What caught my eye this week.
A new survey claiming that one-in-four six-figure earners ‘lives paycheque to paycheque’ is bound to rile three-quarters of those who read about it.
The Telegraph reports (via Yahoo Finance) that:
[Survey] respondents primarily blamed cost of living increases (90%), as well as rising mortgage payments (38%) and debt repayments (29%).
In London, 28% of the 1,700 high earners polled said they were struggling to live within their means.
That the study was conducted by RBC Brewin Dolphin – a wealth manager, rather than a poverty campaigner – might raise further hackles.
But according to Carla Morris, a financial planner at the firm:
“The findings of our survey underline just how much the cost-of-living crisis has affected every section of society in the UK.
“Even people who are among the highest earners in the country are living pay cheque to pay cheque, with almost all of them citing the rising cost of living as one of the main reasons for being in that position.”
Now, the obvious – and entirely accurate – response is that higher earners have many more options for cutting costs than those within sniffing distance of the breadline. To put downshifting from Waitrose to M&S or from London to Reading in the same bracket as getting familiar with a food bank is at the least delusional.
Generally that would be my response, too.
I’ve been collating Weekend Reading links for 17 years now. There have been tiny violins playing for the wealthy somewhere in the media in most of them.
However I do think it’s a bit different this time.
Higher and higher
The middle-class cost of living crisis is very real for starters, as I wrote a few weeks ago. Everything costs more. Particularly rents and mortgages – both soaring.
But the woes of the wealthier are being massively exacerbated by stealth taxes.
The Resolution Foundation recently calculated that the freezing of tax thresholds will see £40bn a year more paid in taxes by workers by 2028 – the biggest tax grab in 50 years.
Taxpayers in the higher bracket will by then be paying an extra £3,700 a year in taxes, following a six-year freeze.
And rather than the personal tax allowance rising to £16,200 as inflation – booked and forecast – would imply, we’ll still only be allowed to keep the first £12,570 of what we earn unmolested.
The Accumulator drafted an article last summer on all this that ultimately we didn’t publish. TA’s angle was to frame the stealth tax increases as outright hikes in the income tax rate.
I felt his workings were too convoluted to share. Possibly my mistake, in retrospect, as the direction of travel he identified was bang on.
It’s since been estimated that freezing tax brackets and allowances will have the same impact as a 6% hike in income taxes!
Harder and harder
Just on a household basis, having six-figures coming in apparently puts a family into the rarefied air of the top 5%.
Yet an analysis by Chase Bank in March showed that – with kids – it’s pretty easy to spend the lot each month without going hog wild at lap dancing bars or in a Hermes showroom.
Savings can be made. Monevator regularly features case studies from people who achieved financial success by spending and saving differently.
Fill your ISAs. Sacrifice your salary to boost pension contributions (especially around cliff edge numbers, such as where child benefit and personal tax allowances get taken away). Hope that tax rates come back down by the time you retire. Cut costs and consider moving somewhere cheaper.
It’s all getting more difficult, however.
Britain is a poorer country than it would have been absent certain terrible political choices – and a global pandemic of course. Public services are creaking, and the cost of government debt is ballooning.
Chancellor Jeremy Hunt may find the world’s tiniest rabbit to pull out of his threadbare hat in next week’s Autumn Statement, but I wouldn’t hold your breath. Ideally any tax bungs would target boosting business anyway, especially our stagnant productivity.
I wouldn’t want to start from here if I were him.
Have a great weekend.
From Monevator
The cheapest stocks and shares ISA on the market – Monevator
FIRE-side chat: high-rolling down under – Monevator
From the archive-ator: Preparing for The Reaper – 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.
UK inflation falls to two-year low of 4.6% on lower energy costs… – Sky
…though energy bills are expected to rise 5% in January – Guardian
…and rent is up 9.6% year-on-year – Which
UK retail sales hit their lowest level since the 2021 lockdown – BBC
Rumoured ‘Great British ISA’ allowance could be £5,000 – Yahoo Finance
More rumours ahead of Wednesday’s Autumn Statement – Which
Thousands of parents penalised over child benefit tax trap [Search result] – FT
Hotel Chocolat bought by Mars at 170% premium – This Is Money
LSE Group: when equities are no longer the stock in trade [Search result] – FT
Can the UK learn from Australia’s pension savers? [Search result] – FT
Products and services
For the first time in two years, lots of savings accounts beat inflation – Yahoo
Virgin Money launches 1% percentage fee remortgage deals – Which
Get £100 cashback when you open an ISA or trading account with Interactive Investor before 30 November. Terms apply – Interactive Investor
Interest rate on the latest NS&I Green Bond is 30% lower – Which
The pros and cons of Hyperjar Cashback – Be Clever With Your Cash
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) – InvestEnginex
Secondhand luxury watch prices have plunged – Robb Report via Yahoo
Hedged vs unhedged share classes: what to consider – Vanguard
Homes for sale that make a splash, in pictures – Guardian
Withdrawal rates mini-special
The 4% rule is back on [US but relevant] – Morningstar
Whereas an 8% withdrawal rate is by no means safe… – Of Dollars and Data
…indeed plenty of times it would have failed you – Portfolio Charts
Comment and opinion
When market-timing fails – Morningstar
Don’t take it personal – Of Fortunes and Frictions
Diversification is not a free lunch – Behavioural Investment
Investing behavioural hacks – The Big Picture
Should platforms enable you to buy poor investment products? – Which
When best-laid retirement plans fail – Humble Dollar
Are defined benefit pension schemes all they’re cracked up to be? – Peter Watson via X
How to make retirement less taxing [Search result] – FT
You can’t shop your way to a new self – Vox
Strategies to help retirement spending [Targets advisors but relevant] – Kitces
Spare your heirs mini-special
Let the elephants go – Humble Dollar
Nobody wants nothing – Abnormal Returns
Naughty corner: Active antics
How ‘Canada’s Warren Buffett’ achieved a 23,300% return – CityWire
Hedge fund index replicating ETFs have done ok, but why bother? – Finominal
Goldman Sachs: the hard part of market regime change is done [PDF] – Goldman Sachs
Do you need to be arrogant to invest actively? – Flyover Stocks
‘Super’ multi-manager hedge funds lose some superness [Search result] – FT
US consumer inflation is basically contained – BondDad
Kindle book bargains
Rogue Trader by Nick Leeson – £0.99 on Kindle
I Will Teach You To Be Rich by Ramit Sethi – £0.99 on Kindle
The New, New Thing by Michael Lewis – £0.99 on Kindle
The Epic Rise and Fall of WeWork by Reeves Wiedeman – £0.99 on Kindle
Environmental factors
China’s emissions set for structural decline from next year – Guardian
How ‘ESG’ came to mean everything and nothing – BBC
Used EV batteries could get an extra lease of life in solar farms – Grist
Green corridors are saving golden lion tamarins from extinction – AOL
Let forests grow to store huge quantities of carbon, says study – Guardian
Off our beat
The cocktail revolution – Works in Progress
How to kill a superhero – The Honest Broker
Patterns of reality – Aeon
The story of the Zoe gut health business – Guardian
We’re probably getting attachment styles all wrong – The Swaddle
Singapore urbanism… – Noahpinion
…vs the £100m regeneration project in Hackney that’s a ghost town – Guardian
How one manufacturer made a four-day work week work – NPR
Weight loss drug cuts heart attack risk by 20% – Statnews
And finally…
“Just 300 generations after the last ice age, we live in a financial world whose risk horizon is measured in decades, not seconds. Consequently, the investor’s greatest enemy is the Stone Age face staring back in the mirror.”
– William Bernstein, The Four Pillars of Investing Wisdom
Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.
“Just 300 generations after the last ice age..”
That didn’t sound right to me, but a quick back-of-the-envelope: last glacial maximum was about 20,000 years ago, 300*60 years = 18,000 years. Pretty spot on. Interesting perspective.
HL will be rubbing their hands together at the thought of a separate GB shares ISA. Another £45 a year per customer account just for holding U.K. shares. Of course my household will use all tax shelters available but could they just increase the ISA allowance to 25k of which anything above 20k needs to be invested in U.K.?
The Chase £100k “where does the money go” whineathon includes the following gems in the monthly expenses line
£750 month pension savings treated as an expense
£120 private healthcare
£270 a month for energy year round
£200 a month children’s activities
£200 a month for buying clothes
and £1,700 a month each for childcare (including a pt nanny) and a mortgage
If you have private healthcare, outsource your kids, you’re too special for the NHS and you live in a big expensive house on credit you kind of need a big income
Some interesting political take outs this week – the government predictably claiming credit for the reduction in inflation, (er, still double the target!) and the strange idea of a Great British ISA, which, to me, is instantly null and void, and another token and silly idea wrapped up in faux patriotism to appease the jingoistic kippers that falls down under a moment of scrutiny. Prehaps I don’t undertstand it fully, but a hypothetical situation – I invest my extra £5,000 in a UK listed company, a member of the FTSE100. This company is called Scottish Mortgage Investment Trust, with a whopping 2.65% of holdings based in the UK. Righto.
Have a good weekend all!
Colleagues at work (higher earners) complain quite often about income stealth tax, about how bad this is for their finances. I have suggested to some of them, to contribute more to private pensions as a potential solution of avoiding increase on income tax. So far not a single person told me they will do this. The usual answer is quite the opposite and goes something like this: I cannot afford it because I need money now, for my kids, mortgage payments, holidays etc. People seem to be either in too much debt or they are not willing to downgrade their lifestyle to save on tax.
Personaly I am contributing to my SIPP more and work less. I’m just not very happy with getting 60p for every £1 I’ve earned.
Yes, it has all been a bit of a shock. But I meander onwards.
My particular beef this week is the likelihood that my Scottish council will next year double (yes, double) council tax on what they view as my second home in Scotland. I have owned that for decades and never expected such an outcome. It wasn’t so long ago you got a discount because not using services to the same degree. The motives given for this assault are varied but seem to include avoiding council employee redundancies (I truly never dreamed I was underwriting the council’s finances), forcing second home owners to sell so that “locals” can buy (not sure lack of house building should be laid at my door), with occasional hints that most second home owners are English (who typically vote elsewhere and anyway are foreigners to be forcibly milked). Anyway, at a more general level this is another sign of GB in a longterm decline where everyone will try to eat everyone else. They won’t get their increased tax by the way. If it goes through, I will have to sell up.
@JDW. It would get renamed the BIONISA … British in name only. Honestly, they were meant to be simplyfying ISAs and they come up with another one. Of course, we’ll take the extra £5k/annum each, buy something listed on the FTSE, and dump a bit of FTSE in another account. Must have £10k of British stocks somewhere that I forgot to sell …
At least we can rest assured that the Tories are thinking about all the right priorities. A cut to inheritance tax? I mean what could possibly be more important right now than a cut to the taxes of dead people. Or an increase to ISA allowances for families like mine who are struggling with only being able to shove £60k/annum away tax free.
Phew. I was worried they might fritter it away on bribes to rich retired boomers and the 1%. Err just a sec …
My first thoughts on this were that it sounded incredulous, but thinking back I have met so many high earners who have lived paycheck to paycheck, bonus to bonus with little ability to save. These were people who were supposed to be good with money as well not doctors advertisers or better paid journalists, etc. So no I don’t find it at all surprising that many of those in the £100k+ bracket are suffering.
As to what to do about stealth taxes, I think I have found something that will help a little. The CGT allowance has fallen making it much harder to fund ISAs by selling stocks and rebuying inside ISAs and SIPPs without paying tax. The way round it is to make charitable donations of shares instead of cash. That way you still get full tax relief on the value of the shares, but don’t pay CGT. I then rebuy the shares within SIPPs/ISAs from generated income.
I have yet to do this and some charities I have spoken to seem unable to handle it, but others saying it should not be a problem. The way it works is I write to the charity declaring the gift of X number of shares in Y. The charity then writes back thanking me for the gift and asking me to dispose of the shares on their behalf. I sell the shares and hand over the cash.
I would be interested to hear if anyone else does this and whether there are snags I should be aware of.
The British ISA sounds silly. I would use the allowance but just hold fewer UK shares elsewhere. My overall asset allocation would not change.
Yeah, sorry, but the obvious response is the right one: a high earner having to choose a cheaper holiday is not really ‘struggling’. Save language like that for people who can’t afford the basics.
@Peter , #5
I once had a conversation with an Actuary (1st from Oxford and PhD from elsewhere) – “do you like paying 60% tax on your bonus, would you like to avoid it?”.
No, he’d rather have £10k now than £25k in his pension (with no pressing need for the extra cash either)
Re the Australian pension scheme article in the FT, I felt it wasn’t quite as brilliant as it sounded? Firstly, only the financial service industry could suggest one of the causes of British underperformance would be the fees being too low!
Secondly, it’s a bit easier for private equity to be valued higher than it actually is, which makes your account look good right up the moment you need a pension.
Thirdly, if every scheme that underperformed for two years is automatically merged with another scheme, surely that’s creating survivorship bias on a gargantuan scale?
I’m not saying the British system is better, just that I’m not sure the Australian system is as good as that article is suggesting.
Windy
Well, I’m in the even more rarefied air of the 7 figure earner who lives on cashflow. My current balances in my accounts are about zero, my monthly outgoings (across a fairly complicated series of personal and SPV type vehicles) are about 60k, plus I’m getting divorced, buying a new house, paying for building work on another one and so on. It’s easy to spend £100k a month without trying that hard . People would say I should sell my helicopter or the third Ferrari, but come on, a man’s got to live?
If Hunt is serious about giving business a tax boost, then maybe it would be preferable to give productivity a helping hand via tax breaks on investment, rather than say a reduction in corporation tax. I understand that previous corporation tax cuts have merely resulted in higher dividends rather than investment.
As for a Great British ISA, I assume the rationale is to appeal to a certain kind of patriot who who currently only use cash ISAs? I doubt that it will happen, as the majority of the UK see cash and property as the only viable choices. Moreover, as already evidenced by some comments above, existing investors will find ways to use this proposed ISA to circumvent a switch from foreign/global investment.
@Windinthefens, yes I thought the article looked self serving. Well worth comparing the great returns from the growth and high growth Australian pension funds against that of the MSCI World Index. 11.6% pa over the last 10 years. It would be far better for pension fund members if the pension funds just gave up and tracked the index. That goes for the Australian funds too.
@Naeclue (#15):
Re: “It would be far better for pension fund members …”
Agree, however such a strategy will never happen as Turkeys (for which read the plethora of costly advisors, actuaries, consultants, and assorted other hangers-on engaged by pension funds) do not have a track record of voting for Christmas!
Re your stealth tax wheeze at #8, is it not the case that this only works if you were already making/planning to make such donations?
Anecdotally the fact 6 figure earners are struggling doesn’t surprise me one bit .
When I compare myself (one of your fireside chatters) with my peers 2 things stand out:-
1) their reoccurring expenses are far higher. 1 I can think of earns 50% more than me but 2 children at private school, a whopping 400k mortgage (90% when he bought the house) and a tesla on tick. Another earns about the same and leases a porsche and past year went on 4 overseas holidays that were easily 2 to 3k each .
2) the other is that they don’t have the backkground wealth to support the lifestyle. Its all income based . When I buy cars or holidays alot is covered by investment returns and I keep my fixed expenses low so this can change at any time.
I think it’s the delayed gratification idea again . They get the income and instead of waiting a bit they want the lifestyle now and so never build wealth to support it.
As you say tiny violins compared to people actually struggling but all this will have an effect on a consumer driven economy like ours I think -it has to
I echo @Windinthefens and @Naeclue above I was disappointed with the FT article (especially so as I very much respect Jo Cumbo, the journalist who wrote the piece).
I want to assure readers that things are nowhere as bad as painted (speaking as someone with feet in both the pensions world and private equity valuation world). On performance, the UK and Oz have been similar for most of the last 10 years. The big issue is that a lot of schemes overweight UK equities and, especially, UK fixed income and those got the stuffing kicked out of them. I’m pretty sure most of the difference in performance is due to the last 12ms. I also think one should also be wary r.e. private equity valuations as they often have a significant degree of staleness when markets downturn (quick to go up, slow to go down).
Another thing to note is that the industry is increasingly accessing private investments and doing so without the need to pay 2 and 20. Nest, for example, already allocates a significant amount to private investments and has a public policy not to pay performance fees. I and many others in the industry are strongly against the watering down of the fees cap – all the evidence points that it enriches the fund managers and the expense of savers. The majority of money is invested in low-cost global index trackers and that’s exactly as it should be – that is well-recognised in the pensions world as much as the fund managers may moan about it.
A note on consolidation. This government and previous ones have been strongly hostile to DC consolidation. This is despite the fact we’ve seen through Australia’s hard-earned experience that a lack of consolidation and small pots were a real drag. The about turn has been quite sharp. But my perception is that there is no joined up thinking from a public policy point of view a cynic would suggest that the current crop of politicians see the growing DC pots as money that ‘needs to be unlocked’ i.e. in a way advantageous to politicians interests.
@Al Cam, yes you must give the shares to the charity at the outset. You cannot simply sell shares, give the money to charity and claim CGT relief. Some charities actually have arrangements with brokers who will then take the shares into the charity’s account and then sell them. Some charities seem to offer a “paper trail” option whereby they direct you to sell on their behalf, which at present would be my preferred option. Others say they cannot handle it and simply direct you to Share Gift or the Charities Aid Foundation (CAF).
This can all be done very cleanly through CAF, but that adds to costs as CAF take a cut.
Slight tangent, but hopefully ok for the wide breadth of weekend reading topics. Just been putting a bit of effort into this years self assessment and see that HMRC have now introduced a scheme to help me ‘manage my payments’ in order ‘not to become indebted to HMRC’ – this ‘payment on account’ business. How kind of them to help me out like this. So it seems I have to pay up in normal way for FY22/23 but also pay half the forecasted tax due for FY23/24 by end of July! Don’t know if this is new, or just new to me possibly because I have exceeded some SA tax threshold, either way, the sneaky little f***ers… Anyone know if this is opt outable? (I seriously doubt it). At least they still always round down to the nearest pound 😉 I wonder how many billions that decision costs them?
@ TDM (#18):
Re: ” … a cynic would suggest that the current crop of politicians see the growing DC pots as money that ‘needs to be unlocked’ i.e. in a way advantageous to politicians interests.”
Surely not, with our crop being amongst the finest of the finest, etc!?!?!?
@Rhino:
See e.g.: https://www.gov.uk/understand-self-assessment-bill/payments-on-account#:~:text=You%20have%20to%20make%202,deducted%20interest%20on%20your%20savings
@Fatbritabroad, your comment reminds me of a conversation I had with a neighbour who was complaining about his cost of living. He has had an Aston Martin parked on his drive for the last 5 years which has been out a handful of times. I think the ultra tight cover might be a deterrent though as it looks incredibly hard to take on and off.
@Rhino. As a member of a LLP for over a decade, the HMRC payment on account has always existed. HMRC will ask for 50% of the prior year’s tax bill but you can override this. I always change their number (sometimes up and others down) and I’ve never had HMRC complain about any of those changes. Just make sure the changes are justifiable and you are not obviously trying to delay paying tax.
I don’t really see why this is cheeky. We’re talking about paying the tax bill for Apr23-Mar24 by July 24, so generally speaking it’s not as though you don’t have both visibility on the magnitude of the tax bill and the actual money to pay. Any amount of compensation that is deferred or uncertain, just mention that and they won’t expect you to pay tax.
Cars are definitely one of the biggest drags I think in terms of reoccurring costs. Especially now with interest rate rises , Having bought a second hand car recently and been offered finance from the dealership at nearly 13%!
I switched from leasing a few years ago to buying a car outright second hand. though I still have a weakness for ‘too much car’ at least that limits the damage
Having said that I do wonder at the upper end having talked to someone recently whether I’m missing something in terms of leasing vs buying argument in that is there an opportunity cost of tying too much money up in a depreciating asset and if you actually have the money to buy a car outright can it be better to leave said cash in productive assets and pay the lease costs out of the returns?
Talking to a finance broker I know that’s exactly what many hnw people do with very expensive cars.
And in a similar vein our managing director was talking about the fact he uses finance for the business insurance premium despite having plenty of money to pay for it as it leaves the cash free to be put into more productive assets
Anyone more learned care to weigh in?
@Rhino ive been paying on account for years. Its a mickey take.
Re paying on account. Effectively brings the those taxpayers into near-alignment with those on PAYE then, unless I’ve misunderstood something.
“That the study was conducted by RBC Brewin Dolphin – a wealth manager, rather than a poverty campaigner – might raise further hackles.”
In one sense, yes – I know which lies a poverty campaigner will tell and therefore know not to bother reading.
Whereas I don’t know what a wealth manager will suppress (I assume that bare-faced lies might be avoided in case of potential regulatory problems) so I might be tempted to read to see if I can spot the distortions. But in fact I wouldn’t. To the highly paid I would bid a cheery “Pull your fingers out” and turn the page.
No matter your salary, income, or means of disposal, you’re gonna come a cropper if you’ve over-leveraged.
Sadly, people got paralytic on QE moonshine for a dozen or so years. A 2t 4×4 lump on the driveway of a pad with a huge mortgage. School fees, keeping up with the Joneses, paying off minimum credit card or tarting to 0% every 12m to 18m…. Holidays, spend, spend, spend.
For some (maybe even many), sensibility was lost. How many actually read the mortgage small print that said ‘check you can afford this is interest rates go to 5%’. How many remember the old adage a mortgage should never be more than 1 week’s wage in a month’s pay packet?
It’s now coming home to roost. Mrs WTCLF and I have always lived sensibly and frugally whilst having a load of fun along the way. Debt paid off every month aside from a smallish mortgage, which now stand at something like a 0.5% combined salary multiplier. Cloth cut accordingly.
But I do have sympathy with those in trouble. Learning the hard way is sometimes the only way…
Echoing a great many of the comments above (@tetromino, @peter & ors): the violins here are so tiny that they might need a scanning electron microscope to see. With so many millions suffering real hardship or catastrophic misfortune in the world, I’m not spending much emotional capital on sympathy for six figure earners in the UK. My sentiments are with Phillip Inman in the Guardian today (“Britain can’t borrow at these high interest rates, so we must tax the rich”).
@JDW, @ZX & ors: this ‘British’ ISA idea really is lunacy squared. It’s so stupid that it just might happen. If it does, then rather than topping up on yet more stretched valuation US tech masquerading as a UK listed IT (i.e. SMT), & bearing in mind that the composition of the FTSE 100 is deeply uninspiring, maybe – if there is any extra ‘UK only’ allowance – a UK small cap fund momentum strategy would be interesting for the increment (i.e. use it to buy the best 3 UK small cap OEICs based upon their past 6 months’ total returns, hold for 6 months & repeat). Small & mid caps are now cheap compared to large caps; & UK, European & Emerging markets are cheap compared to the US. UK fund momentum has also historically worked best with small caps. Finally, it may also help to provide some useful diversification away from the US tech sector (esp. the Magnificent 7), which increasingly dominates cap weighted All World trackers.
Sensible policies being suggested by the chancellor. Most people want to stay in the job so do what your core voting base wants. Even if its very suboptimal.
I had a brief conversation with a co-worker last week who I reckon must be on 1/2 m gross total comp about the British Isa. I was informed that it was irrelevant as they didn’t have enough cash to invest. Another person around my level looked as if I was giving birth. I was flabbergasted about the inference on their spending habits!
Dave Ramsey comes across as a dominant bully who cannot admit an error as that would be to eliminate his raison d’etre. No doubt we’ve come across these people throughout our workplace or other interactions. Best avoided, if at all possible.
Re: FT “Can the UK learn from Australia’s pension savers?”
Also, FT Google search results:
20/04/2023 “What the UK should learn from Australia on pensions”
26/02/2018 “What we can learn from Australia’s ‘super’ retirement plan”
18/05/2014 “UK pensioners can learn from Australia and US”
…think I spotted others similar in the search results. But wait, what’s this…
09/01/2019 “Flaws exposed in Australian pension system” Eek, maybe we shouldn’t take too many lessons from their schemes 🙂
Interesting take on Singapore by Noah Smith in this weekend’s crop of links. I’m coming up to 2 years here now (my how time flies) and recognize a lot of what he describes as forward-thinking planning by Singapore governments past.
The real gems are in the comments though, and paint a much better / more accurate picture of the island. Budding Chancellors-to-be, take note, Singapore on Thames is a pipe dream, as socially and economically they are completely in a different league.
I live in a wealthy suburb of a (relatively speaking) low cost of living City in West Yorkshire and I am always amazed at how people spend money. When you have children you meet various parents and it’s fascinating how many look outwardly ‘wealthy’ yet are living on very tight margins. Tesla cars, detached houses but would struggle with an emergency payment should it arise. We sometimes feel as though we are living within an alternative universe and perhaps we have got things wrong.
These posts and the comments are always a reassuring nudge that we are going to win the game long-term despite the short-term dopamine hits many are striving for.
Id say there’s trouble ahead but every time I say this it seems as though many manage to ride it out. Perhaps these earners will continue to get by and the impact will only be felt when they enter their 60’s/70’s due to overworking to pay for the overconsumption years.
Interested in others perspectives
Whilst like many here I have no sympathy for £100k+ earners “struggling” but it does go to show everyone lives to their means. Bigger houses, cars, toys, holidays. Once you have tasted that lifestyle inflation having it taken away by rising costs must feel terrible. Like you are going backwards.
Similar to Peter’s #5 comment when I’ve suggested to others about increasing pensions contributions to minimise tax only a few did so. The rest looked as if I’d just murdered their whole family in front of their eyes. The look of shock was hilarious.
People don’t want to sacrifice their lifestyle for delayed gratification because “yOu CoUlD bE HiT bY a bUs tOMmORroW”. Yes and you could also live, statistically speaking, into your 80’s dumbass.
The GB ISA is a load of rubbish. 95%+ of people don’t use their current ISA or pension allowances. Unless this is some backdoor corporate proposal?
AndyD4
I would welcome a GB ISA if it would encourage the introduction of ETFs domiciled here, gaining the same £85k protection as GB-homed funds. I would be happy to put a bit into UK-domiciled versions of VUKE, VMID and IUKD when they look good value. I wouldn’t touch individual shares, however, whatever the incentive.
@Fatbritabroad in comment #25:
You can do car leasing from pre-tax salary, as a salary sacrifice scheme, so long as your workplace offers it. For people paying 47%+ marginal tax rates, that’s a very attractive pitch. Car insurance is sometimes included in the leasing, and apparently even an EV charger installation can be.
https://www.drive-electric.co.uk/business/services/ev-salary-sacrifice/ for example
@Pikolo that’s just a company car scheme, pure and simple – but currently for EVs the BIK rate is low (3% IIRC this year) so it’s fairly cheap, hence why people buy electric cars at enormous pricing.
Interesting on a tangent that people refer several times to “Tesla on the drive” as a mark of being well off (or in this context, high spending) – which doesn’t really bode well for the Tesla bulls if only rich people can afford them…
@Ryan – in the end, nobody wins the long game.
I once read that humans have evolved two distinct strategies: live for today v save for a rainy day. Spending everything is better most of the time from a evolutionary perspective. But every so often, in times of famine etc, the savers win.
My sister and I had the same financially difficult upbringing. She spends to the hilt justifying it as it’s better to experience and use her relative increase in wealth, I save to the hilt – justifying that it’s better to have something for a rainy day. I think we are both getting better at seeing the merits of the other’s approach as we get older.
The British ISA was a flawed idea when it first floated (and discussed here) a couple of months ago, and it’s only got more ridiculous with the counter-briefing about simplifying the ISA regime. Perhaps they intend to do what the Office of Tax Simplification (I think?) said it would do with one new regulation in meant one had to be scratched off. So abolish some ISA confusion and introduce some more elsewhere.
It would be pretty easy to avoid ITs and ETFs being used by banning collectives. Of course this would mean you couldn’t invest in a ‘British’ IT / ETF (FTSE 100 dominated equity income trusts, say) which then has the government directing citizens to buy individual (non-investment) companies, which is something ‘it’ has also tilted against in the past.
So easy enough to rule out Scottish Mortgage (despite the name) but much harder when you get into the weeds. Is Diageo going to be excluded because it does most business abroad? Okay, then perhaps a qualifying share has to do at least 50% of its business in the UK. Fine this year but not next year if the US operation goes crazy. Or do we not want British businesses to expand overseas?
In practice (you’d hope) this will be unworkable. Even if they do something crazy like create a shortlist of ‘permitted’ investments by next year any company included could fall off it. Will they be ineligible to hold, or just to buy? Who will police this?
That leaves us back to ‘must be listed on the LSE’ which as others have said has nothing to do with the UK economy (from memory 75-80% of income of FTSE earnings are generated overseas), although I guess it does tilt towards the ‘save the LSE’ angle.
In practice, once you open the door to nationalism this kind of foot-in-arse nonsense is the result, as I wrote in April when this sort of thing was floated for pensions:
https://monevator.com/weekend-reading-first-they-came-for-our-freedoms-now-what-about-our-pensions/
It makes a little more sense I suppose for VC and — if you wanted to do it — for housing and property (which doesn’t move).
Perhaps if I was a Brexit-y politician the ‘best’ thing to do would be to get somebody to set up an actively managed private/public crossover fund where a few hand-picked managers (ideally outsourced, like an IT board outsources portfolio management) to ‘invest in Britain’. You could then invest your extra £5K, say, into this ‘British’ fund and the government/managers could ensure it would invest in Britain.
To be clear I don’t like this idea, no more than I like the idea of Britain’s financial services industry getting an officially mandated torrent of cash to invest in private equity or VC, say. Buy a world tracker and get likely a very similar result with none of the idiosyncratic risk. (If it’s good enough for the Norwegian Sovereign wealth fund etc…)
As I’ve said many times, I put things in these links because they’re interesting. Often they align with my own perspective but certainly not always.
Anyway, an actively managed ‘Buy Britain’ fund could at least do what it says on the tin, and what people think they’re buying (and government wants them directionally to buy) so that would be something, even if overall it was a crapshoot whether it did better or worse for its investors.
Thanks for the great weekend convo all! 🙂
Edit: Sorry for the typos in V1 of this comment if you were emailed it. Typed on a bus as I wanted to chip in and I’m running out of weekend! 😉
Edit 2: I’m being unclear about the Norwegian fund. I know it doesn’t hold a world tracker. I’m just saying Norway invests its rainy day fund globally, as indeed all of us should, for myriad reasons.
#1 FitandFunemployed
I think a generation is generally considered to be 20 years (60 years being more like a lifetime), so I think your initial gut feeling was correct (ie more than 300 generations (more like 1,000)).
@Investor
“In practice (you’d hope) this will be unworkable. Even if they do something crazy like create a shortlist of ‘permitted’ investments by next year any company included could fall off it. Will they be ineligible to hold, or just to buy? Who will police this?”
When ISAs were set up in 1986 the idea was explicitly to support the London Stock Exchange and the governments ongoing privatisation efforts
Up until 2001 any PEP (the ISA forerunner) had to be invested into an authorised collective investment scheme like a unit trust or IT which had half or more of its assets in UK shares (the last five years or so it was European shares). There was indeed an authorised list of investment funds for ISAs/PEPs
This system functioned well for about 15 years so its perfectly possible to reinstall
Alongside this there were single company PEPs which had to be listed on the LSE
The legislation to reinstate all of this already exists and just needs to be reinserted into the statute books
How long would it take for the industry to put in place the necessary changes – I’d say not much more than a year
“The past is a foreign country: they do things differently there,” LP Hartley,
The Go-Between (not to be confused with Fly Fishing by JR Hartley of the same mid-80s vintage)
@TI: tempting to say that a Brit ISA would be the thin edge of a Peronist, Corporatist or Clientist political mindset. It’s an idea that doesn’t fit with either mixed economy social democracy (which acknowledges that people should be free to spend and invest their after tax income as they see fit) or classical free market liberalism (whose economic, but not social, values the Tories imbued via Thatcher). It’s a throwback to a horrible hybrid of narrow minded nationalism, conspiracism and magical thinking given Prime Ministerial expression in the Maybot’s ‘Brexit means Brexit’ and ‘citizens of nowhere’.
Sadly, it wouldn’t be surprising if ‘Brit ISA’ happens and is then used by an incoming Labour government (which I otherwise support, but not on this) to try to access funds in SIPPs and ISAs by requiring them to be invested in UK enterprise (whatever that might mean) in order to continue to receive the same or any tax benefits. We’re on a slippery slope.
@Ryan In a similar position (Elsewhere in the North) and as you say I can’t wrap my head around the stress and anxiety involved in such high levels of “lifestyle” spending. As you suspect I think for most the “bankruptcy/selling the house” outcome is unlikely and it’s more a slow painful experience of being stuck on the treadmill for longer and longer. I think balance as ever is the key, I’m sure some of my spending on travel would not be considered FIRE friendly but there’s not much joy in life if you can’t do something you enjoy.
@Tedious P. Indeed, my office car park is covered with EVs as of the last 2 years. Example A: Colleague with brand new £60k EV SUV but only incurs £50/month of BIK tax charge. Seems like an unfair tax break for high earners to me with some green washing thrown in for good measure
I’m not sure why people always feel the need to debate whether violins should be played (and what size if so) when this sort of report comes out. Nor why some go further and heap moral disapproval on the subjects of the report. All they did was answer a survey: no one is asking for tea and sympathy, let alone a handout.
Agree with post #39 by @G. Sorry Ryan, on a long enough horizon, the survival rate for everyone drops to zero. You ain’t going to win. It’s just a question of how you lose.
While living moment to moment is clearly too short-term, the sort of deferred gratification that some FIRE prophets espouse seems worse. It’s not just death. Loads of things can go wrong. I’m not at all convinced that the probability weighted result of front-loaded deferred gratification is a good trade. Plus all this frugality, tax wheezes etc seems like being penny wise and pound foolish. Wouldn’t it be more efficient just to earn more?
If you look at that Chase couple, they are putting £9k in a pension and saving another £12k. So over £20k/annum of savings (plus whatever match one of them gets from the employer). Another £20k is mortgage costs for a house That’s an asset they are paying off. I can estimate the mortgage is £400k with 5-year fix at 2%. At a little over 3x gross income, that is not over-stretched.The £1.4k on private healthcare. That’s a bargain. They’d be mad not to pay that to dodge NHS waiting lists.
So actual spending is more like £46k/annum, over which £21k is childcare 4 days/week. Frankly, that isn’t expensive for childcare and if they need to hold down two jobs, what can they do but pay up? So we are down to £24-25k of actual spending. Or £2k/month. Is that really extravagent to all these frugal FIRE types? Seems pretty boring if it is.
@ZX I coined the phrase “Get enough pounds and the pennies don’t matter” to that effect, lacks the pithiness of penny wise, pound foolish granted but makes the point!
Not sweating the small stuff is vital for most people to stay the course of higher savings/investment rates long term IMO.
@Fatbritabroad #25
The last few cars I’ve bought have been 3-4 years old. My strategy is to negotiate the biggest top line reduction and freebee inclusions (service deal etc) as possible on the proviso that I’m taking some sort of finance deal at an eyewatering APR. Car dealerships are often able to offer these as they receive tiered incentives for selling loans.
Then shortly after the purchase I simply pay off the PCP or HP loan with a 0% credit card and proceed to pay the minimum payment switching as the 0% deals expire.
This works really well if you’re happy with a nearly new car which you intend to hold for several years and you hold sufficient savings that you can settle the loan should you need.
In the last few months I’ve finally paid off a loan for a car I purchased in 2014 and taken another for a second hand car for my wife. I’ve managed to find deals for 0% balance transfers on 0% fee’s since around 2010 when I first began buying cars in this way. All the while benefiting from holding the balance in an ISA.
Interesting rosario. When settling the loan do they not still charge you the interest anyway?
I hadnt realised that
I was under the impression that early repayment fee’s had been abolished under EU regulation (when we were still in) but a quick Google search suggests this might not be the case. Definitely worth checking.
I can say for certain that I’ve not paid such a charge on the 3 car’s I’ve bought in this way.
The 0% credit card payment option still exists if the charge were to be insisted upon. Just removes some of your bargaining power on account of not taking the loan.
I’ve been very focused for a few years on pension contributions to reduce effective tax rate to the extent I was likely running into LTA issues (though I still figured it was a wash as at least 40% in = 25%penalty + 20% out assuming you only draw income in basic rate band). So Hunt did a big favour to people like me and have probably squeezed another year or so of work out of us to fill £60k pa.
But then I’m very much not keeping up with the Joneses on capital spend at home on house improvements or big car to show how successful I am. I still feel I’ve been hammered on IT and NI, but then I always expected the price to pay for Covid would be heavily borne by earners for the next decade or so which is why I do intend to pull the ripcord to join the ranks of the advantaged low contributors. Tax is a funny game of incentives when you look at it.
GB ISA will be largely bollocks. No more attractive to those unable or unwilling to fill their current allowance and just a gimme on top for those willing to rebalance to chuck £5k into a UK Investment Trust etc.
IHT doesn’t really need anything throwing at it other than perhaps an inflationary rise in thresholds. It’s only there as a budget measure because the Daily Mail and Torygraph are obsessed with it.
@Neverland — I agree it’s extremely possible to create a list of UK listed shares. The issue, which you have truncated out, is that those listed UK shares often do not do very much business in the UK, as I cite re: Diageo.
But yes, if they want to prop up the LSE listings then they may see this as useful. (Obviously I think it’s silly, but at today’s valuations worse places to put your money).
I noticed some comment in the press over the weekend about a “UK sovereign wealth fund” (This Is Money I think) so perhaps my ‘Buy Britain’ fund idea isn’t 1,000 miles wide of the mark. (Again not an endorsement of it!)
Another thought is where is the moral hazard in the over leveraged lifestyle. If a large swathe of middle to high income earners end up underwater and in danger of mortgage default won’t the political pressure on any govt that wants to stay elected be such that they’ll effectively get a state bailout?
Which would be a kick in the teeth for any that have cut their cloth prudently with a view to the rainy day particularly if their SIPPs or ISAs become part of the equation for the bailout.
Can see it happening unfortunately. Got a big house/car that’s just success for your hard work. Got a big pension pot that’s greed.
@TI, as flawed as a British ISA may sound, this would still be better than the original PEPs. 75% had to go into listed ordinary shares in UK incorporated companies. ITs did not count. The remaining 25% could be invested in ITs or UTs.
@BBBobbins: Yes, also can see that type of scenario eventuating, most likely under some future Labour administration.
As a colleague of mine used to say, ‘no good deed goes unpunished’. Save for your family’s future via ISAs and then face some sort of punitive exit charge if you’ve got over £100k in there, perhaps with a proviso that the charge is tapered if reinvesting the balance into government preferred infrastructure projects (HS3!)
@Naeclue: Fear that the restrictions of the old PEP rules and any ‘Brit ISA’ terms now would both be used in the future as precedents for forcibly redirecting ISA funds into individual UK companies and/or state sponsored infrastructure drives.
Of course, it wouldn’t necessarily always have to be a total disaster if it happens. However, I very much doubt that – over decades – the returns from UK only investment would match a global tracker, or even 60/40 (with VWRL for the 60). There’s a reason why the UK accounts for just 3.8% of global equities’ current market cap, and it isn’t that the market as a whole is daft and radically underpricing UK shares.
This is something that rings true for me.
I’m at one of the cliff edges that you mention, earning slightly above the 50k mark where I start paying 40% tax plus losing child benefit. As I have 3 children I figure my marginal tax rate to be around 60% (although I could be wrong). Therefore, I always sacrifice a lot of my salary into my pension, which is obviously good for future me. However, it is becoming harder, and harder to “get by” (my wife works part time so we are heavily reliant on my salary) without needing to reduce my salary sacrifice and being dragged into the higher tax band.
Having come from a family where both parents worked what would have been minimum wages jobs if minimum wage existed then, I appreciate my good fortune to earn what I do. If anyone needs help it’s those at the lower end of the spectrum, I don’t believe someone on minimum wage working full time hours should pay any (income)tax.
However, looking at the state of public services in this country maybe we should be thinking about using and headroom to better fund these.
Regarding car loans (#49) my dealership were offering a few thousand “deposit contribution” for taking out PCP. The loan agreement had a clause about being able to back out within the first 14 days… as the loan was a separate agreement to the car I benefited from the “contribution”. I.e. car was £15k, less £3k contribution means the dealer arranges a loan of £12k for the balance. I drive away with the keys, and then phone the PCP company to clear the £12k saying I’ve changed my mind.
I don’t know if this is / was something they were legally obliged to offer, or if me doing this once will put me on a blacklist for any future purchase.
@TimeLikeInfinity
“tempting to say that a Brit ISA would be the thin edge of a Peronist, Corporatist or Clientist political mindset. […] We’re on a slippery slope.”
What utter rubbish.
Its totally normal for a tax break to come with conditions and limitations.
Eg. with personal DC pensions you can’t access any funds until 57. Until this year there was lifetime allowance. Until 2016 you had to buy an annuity with your fund. Etc.
It really does get to the heart of the rentier cancer eating away at British society to see the wealthy complain of the affront that they have to pay ANY taxes on their unearned income or gains.
Cf. any discussion about inheritance tax or capital gains tax on houses
@BBBobbins
“Another thought is where is the moral hazard in the over leveraged lifestyle. If a large swathe of middle to high income earners end up underwater and in danger of mortgage default won’t the political pressure on any govt that wants to stay elected be such that they’ll effectively get a state bailout?”
We already had that for COVID and effectively government debt went up by 25% of GDP.
Benefits are so miserly in the UK it simply wasn’t politically possible to inflict them on average voters.
By contrast in most European countries the COVID response was about 10% of GDP in extra debt simply because they didn’t need to throw in as much emergency help (also our energy support scheme was much bigger to be fair)
As a thought experiment imagine how much less COVID would have cost if the average family had £10,000 in savings instead of less than £1,00p
@Neverland #58: respect your POV (the underlying sentiments of which I have some sympathy for), but my point is that ISAs are quite unlike existing tax favoured UK company only investment products; such as VCTs, EIS and SEIS.
Whilst, 25 odd years ago, PEPs did have a nationality restriction (i.e. only UK listed company shares etc), I don’t recall S&S ISAs ever having such a limitation since they were introduced back in (IIRC) 1999 (I may be wrong on this, and am happy to be corrected if so). Therefore, if a future government does start making existing ISA tax treatment contingent upon UK only investment, then that would be a radical break with a generation long policy of allowing S&S ISA holders basically unencumbered investment options.
I think that situation would be somewhat unfair, might undermine tax certainly (to an extent), and would likely reduce the personal incentive to invest for the future (which can itself have appreciable societal negative effects if, in old age, people need more state support because they didn’t invest to provide for themselves when they were earning).
@Neverland – back to the strawmen I see. Back on the delete list 🙁