What caught my eye this week.
I can’t get very het up about housing secretary Angela Rayner’s resignation on Friday, as a result of her underpaying stamp duty on a flat in Hove.
For starters, it’s pretty clear that Rayner is just the latest person to run into the buzzsaw of Britain’s ludicrously complicated tax code – even with professional help in her case – and to come out supremely chaffed by the contact.
Nothing in this sad story involving divorce, a disabled child, and divided duties across the country has the hallmarks of a grand conspiracy to dupe the taxpayer.
All the same, as a leading minister she should have got it right and she didn’t.
And honestly, after the past few years it’s refreshing to see an MP resigning in good time, rather than having to be burned out of office like a recalcitrant tumour.
This is the way our knockabout democracy used to work.
Snagging issues
Perhaps as housing secretary she should have gone anyway, given Labour’s dismal showing to-date in homebuilding.
True, the creation of the Building Safety Regulator in 2022 long predates Rayner’s taking on the housing brief.
But industry voices have been warning for years that the new body was underfunded and that this was severely delaying development.
The construction sector is running at levels last seen during the pandemic – you know, when most of us weren’t even allowed out of the house. According to homebuilder Berkeley, new home starts in London are as low as in the aftermath of the financial crisis.
Sure I’m gloomy about the UK economy, but even I think it should be a better time to be building houses than during a plague or a potential depression.
Rayner must have seen similar numbers crossing her desk. I didn’t notice any urgency in response. Perhaps the next one can do better.
Homebuyer’s report
It’s notable that it’s a housing-related scandal that’s delivered this speedy resignation.
Would Rayner have faced quite the same opprobrium if she’d made a mistake on her self-assessment tax form?
Possibly not.
It’s an interesting coincidence too that Trump is currently pressuring the still-independent US Federal Reserve by firing a Fed committee member over alleged mortgage fraud.
Of course this is just the latest in his ongoing belittlement of the US institutional framework. He might have fired her for being late returning her library books if that was all his people dug up.
But mortgage fraud hits the sweet spot.
Indeed given how politically hot this potato is in the US and UK, I was surprised to also read a story in The Guardian this week that detailed the property holdings of Australian politicians.
Out of the 236 federal Australian MPs and senators who’ve disclosed their housing interests, more than half – 130 – have multiple homes, investment properties, or both.
Some have six properties! (Some have cattle ranches, but we’ll put that to one side. Fair dinkum mate.)
Australia is a vast country, and there’s lots of room for more homes. Though most of that room is in a desert and Australia has its own housing affordability crisis.
How are the Aussie lawmakers getting away with their side hustles as property tycoons? It must come down to cultural norms.
In her recent FIRE-side chat, Melbourne-based Monevator reader London a Long Time Ago told us how everyone with any money in Australia does property like we do ISAs.
I suppose that keeps any stone throwing through glasshouse windows to a minimum.
Fixer-upper
Will Rachel Reeves still go after stamp duty and other property taxes in the November Budget, given her own colleague just blew up on contact with this touchy subject?
The chancellor could spin it either way – as yet another pointer that complex property taxes are overdue reform, or as deciding to avoid complicating the situation even further given those infamously hard-working families already have enough on their plate.
Reeves should at least scotch the rumours pronto if there’s nothing doing. The uncertainty is slowing down the housing market, and the UK (and Treasury) needs all the economic growth it can get.
As for building more homes, an interesting article behind the paywall in the Financial Times this week makes the case that supply isn’t actually the problem many of us think it is. It even advocates for a wealth tax on land as a salve to a distorted market.
Personally, while I think stamp duty is a dysfunctional tax that desperately needs reform and that something must be done to slow the UK’s descent into neo-feudalism, the reality is an Englishman or woman’s home is their castle – one with barrels of explosive gunpowder in the basement.
If Reeves wants to follow Rayner out in a blaze of glory, then she only needs to light the fuse…
Have a great weekend!
From Monevator
When are fund fees low enough? – Monevator
Retail bonds: Rare, risky, and sometimes rewarding – Monevator
From the archive-ator: It’s survival of the fittest with ESG returns – Monevator
News
Rachel Reeves sets Budget date for 26 November… – UK Gov
…and the rumour mill has put plenty on the table… – Which
…prompting savers to pull tax-free cash from pensions again – This Is Money
Former footballers lost millions in investments – BBC
Gold price hits record high – BBC
UK fintech pioneers unite to build bank for high-net worths – Finextra
Average UK house costs a record £299,331, says Halifax… – Guardian
…though Nationwide says they fell – This Is Money
Google’s parent soars as court rules it doesn’t have to sell Chrome – Sherwood
High-frequency trading intern wanted. Monthly salary $35,000 – FT
Bitcoin treasury companies collectively own over one million BTC – The Block
The US population could actually shrink in 2025 – Derek Thompson
Products and services
Households urged to lock down new mortgage deals now – This Is Money
The death of the wallet – Guardian
Get up to £1,500 cashback when you transfer your cash and/or investments to Charles Stanley Direct through this affiliate link. Terms apply – Charles Stanley
“Can I use a trust to pass my property to my adult children?” – This Is Money
Average pot to purchase an annuity rises 160% to over £166,000 – Which
Fixed tariffs to beat the energy price cap – This Is Money
Get up to £100 as a welcome bonus when you open a new account with InvestEngine via our link. (Minimum deposit of £100, T&Cs apply, affiliate link. Capital at risk) – InvestEngine
The self-storage pitfall that could cost you £2,000 a year – This Is Money
How to qualify for the attendance allowance benefit – This Is Money
Homes for sale near great schools, in pictures – Guardian
Long-term gilts rise mini-special
UK government borrowing costs hit a 27-year high – BBC
BoE chief warns against ‘exaggerating’ rise in government borrowing costs – Guardian
Torsten Bell has made me want to buy bonds – The Times
Note long-dated bond yields are rising globally – Reuters via MSN
Comment and opinion
AI hype will spur investors to do the wrong thing – Behavioural Investment
Four years on, the cost-of-living crisis endures – David Smith
Europe’s small-cap golden age – Verdad
The relationship between time and money – We’re Gonna Get Those Bastards
Proof of wealth – Of Dollars and Data
The case for short-term TIPS [PDF, holds for linkers, too] – Mekata
How to never run out of money in retirement – The Times
The 4% ‘rule’ and risk – Humble Dollar
Why it’s a terrific environment for bond income – Morningstar
The benefits of not regularly checking your net worth – Financial Samurai
Not-at-all biased Coinbase makes the case for crypto [PDF] – Coinbase
At what point do passive investing principles no longer apply? – Oblivious Investor
Naughty corner: Active antics
The new currency is narrative liquidity – Groundwork [h/t Abnormal Returns]
How consumer surplus affects pricing power – Flyover Stocks
Big fund inflows can be a precursor to poor returns – Morningstar
A good memory makes you a better investor – Klement on Investing
Is Venture Capital finally starting to come back? – Institutional Investor
Multi-asset managers ‘stuck in the past’ – Trustnet
IPOs don’t really leave that much money on the table [Research] – SSRN
Kindle book bargains
Flash Boys by Michael Lewis – £0.99 on Kindle
Alchemy by Rory Sutherland – £0.99 on Kindle
The Green Budget Guide by Nancy Birtwhistle – £0.99 on Kindle
Techno Feudalism by Yanis Varoufakis – £0.99 on Kindle
Or plump for one of our investing favourites – Monevator shop
Environmental factors
Why plastic-filled ‘Neptune balls’ are washing up on beaches – BBC
Europe debates restoring wetlands for defence – Semafor
Global temperatures to remain above normal, despite La Niña… – Guardian
…with Panama’s ocean upwelling failing for first time in 40 years – BBC Wildlife
World’s largest sand battery switched on in Finland – Independent
Electric cars’ range almost halves when driving in heatwaves – This Is Money
Robot overlord roundup
Chat GPT-5: the case of the missing agent – Second Thoughts
AI and jobs, again – Noahpinion
Will AI ‘do a Bloomberg’ on private markets? – Colossus
Cloudflare’s CEO on saving the web from the AI oligarchs – Crazy Stupid Tech
AI will end the Magnificent Seven’s dominance, says fund manager – Trustnet
Not at the dinner table
The authoritarian checklist – Can We Still Govern?
America’s gun problem isn’t hard to diagnose – Garden of Forking Paths
The myths of Chinese exceptionalism – Scott Sumner
Online speech laws in need of review after Lineham arrest, says minister – BBC
UK suspends refugee family applications – BBC
Xi Jinping says it’s peace or war at China’s grand military parade – Guardian
Off our beat
UK graduates crippled by debt swap degrees for plumbing courses – Standard
Breakneck’s take on China vs the US pits engineers vs lawyers – Noahpinion
Why US capitalism is a success story like nowhere else – WSJ
Hot mic catches Xi and Putin talking organ transplants and immortality – BBC
American Football teams ranked by value on the eve of new season – CNBC
This is still your first time – Raptitude
And finally…
“Life makes you pay…everybody pays something.”
– Min Jin Lee, Pachinko
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Re: the “America’s gun problem” article, I don’t know if there’s anything new being stated in the article, but it all does bear repeating into the apparent void.
I’ve seen for myself otherwise reasonable US people on social media suddenly go into these ludicrous logical contortions when this totally insane situation is brought up. However, there seems to be no limit to the number of innocent children slaughtered to make them reconsider, it’s simply astounding.
Join the dots. Cherrie Blair. Bristol. Flats.
It’s grubby how they all aim so small.
Your Rayner stamp duty fiasco analysis is extremely kind. With her already having had one close call over council tax to have not been diligent in getting the situation double and triple checked is downright stupid at best even if she wasn’t negligent. It’s not as if in her position she wouldn’t have had easy access to plenty of folk with the necessary knowledge. Whole thing smacks of a serious lack of ability in our policy classes which explains a whole host off current affairs in UK plc.
Super links, thanks @TI. Hmmm, well there’s a can worms! Agree with your observations on complexity, competence and sad stories but can only admire your generosity wrt conspiracy I’m afraid. The hallmarks are writ large in this government’s blatant ’snouts in the trough’ attitude (Rayner being a conspicuously willing participant), possibly even worse than the last lot. Sadly conviction (as opposed to career?) politicians seem to belong to a bygone era. If you’re going to put yourself on the highest pedestal and get caught cheating by your own rules (however complicated, that all us little people have to obey) good riddance to bad rubbish.
@far_wide – our governments have a monopoly on violence. It’s just not highlighted in the MSM for obvious reasons.
Do you really think they should have all the guns ?
Stamp duty used to be mildly irksome, but they kept cranking up the rates, and fiddling with bands, and it’s ended up being by far the largest cost associated with moving and/or downsizing. The easiest way to simplify and reform it is the just undo (say) the last three dozen changes that have been made to it!
The point about property being like ISAs in Australia got me musing a little. There are often debates in the UK about the relative merits of property investing versus pensions versus ISAs. I’ve personally always steered clear of property in the BTL sense as it sounds too much like hard work, so have split between ISAs and pensions. But if there are further attacks on DC pensions (and it’s a rare budget when there aren’t) then we’ll surely see people steer more money into property given the ISA subscription limits, which might not be exactly what HMG want to be encouraging.
Stamp Duty is archaic in a digital age. Our national tax system is in dire need of simplification but the air of desperation from the Government implies yet more short term complexity and kicking the simplification can down the road once more. They had the popular mandate but collectively and, in many cases, individually lack the intellect and wisdom necessary to govern effectively.
I don’t happen to believe the sad example of Angela Rayner is about tax complexity but if it triggers a focus on simplification then at least something good will have come of it.
As Billy Connolly wryly observed “The desire to be a politician should bar you for life from ever becoming one.”
Can’t say I’ve been impressed by the first year of this government, and I say that as someone who was glad to see the Conservatives go.
Way too many own goals, including the policy u-turns. Let’s hope they make a better job of the coming Budget.
Also agree with FrequentFlyer – I’m not sure they have what it takes to improve.
Politicians lying and breaking the law is a red line for me.
I don’t mind she is a blatant hypocrite and broke a Ministerial Code. It’s quite secondary to the above for me.
This budget is going to be depressing. Please leave pensions and ISAs alone.
Interesting that property is this society’s sweet spot for malfeasance
The British don’t do the stockmarket because ignorance of this area is frightening to the average U.K. investor but “we all have a house” therefore we comfortable with buying bigger and more homes
(Similar situation in teaching “we all have kids or did have” so we are comfortable telling teachers how to teach)
Americans however do the stockmarket as well as property because they are more entrepreneurial?-another major cultural difference between them and us
Property also seems the only way to go if you have surplus wealth in U.K. as all other avenues of saving have been closed down and given severe limitations
xxd09
@xxd09 (#10):
Came across this recently that may be of interest: https://www.visualcapitalist.com/ranked-top-countries-by-stock-market-ownership/
Some of the difference between UK and mainland European countries may be down to differences in pension schemes.
@marc1485153 ‘Please leave pensions and ISAs alone.’
– Maybe they could do something positive though, e.g. like increase the pension tax free lump sum, since they’re inflating the value of it away with the current unchanging limit ?
(of course I know that will never happen, as the inflating / taxing the citizen’s wealth away is one of their core strategies).
House prices going up? That’s certainly not my experience trying to sell a central London flat, although I appreciate that central London is a different market to the rest of the UK. Yet another buyer pulled out after we refused his attempt to cut a silly amount off what was already a low offer. We will cut the price to offers over £1m next week (orignially £1.65m in Dec 2023) to see if that generates any interest. If not we will take it off the market and renew the lease. The low lease is I think a big turnoff in a buyer’s market and limits us to cash buyers. A higher lease will of course mean more SDLT will eventually be paid by the buyer.
Given that she already had a shonky record on property manipulation before this latest episode, the question with Rayner is how much more there is to come out.
She used her disabled son’s trust as an ATM, taking out the sort of liquid capital that could provide the poor lad with an income and replacing it with an illiquid 25% share of a house (or, more exactly, a purported 25% share, depending on how accurate the valuation was).
Handily this let her pay a 20% deposit on the flat in Hove. Perhaps it also means that when the boy turns 18 he’ll get more “benefits” money from the taxpayer since his trust will generate less income. This rather suggests to me that she may have had some reasonably expert advice on the matter.
Now that the trust owns 75% of the house what value should one attribute to it? How many angels can dance on the head of a pin? How will such considerations affect eventual CGT liabilities on the house? Dunno, but perhaps she has had advice on that too.
If this is malfeasance – and I am too ignorant of trust law to know – then presumably her enemies in the Labour Party will try to defer using it until she needs a further setback at some point.
As for her claim of having had bad advice, why would anyone believe her? We don’t know how many firms she paid for advice, we know only that she vaguely claims that she received some bad advice. Maybe she also received some good advice but decided that it didn’t suit her objectives and therefore that she’d ignore it. Who knows? Who can know? But I laugh at the suggestion that we should now trust her every word on the subject.
The pensions hokey cokey: it seems that with some providers you can withdraw your lump sum a week before the budget and then reverse your decision a week after if the budget turns out not to alter the tax situation. With others you can’t. Anyone know of a list, or what the situation is with aj bell? Would this be a useful and timely post on monevator?
Something like two-thirds of Australian rental properties have negative gearing/cashflow (i.e. the rental yield is lower than the cost of debt). These losses can be deducted from employment income alongside depreciation which significantly reduces the loss. People are relying on capital growth to be made whole. This tax policy only benefits owners, many of whom appear to sit in the same parliament that sets the rules they benefit from.
The impact of the Building Safety Regulator (BSR) has been more pernicious than it might appear. It’s not just the backlog and delays but they are rejecting 70% of applications and there are very poorly thought through requirements with very low cost to benefit ratios (like the requirement for two staircases). New housing construction starts in London are now at post GFC levels.
Rather off topic for an investing blog, but on the subject of US gun violence the European total bafflement as to why the authorities there don’t just effect European laws is to misunderstand how fundamentally different their society is to ours. America is absolutely awash with guns. It’s a high crime society and all the criminals are armed. And there is no chance of _them_ handing over their guns because, well, they’re criminals. If you put in place major gun control then, sure, you may very well prevent the mentally ill lawfully obtaining the assault rifles used in most of the high profile mass shootings we hear about over here (although as an aside, the vast majority of killings – which are the ones you never hear about – are perpetrated with pistols). But on so doing you’ll also disarm the law abiding citizenry and leave them defenceless. For the criminals it’d be as if all their Christmases and birthdays have come at once. I’m afraid the idea that the public should just dial 911 if they’re in trouble is staggeringly naive given the vast quantity of illegal firearms in circulation. Gun control in America? It’s way too late for that, my friends. That ship has long sailed.
Joiners, brickies, sparkies, plumbers – all trades where we’re short staffed, and arguably lacking a minimum qualification standard. Probably the least likely to be replaced by AI. Sadly, the FE system doesn’t seem to have caught on.
@dearieme
Somewhere else perhaps for your clumsy smeary stuff…
Are you quite sure, Trufflehunt, that this woman has never received good advice? How come you are privy to the details of her affairs?
“All Cabinet ministers are entitled to a severance payout upon leaving office equivalent to a quarter of their annual ministerial salary.
But from October, Labour is changing the rules so that ministers who are forced to leave office following a “serious breach” of the ministerial code will no longer receive the payout.
Because the changes come into effect on Oct 13, Ms Rayner will still be eligible for a £16,876 payout.”
Sounds to me as if she may have received some good advice there.
You start with just a little house, bought in a council estate, then a modest semi detached house in a nice suburb. Before you know it, you’re buying a house on the coast, you lose your job and you need a good tax lawyer.
Houses. Just say no.
I think we’ve had all sides of the Rayner perspectives now so yes let’s leave the personal stuff here please either way.
Comments on housing or stamp duty the tax or the budget still very welcome. Ta!
#B. Lackdown. Yes seconded regarding a Monevator post. I know all the advice is not to make major investment changes on the basis of budget speculation, but beyond the usual newspaper advice there must be many of us here with Sipps near to or over the current maximum tax free threshold. The benefits of staying fully invested seem to diminish after this point. So with risk vs reward in mind, I’d be interested to hear thoughts on people’s confidence levels as regards keeping their SIPP fully invested and that any changes to the SIPP tax free element that have been mooted in the past by those now in a position to influence the budget are not going to be brought in as a nasty surprise shock on the day. I know changes have been handled more sensitively in the past with fair warning. But right now there are a lot of older investors who have lost faith, potentially looking to empty their Sipps in an accelerated manner for IHT reasons. And so the government limiting the tax free element quickly would make some sort of sense to close off escape routes. As someone already affected by the withdrawal of entrepreneur allowance benefits on their future company exit, a type of retrospective taxation really on a trapped asset, also general capital gains increases recently coming in immediately on the budget day, punishing IHT increases on tax trapped SIPP portfolios, personally I’ve been considering taking my full SIPP lump sum. That the speculation on such a critical life affecting decision is not shut down by RR is infuriating, irreponsible but possibly telling. Its like three dimensional tax having to think of how all the potential tax change possibilities could feed in and interact these days.
Just to clarify, I mean it could make sense to take the full tax free amount to invest in a GIA not for spending now. Pay CGT / Dividends tax on the accruals rather than higher rate tax ultimately after frozen thresholds. But will they put up dividend tax and CGT again instead?
I purchased my London flat in 2012 for £700k. If I wanted to sell it today I’d likely get around £1.1m for it, maybe less. But inflation has been 45% in that period. So I have made no real gain or even loss, depending.
If I moved up the ladder, at £1.5m I’m paying £90k SDLT (new Porsche) as well as Reeve’s new Wealth Tax, so it would certainly be a loss to move. So, err, yeah. F**k that.
No wonder the “rich” are fleeing London!
The BoE is not controlling inflation. The government won’t either because the tax system now need above 2% to balance the books. The performance of gilts since 21 has been a soft default IMHO. Reeves lacks the integrity and conviction to do the unpopular that clearly needs to be done i.e. NHS and welfare reform (yes triple lock I’m looking at you too).
@JohnCharitySpring. I don’t get how you can see Gilts performance as a soft default. In 2021, real yields were -3%. Gilts were staggeringly expensive. Real yields are now 2%+; high compared to recent decades but not anomalous. I would point out that Buxl (German 30-year) yields have moved more this year, as have 30-year JGBs. The only reason why 30-year Treasuries haven’t more more is that Bessant etc are increasing short-dated issuance as expense of 30-year. They are swapping lower yields for higher rollover risk.
Moreover, GBP on a trade-weighted basis is has not devalued by any significant amount since 2021. In any sort of soft default, the currency is the primary valve to express this. What we have is a broad based concern, globally, about the fiscal position of most developed countries. The UK is of more concern than average but not especially so.
I agree that Starmer/Reeves have shown a total lack of willingness to face up to the need for large expenditure cuts. The triple lock is an outrage given our fiscal position. Their inability to confront backbenchers and the electorate shows a total absence of backbone. I would argue that this criticism applies across the developed world though. The issue is populism (both when in power and when the current incumbents fear it). It’s totally incompatible with good economic policy. The fundamental problem remains the electorate itself.
@JohnCharitySpring, when did Rachel Reeves announce a Wealth Tax? There isn’t a budget for another couple of months.
I think you may have been misled by media speculation, which is something that has been around for ever and rarely has any relationship to what eventually appears in a budget. I recall “briefings” about the idea of a single rate of tax relief on pension contributions around 20 years ago, and recurring most years since. It hasn’t yet happened.
Having said that, it seems possible the wealthy are undertaxed. There was a news item back in the Spring about the top 500 individuals in the country having more wealth than the bottom 50%. I don’t know how they came up with that number, but even if it is closer to 5000 I bet they don’t pay the same share of tax. But a Wealth Tax would be a horrendously complicated way of making taxation more fair.
@Jonathan B:
“The top 10% of Income Tax payers were liable for around 60.3% of total Income Tax, while the top 1% were liable for around 28.5%”, source: https://www.gov.uk/government/statistics/income-tax-liabilities-statistics-tax-year-2022-to-2023-to-tax-year-2025-to-2026/bulletin-commentary#:~:text=In%202022%20to%202023%20the,were%20liable%20for%20around%2028.5%25.
Some people are just very wealthy.
@Black Hole (25)
I had this dilemma last year and potentially this. Last year I decided eventually to leave everything in my SIPP and I don’t think I shall do anything different this year.
I don’t quite follow your arguments regarding the GIA. If the LSA survives unchanged there is the prospect that money in the SIPP will grow such that the 25% exceeds the LSA, if not withdrawn while still under it. However, if income tax thresholds remain frozen for the foreseeable future, withdrawing the tax-free cash now has no impact on whether taxable funds in the SIPP will eventually be subject to HRT. On the other hand, extra funds in the GIA from taking the tax-free cash will, depending on your existing income, make it more likely that dividends will be subject to HRT and capital gains be taxed at the higher rate.
@Al Cam, thanks for that fascinating link. As you say the highest earners pay a significant proportion of total income tax. The actual numbers are a bit misleading though since they ignore National Insurance which isn’t meaningfully different from income tax and falls proportionately heavier on the lower and middle paid.
However the question is really about whether those who are wealthy, as opposed to the highest earners, pay a proportionate share of tax – since it came out of a claimed proposal for a Wealth Tax. That HMRC document shows that income tax as a proportion of earnings actually declines slightly for earnings over £500K, and I suspect tax paid as a proportion of wealth would decline much faster.
@DavidV Thanks for your thoughts on taking the SIPP lump sum. I’ll probably get my ducks in a row and see which way the wind is blowing closer to the time as I have reached the point of maximum TFLS. I think minimus had a nice turn of phrase somewhere where he compared getting money out of a drawdown SIPP at lower tax rates as like getting a camel through the eye of a needle. My SIPP lump sum would go to my wife’s GIA as I have the bigger pension and she can has the lower tax allocation. But we have company money that has the same bottleneck issues as well. So the plan has become to retire early enough and space out the withdrawals. I was never keen to retire early really, I’d still like to stay in the race and be productive, but the disincentives are piling up.
@JB (#31):
Re “… actually declines slightly for earnings over £500K, and I suspect tax paid as a proportion of wealth would decline much faster.”
I assume you are referring to Fig 10. If so IMO that difference is negligible and may just be some form of measurement/sampling artefact.
As I am sure you are aware wealth is very tricky to measure and can be highly volatile too, nevertheless perhaps your suspicion is correct but I would be interested in that case at to how you measure the tax paid. AIUI, these are the primary reasons that income is often used in official stats as the [admittedly less than perfect] proxy for wealth.
@Al Cam, agreed. I don’t think those clamouring for a Wealth Tax have thought about the practicalities at all. It is hard to produce an exact figure representing someone’s wealth, except for that part which is in traded liquid assets like shares.
So if someone’s idea of fairness is that taxation should be related to wealth (a social and political question) then the way to do it is via income.
It was that Fig 10 finding I was referring to, while the decline is slight HMRC seems sure enough of it to mention it in the text. My surprise was just that income tax stops being progressive well below the income of bankers, chief executives and footballers.
@Black Hole (25)
I very recently withdrew the full PCLS, as I had also breached the maximum linked to 25% of the old LTA. I concluded that removing the political risk of allowance reductions and, to some extent, the inflation drag reducing its value over time was good enough. There was also the market risk: in the event of a major crash in the pension valuation, it could have dropped below the maximum again.
I’m currently in drawdown and no longer working, so I decided to allocate the vast majority of the cash into the GIA to build an index-linked gilt ladder—low coupon and CGT-free. The ISA holds a roughly equivalent high coupon conventional gilt ladder. The plan is to use this as the almost tax-free ‘floor’, also folding £20k of the GIA into the ISA each year.
The taxable pension is now 100% global equity for the ‘upside’. Minimum drawdown will cover the tax-free personal allowance, and the maximum can go up to the 40% tax band (as long as total annual spending stays within ~4% of total investment value).
Time will tell if this was wise, but it’s definitely one less thing to agonise over.
@Ade (35) – seconded. Like your approach.
For me, the TFLS withdrawal also made sense. I wanted to rebalance somewhat away from equities and into some individual gilts and (at the time) there didn’t seem to be any reason to delay. I did buy a few long-dated gilts with the proceeds though, so the timing wasn’t ideal, as they’re down a fair bit since purchase! In theory though, i’m not touching them for decades so i’m still happy with the decision overall.
Being as well spread and diversified as possible is something that i continue to try and focus on, and the balance of holdings between the various wrappers (SIPP, ISA etc) is something that continues to intrigue me. There are so many factors that one needs to try and consider, many unknown due to Government meddling etc., and everyones personal situation is unique, but for me it just felt that the pension holding was relatively higher than it needed to be.
The recent BBC documentary on the plight of some of the highly paid Premier League footballers, whose pensions had been badly managed, just acted as a reminder to me that we’ll all make some mistakes along the way, but if we can steer clear of the obvious catastrophes we should hopefully fare reasonably well.
“The top 10% of Income Tax payers were liable for around 60.3% of total Income Tax, while the top 1% were liable for around 28.5%”
Does anyone have any sort of stat for total tax contributions, rather than just Income Tax? I’m guessing that the total tax paid by the top 10% would show significantly less than 60% when other taxes are accounted for.
There is the obvious NI, the less obvious employers NI but also VAT, fuel taxes etc
https://ifs.org.uk/taxlab/taxlab-key-questions/where-does-government-get-its-money shows that IT only makes up 28% (or 25%) of the revenue so only including IT seems very deceptive.
I’m not sure quoting true but deceptive stats helps with understanding.
@Dazzle
Chatgpt reckons around a third of all income tax, national insurance, VAT, capital gains tax, inheritance tax and stamp duty is paid by the top 10%, the top 20% pay more than 50%, the top 50% almost 90%, leaving the bottom 50% paying the rest.
https://chatgpt.com/share/68becd75-e8b4-800d-8d76-802a65ff35d0
Haven’t done any verification, but it sounds broadly right.
@Ade 35
I’m not in any danger of reaching the lifetime limits but I was thinking about doing something similar, ie take the 25% and purchase some kind of gilt ladder, as I need to start drawdown soon. Sounds like you have a good and clear strategy.
@Ade (#35):
Thanks for the update. Seems like things have firmed up a bit and moved on since we last chatted at some length; see: https://monevator.com/how-to-buy-index-linked-gilts/comment-page-1/#comments
Well I took every pension commencement lump sum the moment I became eligible. My wife has a smallish sipp at £80k which I reckon will fly under the radar. If they do anything in this regard they had better be fair and make sure public servants are treated the same.
And what about the people who opted for ufpls or whatever it was called.
Just gave a wodge of money to my children as I reckon the 7 year rule and tapering are toast.
@Al Cam
Yes, indeed — I’ve definitely moved from planning to execution!
The previous discussion certainly helped firm things up, so thanks to everyone for their help.
The floor-and-upside concept really appeals to me. First objective: don’t lose (to paraphrase ZX from the previous thread). The natural yield from the gilt ladders should just about cover that, and I can always add or adjust if needed. The “upside” is hopefully more of a Margate vs Mauritius problem.
I’ve also structured it as best I can from a tax-planning perspective, and hopefully plenty of optionality remains. How far up the 20% band to pull being the main question I’m still working on – probably all the way.
The ladder construction is very much an amateur DIY 1st attempt, with each rung almost equal on a cash basis:
GIA ILGs = T27, T28, T29, TR31, T32, T33, TRTQ, TR35 — Real Yield: 1.06% / Equivalent: 4.14% / Duration: 6.08
ISA Conventional = T27A, TE28, TS29, T30, T31, TR32, T34, TG35, T4Q, TG38 — Yield: 4.28% / Duration: 5.63
I’ve skipped the next few years and opted for a couple of years’ cash buffer in a GIA MMF. I haven’t bothered trying to match the cashflows either; I’ll just rebalance the lot periodically, probably at the start of each tax year, rolling out as we go.
I plan to start “glidepathing” or tapering away some of the gilts once I’m about 10 years out from state pension age, essentially slotting the SP into the living-expenses floor.
The ladders differ in length because I wanted a similar duration in each class. I also didn’t have the confidence to go out any longer — grateful for any opinions on that.
As for what to sell first if I need to release some cash early or during the glidepath, my AI robot friends suggest keeping the winners on the inflation bet — in other words, if the ILGs are “winning” because inflation is tracking higher, sell the conventionals first. I’ve not given this much deep thought, however it sounds sensible enough on first pass…?
That Trustnet article is so bad, it reads like satire. “software 2.0″… sigh.
@Dazzle, interesting point. Those at the lower end of the income scale are likely to spend a greater proportion of their pay on items that attract VAT or fuel duty and of course are subject to the maximum employee NI, those at the higher end are the ones whose tax (averaged over their life) will include IHT. And in both cases allowing for things like pension tax relief. Having an overall comparison would be informative, though not in terms of fraction of total tax paid which is meaningless without knowing the income distribution, it needs to be expressed as effective overall tax rate.
On balance I think employer NI should not be counted as part of tax on employees, it is a tax on companies like corporation tax.
@Jonathan B. Employer’s NI increases the payroll cost of employing another person. Minimum wage increases the payroll cost of another person. Increasing the employment security of an employee increases the cost of rectifying an employment mistake, or the consequential costs of a company restructuring. In all cases disproportionately costly for the lower paid. They are taxes on employment not the employee.
Odd when you claim to be aiming for growth.
I think the technical term is’ gaslighting’.
In view of TI’s strictures I will skip discussing the legal responsibilities of trustees or the role of education in developing the mind.
@Adam — The software 2.0 branding is perhaps a little silly but I thought the general point — of a shift from instruction/computation heavy computing and the winners therein to mass data processing being the fundamental driver — was an interesting one, albeit we can obviously pick it apart, say both are needed etc.
So clearly a simplification but if one had had this insight five years ago it could have been a decent driver of outperformance. My biggest concern now would be that it’s seemingly a little late in that day!
@Paul_a38 — I agree that in theory increasing the cost of employment in the ways you describe should be anti-growth (/anti-hiring!) and I’ve been a critic of Rachel Reeves’ NI hike (and the other distinctly non-growth antics of this administration to-date).
However it’s interesting that increasing the minimum wage, whatever the theory, doesn’t seem to have reduced employment in studies, whereas I cannot see how increasing employer’s NI won’t have that effect — and indeed it already seems to have, looking at the hospitality sector. Beyond the headlines I also have some small private investments in this area and all cite the NI hike is a real kick in the nads and a reason why they’ve not increased headcount (/decreased), especially as there’s no scope to raise prices — consumers are at the limit.
If this trend is durable, I’d guess it’s something to do with the extrinsic benefits to a company of hiking minimum wage — perhaps happier or more motivated workers, perhaps less transient workers, perhaps they treat their workers a little less like a commodity at the margin so train them more or similar and see some added benefit? Only the last of these would apply to the NI hike though, where the money will basically disappear into the government black hole etc from a particular company’s point of view.
In general I’m in favour of ultra low taxes on companies (including corporation tax which, in a perfect world absent shenanigans I’d set at 0%) so that’s my wider view/bias.
(Clearly I’d tax income, dividends, disguised income as capital gains, and inheritance to make up the difference — money leaving productive companies. As I see it corporation tax is basically a drag on businesses doing well and delivering the public/society what it’s asking for, so why do we impede that?)
@Paul_a38 – I agree, public servants must be treated the same!
So when I die, my wife should be able inherit all of my small Civil Service pension (less than the State Pension) instead of seeing a 40% haircut. Or maybe you should pay the 40% haircut as well? That would be treating everyone the same, wouldn’t it?
If I die before 67, my wife receives just 30% of my pension rather than 60%. Can we treat everyone the same here too?
Also, the public sector should be able to access their pensions at 57, rather than 67. Or maybe private pensions aren’t accessible until 67? That would be treating everyone the same, wouldn’t it?
And of course I won’t be able to pass my pension onto my children, have no tax free lump sum, cannot access any capital, etc, etc. etc..
Please stop with the Daily Mail comments.
Another exciting thought today from a floundering Labour Government scratching everywhere for cash-Times article this morning
Adding NI contributions to pensioners incomes as they are the only portion of the population left with any spare cash
Wild times
xxd09
@TI
Demand for minimum wage employment is relatively inelastic because the work tends to be in service sectors where labour is not easily replaceable. Wage increases are absorbed by the business, often through price increases or productivity improvements.
NI increases impact all levels of employment making substitution and automation more likely for some roles. Further, employer NI increases are not seen by the workers at all and employee NI increases result in lower take home pay for workers, disincentivising productivity improvements (why work harder/better for the same or less money?).
@Paul-a38, I think we are in agreement. Employer NI is a tax “on employment not the employee” which is a cost of a company doing business. (If employer NI was reduced, that would have no impact on employee pay the next month, but would have an impact on the company’s accounts).
Whether it is a good tax is a different question, involving politics and economics. To my thinking employee NI has no meaningful difference from income tax and should be considered as part of that (it has now lost its one former distinct role, being required to qualify for state pension, since the pay threshold for qualification is no longer the same as for NI payment). It is also illogical in that it is applied to certain forms of income (e.g. PAYE employment) but not others (e.g. rental income).
Employer NI is a tax on companies based on the size of their workforce. While it might very slightly incentivise improvements in productivity, its effect is surely marginal given the cost of salaries anyway. If you are going to tax a company on doing business (which has a logic, a quid quo pro for the benefit of limited liability) it could just as well be a very small rate on total company income.
@Ade (#42),
Thanks for further details; seems you have been busy.
I am not overly familiar with gilts so have little to add on the individual holdings. I did however note you have gone for split approach using indexed & non-indexed gilts and wondered if you had assumed a rate of inflation (and if so what it was) for the latter?
Another thing that did occur to me was that, assuming no further changes in ts & cs (agree v. unlikely – but at least a place to start from), what is your mid-term plan re ISA/SIPP/GIA e.g. are you looking to keep them all, or planning to run down the SIPP (“probably all the way” is what I noted) and try to grow the ISA(s), or ….
Employer NI, why I think it should be treated as a tax on the employee.
If as a company I think adding an employee will result in £100k worth of profit to the business vs not having them. To keep a 10% margin I can pay them £90k
But I can’t – because whatever I “pay” them I also have to pay Employers NI to the govt.
So that £90k becomes £78k to the employee, £12k to ER NI (15%)
If ER NI was only 5% that £90k would split £85k / £5k
If ER NI was 25% then £90k is £72k / £18k
The rate on ER NI has to affect what I can afford to give to the employee and so is a tax on the employee.
If 15% ER NI is increased to 25% ER NI then the employee I was paying £78k to with £12k ER NI I now have to pay £19k ER NI, an extra £7k which has to come from my profit margin – is that employment worth it now?
Shall I give no pay rise to the employee in future to restore my margin? Should I just get rid of (or “encourage” them to leave) the employee? They are not making me enough money to keep on now.
If the ER NI rate was increased from 15% to 25% over 10 years (1% more per year) how would that affect salary increases I could pay the employee. Obviously it would reduce the employees salary (or rather reduce the increase they would have had otherwise) Thus it’s a tax on the employee
@Ade #42. I am (slowly) increasing my direct holdings of gilts, mainly IL, in my SIPP. There are two concerns though, one real and one a bit silly.
First, my wife couldn’t manage a bond ladder in my absence so at some stage a cpi linked 100% annuity may be a better option so need to bear in mind the bond ladder may need to be liquidated prematurely.
Second, I HATE the way the investment platforms only show valuations based on clean prices.
Only yesterday I ‘ found ‘ another £28k in my SIPP because I had forgotten this.
@Al Cam (#52)
In terms of the split between conventional and ILGs, I did consider going the whole way out to 2042 with ILGs when my SP comes in, but I eventually decided I’m not confident enough to commit to one strategy. I’ve settled on aiming for roughly 50/50, a foot in both regime camps. So much can and will change, the shorter length and split will hopefully be ‘good enough’ to meet the goal of covering living expenses with fixed income assets.
I don’t have an opinion worth putting any money on in relation to the direction of inflation or rates – who knows? The prevailing rates look ok, certainly compared to the recent past. If it starts to fall short, I’ll probably have to buy more ‘floor’ through equity sales from the pension during rebalancing events. Roughly 70% equity pension / 30% gilts/MMF right now.
In terms of the GIA/ISA/SIPP balancing act, the primary goal will be to let the ISA build until the GIA is exhausted. The coupons in the ISA will help to fold in the GIA with sale and then repurchase in the ISA, same for the annual allowance. I would ideally let each rung mature and keep rolling into a new rung.
A lot depends on how much I pull from the pension though. The cashflow models I’ve looked at even with modest equity returns suggest extracting the maximum of the 20% income tax band, to avoid being forced to pay 40% later on. This looks great on a 40+ year model, trouble is something inside is telling me to only draw what I need to enjoy life. No tax rebate if the plan goes belly up!
If I do pull up to the full basic rate band 20%, this will probably be more than I need based on my lifestyle. I’ll then likely be moving ILGs back into GIA and buy some equity in the ISA. Too many moving parts here to be honest, I love to plan, but this is going to have to play out in the real world, not only in a spreadsheet. It’s still very early days too.
@Paul_a38 (#54)
I have the same problem with passing this project on. To be honest, I’ve so far suggested my wife consult a couple of the financial planners I follow on youtube as they appear to be on the same page. I should probably try a bit harder to write a simplified plan down though.
Re valuations, I’ve just settled on a spreadsheet tracking transactions and the various metrics at the time. I then have a couple of columns where I input the current dirty price and duration from yieldgimp.com to get the valuation. It’s a bit of a pain though.
@Al Cam. Didn’t know about yieldgimp. Cheers.
Nice piece on China from Scott Sumner. A welcome dose of pragmatic realism. We need more of that in the world. Less performative outrage. Less moralising.
Which brings us onto Ms Rayner.
The only takeaway here is that:
1. All else being equal, you’d expect this increases the odds (already 4 in 5) of a Con-Ref or Ref majority government (with 1 in 5 for Ref majority).
2. But Starmer appears to be pivoting to Ref talking points. Maybe that helps him. Maybe it makes his position worse. Either way it’s a change and will have an effect.
What’s remarkable here is not so much that his net approval is -42%, lower than Trump (by some way), and only above Macron (-55%), but that it’s fallen so far so very quickly.
Macron’s had 8 years. In 15 months Lab have gone from 34% to 20%, and Starmer worse.
No way to spin it.
That’s the worse polling on record for a governing party or PM in that timeframe since a GE (although Mrs T and Mr Wilson were not exactly popular in 1980 and 1975 respectively, at the same points in).
Given that we have to have a GE on or before 15/8/2029, the issue now is not what Ms Reeves (or her successor as Lab CHX) do in 2025-28, but rather what Farage might do on tax and the economy over 2029-34.
Markets are forward thinking and discounting. So should investors be.
Expect IHT thresholds to go up to £2 mn (that’s in Ref’s pledges already), and the Cons might outflank them in their manifesto in 2029 with abolition.
Any NI on pensions will be reversed as Cons and Ref power base is the retired, middle aged, top decile and lower tercile wealth and income.
As Lab, Grn and Lib power bases are students, young urban renters, the PMC and public sector, expect all those groups to be made to suffer, and to have to pick up the tab.
Each party looks after it’s own. The way of the world. Always has been.
Will Ref ‘populism’ cause a run on gilts and £Stg? Dunno.
If Farage goes Mr Austerity the axe wielder, and tries to reduce the deficit, then maybe not.
But is he a Mini-Milei, or just a Mini-Trumper?
Elon’s chainsaw didn’t last long, and we’re back already in the US to money printer set to brrr.
If Ref or Ref-Con get into a pickle on the economy, (which I guess they probably will soon enough, as politicians generally get the opposite of what they want), then duration will be a killer, which is bad for long gilts and interest rate sensitive ITs.
Infra probably takes a special hit due to Ref’s war on renewables (almost literally tilting at windmills!)
As DM increasingly = EM worldwide, it’s striking how DM gov bond yields are converging on EM, as they should (given demographics and the decline of DM state capacity and competence on a relative basis).
For a short while 30 year gilts topped 5.7% YTM. It’s a bit oranges to apples but, contrastingly, the EM bond SEMB ETF got down to a 5.8% distributing yield.
If it looks like everyone’s a moron now (which increasingly it does), then the bond vigilantes have less reason not to put DM debt on the naughty step.
Hmm, a little recovery in renewable infrastructure trusts has fallen apart in the past couple of months. I’d put it down to gilt yields rising, but maybe political risk is a factor as you suggest. (Political risk is definitely a big factor in infrastructure and renewable trusts, I suppose I mean “maybe it’s showing it’s ugly face” 😉 )
I am never sure how to view infrastructure which has regulatory risk. National Grid, for example, seems to need to restructure the distribution system to match new sources from wind farms and, if the Iberian example is anything to go by, the control mechanisms may need overhaul to be more responsive to avoid the dreaded pole shift. OK it’s investment but it’s also cost spend. Is this good or bad for the share price ?
@Ade
In balancing your asset allocation across various platforms/shelters, and deciding whether to prefer running down your GIA or SIPP (up to the HRT threshold) to fund your ISA, there is a consideration you have not mentioned. I credit this to ermine who mentioned it in one of the articles on his blog. That is any growth or dividends in your SIPP can only be extracted as pension income and are taxed as such. Pension income is taxed at normal income tax rates – higher than CGT or dividend tax.
Growth in the GIA (excluding gilts or ILGs which appears to be the bulk of your assets there) is taxed as capital gains when accessed. At BR there is now little difference between IT and CGT, but at HR capital gains still have the edge (for how much longer?). Dividends in the GIA would be taxed at the dividend rate, which are currently lower than for IT, particularly at BR.
You have said that your SIPP contains global equity for the upside. It is worth considering whether in your circumstances there could be benefits in allocating some equity to your GIA. It may also be an argument for running down your SIPP, as favoured by Al Cam, faster than you are comfortable with at the moment.
@Ade (#55):
Yup, lots of moving parts is a bit of a feature.
I recognise a lot of what you say and can only reflect my own experience noting that YMMV. I cannot recall what may ultimately cause you to be a HRT payer, but in my own case it could be the combo of SP and DB. Therefore, the period from pulling the plug until then was the possible window of opportunity (WOO). I was initially a tad timid and only drew from my SIPP what was needed to fulfil my plan. On reflection, this was possibly a mistake. The WOO is use it or lose it. Having said all of that, I agree that this has to play out IRL and it is still early days too.
Go well.
I recently changed my approach to drawing down my SIPP. Having also previously been cautious, I now take out as much as I can below the 40% tax threshold.
@DavidV
Thanks for this – you are right, I’m not currently utilising my CGT or dividend allowances, let alone comparing the tax rate differentials. The release of all the tax free cash at once has forced me to use the GIA beyond a simple cash allocation for the first time. I’ll definitely put this on the list to see if I can extract any more efficiency this way.
@Al Cam
The use it or lose it remark from this and your previous posts definitely resonates with me. It may just mean I pay 20% tax to extract it from the pension only to leave it in a taxable environment if I don’t spend it. The tax paid is also no longer compounding in a positive way. I’ll be giving this some further thought though. Possibly combining it with DavidV’s suggestions.
The only reason I would hit HRT is if overall drawdown plan/requirements exceed the currently frozen HRT threshold. Not a big issue at the moment, however if things go well over the long run, there could be quite a lot of value growing in the taxable pension. The introduction of the State Pension will also come into play, 17 years away though.
@Paul_a38
Thanks for sharing this too.
@Ade:
I am sure you have thought of this, but felt I should mention it just in case.
With partial flooring until your SP commences you run the risk that the Upside could precipitously fall below the level necessary to purchase the missing rungs. Have you conceived of a strategy to manage this risk?
I do not know if you purchased the Zwecher book, but he refers to this as active risk management and makes some suggestions as to possible approaches in Chapter 9. In essence, he suggests you a) keep an eye on the cost to buy the missing rungs; monitor the excess of your Upside versus this [varying] cost (your Cushion if you like) and act, as required, to stop the Cushion becoming too small. Easy in principle, but …
FWIW, I went for essentially a static implementation (full flooring from the outset) so have no real world experience of (that type of) active risk management. The downside of a static implementation is the opportunity cost.
FWIW, the vast majority of my envisaged Gap (to be floored) from the outset was somewhat shorter than yours at around ten years. In the end, however, mine became six years – which, of course, exacerbated the opportunity cost. In my case, things definitely changed.
But, as usual, there is no one size fits all in all of this stuff.
“it is a tax on companies like corporation tax”: only if you take a particularly narrow and short-term view is corporation tax a tax on companies.
Companies are legal fictions – they are not like individual humans who, if you tax them, reduce their consumption. So the economic incidence of corporation tax falls on people – customers, employees, and owners. The owners of most large companies are … boom, tish … the pension schemes of individuals.
The advantage to the politician of corporation tax is that most voters don’t understand that it is tax on them, so it’s more palatable to them than, say, income tax. In other words it’s essentially a con.
@Al Cam
Thanks for the follow up.
I theoretically have enough invested at current yields to throw off the required ‘floor’. I will definitely be exposed to reinvestment risk at the prevailing rate as I renew the rungs. I also anticipate having to increase the amount invested if my minimum living expenses increase significantly or future yields decline at the long end.
If I do end up taking more than I need from the equity based pension to wash off the 20% tax, I may be able to build out the ladder further for the added insurance.
I plan to add all of these considerations into the overall rebalancing exercise as the tax years roll over.
The ‘upside’ is just discretionary spending, so if it really tanks and stays down for a long time, I’ll just have to live with lower cost options.
Truth be told, I probably saved a bit too hard filling the pension over the years, meaning I know how to cut my spending cloth to size to hit a goal. I’ll do that again if push comes to shove, or god forbid, get a job! 🙂
@Ade(#66):
Sorry, my misunderstanding of your flooring strategy.
I think I have it now ie each rung you have purchased has excess (vs foreseen need for that year) which will need to be re-invested in later rungs in due course?
It will be interesting to see how you get on vs your estimated minimum living expenses – I made (at least) two mistakes thereabouts: 1) I went for flooring the lifestyle (ie not the minimum or essentials) and 2) I also over-estimated that.
FWIW, one of the concepts pushed in Z’s book is called “raising the floor”. As I see it this is just a way to use good news from the Upside to offset the possibility of having “to live with lower cost options”.
An annual review seems prudent.
@Al Cam
I guess it’s really just a rough low tax DIY ~2-12 mixed gilt fund at this stage. I aim to rebalance annually so that the aggregate expected yield covers the annual living expenses budget. Reinvest as required. Let’s see if it stands the test of time though.
@Ade,
Got it – planning to just draw the natural yield. Interesting approach.
Very interested to hear how it all works out in due course.
Apologies for being so slow to catch on.
@Brod (#48)
Why should your wife inherit your civil service pension? According to this article in the FT, there are no assets behind it: https://www.ft.com/content/84c596d0-c192-4903-a228-abec6e938095. There is nothing to inherit.
Your pension is a perk of your employment. Your wife wasn’t the employee, you were.
30% / 60% – same point as above.
No assets, so nothing to pass on to children. No assets, so no capital to access. No assets, no lump sum. You see how this works?
Private sector pensions @ 57 – well, there are generally assets behind DC private sector pensions.
Being able to access at 57 is (or rather was) I suspect the quid pro quo for (1) it not being final salary / career average, index linked and totally safe, but instead being linked directly to the vagaries of the market, and (2) out there in the chill winds of the private sector, 50+ year olds stand a non-trivial chance of being made redundant and not being able to find a new job. I suspect in say, oooh, 2008/2009, lots of private sector 50 something year old employees were having bowel motions involving bricks about the security of their employment while watching their DC pension pot values being toasted …
Of course, the current government has now changed the rules, so those DC private sector pensions can’t be inherited anyway. Given the initial hit from Inheritance Tax, and beneficiaries then being in line for taxation on the bequest at their highest marginal rate of income tax, there are scenarios where those DC pension pots will be getting taxed at effective rates of well over 80%. In Scotland, more like well over 90%.
Given there are various articules which suggest that the average size of a private sector DC pension pot in the UK is ~ £40,000, which would give an annuity of barely £2,500 PER YEAR, then I think your concerns about us “rich evil etc etc” private sector workers passing on untold wealth to our families/kids is, I would respectfully suggest, somewhat wide of the mark.
They may be Daily Mail comments. Doesn’t mean they’re wrong …
@Ade (66)
From your mention of reinvestment risk it seems that you have built an extendable gilt/ILG ladder rather than a collapsing ladder. If I have interpreted this correctly, and given that you have an eventual end point in mind, i.e. your state pension age, I am intrigued why you made this choice.
A collapsing ladder would be designed such that each year the principal from the maturing gilt plus the coupons from all the gilts still invested would be used to pay that year’s expenses. If ILGs are used the payments each year can be kept constant in real terms. At the end of the designed ladder length nothing remains, but the initial capital has been invested as efficiently as possible to provide the desired payments exactly over the required period. No reinvestment risk is involved and optionality is preserved as the ladder can be abandoned or modified at any time (albeit with interest rate risk in this case).
In contrast, with an extending ladder, only the coupons are spent but each maturing gilt has to be reinvested with the associated risk of interest rate/price movement. A much higher amount of capital must be invested at the outset, but capital (dependent on price movements during the ladder’s existence) remains at the end. However, as the aim is to substitute for state pension income as efficiently as possible until the pension is paid, I’m not sure why you would choose this route over the collapsing ladder.
Designing a collapsing ladder is more complex than an extendable ladder, but TA produce a spreadsheet, available to members, to ease this process.
@DavidV (71)
Thanks for taking the time to reply — and apologies to everyone else if this is turning into my own personal clinic!
The honest answer is that I’m keen on the idea of covering my living expenses with fixed income rather than relying on an arbitrary percentage-based split. The ladder construction is my first attempt so isn’t as fully developed yet, apart from the tax-management considerations.
I have initially used limiting duration as a guide, but I’m very open to being persuaded there’s a better approach — it’s easy enough to adjust.
I haven’t been aiming strictly to match the state pension, just aware that it’s coming on stream and should eventually be factored in.
If I were to match the state pension with ILGs out to 2042, then I’d only need to cover the gap between the SP and my living expenses, either with a rolling conventional (?) gilt ladder or an intermediate gilt ETF for simplicity.
This already sounds like an improvement — my plan might not have survived one forum post, let alone the test of time!
The only potential snag is that at current valuations I’m already 70/30 equity/gilts. If I went for the collapsing ILG ladder, I’d start at about 80/20 and gradually move towards ~93% equity / 7% gilts + SP by 2042. Lots of potential ‘upside’ — which is a nice problem to have — or maybe just taking on unnecessary volatility.
I guess the easy answer is to simply ‘raise the floor’ as Al Cam suggests, and give the plan more wiggle room.
@Ade,
AIUI, you have at least until 2027 sorted. You will learn a lot in that period. You could also use that time to refine your plan too. Did you buy/borrow the Z book?
@Ade (72)
Thanks for your comprehensive response to what could perhaps be regarded as a somewhat impertinent querying of your investment approach. I do still have a couple of random thoughts arising from your answers though! I’m also keenly aware that it’s so much easier to try to solve other people’s problems than your own, so what I suggest is not necessarily what I do.
I understand your desire to limit duration in your gilts and do the same with my own fixed-income investments. However, I’m much older than you and fortunately seem to get by comfortably mainly on my state and DB pensions. My fixed income is part of an equity/bond mix that I may need to draw down on some time in the future and wish to minimise volatility in the meantime. You are using your gilts for a different purpose – to provide at least part of your floor until your SP. In this situation duration matching rather than duration limiting would seem more appropriate as, at least with a collapsing ladder, you can tolerate volatility in a gilt until you need its par value at maturity.
My second observation is that you are building a floor using ‘safe’ assets (i.e. the safety-first approach in Wade Pfau terminology), but then worrying about your resulting overall equity/bond asset allocation as if you were relying on your total portfolio for a probabilistic drawdown approach to generating income. It would seem to me to be more logical to secure your floor, however you deem appropriate, and then consider your desired asset allocation for the remaining upside portfolio. Remember your upside portfolio doesn’t need to be, and possibly shouldn’t be, all equities.
@Al Cam (73) – book ordered – thanks.
@DavidV (74) – No worries, I’m grateful for the pointers – I’m certainly going to give it some more thought. The almost set it and forget it aspect is appealing too.
Taking a basic SP matching plan using Lategenexer’s ILG ladder tool and duration from yieldgimp puts the duration at ~7.6. I should be ok with that even if I have to bailout for some reason.
I’m conscious of the obvious contradiction quoting the % splits after promoting an alternate model, however I think it does shine a light on a possible weakness or inherent risk in the strategy vs. conventional asset allocation.
@Ade:
Z’s book IMO is still the go to text for Floor & Upside*. It is not the easiest read and its main strength is the theory**. It will provide you with, amongst many other things, an answer to the contradiction you mention above. Whilst you may be tempted to jump straight to Chpts 13 (products and example portfolios) & 14 (Preparing your client for …) the earlier chapters lay the ground for these. In any case, you will still need to tailor your own implementation, but to some extent it was ever thus.
Hope it helps.
*like all other F&U texts it is quite weak on real life implementation issues though
**I never bought the companion book – but from the samples I have seen it just ‘tests’ the theory given in the main text and adds little/nothing new.