2016 HYP Review

My mature overall investing strategy is these days not much more complicated than a diversified collection of low expense, physical (as opposed to synthetic), income based (as opposed to accumulation) ETFs tracking enough indices to give me diversification across asset classes and countries held within low expense wrappers.  While this is where my journey has left me, as the best strategy for me, I’ve tried a number of different things over the years that I’m either neutral on or negative to.

A negative, for example, are actively managed investment funds.  As I’m negative on them I’ve done everything I can to move my investments away from them but even so I still have a couple that I can’t sell for tax reasons.  A neutral is my UK High Yield Portfolio (HYP) which because I’m neutral on it now just sits passively amongst my portfolio doing its thing.  It’s just completed its 5th calendar year and still contains a not insignificant £65,000 or so of my hard earned wealth.

Its original aim was to help me live off dividends only in FIRE and in that regard it’s still punching above its weight as it’s now only 6% of my total wealth but spins off 16% of my dividends.

My neutral approach mean changes to the HYP are now few and far between with changes for now only being forced by corporate events.  In 2016 there was only one of these:

• Amlin.  Bought on the 29 August 2014 with a forced sale on the 08 February 2016.  AML provided me with a total return of 59% over a little less than 18 months of holding

I’ve written and published that book

Over my 9-year journey to financial independence (FI) I’ve had a number of readers of both this blog and the fora that I frequent ask me if I’d write a book.  If the truth be told I was reticent while on my journey as I thought I would be a hypocrite for writing about how to achieve something that I actually hadn’t done myself.  That all changed in July 2016 when I achieved my financial independence goal with being a hypocrite switching to feeling empowered and ‘qualified’ to tell the story.

I also thought that I was too busy to write the book but in hindsight that was just the victim coming out in me.  Like anything in life both achievement and success is all about unrelenting prioritisation in my experience.  Without that you just don’t have a chance.  So with a focus on just work and the book (thanks go out publically to a very understanding and supportive family who’ve had to put up with it and me) I’ve been able to get it written over the past months and it’s now published.

I’ve called the book - From Zero to Financial Independence in less than 10 Years: Tools and techniques to escape the rat race quickly.  It’s currently only available on Amazon but is available in both ebook and paperback formats giving some choice.

So why write it?  A few reasons:

• I’ve found my FI journey an incredible experience both financially and spiritually.  I’ve also learnt so much, including a lot about myself, most of which will serve me well for life.  This includes a switch to focusing on quality of life rather than the far more common standard of living.  At age 44 I am also now in a position that is incredibly liberating and empowering.  I would just love others to be able to at least see what’s possible and hope the book might spread that message further than this blog.  If they then choose to stay on their current course I’m more than ok as at least they saw an alternate option and made a choice.  The book has only been live a few days and this goal is looking good so far.  It is already ranked number 4 in their retirement planning category, number 11 in their ebook personal finance category and number 24 in their ebook finance category.
• I wanted to provide the book that readers asked for.
• An unexpected reason was that I actually found the whole process incredibly cathartic.  For years I have been learning and had tonnes of information swirling in my thoughts.  By sitting down and putting pen to paper it allowed all that to be organised and filed forever freeing my thoughts for more.

Pushing pensions to the limit

I continue to find pension wrappers are a powerful tool for building FIRE wealth quickly.  Let me demonstrate with a couple of quick examples:

• Over my FIRE journey I am fortunate to have found ways to earn more which means that I am today a 45% additional rate tax payer.  On top of that I also have to pay 2% employee national insurance on the last of my earnings.  This means that if I earn £10 and I don’t salary sacrifice it into a pension wrapper I only end up with £5.30 to invest.
• My employer allows pension salary sacrifice, has a contribution match up to a certain percentage and also gives me 10% of the 13.8% employer National Insurance that they save when I contribute to the company pension.  So under these conditions if I put that same £10 into the company pension I actually end up with £21 to invest.  That’s nearly 4 times more.
• Even if I continue to contribute to the pension wrapper once the employer match is over its still favourable.  In that instance I still end up with £11 going into the pension which is more than 2 times the savings outside of the pension.

The wise among you will now being saying ‘but pensions are just a tax deferral scheme’ and that’s certainly true but let’s look at how that will play out in FIRE.  The UK in my view can almost be considered a tax haven for those with enough wealth that work is not required.  To demonstrate let’s take £20,000 from that pension pot every year.  The 25% pension tax free lump sum effectively gives one £5,000 tax free.  Then one also gets a 0% tax rate from the £11,000 Personal Allowance leaving just £4,000 subject to 20% Basic Rate tax.  That works out to be an effective rate of tax on the £20,000 of just 4.0%.

Move to the Mediterranean and it could be even more favourable.  Cyprus, for example, gives a choice of how pensions can be taxed.  The first is 0% tax until you earn EUR19,500 with the next band being 20%.  In this example our £20,000 (assumed to be EUR22,460) sees an effective tax rate of just 2.6%!  The other method favours high pension sums as the income is taxed at the flat rate of 5% on amounts over EUR3,420.  In this example one’s effective tax rate would be 4.2% so one would pick the former in this example.