What caught my eye this week.
Our piece on the potential for a rise in capital gains tax (CGT) kicked off a great discussion. We’re at nearly 100 comments now, almost all thoughtful and articulate. Check them out.
Plenty of you voted in our poll, too. Here are the results:
It’s good to hear 40% of Monevator readers have no CGT-chargeable gains to worry about.
(Hopefully that’s because you’ve been using ISAs and SIPPs – not because you’ve no investments and you only read Monevator out of a morbid masochism!)
It’s also no surprise that so few people are thinking about emigrating to escape a potential CGT hike.
However perhaps more than you’d expect are selling positions ahead of what’s still only a rumour.
I can see a case for it, though. Not only because any changes to CGT will probably come into force before Rachel Reeves has even finished her bedtime cocoa for the day, but also because it’s hard to imagine lower CGT rates anytime soon, even if they don’t go up in 2024.
If you’re sitting on gains that you’ve hitherto failed to defuse – and you see little prospect of doing so now, given the already dramatically-lowered annual CGT allowance – then maybe it is rational to sell up, take your tax lumps, and reinvest into something else?
Preferably within an ISA or SIPP this time, obviously.
Yes it’s usually better to delay taxes savaging your returns for as long as possible, all things being equal.
But long-term demographics and the UK state’s finances suggest today’s status quo won’t endure indefinitely – even if CGT rates do get through October unscathed.
Under the weather
Perhaps it’s all part of Rachel Reeves’ cunning plan? To scare us into paying more capital gains tax before she speaks, only to leave things as they stand on Budget Day.
If so that would be a textbook case of winning the battle but flunking the war.
We don’t need any more political gamesmanship, nor obstructive and punitive taxes if we can help it.
Rather, what we need after almost a decade of foot-targeting self-harm and knee-jerk populism is joined-up thinking that encourages for long-term growth.
And a just-released report – The Capital Markets of Tomorrow [PDF] – has some ideas on that.
Get past the report’s strangely 1970s-style cover art, and inside you’ll find the thoughts of various City Grandees recruited back in 2022 to look into what ails UK growth, productivity, and the London Stock Market.
Make no mistake, as we’ve said many times there is a problem. Ignore jingoistic pundits who accuse those of us who say so of just talking the country down.
It might feel like the UK has been a sick man forever. But Britain’s relative decline – at least post-WW2 – only really began 15 years or so ago.
For most of the post-War period the report claims we kept up even with the mighty United States.
Take me back to dear old Blighty
The report says that from the mid-1950s up until the Global Financial Crisis, UK and US growth metrics across real wages, productivity, and real GDP per capital were similar.
Moreover, between 1955 and 2005 it puts the UK real equity average return at 6.6% – slightly outperforming even the US’s 6.2%.
Unfortunately:
…since the Global Financial Crash (GFC), between 2010-23, the USA has delivered 8.4% and the UK only 2.2%, a significant and possibly ’embedded’ outperformance. […]
ONS data demonstrates how poorly the U.K. economy has performed since the GFC.
There has been no growth in real wages or real GDP per capita and small growth in productivity.
As the TUC and several academics have commented, average wages in the UK would have been £10,000 per annum higher if they had matched their performance prior to the GFC.
ONS data also shows that real GDP per capita was £27,218 in 2007 and £27,819 sixteen years later in 2023, so no annual growth. In Q1 2024 it was £6,903 compared to £6,850 in Q1 of 2007, again no growth. Productivity is only around 5% higher in 2023/4 than it was in 2007, much lower than the pre GFC trend growth of around 1.5% per annum.
This poor performance was against the background of Government debt increasing from £1 trillion in 2010 to £2.7 trillion in 2023/4, i.e. 100% of GDP, which is also £2.7 trillion.
Given the UK’s prior credible performance then, the last 15-20 years do look more like an aberration than our natural state of being – although of course we have recently had a meaningful structural change with Brexit that’s still playing out, for good (ahem…) or ill.
For their part the grandees are optimistic. They believe the UK can revert to ‘its pre-existing parity’. But they reckon it’ll require £100bn a year of capital inflows to achieve this.
And not just into the capital markets either, but also infrastructure such as water, transport and housing.
Their ideas concerning our pointy-end of the issue include scrapping stamp duty on UK share trades and encouraging or even mandating pensions to invest a minimum amount into UK private business.
The report also notes the UK has 20-30 high-quality unlisted growth companies worth tens of billions.
These unicorns could help revitalise the UK stock market were they all to float in London.
London calling
By the way, if you’re wondering what a capitalist revitalisation of the UK would look like if represented on a flyer created by a student activist from the 1970s channelling The Good Life, then The Capital Markets of Tomorrow has you covered:
My cynicism aside, it’s refreshing to hear the case made for capitalism, investment, and the UK economic engine firing together, and all without anyone wrapping themselves in the flag.
This report won’t change the world, or even our corner of it. But hopefully it will get more of us thinking.
Have a great weekend!
From Monevator
Better than buy-to-let – Monevator [Mogul members]
Are you selling ahead of a capital gains tax rise? – Monevator
From the archive-ator: Back-up plans for living off a portfolio – Monevator
News
Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.
Record level of former rental homes up for sale, says Rightmove – This Is Money
Investment bosses welcome Labour scrapping ‘gimmicky’ British ISA – P.A. via Yahoo Finance
State pension set to rise by over £400 in 2025 – Pensions Age
Housing Secretary Angela Rayner says fix unsafe cladding faster – BBC
Tenants in rent arrears to rise, landlords warned – This Is Money via MSN
Seasonal workers on UK farms in ‘unhealthy and dangerous’ accommodation – ITV
The hoped-for IPO boom isn’t happening in 2024 – Crunchbase
Ireland’s luxury problem: what to do with its €8.6bn surplus [Search result] – FT
Products and services
Mortgage rate cuts continue, as Santander set to slash loan costs – This Is Money
Apple Pay is amazing, and it’s about to change – The Verge
Get £100-£2,000 cashback when you open a SIPP with Interactive Investor (T&Cs apply. Capital at risk) – Interactive Investor
Coventry BS’ new lottery-style regular savings account pays 6.25% – Which
Five questions to ask yourself before buying an annuity – Which
Open an account with low-cost platform InvestEngine via our link and get up to £50 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine
Pay-as-you-go schooling: parents pressured to fund essentials – Guardian
How to keep your phone safe – This Is Money
Club Pret review: is it still worth it? – Be Clever With Your Cash
Family homes for sale in super suburbs, in pictures – Guardian
Comment and opinion
The best AI fund of 2024? The S&P 500 – Sherwood
Dan Neidle: a UK wealth tax “wouldn’t work” [Search result] – FT
Yes, you can eat risk-adjusted returns – Cullen Roche
Steve Webb: three ‘fairer’ ways to reform Winter Fuel Allowance – This Is Money
Our balancing act – Humble Dollar
Helping a loved one die risks forfeiting inheritance, lawyer warns – T.I.M.
31 years of US stock market returns – A Wealth of Common Sense
Tips to help you spend less (or more) in retirement – Morningstar
Elusive alpha, corrosive costs – CFA Institute
A philosophical perspective on retirement – The Conversation
Capital gains tribulations – Simple Living in Somerset
The butterfly affect, index funds, and the rise of mega caps [Nerdy, unconvincing to me1] – Klement on Investing
Naughty corner: Active antics
What happens if nVidia employees hit their ‘number’? – Sherwood
Li Lu and Charlie Munger and Warren Buffett [Podcast] – Founders
Next shares are up 100%: time to buy or sell? – UK Dividend Stocks
Why VCs keep some money in reserve – Fred Wilson
Fund bets that happier workers produce healthier returns [Search result] – FT
A frontline view from inside a hedge fund – Investment Ecoystem
The power of private equity [Podcast] – Capital Allocators
Plunging office property values alarm Washington – Politico via MSN
Kindle book bargains
Quit: The Power of Knowing When to Walk Away by Annie Duke – £0.99 on Kindle
The Good Enough Job by Simon Stolzoff – £0.99 on Kindle
Grit: The Power of Passion and Perseverance by Angela Duckworth – £0.99 on Kindle
The Missing Cryptoqueen by Jamie Bartlett – £0.99 on Kindle
Environmental factors
The big Baltic bomb cleanup – Hakai
2024 was the hottest summer on record in Europe and globally – Copernicus
Can solar costs keep shrinking? – Uncharted Territories
The powerful potential of tiny urban conservation plots – Noema
Are all heat pumps noisy? – This Is Money
Robot overlord roundup
The world’s call centre capital is gripped by AI fever and fear – Bloomberg [h/t Abnormal Returns]
How AI disrupts tech investing – Uncharted Territories
Rushin’ to the Russians mini-special
Why a Pro-Putin movement is expanding across the former Soviet bloc – The Conversation
The kleptocrats aren’t just stealing money. They’re stealing democracy [Search result] – FT
Dimwitted rightwing influencers accused of being unwitting Russian assets – Defector
Off our beat
“When the Bitcoin scammers came for me” – The Atlantic
How dating apps contribute to the demographic crisis – Kyla Scanlon
Nate Silver on his new book, On The Edge: The Art of Risking Everything – Numlock
Weight-loss drug linked to fewer Covid deaths – Harvard
The Chinese youth owning their unemployment – Reuters via MSN
Is the fear of death holding you back? – Life After The Daily Grind
And finally…
“If he had been able to sell all his assets at full market value at the moment of his death, in January of that year, [Vanderbilt] would have taken one out of every twenty dollars in circulation, including cash and demand deposits.”
– T.J. Stiles, The First Tycoon: The Epic Life of Cornelius Vanderbilt
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- Nearly all the mega caps also happen to have best-in-history fundamentals in terms of sales growth, margins, and market dominance… [↩]
So we are still living with the hangover from the great financial crisis and we’d have escaped by now if it hadn’t been for that pesky Brexit ..
Interesting report, thanks for pointing it out.
The extract from The Capital Markets of Tomorrow report uses real (inflation adjusted) figures (as it should) but then reverts to nominal values for Govt debt. In order to be consistent, I reckon the growth in debt is from 1.5tn to 2.7tn (not 1.0tn to 2.7tn). Still a significant increase of course.
This country has been on the slide since WW2, hampered by clinging to the ‘glories’ of the past and strength of Sterling in the early days (1960s Wilson devaluation), 1970s 3 day week (Union hegemony), IMF. Then mismanagement of North Sea oil legacy, EMS…..
GFC just a blip.
Like individuals, you can either spend your money or invest for the future. As a country we spent it to benefit our immediate quality of life rather than invest it.
Still true today.
Market timing is bad, okay, kids?
But it’s legit to glance in its direction when making big moves for other reasons. My worry about CGT harvesting is what if I crystallise a gain and congratulate myself on “only” paying 10 or 20% on it and the market then moves sharply down just after I go back in and I have paid tax on what is now illusory money? A 20% move down ain’t that big a deal and looks ATM more likely than 20% up what with world and sp500 trackers being full of NVDA.
Somewhat humorously my shop’s annual Choices window closes at the end of September. I will have to decide how to balance my SIPP vs ISA contributions before the budget.
First world problems etc but, after seeing my pension date moved by two years, I now value the flexibility in my ISA over the guaranteed NI saving I receive via my salary sacrifice.
These being contributions above the firm’s salary match.
Thanks for covering this capital markets report. The topic of how to increase investment in UK public and private assets has been something I’ve followed for a few years, thanks to holding L&G and Schroders, both of which are fairly heavily involved in this stuff (eg default DC pensions investing 5% in UK private assets, setting up long-term institutional funds for illiquid assets like infrastructure and housing, directly investing in business and science parks, etc).
The report’s 1970s design looks like L&G’s annual reports, and given that Nigel Wilson runs the taskforce, he probably used the same graphics design firm (unless he designs these things himself in MS Word and Paint).
Much obliged.
The poll results are really interesting. There’s potentially a bit more to the 17% actively selling stuff though. If readers are convertimg one tracker into another tracker, which tracks essentially the same thing to diffuse CGT, you can argue that’s a lot more sensible and low risk than running into your nearest estate agent and having a fire sale on your five rental properties, which would be much more of an eyebrow raiser!
Do we think the Monevator readership will be more of the former or the latter?
@John Kingham
I was giving a presentation to Nigel Wilson about 12 years ago and was concerned about what level to pitch it from a maths/stats perspective. So I ask how strong his maths was, his reply was “it’s ok, I did teach a stats course at Harvard” ….
Growth, growth, capitalism, investment…
Not to be depressing at all, but the figure from the report has uncomfortable echoes of the planetary boundary framework graphic (and Raworth’s doughnut economics), i.e.
https://www.stockholmresilience.org/research/planetary-boundaries.html
UK wages for “normal” people certainly stalled, but that was fine since cheap imports and easy credit were available for all those years to cover it. People may have noticed housing being priced out of reach though! Even with recent inflation, there are still very many people out there with lots of money doing things, going places and buying stuff. All a bit bewildering!
Thanks for the links, TI.
A long time follower of this excellent site, I wonder if I could ask a question about Bed & ISA? Sorry that its off topic.
My wife has a strong emotional attachment to her Marks & Spencer shares which she accumulated whilst working for them. We have split the shares so we each have 50%. We have never sold any over the years.
We are both coming up to our 70th birthdays and I am trying to convince her that perhaps we should both sell enough shares so we can make use of the £3K CGT allowance to increase our tax free income. She is not convinced!
I was reading about Bed and Isa that was mentioned last month and thought this could be an option in the next tax year that would keep her happy. The value of our M&S shares (50% each) is today about £26K and the average cost is £19K, so a gain of £7K each.
Is the process of Bed & ISA using AJ Bell as the broker of them just selling £20K each and have these re-purchased in a new S&S ISA? Then the following tax year we do the same with the balance of the shares we have left. Will there be any implications concerning CGT with this process. Sorry for the idiot question.
“Ireland’s luxury problem: what to do with its €8.6bn surplus”
Obvs: buy Greenland.
Separately: the Pension Age piece.
“Meanwhile, those on pension credit will be wrestling with the fact they won’t be receiving a cost-of-living payment this November. Last year they had a £300 payment to help take some of the pain out of winter energy bills, so losing this will take a toll.”
By golly, that’s been under-publicised.
I just hope for more thoughtful policies than taxing private schools, failing to defend the right of the government to approve development projects and giving into union pay demands without productivity reform.
@Hal
Bed & ISA only protects you from CGT once the shares are in the ISA. Therefore, if you want to avoid paying any CGT, you and your wife can each only sell sufficient shares that would keep your gain within the £3k allowance. From the figures you give this is approximately £11k worth. You can then repeat this each tax year until you have reacquired all the shares within the ISA, provided of course that the £3k allowance remains.
Beware of relying on your ‘average’ cost of £19k. When shares have been acquired at different times, you need to follow the HMRC rules in calculating the gain. Much more information of course on gov.uk, but you really do need to look there if you are getting involved with CGT and its mitigation.
@DavidV
Thank you very much for your reply and good advice, that was extremely helpful. I know we will not have sufficient free cash to fund our ISA’s in the next tax year, so bedding our M&S shares over time makes perfect sense. And will keep my wife happy. I will read the information on the gov.uk site. Thanks again.
Perhaps the Uncharted Territories piece under Environmental factors has the/an answer here: “If we had stayed on the Adams curve, we would be consuming 2-5x more energy than we do today. For the US, that means that GDP per capita today would not be the current amount of $65k, but $100k-$200k. It is a catastrophe that we don’t have more energy: We should be much richer. Energy stagnation makes us poor. If we want to be richer, we must produce more energy.”
@TI: your comment on the Klement on Investing link (“unconvincing to me”): A genuine question: what evidence would convince you?
Re: Klement. Is talking about inelastic markets/assets a new fashion trend? I find it odd since it’s clear to me having tracked/traded market liquidity for almost 30 years, markets are inelastic, and getting more so all the time. The idea that marginal flows cannot impact pricing (elasticity) seems just dumb if you are in the markets I am. The phenomenological data is overwhelming.
The compositions of agents in markets has changed massively over the past 20-25 years, changing capital flow profiles in favour of momentum over mean-reversion. What was once a phenomena just observed in EM markets is now being seen more regularly in developed ones. Yes, much more elastic and efficient in “normal conditions”, which creates an illusion of deep liquidity. Very inelastic once out of that ever tighter phase space. Stretch … stretch … snap. Oops!
Thanks @ZX. Had begun wondering if I might be wailing into a void with earlier comments on the Inelastic Markets Hypothesis, i.e. #36 & #41 (with links to research complimenting Gabaix’s and Koijen’s by Jean-Philippe Bouchard and Valentin Haddad) on 24 Aug & #37 on 9 Feb and #17 on the 13 Jun in MV week’d reading threads.
Question is what’s a ‘passive’ (God I hate that word) investor to do? Keep cash on the sidelines for the potentially deeper, more sudden and more frequent sell offs for immediate deployment back into the market on an ATH minus 20% drawdown? Buy OTM LEAPS Puts? Can’t stay out of the equity markets. With each $1 into ‘passive’ increasing market cap by ~$17 and each $1 into ‘active’ by only ~$2.50, a net annualised fund flow into passive over active equivalent to 0.2% of market cap should/could/might (back of envelope) be inflating market CAGR by ~3% p.a. currently. This may well rise as increasing passive/reducing active share further increases relative inelasticity and relative illiquidity, especially in the largest cap holdings in the index.
To clarify, where I said I am not convinced, I mean I’m not convinced that unthinking passive flows is what has driven up the valuation of these companies to the levels they are at, except at the margin / a last push, given their generally incredible margins and other underlying economics. I’d agree, in as much as I am in any place to have a view, that flows must have some impact. But I don’t believe (as some critics say, not citing anyone in this thread) that passive flows are overwhelmingly determining valuations, to the point where they are massively distorting mega cap valuations.
It just doesn’t pass a sniff test to me. But again if you were to say that nVidia was valued at $3.1 trillion versus $2.9trillion (numbers pulled out of hat) due to passive flows, well maybe, who knows. But I think the vast majority of that $3 trillion valuation is a result of active investors, based on everything else I’ve ever read about price setting in markets etc.
In terms of ‘what would convince me’ I guess seeing really terrible companies with poor valuations being driven up to high levels, and somehow in the absence of an active narrative (like AI or the dotcoms). Even writing that I don’t know what it would look like. Perhaps these narratives that seem to drive these bubbles are after-the-event explanations to explain flow-driven valuation changes, but it sure doesn’t feel that way.
Again though I’m probably talking at cross-purposes with the Klement paper. I’m quite happy to believe there is *some* measurable impact. And I’m very certain others are better placed to comment on it than me!
My comment was mainly there because I am the person who compiles the links, and that was my gut feel, not because I’m any sort of domain expert on market structure! 😉
I don’t know (and noone can know) if the aggregate stock market is price-inelastic, meaning that market flows have a disproportionately large impact on prices.
Moreover, the Inelastic Markets Hypothesis obviously relies on new empirical methodologies and data that are not fully explored, with doubtlessly many legitimate and fair questions about its robustness and applicability.
In addition, the IMH is just a model, and all models are wrong (but some may be useful) because they have to make assumptions some of which are going to turn out to be erroneous to some extent, e.g. IMH may not fully account for the complexities of real-world trading.
However, I’d suggest that it is reasonable to doubt whether markets are elastic to the extent that prices always and necessarily fully reflect all available information.
Nvidia is in one respect at least a bad example. It’s arguably still a cheap company in view of its fundamentals. At a 17% p.a. (rather pessimistic) 5 year EPS growth a DCF gives a $80 value now, not far below where it trades. At a fairly cautious 30% 5 year CAGR in EPS you get $120, above where it is now. At a (likely ridiculously) super optimistic 90% 5 year CAGR you get $700 per share.
Nvidia is not a bubble. It’s not being driven by any of ‘sentiment’ expansion, pure momentum or inelasticity factors; but by fundamentals.
However, some of its price sensitivity (up and down 30-40% intra month on earnings in line with expectations) might be driven by the inelasticity which the Inelastic Markets Hypothesis describes.
A better example perhaps might be Super Micro Computer going from $200 to $1,000 and then back to below $400.
This is known not to be a great company like Nvidia. Check out short seller Hindenburg’s report on them on their website.
Nothing in it was not know or suspected before Hindenburg published, and, in any event, unlike for Nvidia SCMI has no moat (admittedly Nvidia might loose its moat eventually, but its got one for now).
And then you’ve got examples like GME and crypto (e.g. SHIB). Extraordinary changes in price with little change in fundamentals. How can flows and elasticity not be a driver of returns (positive and negative) there?
It’s important to understand how Michael Green’s thesis uses to IMH to suggest that markets have become less efficient and more inelastic due to the dominance of passive investing strategies.
In his view this passive fund flow exacerbated inelasticity will lead eventually to rapid and intense bouts of volatility, possibly preceded by an ‘up-forcing’ of prices (especially in the largest cap firms, with the least liquidity per unit of capitalisation).
In his view this may have even started (e.g. it’s striking perhaps that the CAPE 10 has not really ‘worked’ in the US since the 1990s).
Green’s interpretation aligns with, but is not the same as, the academic framework developed by Xavier Gabaix and Ralph Koijen and others, which just posits that the stock market’s price elasticity of demand is low and based on empirical observations estimates thay $1 in net fund flows move capitalisation by $3 to $8 (with passive flows, being price insensitive and automated, moving aggregate cap by more per unit of flows than active traders).
Those academics do not then go on to claim, as Green does, that passive strategies in aggregate could eventually (or even soon) become a macrostructural risk per se above a certain market share (e.g. over 80%) or even in certain situations (i.e. where Vanguard is given a regulatory easement to sometimes hold negligible cash to meet redemptions).
In contrast Green (as I understand him from his recent interviews on YT with Barry Ritholtz, with Rational Reminder and with Michael Gayed) does explicitly make those points.
However, both the academics and Green challenge market efficiency and suggests that flows, rather than information, might be driving price changes to at least some significant (and quite possibly increasing) extent.
I would caution against using the smell test or intuition here.
Throughout history plenty of things have turned out to be true that defied both intuition and would have failed most people’s smell tests based on what they thought they knew at the time – Special and General Relativity (and even, to an extent, Galilean relativity and Newtonian mechanics), Quantum Indeterminacy, Darwinism, the fact that everything is made up of a handful of particles and that these are excitations of their respective quantum fields (e.g. the photon as the excitation of electromagnetic fields etc).
None of this would appear obviously plausible based only upon ordinary observation of human sized objects moving at human sized speeds, which would appear (incorrectly) to support an absolute notion of space and classical mechanics (even though these are superseded by modern methods and understanding).
tumbleweed…….
Sad news about the humble dollar chap.
There is much hand wringing about people checking out of the country….For the average high earner >£100k, lived in this country all their lives, got a mortgage, friends roots and speaks no other language, the chances of exiting feels very low. You can squeeze them quite a lot more and the real question then is at what point do people think I cannot be bothered.
This was an issue in the 1970’s as my father enjoyed explaining to me. His company found it hard to fill the top top exec roles as the additional stress wasn’t amply rewarded by a tax rate, which could be 83%. People didn’t bother to go for promotions because as Monevator explains…”you can’t tax free time”. I’m not old enough to know if that’s true or not but seems to make sense.
If they cut pension relief there will definitely be people questioning, why am I going to go for a promotion that pays £110k and means paying a circa 100% tax rate when you factor in loss of child care hours.
There’s a significant number of citizens of no where or global citizens prevalent particularly in financial services as it’s one of our few leading industries. They typically like the UK for many reasons but they aren’t overly attached to it. Happy to work in Continental Europe where tax rates for them can be much cheaper (e.g Italy, Switzerland). They are more likely to check out.
In Norway, people avoid the 38% CGT (or at least defer it) by investing through an AS (Company). As long as you reinvest into a qualifying instrument, you don’t pay CGT when you realise the asset. It’s a Fugazi. 🙂
For me, I’ve been potentially interested in exiting to the US via an in work transfer, which surprisingly hasn’t really surfaced yet. Interested to give it a go. If it doesn’t come up fine. What I’m not going to do though is realise Capital Gains in a GIA at a >40% tax rate.
I’m pretty sure Rachel Reeves / Kier Starmer, both of whom are not stupid at all, know that hiking CGT is not a revenue raiser. Same as George Osborne raising stamp duty to 12%. But that’s not the point. They can signal to the millions of £30k plodders that they are on their side. Meanwhile the freezing of the tax rates will help to increase the taxing of the masses over the next five years and help keep pace with the increasing numbers of retirees.
On Klement’s piece and the IMH again: Michael Green’s just posted Part 1 of his discussion with the legendary Cliff Asness on his Substack:
https://open.substack.com/pub/michaelwgreen/p/trying-to-be-better-again
@DH. You mentioned that you and your partner had DB pensions worth £90k/annum. So, you have a sizeable floor, and don’t need to worry. Plus, even if you could spot every bubble forming, historically, the best advice would be to go with the bubble, not against it.
This inelasticity is a function of the varied objectives/restrictions of the agents in the market. It’s always been there. It’s just those constraints, combined with the mix of agents, is making inelasticity worse and inefficiency greater. The bond market rout of 2022 was a prime example of what to expect going forward. Assume developed markets act more like emerging markets in stress scenarios.
Nonetheless, I’m not sure it’s changes anything about long-term returns (20-30 years). It’s the return distribution that alters. Less continuous and more discrete. Week-to-week it becomes less volatile since there is this embedded stabilization process causing the system to oscillate in a tight range around a local minimum that trends higher.
Once, however, the energy in the system gets too large, a trigger can cause the system to exceed local maxima. You then get a rapid phase change. The system experiences cascade failure until a new equilibrium is found. Hence the airgaps.
Your only response is behavioural. Don’t be sucked in to thinking volatility is lower. Be prepared for bigger drops. If you feel worried about a 30% drop, then do something about it now, since it’s probably going to be a 60% drop.
@TI. I cannot speak for equity markets, but the deterioration of efficiency and elasticity of rate markets is clear. Liquidity is a function of transaction cost, depth and resilience. Too much focus tends toward the transaction costs when it’s really about depth and resilience. These are deteriorating due to the dominance of specific agents (index trackers, active funds that are 90%+ index trackers, momentum CTAs, short vol funds).
Re: the capital gains comments. Surprised no one mentioned offshore life bonds. Their biggest issue was gains taxed as income, not CGT. Well, if (big if) CGT and income tax were equalized, then that disadvantage falls away. Their top slicing relief to reduce 45% income tax to say 20-25% becomes far more valuable.
@Seeking fire I FIRE’d at the end of June this year. I was one of those financial types you flagged. Whilst I wasn’t enjoying it, a significant element of the decision was driven by getting to the half year point and realising that I had been working for the govt for the first half of the year…push rates up even higher and people just won’t see the point, it may not need to go up that much.
Thanks @ZX #23 and apol’s for the delay in replying. So, at 60, between legacy FSS and current CARES, Mrs DH should then have accrued ~£45k p.a. and I ~£38k p.a. I’m not quite 50, and Mrs DH a few years older, so we’ve a while longer to keep at working.
However, if we’re still permitted to, then at retirement I suspect we’ll end up taking PCLS for the full 25% at a rate of £12 tax free lump sum per £1 surrendered income. Notwithstanding Labour’s 29 June ‘pledge’ not to reduce current limits on total amounts of lump sums, I don’t have confidence both the 25% and the £268k limits will survive this and the next Parliament unscathed. We’ll see.
I worry that regulators don’t understand or appreciate fully how the changing methods by which retail and institutional investors access equity markets could both reduce market makers’ ability to provide liquidity which has reliable resilience to stress, and also degrade the market’s own ability to disseminate useful information through meaningful price signalling.
To date, passive has been great for informational efficiency in markets.
Median and modal retail punters (like me) are (essentially, and in aggregate) uninformed (as compared to insiders and professional traders and investors) about single name stocks, whilst manifesting multiple behavioural biases likely to impede performance; and therefore are highly likely to underperform the reference index.
By indexing they/I guarantee the average index return, an average which I would struggle to achieve with active stock selection due to the return skew in equities.
But I wonder with passive if, in aggregate, it is possible to eventually have too much of a good thing? Water is great in the desert. Less so at the bottom of a lake.
Passive is essentially an instruction to buy or sell at the last quoted price. Fresh fund flows are committed on an explicitly price insensitive basis. And passive equity fund mandates don’t generally permit holding cash (to meet redemptions etc).
It’s quite tempting to say that it’s not that hard to see where the risk could come from.
But, then again, when the passive share is well below half, then it’s unlikely that these mechanics will matter much.
However, if and when passive share gets to over 80%, perhaps even as high, ultimately, as 95%, then the feedback loop would seem to have the potential to overwhelm the ‘signal input’ flows from active traders.
For this to actually happen though there has to be a strong ‘cultural’ and institutional predisposition not to want to see any real problem.
Mere accretion of individual instances of regulatory or other failings are not enough, usually, for a truly systemic issue to arise. To be such it usually also needs a substantial measure of inaction by consensus, or at least of collective inertia.
What could possibly go wrong? 😉
No need to emigrate, sitting tight here waiting for demographics and the EU to come to me, in Northern Ireland. There’s a financial and societal win-win to be had here.
@DL #24
Re the PCLS £12 cash: £1 income
This may be worth checking. I recalled similar numbers from my original paperwork when I started my pension in 1992 – the current rate offered is more dynamic and closer to 22:1 for me.
Not sure if the regs changed and created a new more generous treatment/formula.
Good luck
@Boltt: I could only dream of £22! Sadly, it’s very definitely fixed once and for all at £12. 🙁 Still feeling that it’s probably still worth taking that £12 as one off tax free cash rather than retaining £1 of annual inflation proofed but fully taxed income.
@Boltt, @DH:
I agree a CF of 12:1 is really very poor value for money.
However, the overall tax situation should not be overlooked. As I read the numbers given above (for age 60 retirement) if DH does not take the PCLS from his DB scheme (FSS & CARES) his SIPP will become what I call a “hostage” from the date his SP commences. By “hostage” I simply mean the taxable elements of the SIPP can only be accessed at HRT.
Furthermore, any headroom to the HRT threshold estimated today will IMO almost certainly reduce further over the coming decade, (ages c.50 to 60 in DH’s case).
I know this insidious scenario from experience! It almost got me*, and I am definitely not the only one. It is largely down to frozen allowances/tax bands, but other parameters (such as any differential escalation vs CPI (e.g. SP triple lock, NHS CPI+1.5% CARES revaluation), career progression/salary increases, un-sheltered interest/dividends, etc) can contribute too.
FWIW, some folks will be perfectly content drawing from their SIPP at HR and/or leaving it untouched (although I suspect that extant IHT dodge is time limited).
@DH, have you considered earlier retirement (from your DB schemes) without the PCLS?
Lastly, watch your SIPP: filling it is easy; but the real challenge comes when you access it.
*I will probably still end up a HRT payer on SP commencement
Thanks @Boltt and @Al Cam.
Tbh until very recently, as age 50 starts to come into view for me, I’ve been fully focused on getting a high saving to invest rate and on accumulation.
It’s really only been with @TA’s recent decumulation options piece that I’ve really started to think about how and when to actually get the money out of the occupational DB schemes and the SIPP.
Accordingly, I didn’t really have any sense of whether 12:1 was good, bad or indifferent.
From what you’ve kindly outlined above, it’s becoming clearer to me now that it’s probably a bad deal, even allowing for the tax free aspect.
One thing that really concerns me is tax changes over time. Look how the pensions rules have changes over the last 25 years or so, and not just once or twice, but again and again and again!
I place no faith in the 25% tax free cash capped at £268k aspect surviving even a decade more.
Planning based on where the rules are now seems almost futile. I guess just try to plan based on maximum uncertainty 😉
The problem with retirement before 60 is I don’t think it gives me a sufficient secure (inflation proof and ‘bond like’) DB floor.
After retirement at 60 I’m definitely up for leaving the UK though for somewhere where money goes much further and where taxes are less than here. Bulgaria and Bosnia have low flat rate taxes and a much lower cost of living I see.
@DH:
No worries.
I pulled the plug nearly eight years ago.
I fully understand why, to date at least, your focus has been on accumulation.
There is a lot to think about when you start considering de-accumulation.
Fortunately, there is now also quite a lot of supporting information too; and IMO Monevator is right up there from a UK perspective.
Planning with uncertainty is nothing new. FWIW the details of my plan, from just eight years ago, have morphed somewhat* and will hopefully continue to change and evolve for a good many years yet! Changes to your plans are inevitable.
IMO, there is absolutely no set & forget, one size fits all recipe for de-accumulation. You will end up doing you. However, it might pay you to start thinking about the next phase sooner rather than later. You may even surprise yourself!
*as I mentioned above I will almost certainly be a HRT payer again once my SP starts – this was never the intention, but it is also far from being the end of the world!
@DH (#29):
FWIW, my (and many other peoples) experience to date of de-accumulation is spread across comments to a lot of posts here at Monevator. I happen to have always advocated floor and upside but other approaches are available, and, depending on your circumstances, can be viable too. Pfau, et al has developed a way of looking at this via what he calls the retirement income style assessment (RISA). You will inevitably end up doing you!
In terms that are more aimed at my experience and hopefully a bit less general and/or more action orientated a reasonable summary [of my experience to date] is in my comments to this recent post: https://monevator.com/now-could-be-a-better-time-to-retire/
Comments #26 & #37 together give the terse version!
A lot of people say accumulation is the easy part, and I can not disagree with that. However, that may just be down to the fact that I did, seemingly successfully, complete the accumulation phase.
A useful summary of the fund flow (as opposed to price discovery) related concern aspect of the passive v active debate:
https://davenadig.substack.com/p/why-the-activepassive-debate-matters
Re #15-18, 21-22 and 32 above, and market inelasticity due to riding passive / diminishing active share: Part 2 of Michael Green’s piece now available here:
https://open.substack.com/pub/michaelwgreen/p/why-bother-being-better