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.
Give me magical thinking about the future of stock market returns, any day!
From the blogs
Making good use of the things that we find…
Passive investing
- 11 tips from my new millionaire friend – Budgets Are Sexy
- Bonds are dry powder – The Irrelevant Investor
- Why people still invest in hedge funds – AWOCS
- Beware: Experts are deluded – The Value Perspective
Active investing
- Premature evacuation – The Felder Report
- Beware of paradigm shifts – A Wealth of Common Sense
- Is it worth paying up for Ferrari shares? – Musing on Markets
- How can there be “more sellers than buyers”? – Oblivious Investor
- Tristel: To global growth – Richard Beddard and Maynard Paton
- The collected wisdom of Seth Klarman – Scribd
Other articles
- A reality check: Now versus 1929 – ETF Reference (via Josh)
- A year on from busting out of the prison camp – The Escape Artist
- Pack your lunch, go to Paris! – Proceed Until Apprehended
- Reclaim your time and get rich – Under The Money Tree
- Solar PV Panels: A year in review – The FIREStarter
- Out Liars and entrepreneurship – SexHealthMoneyDeath
Product of the week: Have you claimed your PayPal.me vanity URL yet? PayPal’s new easy payment initiative might not go anywhere, but if it does, wouldn’t you rather your friends and family could pay you as JoeBloggs instead of J03blggz1932 because that’s all that’s left by the time you show up?
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1
Passive investing
- Trump would be twice as rich if he’d just tracked the S&P 500 – Twitter
- Why you can safely ignore commodities futures [Nerdy] – Morningstar
- Hedge funds are dropping like flies – ETF.com
A word from a broker…
- The most popular funds in September [Only one is a tracker 🙁 ] – BestInvest
Active investing
- Investing versus flipping – Research Affiliates
- The easy way to beat the market? – The Guardian
- Behind the scenes at Woodford Investment Management – ThisIsMoney
- Seven previous stock market crashes – Telegraph
- Another comically bad year for hedge funds – Business Insider
- It’s not easy to exploit these structural ETF flaws – Bloomberg
Other stuff worth reading
- Ethical funds’ moment in sun [I get asked about these a lot] – Guardian
- What stuff loses its value fastest? – Guardian
- £80,000 in a pension at 20: Time to stop contributions? – Telegraph
- Landlords admit to £50m in unpaid tax… – Telegraph
- Couple who live on 6.25% of their income, donate the rest – Quartz
- How Al Gore has profited from a ‘new capitalism’ – The Atlantic
- Get your shit together in an afternoon – Medium
Gadget of the week: The new Amazon Fire tablet
Like these links? Subscribe to get them every week!
- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩]
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The major thing to say is that for most of the group who can pay class 3a (i.e. most of those who reach SPA before 6th April 2016) deferring the state pension achieves the same affect as purchasing extra pension through class 3a at a much cheaper cost below about age 80. So the general order of purchase should be
a) buy missing years first
b) then defer the state pension
c) then, when the deferment advantage ends, finally purchase extra pension through class 3A
For example someone age 65 who defers state pension of say £96.15pw for a year would get a 10.4% increase or £10pw (remembering that the 10.4% increase is on top of indexing). And remember even if your state pension has started to be paid from SPA you can still choose to defer later (once), and if you originally put off claiming state pension you can still defer the state pension then in payment later (once).
The cost of that £10pw from age 65, is the £96.15pw foregone during the year of deferment plus the £10pw not received in year 1, so the cost is roughly £5,520 (£106.15 x 52).
However to purchase £10pw from age 65 through class 3a contributions would be £8,900 (over 60% more ).
Not until age 80 does purchasing class 3a compare favourable with deferring as the cost at age 80 is £5,440.
And that’s ignoring the tax effect which can make the differential even greater in some scenarios.
Clearly depending on how much State Pension you have you can adjust the period of deferment to achieve the same effect as purchasing extra weekly pension through class 3a and at a much cheaper cost.
And in relation to a) above there are concessions to normal limits for buying missing years that means that those who reached SPA between 18th October 2009 (today less 6 years) and 5th April 2015 may be able to buy some missing years to 1975 which will be teh cheapest way initailly to buy extra State Pension.
@Snowman — Great summary, thank you!
> heading off to study fashion, photography, or marine biology.
It wouldn’t be so tragic if at least some of these precious media studies folk became halfway decent movie storytellers or photographers. I’ve had to sit and grin through ‘films’ by sixth-formers that were so dreary and rote-scripted but good causes promote them, because, well, telling budding artists their arts is crap is so negative, though it’s the only way to get better. Likewise there are only a few photographers for whom not getting the horizon level is art. For the rest of us it’s incompetence that can be rectified in post, if we give a damn 😉
@Snowman,
Good summary. I didn’t understand your point about ‘plus the £10pw not received in year 1’ since if you did not defer the pension you would not be getting an extra £10pw but maybe I’m missing something.
If you can afford to purchase 3a NI contributions or defer the State Pension, then you can equally well afford to invest the funds into an ISA or, if already using the full ISA allowance each year, taxable investments (funds, ETFs, ITs or whatever). Either way, the “naively calculated” break even points recede even further into the future once you allow for the likely capital growth of your investments. And, of course, should you switch to a very concerted de-accumulation phase you will enjoy the tax-exempt withdrawals from your ISA or the lightly-taxed withdrawals from your taxable investments.
The only counter-argument I can think of is that should we suffer rampant inflation at some point over the 30 or 40 years you might expect to live after commencing to draw the SP, the inflation protection offered via any means of enhancing the SP could be very valuable.
However, optimal financial planning for retirement requires prior knowledge of:
– longevity and health
– future changes to the ‘triple lock’
– future taxation changes
– future investment returns
Hi Grumpy Old Man
If we do everything in real terms
OPTION 1
If say a male (say) reaching SPA at age 65 in November 2015 does not defer and takes their State Pension of £96.15pw and at the same time purchases £10pw of extra state pension then they will receive
£96.15pw from age 65 plus
£10pw from age 65
and they will pay £8,900 as a class 3a contribution
OPTION 2
If instead the 65 year old defers their State Pension for 1 year (and doesn’t do a class 3a purchase) they will receive
£96.15pw from age 66 plus
£10pw from age 66
This is the same as option 1 except that there are two missing bits of pension of
£96.15pw from age 65 to age 66 and
£10pw from age 65 to age 66
And there has been no need to make a class 3a contribution
So these missing payments are essentially the cost of achieving the same affect through deferring, and the payments total
52 x 106.15 (=96.15 + 10) = 5,520
i.e. under option 2 you’ve lost out on payments of £5,520 (gross) but you haven’t had to pay the £8,900 class 3a contribution
Does that make sense?
For anyone who, for better or for worse, is intent on choosing the annuity path, perhaps we should compare the Class 3A numbers with the annuity quotes that are currently on offer via moneyadviceservice.org.uk.
Taking a healthy male pensioner aged e.g. 73 who wants a no “bells and whistles” but inflation linked annuity, then £17,975 (the Class 3A amount needed for the maximum £25/week top-up) would buy an annual amount of £980 (£ current) from Just Retirement, with lower amounts from other providers. This compares with £25 x 52 = £1,300/annum via the Class 3A route, which also has a 50% surviving spouse benefit.
I don’t lay claim to infallible financial expertise, so please check my E&OE numbers above if these figures are of interest to you.
@Snowman,
Yes, perfectly thanks.
@GOP > over the 30 or 40 years you might expect to live after commencing to draw the SP
Not that many of us are going to see our 100th turn round the sun, and as for our 110th, dream on 😉
@TI @ermine Ha! Just last week I spoke to 105 year old! And he told me he was aiming for 110… We had a long chat and he shared his thoughts and concerns about the future with me, he remembered the Great War as his dear father was out fighting it. I didn’t dare ask him what he thought of the pension top up opportunity. It seemed rather insignificant a subject after all that profundity. But a quick calculation shows that he would effectively double his lump sum payment in those 5 years. The trouble is the fate tempting element. I also did the calculation for my mother and it didn’t seem like a great return overall. Even being generous on life expectancy it seemed pointless as you’ve pointed out in MSW’s article. And my mother’s mother lived till 99…
@TI Hahaha! Just saw the Kindle Fire comment 🙂 A perfect Christmas present choice for a bigamist with three children (one for every one) or more likely for the surprisingly common phenomenon of the man with a ‘rotation’ of 5 girls…..seriously, these guys keep spreadsheets going to help them remember stuff
https://m.reddit.com/r/seduction/comments/2gcypg/
Thanks for passing on the good word, sir. Much obliged!
It is a good deal, but perhaps just for the government, not for the contributors.
Even if it were a good deal, for the vast majority of people, they already have enough exposure to the state.
I’m always amazed at how willing people are to give up their capital for stable income. It’s hard to accumulate capital, why be so willing to hand it over to someone else?
It will be interesting to see the take up numbers of this though. I expect it will be popular.
Hi, spotted an article this morning on drawdown and thought it might be suitable for your roundup of links http://www.telegraph.co.uk/finance/personalfinance/pensions/11934083/Can-I-take-4pc-a-year-from-my-pension-investments-forever.html
Thanks for the posts this week. As well as Merryn’s great article (who said you can’t put maths in the press?), there are some lovely nuggets in there this week — and as is so often the case (with both mainstream journalism and the blogs) — the thought-provoked by figuring out why one thinks the article is wrong is often as useful as the conclusion intended.
Some really good stuff on frugality / life organisation (is FIRE the new self-help?). I love BudgetsAreSexy and Under TheMoneyTree for their step-back-and-take-a-look-at-yourself stance, as is TEA’s restrospective on his escape and the “Get your Shit Together Afternoon” post. Even for those of use who aren’t rampant frugalists, pedalling our stationary bikes to power the internet to read this blog, there’s some good thinking in there. And the constant call back to enjoy what nature has provided – “Ignore the news, everything is fucking marvellous”. Indeed, I ventured to my thankfully-not-so-local Lidl this afternoon — I confess as a direct result of the coffee chat here some weeks ago — and realised that there was a half-price solution to my espresso habit. While his simple diagram to show that small regular amounts are valuable is a start, I disagree with ProceedUntilApprehended’s calculations — far simpler to have a constant discount rate for income / capital calculations. I’m a 4%ist myself –saving £250 a year on coffee? That’s £6.25k Kerching. All in an afternoon’s work. Can I move to Lidl own-brand claret? It would make up for the last few months of investment returns but…I’m afraid there are limits.
Then there are those banging a drum. The Trump factoid has been often quoted. It ignores fees and the fact was that when he inherited his wealth there wasn’t a good low cost tracker on offer. His wealth is net of taxes post costs. Apples. Oranges. The goal is to make him look incompetent. He might be. That fact doesn’t illustrate it well. Similarly, I’m not quite sure what SexHealthMoneyDeath is aiming for. Anyone who bets the farm on their own success and eats only what they kill deserves a pat on the back, regardless of what fortunes they used in order not to drown while doing so — although I’d make an exception for Alan Sugar: The Apprentice makes it look like successful businesspeople need to be loud-mouthed self-centred salespeople, which could hardly be further from the truth in my experience. We all have advantages and disadvantages — pointing our the advantages others have used as an excuse for inaction isn’t the way forward, imho. Play the hand you’re dealt.
Finally some good investment stuff. TII’s point about bonds is very well made, and to be borne in mind by those who have chased yield into corporate and junk bonds while misunderstanding what this portion of the portfolio is about. It’s not about yield: it’s about rebalancing. It’s why gold isn’t as barbarous as it should be and the alternative is cash or other short-term-a-likes (Zopa is my home of choice for this portion). My heart goes out to those two poor young lads in the Telegraph who may be on the threshold of their lifetime allowances (but won’t know for another 30 years). And their 4% article is comical in its misapplication of the facts. Pfau’s 9% failure rate isn’t “ok” — it’s a massive chance of catastrophe, and a delight to see Buffet’s Will in print again. Buffet recommends putting more cash than his widow can spend in her lifetime in the most stable cash-like asset possible and the rest to be gambled on the stock market, although it is often reported somewhat differently.
@Mathmo — Cheers, and cheers as ever for the recap. I do quite enjoy seeing a week’s worth of reading summarized by your good self, it’s like one of those What The Papers Say slots on BBC News 24 late at night, but with better taste!
@Minikins — I think if you’re having to keep the harem quiet with Amazon bulk buys, you’re doing it wrong, as I understand that way of life…
Very kind of you to say so, TI… I think 😉
I hope The Accumulator doesn’t see the Sponsored Financial Content section with its “AIM Listed company offering 8% coupon on 540 day Loan. Risk Involved”, he might choke on his corn flakes! I clutch my LifeStrategy funds in fear.
@david — Indeed. I have got the penny stocks barred from there but the odd less-than-compelling thing does creep in.
Am I missing something about this class 3a NIC business? Surely – assuming you trust the government to pay out – these *are* super-cheap annuities? Whether they are good value despite their cheapness is another matter.
@David — An annuity is bought with a pension pot (i.e. pre-taxed income). These are bought with savings (i.e. unencumbered, unrestricted post-taxed income). Merryn does a fair job of explaining (in my opinion anyway) why that makes them unattractive. I agree the mechanism is clearly the same as an annuity.
Love the comment:
The Apprentice makes it look like successful businesspeople need to be loud-mouthed self-centred salespeople, which could hardly be further from the truth in my experience.
I so totally agree with that one!
@TI Quite so…from an optimistic perspective…But I imagine a rotation would leave some of them bored some nights and an Amazon Fire might just be the ticket 😉
@TI Thanks for the clarification re the annuity; I couldn’t read the FT article (the search link trick doesn’t work for me, for some reason, it never has – on my phone right now using Firefox it just takes me to the Google home page).