signs advising us to reduce speed.

Sometimes you wonder what that was all about as the hazard fails to materialise. But other times danger genuinely lies ahead. 

Currently, the US CAPE and World CAPE valuation metrics are very high. High CAPE ratios tend to correlate with lower ten-year returns, though the signal is noisy. 

Meanwhile, expected returns for typically lower-volatility government bonds aren’t much lower than for global equities. So if diversification is the only free lunch in investing then right now it’s coming with a complimentary bag of crisps. 

Job and health 

The more secure your employment – and the longer you can keep going like the Duracell bunny – the more risk you can take.

I mention these two for completeness. But personally I wouldn’t pay much heed to them, because your situation can change in an instant. 

Strategic objective 

Your endgame matters. If you want to hit a certain number, by a certain day, then you need to reduce uncertainty in your portfolio. 

But the less certainty you need, the more you can venture on achieving a better outcome by loading up on equities. 

To that end, the risk modifiers I’ve outlined are additive in some cases. If you’re prepared to compromise on your set retirement date, income, and portfolio contributions then you can make less drastic adjustments to all three if required. 

On derisking your portfolio with bonds

It’s important to realise that cash and short government bonds are a recommended part of the risk-off package because they can lower portfolio volatility. Not because they’re expected to contribute much to its growth. 

By reducing volatility these assets narrow the range of potential outcomes (good and bad) that could befall your portfolio by retirement day. 

If you were burned by longer duration bonds in 2022 then it’s worth knowing that on the risk spectrum:

• Short duration government bonds are more cash-like. Long duration bonds are more equity-like (though not as rewarding over the long term.)
• Hence long duration bonds don’t have much of a role to play for late-stage accumulators. 

The exception is if your retirement strategy involves annuities or a liability-driven floor-and-upside approach.

We’ll look at that and more in later instalments in the series. Part two of the series: When to derisk before retirement is available from all good blogs now.

Take it steady,

The Accumulator