≡ Menu

Weekend reading: Higher bond yields trump lower bond prices, eventually

Weekend reading: Higher bond yields trump lower bond prices, eventually post image

What caught my eye this week.

I answer comments on old posts every day on Monevator. A great many ask whether investors should still own bonds, given rates are “sure” to rise – and hence bond prices fall.

In the UK it’s still mostly an academic question. But US yields have been going up fairly swiftly. The Federal Reserve has been raising interest rates, and there are more signs of higher inflation in the US, too. Bond prices have fallen as a result.

My reply is usually some mix of the following:

  • Your bonds are there to cushion big share price falls, not to provide a huge return in themselves.
  • People have been predicting a bond bear market since 2009 (and in truth before that).
  • But inflation (and hence lower real returns) is what really kills you as a long-term bond investor.
  • A moderate correction that sent bond prices lower and yields higher would be good for long-term investors.

That last point is the hardest for people to accept. We’re so conditioned to obsess over the level of the stock market, for example, it’s easy to miss the importance of reinvesting and compounding returns. The same is true with bonds.

This week Sellwood Consulting wrote a very clear post explaining why bond investors shouldn’t fear rising rates. It is about US bonds, but the same logic holds true in the UK.

If you own bonds and yields rise, the value of your bond holdings will indeed fall. But thereafter you can look forward to a higher yield, and over time reinvesting this in now cheaper bonds can be more valuable.

Don’t hold too much in bonds, though. Not because they are super-risky – but because they’re not!

If you’re a long-term investor, being overly cautious can see you miss out on much higher returns. Michael Batnick explains why in his Irrelevant Investor blog this week.

Happy reading!

From Monevator

Gold as an asset class – Monevator

From the archive-ator: What does mark-to-market mean? – Monevator


Note: 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.1

Pensions cold calling set to be banned by June [Search result]FT

Coinbase is launching a crypto index fund. US investors only for now – Coinbase

MPs call for ISA simplification [Search result]FT

Nimble schmimble: Most hedge fund money is held in giant funds – Bloomberg

Emerging market investors fail to reap benefits of GDP growth [Sorry, search result not working for this]FT

Great chart of the history of the US 10-year bond yield, the global benchmark – via The Reformed Broker

Products and services

Monzo, Atom, Revolut, and Starling: A guide to digital banks – Telegraph

NS&I has cut rates on two of its popular products – Telegraph

Get the most out of the free pensions help sessions for the over-50s – ThisIsMoney

LendingCrowd’s P2P rates start at 5.6%; capital is at risk – LendingCrowd

Why it’s so hard to invest with a social conscious [US products but relevant]NYT

Is this the beginning of the end for closet trackers? – Evidence-based Investor

As a rate rise looms, it’s time to fix mortgage repayments – Guardian

The key upcoming changes to the VCT and EIS regimes – Telegraph

Fitting a new flat? 🙂 Grab two Sonos One speakers for just £350 – Amazon

Comment and opinion

10 ways to safeguard your savings income [Search result]FT

How extreme frugality enabled one couple to retire early – Guardian

Unpicking the pension allowance taper – 3652 Days

The winners write the history books – A Wealth of Common Sense

The five types of retirement – Get Rich Slowly

Misfits, outcasts, criminals, financial professionals – A Teachable Moment

Would Buffett’s index tracking bet have paid for deaccumulators? – I.I.

The case for selling shares in AstraZeneca – UK Value Investor

All growth stocks end up in the same place – Gannon on Investing

Why Oscar winner Get Out resonates with value investors – The Value Perspective

Fear and greed are undefeated – The Reformed Broker

Off our beat

Bitcoin is ridiculous. Blockchain is dangerous – Bloomberg Businessweek

Chuck Feeney: The billionaire who gave it all away – Irish Times

The Boring Talks: The Argos catalogue [Podcast]BBC

Jerry and Marge go large [Lottery hacking]Huffington Post

James Altucher talks to Jim Cramer [Podcast, naughty step]James Altucher

And finally…

“The next bear market is sure to test the resolve of existing shareholders, but it will also – just as certainly – provide an opportunity for savvy trust connoisseurs to pick up bargains as trust discounts widen once more. For the forearmed investor, a crisis is an opportunity, not just a threat.”
– Jonathan Davis, Investment Trust Handbook 2018 (FREE on Kindle, saving £24.99!)

Like these links? Subscribe to get them every Friday!

  1. 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”. []

Receive my articles for free in your inbox. Type your email and press submit:

{ 65 comments… add one }
  • 1 Gadgetmind March 10, 2018, 10:01 am

    The article on annual allowance taper rang a lot of bells with me. After many years of dodging this and the personal allowance clawback, the sods finally got me with maximum of both this tax year. My tax and NI bill has gone bad and I owe more tax for exceeding TAA and LTA.

    As I’m 55 next week, I’ve knocked it all on the head and will be a basic rate tax payer from now on, so someone else can pay for the deficit!

  • 2 Snowman March 10, 2018, 11:47 am

    Good to see a Chuck Feeney link there. Puts the moaning about the annual allowance into context!!

  • 3 hosimpson March 10, 2018, 12:56 pm

    Thanks for that Huffington Post link about the lottery. A long read but worth the time.

  • 4 Simon March 10, 2018, 3:33 pm

    @ Gadgetmind

    The UK is now in the vulnerable and potentially disastrous situation where 15.5% of the population (say 1 in 6) pay 68% of total income tax! Or put another way, 84.5% of the population only contribute 32% of total income tax! In my view, this concentration of the bill for public services is completely unsustainable.

  • 5 Andy March 10, 2018, 4:20 pm

    I found the Lottery Hacking article unbearably long-winded. I’d advise you not to read it.

    The TLDR summary is – Jerry and Marge wait until a big rollover week when the they are most likely guaranteed to receive more money than they spend. They then buy lots of tickets and come out ahead. They repeat this, but some people don’t like it.

    Just saved you about half an hour of your life.

  • 6 Sara March 10, 2018, 4:22 pm

    Hi, did you know you were mentioned in the Metro free newspaper on Wednesday 7 March? – page 24 – “Novice’s guide to building a portfolio” – doesn’t seem to be online though. Referred to your online broker comparer.

  • 7 Gadgetmind March 10, 2018, 4:23 pm

    @ Simon

    Yes, it’s completely unbalanced and unsustainable. Many people are going to take my route of early retirement while others will simply clear off to other shores. The Laffer Curve is alive and well.

  • 8 Retirement Investing Today March 10, 2018, 4:24 pm

    @Gadgetmind, @Simon
    Like Gadgetmind I’m also caught by the annual allowance taper. Up until now I’ve been able to compensate a little with carry forward however that will be extinguished at the end of this financial year. After that it’s yet more tax for me.

    To then bring Simon’s point into the discussion. Since 2013 my gross earnings have disappeared as follows:
    – 50% saved and subsequently invested;
    – 40% tax and NI (which admittedly also includes tax on investments); and
    – 10% RIT family spend
    I’m definitely one of the 1 in 6.

    No worries for me though. I’ll FIRE and move to the Med in just a few months so won’t have to worry. Unfortunately for UK PLC I believe my vacated job will then be moved to another country. So a bit more spending to be added to the National Debt it is then…

  • 9 Retirement Investing Today March 10, 2018, 4:27 pm

    @Gadgetmind, was posting while you were typing so missed your Comment 7.

    “Many people are going to take my route of early retirement while others will simply clear off to other shores.” I’ll be doing both of those. Retire at 45. Then need to be well established in the Med before Brexit date.

  • 10 Steve March 10, 2018, 4:57 pm

    @ Simon

    Bang on the money. As it happens, both my kids fall in the 1% who pay 31% of the total income tax bill and, guess what, both are aware of that imbalance in broad terms and both are currently interviewing to move their jobs to less unfair tax regimes. Once you get into the kind of concentration risk we currently have, it does not take very many people to say no to the system and the whole thing/the public finances collapse.
    It was always a mistake to take people completely out of income tax, just as it was always a mistake to offer a completely “free” health service. Once large numbers of people lose any connection between public spending and their own wallet, you are immediately on a collision course with a large and immoveable iceberg.

  • 11 dearieme March 10, 2018, 5:45 pm

    I’ve often wondered about the scale at which “others will simply clear off to other shores” would happen. Recently a youngster in our extended family said “You know, Uncle dearieme, that my politics are well to the left of yours.” Oh dear, what’s she going to say next? “But you are right about tax; we are considering moving abroad and we’ll certainly move abroad if Jeremy Corbyn wins the next election.”

    My views about tax are really rather mundane – the State tries to do far too much and does much of that badly. So it should shed burdens and reduce tax. A thorough-going, rational, patient revision of the tax system would also be a good idea. There is an equally slim chance of that happening.

  • 12 Ms ZiYou March 10, 2018, 6:19 pm

    Wow, that ISA article wasn’t what I expected. Hell I’d vote for anyone who was seriously behind a £1m lifetime allowance.

  • 13 Guido Maluccio March 10, 2018, 8:27 pm

    @TheInvestor: thanks again for some thought provoking perspectives and great articles, I loved the Chuck Feeny one.

    Taxes don’t pay for public expenditure. Monetary economics is rather counter-intuitive. We have a fiat currency in the UK, so government spending essentially creates money and taxes drain excess liquidity from the economy.

    The level of public expenditure and the choice of who has to pay tax is inherently redistributive from a monetary economic perspective. This means that the decision of what public expenditures to spend depends how much income the country as a whole generates, rather than the level of tax. The UK’s GDP pretty high by international standards.

    Usually discussions of reducing the overall level of tax boil down to making the tax system flatter across the population, and leaving people to fend for themselves.

  • 14 Noodle March 10, 2018, 9:32 pm

    Perhaps people should try to think why the tax bill is lop sided. That the majority of the population earn so little and that a small amount of tax is dissproportiatley a huge portion of their already tiny or non existent disposable income…? I dint think uk tax system is particularly aggressive vs rest of world

  • 15 Hospitaller March 11, 2018, 1:22 am

    @ Steve
    “Once large numbers of people lose any connection between public spending and their own wallet, you are immediately on a collision course with a large and immoveable iceberg.”

    Well said. And it is a huge problem for our future. There is a swathe of the population which actively demands more public spending but do not seem to think for a nanosecond about where the funding is going to come from. And you have the cause of that disconnect in thought process right there. They don’t pay much if any income tax; ergo they do not think its an issue. That disconnect will not end well.

  • 16 David March 11, 2018, 7:48 am

    What this discussion hasn’t touched on is that the super rich owners of capital could also pay more tax. It doesn’t have to come down only to whether £100k+ plus earning bankers and consultants should be paying a much higher rate than middle income just about managings or the low paid.

  • 17 Noodle March 11, 2018, 9:35 am

    I’m not arguing for high earners to pay more tax. I’m arguing that the disconnect and inequality that’s grown in last 20 years between the highest, lowest and average earners is the reason for this percoeved tax burden on the highest. If salarys were not so skewed and majority not living paycheck to paycheck then they could pay more tax out of a higher salary….obvioisly.

    However this would require high earners or more accurately the companies they work for not to exploit their workforce…

    The problem ,as always, is not those who are the most vulnerable and with least power who always get blamed and denigrated because they are the easy weak target but lies with those with the power and influence to change the situation.

    You want someone who earns £15k a yr and has no savings or assetts to pay more tax? Okay well they’ll just go bankrupt quicker and continue sliding into poverty with no hope or aspirations and ultimately cost the state a hell of a lot more.

  • 18 zxspectrum48k March 11, 2018, 9:58 am

    I’ve been working since 1998, earned six figures plus since 2000, and paid many millions in tax but I don’t see this as unreasonable. We’re in a post-scarcity environment for human labour; pay continues to bifurcate, with the majority paid less and a minority paid more. Luck, as much as skill or hard-work, often defines which side of that you land on. So the tax system needs to be redistributive. I do have issues with the wide differential between income tax and other forms of tax (CGT, CT). Work is taxed more heavily than capital, favouring the retired, wealthy and corporations. Pension tax relief, now at over £40bn/annum (comparable to the defence budget) benefits mainly the higher paid.

  • 19 Survivor March 11, 2018, 10:05 am

    @ Noodle – good point, well articulated. A govt. interested in reviving an economy on life support would seriously slash small business taxes for a start – far from just reducing the tax intake as a whole, it’d build the backbone of the economy up again. Family-owned small businesses drive German power, families employ their vulnerable members who’d be unemployable elsewhere, thus keeping them socialised & off govt. benefits, leading to a happier nation too.

    The emphasis would be on the long-term as they’d want to hand over viable businesses to the next generation, vs ripping off customers & trying to contribute as little tax as possible. This would help eliminate the unfair advantage huge the corporates currently have over small & medium-sized businesses & keep profits in the country to help balance the books on a national level. Just that one simple move would salvage so much of the damage inflicited in the last 2-3 decades; it’s not rocket science, just about subtler corruption & general ineptitude…..

  • 20 IanT March 11, 2018, 10:07 am

    Excellent article from Sellwood Consulting on why we shouldn’t be fearing rising rates.

    I’m reasonably new to bonds. I’m now 80/20 equities/bonds in my SIPP after being 100% equities for years.

    Mrs IanT and I will have a Defined Benefit income ‘floor’ of about £2k/month when we are both retired in 3 years(ish) time. We will be mid-50s. It was always my thinking that our ‘floor’ should mean we can be more aggressive with the SIPP funds, but I’ve been reading the excellent Monevator site for about 12 months now and decided to have a modest amount in bonds.

    My biggest fear was that I was buying them at the ‘wrong time’ but that article has re-assured me that I needn’t worry, and I will continue to have a 20% allocation as the SIPP builds up, and then probably even after retirement as we plan to keep invested and use drawdown.

    Thanks to Monevator for the invaluable ongoing advice…

  • 21 Amit March 11, 2018, 11:55 am

    That article by Sellwood Consulting has put a lot of my concerns at ease since Warren Buffet’s letter called into question the very premise that bonds are risk free assets going forward. Several multi asset managers like 7im are also toe-ing this line and add alternatives to their portfolios to substitute bonds to some extent. Having discovered all that in the last few week, the thought of being stuck in a static bond allocation with vanguard lifestrategy seemed foolish so glad to know that a contrarian view exists.

  • 22 The Investor March 11, 2018, 9:57 pm

    @Sara — I didn’t see that, thanks for the heads up! 🙂

  • 23 Adrian March 11, 2018, 10:48 pm

    The poor are disproportionately taxed in ways other than income tax. e.g. VAT, petrol, etc. Frankly I find it quite distasteful to see posts suggesting the less wealthy live in some kind of “disconnect”. It’s those who think like that who are disconnected. Ah yes our libertarian friends once again…

  • 24 dearieme March 12, 2018, 1:46 am

    ” e.g. VAT, petrol, etc” You may be wrong about VAT: the exemptions and low rates are specifically intended to protect the poor. Petrol, booze and tobacco I’ll grant you. And the TV licence of course. It really ought to be scrapped.

  • 25 Gadgetmind March 12, 2018, 12:00 pm

    However, benefits and tax credits mean that many people actually have net negative taxation in that they get more back in money (not even considering services) than they are taxed.

    However, we won’t be able to address the tax gap until we tackle the income gap, and we can’t do that until we address the (frankly massive) skills gap.

  • 26 SemiPassive March 12, 2018, 12:12 pm

    The Frugalwoods article in the Guardian, hilarious amount of hate in the comments. Probably 90% negative. Some rightly down to the perceived smugness of the author, and overegging of DIY jobs that would have saved trivial amounts in relation to how their net worth was generated.

    But a lot of extreme bitterness and jealousy from the precariat, Just About Managing, and social justice warriors towards anyone who achieves FIRE, or anything like it.
    Its got me thinking how the shape of your FIRE strategies will determine how resistant you are to the Corbyn government that the commenters could vote in.
    How extreme could socialism become?

  • 27 David March 12, 2018, 12:22 pm

    @ SemiPassive

    Very true about FIRE strategies being threatened by Corbyn & Co. I’ve long thought that the days of ever expanding ISA allowances must be numbered, especially when you have brokers like HL boasting about its ISA millionaires when that is blatantly not what the vehicle was intended for. The last time we had a proper socialist government in the 1970s it was all about taxing ‘unearned income’ at rates of over 90%. We’re now in the perverse situation where the highest overall tax rate is paid by middle earning PAYE workers, with higher earners able to pay less due to a combination of pension tax relief and 2% NI, rentiers with large ISA and pension balances paying very little indeed, and international capital-rich 1%ers paying essentially nothing at all.

    As with Brexit and Trump, if enough ordinary voters become fed up with the status quo, then it becomes unsustainable and something has to change.

  • 28 Ms ZiYou March 12, 2018, 1:35 pm


    The response to that guardian article really shocked me. I agree the word retiring wasn’t the best choice, but the envy and vitriol in a lot of the comments was scary. And this wasn’t even the Daily Fail…

    It’s a hard question where the line between bootstraper and victim occurs…..as a society we seem to be moving toward to victim mentality, encouraged by rather the socialist parties.

  • 29 FI Warrior March 12, 2018, 1:56 pm

    As FI becomes harder to achieve, what with ever-more insecure work, which is ever-less well paid, (except highly skilled) & asset-inflation from money printing which exacerbates injustice, envy will become toxic. It’ll be harder for the have-nots to accept it can be done with hard work, so they’ll assume the ‘winners’ they see must had an unfair advantage.

    My strategy is already to move as quietly as a mouse beneath the radar, not standing out in any way and by necessity it’s easy to look modest since that’s a condition of being FI at the lowest level. I assume most people will be hostile, (this has indeed largely been my experience to date) so tell them what they want to hear until I know they well enough to take the risk that they can handle the truth. Otherwise, it’s easy to pass in today’s flexible world as a consultant working irregular hours at home in something vague, it’s not worth the hassle, especially if they’re not even your nearest and dearest.

  • 30 David March 12, 2018, 2:07 pm

    @ FI Warrior

    The first rule of FI Club is… You do not talk about FI Club!

  • 31 FI Warrior March 12, 2018, 2:54 pm

    @ David, haha, yes agreed; I had thought it safe here 🙂

  • 32 2021er March 12, 2018, 3:48 pm

    @IanT We’re both in a similar position. Depending on when I choose to retire, we’ll have ca. 82-85% as a minimum income floor with the balance to come from returns on two Vanguard ISAs. Those currently have VLS60 as their core but I’d like to aim at a portfolio with a 70/30 equity/bond split with reduced UK bias over the next two years. The equity bit is easy, but I’m finding it more difficult to make a decision on an appropriate bond fund(s).

  • 33 YoungFiGuy March 12, 2018, 4:37 pm

    Just to add about the marginal tax rate point for high earners above. The situation is worse for us “young’uns”. You effectively have to add an additional 9% to whatever rate the “golden oldies” pay (no offence meant) paid to the incredibly incompetent Student Loans Company.

    Not to mention, we have an NHS-crisis, a legal system in desperate need of rescuing, we’re going through Brexit chaos and have successive governments that are continually chipping away at our future state pension (if there will even be one…)

    That’s all very moany I know, but I’ve walked the talk and packed in work (for an employer) very early. When the Labour manifesto came out last year, high earners (not the highest earners) were in line for a 75% marginal tax rate. For me the cost of additional labour far outweighs the benefit.

  • 34 Gadgetmind March 12, 2018, 5:06 pm

    Our Defined Benefit pensions will provide exactly 0% of our income floor, which is why I work hard to avoid excessive taxation eating into our retirement funds, and why it roasts my nuts a little when this isn’t possible. Providing for our own retirement is hard enough without it also feeling like we’re paying for a whole load of others too!

  • 35 2021er March 12, 2018, 5:55 pm

    @Gadgetmind Your taxes will pay exactly 0% of our DB pension income floor!

  • 36 The Rhino March 12, 2018, 6:11 pm

    @FIW – I think that its safe to say, by observing those that have, thats its best not to put your head too far above the parapet in terms of espousing your intentions to retire early.

    Anyone wishing to promote themselves in the media as such probably needs their head examining unless there is some very clear and considerable payback from the act of doing so.

    I agree its not too tricky to tread a grey-area where pretty much no-one knows what you’re getting up to. The working from home approach is possibly the very best as it attracts a very neutral response, i.e. its totally normal.

    You *could* claim to be unemployed – you may attract a sympathetic response. But I have a suspicion that could backfire.

    Certainly, to my mind, there is everything to lose and little to gain by proclaiming your joyous financial independence?

  • 37 IanT March 12, 2018, 7:44 pm

    @2012er Yes, I too had difficulty in deciding on which bond funds to use.

    I’ve settled on 5% (of the total SIPP) L&G Global Inflation Linked Bond Index, 5% Vanguard Global Short-term Bond Index, and 10% Vanguard UK Govt Bond Index.

    I’ve little idea whether that’s a sensible mix, but they all charge <0.2% and it 'feels' right to have taken a bit of risk out of the overall picture.

  • 38 Hospitaller March 12, 2018, 7:56 pm


    “How extreme could socialism become?”
    Very, I think. I think of socialism as in essence people saying “I want to take more of your stuff”. It is often dressed up in a more kindly way for public consumption, but there it is in terms of the basic proposition. Then there’s another group of people who say “Hang on. Nice as I am da, da, da, there is a limit to how much of my stuff you can have”. And the comments above suggest that not a few of those people are thinking we have gone over that limit and need to start “regressing”. The point I was trying to make about our present income tax spread (or lack of it) is that it actually encourages the “hand over your stuff” mentality. If so many folk do not pay much income tax, then we can expect more of the same attitude than if things had been better spread.

    A clear sign, for me, that things may get worse is the preoccupation with capital as the next target for tax. Not content with spending pretty much what we earn in income, here the idea is to raid what we managed to put aside over the years so “we” get to spend even more. Of course, spending capital to meet running expenditure seems dumb in terms of the end result, but hey, who cares … because “I want to take more of your stuff”. When does that all stop? Not I suspect through Westminster politics but through market mechanisms. There probably has to be an almighty implosion around our government debt, then someone comes in and resets the board.

  • 39 FI Warrior March 12, 2018, 8:42 pm

    @ The Rhino, the general population are even more hostile to the unemployed, so I reckon you’re right that it’d be worse to have that ‘look’ at any time.

    Also, at a sovereign level, the UK is heavily indebted and the annual deficit running is inevitably adding to the cumulative national debt. Given these facts and that the drivers of them (we don’t sell enough to afford what we want that others produce) don’t look like they’ll change any time soon, we must have a hefty correction in the near future. When that happens, anyone with any visible wealth, who can’t sit it out far away until it blows over, is going to be a target. Look to those experienced at surfing these situations for tips, the 1%, why do you think the land registry isn’t clear and transparent about who owns all the land in the UK, to consider just one asset class.

  • 40 Factor March 12, 2018, 8:59 pm

    @dearieme (24) “….. the TV licence ….. really ought to be scrapped.”

    FWIW it actually has been for those such as me who are three score years and fifteen or over, and thereby entitled to the free “Over 75 TV Licence” [sic], so keep calm, carry on taking the tablets 🙂 and apply in the year following your 74th birthday, when you only have to pay for a short-term licence covering the actual balance of time between the date of your application and the date when you are due to turn 75. The free licence is not provided automatically, you must apply for it.

  • 41 dearieme March 13, 2018, 3:03 am

    “Not to mention, we have an NHS-crisis, …”: don’t worry, there’s always an NHS crisis and has been ever since it was formed. No sooner had the government established free everything than it reversed course and started charging for specs and teeth. There always will be a crisis, not least because doctors and others reckon that screaming “crisis” is the best way to get a pay rise or influence the result of an election.

    “a legal system in desperate need of rescuing …”: when we came to live in England we were struck by how unbusinesslike English solicitors were. Then we saw the CPS – which I suppose was an attempt to mimic the prosecution system in Scotland – established, and and pretty soon it appeared to be rather useless. This would seem, therefore, to be the only good point you make.

    “we’re going through Brexit chaos …”: oh now you’re just being hysterical. Whether there will be chaos remains to be seen.

    “… and have successive governments that are continually chipping away at our future state pension …”: breathtakingly wrongheaded. The new State Pension – the so-called Single Tier – pays out a much bigger basic pension than the old one did. It has much better protection against inflation than the old one used to have. And it takes only 35 years of NICs to get the full pension compared to the 44 required (for males) during most of my working life. There’s an interesting question raised by this: how on earth did you persuade yourself of the nonsense you wrote on this point? Don’t you know any grown-ups who could have corrected you?

  • 42 John B March 13, 2018, 9:41 am

    As globalization and automation mean that certain rare skills are valued more and more, we need progressive taxation to claw back the money. As salary is the interface between business and those skills, that’s why salary taxes need to ramp. Treating other income and wealth the same way may not be so reasonable, as one person’s 500k could a lifetime’s savings, but another’s annual windfall.

    If you want flatter taxes, you need a flatter income and wealth distribution, and anyone earning 5x average wage should ask themselves if they are really worth it.

  • 43 Simon March 13, 2018, 12:04 pm

    “nhs crisis” I suspect the “crisis”, if there is one, is of our own making; charge everyone who goes to a GP or A&E £1 per time, and thus everyone who needs to be seen gets seen, those who do not need to be seen may think twice about going, and we are probably back in balance. Worth trialling for a couple of years.

    Income tax: I would like to see the next Budget bring everyone, including benefit recipients, into income tax, even if again it is for entirely nominal amounts. This might help towards curing an unethical situation where people feel that they can vote for more public sector spending when they don’t get to pay towards it.

  • 44 The Investor March 13, 2018, 12:11 pm

    Hi all — Generally reasonable comment here, even if we’re straying off-topic into politics. (Understandable given the crossover.)

    However anything else in this vein will see the entire comment immediately deleted:

    “There’s an interesting question raised by this: how on earth did you persuade yourself of the nonsense you wrote on this point? Don’t you know any grown-ups who could have corrected you?”

    Plenty of other places on the Internet to talk to people like that.

  • 45 The Rhino March 13, 2018, 1:28 pm

    Slightly off-topic but I was making a purchase via selftrade recently and just before the purchase goes through they now have a link to a breakdown of charges (as well as the links to the kiid docs and that stuff). I’ve never seen that before and it was very useful. It highlighted an exorbitant FX fee and also that they’ve introduced a .25% fee on shares/etfs/ITs. I was wondering if this was down to some new regulation or whether selftrade are just being particularly transparent. Either way a very welcome development..

  • 46 The Rhino March 13, 2018, 1:30 pm

    Meant to add – was there any way of purchasing VWRL, VHYL or the like *without* being exposed to an FX transaction?

  • 47 The Rhino March 13, 2018, 1:44 pm

    sorry to keep adding – the link to the breakdown of charges wasn’t just a link to the normal generic charges section of the site, it was a specific breakdown of the charges in % of the purchase amount and £ and pence for the specific transaction I was about to do. It was super clear as to what was being chopped of in terms of various fees..

  • 48 YoungFiGuy March 13, 2018, 1:52 pm

    Thank you for the comment TI – I will ignore the insults thrown at me.

    I think there are some very important points about the state pension that I should be raised to avoid mis-information.

    Firstly, since 2002, the government has changed the state pension regime FIVE times. First SERPS was scrapped to be replaced with S2P with the idea it would be more generous to lower earners. That lasted only 8 years before the accrual rates for medium workers were slashed. That then lasted only 4 years before they changed to flat rate accrual. They also stopped contracting out. That regime lasted only 4 years before they scrapped it altogether for the single-tier state pension. In doing so, they left individuals close to retirement who contracted out, a very short space of time to get the NI years needed to get the full pension. In 14 years, the system was changed 5 times; its end point completely unrecognisable from its starting point.

    There’s also a clue in the name of why the single-tier basic state pension pays out more than under the old system. It’s single-tier – you no longer get any ability to use contracting out or to build up a second state pension through hard-work and earning more. Those options have value. I highly doubt it would be popular for the government to scrap a pension regime only to replace it with one that pays people less!

    On to qualifying years. Firstly, the 44 years you quote is for men born before 1945 (i.e. over 73). There is a very simple reason the number of years is much higher – the system was massively overhauled in the 70s from a flat rate to a percentage rate. Your 44 years are incomparable – the rules are different. The two facts for those working NOW are: you’ve got to get more NI years to get the full state pension, and the cost of doing so is at the highest rates ever.

    You mention the inflation protection as a good thing, but the “triple lock” is disastrous for middle-aged workers. The cost of pension provision has ballooned. We have our pensions minister explicitly saying it is unsustainable and needs to be scrapped. It’s been great for those who’ve received the benefit of higher payments, but for the rest of us it has left us with a burgeoning deficit and the strong likelihood that such generous increases will be scrapped and never seen again.

    None of this even touches on the increases in state pension age; the morally dubious WASPI issue; or the increases in age to accessing private pensions. All of which make the state pension even less attractive to current workers.

    But the overall point is this. The government has continually changed the rules on pensions. It is near impossible to plan for something 20/30/40/50 years away when the rules are changed every year. We know that the current pensions regime is unsustainable. We know our country has a huge deficit it is struggling to bring down (even though it wants to). We know our politicians will raid any piggy banks they can get their hands on (Brown and private pensions, Osborne with his LISA tax receipts grab). I honestly do not think there will be a state pension in a format we recognise today by the time I would be entitled to. I say that as a Chartered Accountant and a Member of the Institute of Securities and Investments.

  • 49 The Rhino March 13, 2018, 2:33 pm

    It is near impossible to plan for something 20/30/40/50 years away when the rules are changed every year.

    Very true. It doesn’t help much. Its hard enough planning anything for the long-term as it is.

  • 50 FI Warrior March 13, 2018, 4:08 pm

    @YoungFiGuy, your views and analyses on this crucial topic are very interesting, I would really appreciate your thoughts on what the best we can do with this situation would be?

    What’ll your strategy be, to end up with a decent pension given the cards we’ve been dealt?
    (I’m just an amateur in this field, trying to learn as much as possible here, so it’s useful to interact with someone with access to different knowledge)

Leave a Comment