Raise the Private Pension Access Age & My Global Exposure

Firstly, an interesting article in the Financial Times today – Retirement experts campaign for pension freedom age to rise to 65 (should be a free click through or alternatively Google the title and you’ll also find it for free).  It looks like the pensions industry is starting to lobby the government to push back the age at which we can access our pensions from as early as 55 (some of us are not that fortunate) to 65.  Apparently, according to the Society for Pension Professionals:

• “...55 “was far too young” to allow full access to retirement savings...”
• “...it is also too young to consider oneself retired from a working life...”
• “Although I recognise this will not be popular it would result in better outcomes in true later life.”

It’s really great to hear that the Pensions industry apparently has our welfare at the top of their agenda.  To be honest though, in my years of investing I've never seen the Pensions industry do anything that has my best interests in mind so I’m not going to start believe their tripe now.  The cynic in me says that this is yet another way to extract more expenses or fees from us.  Just think about all the extra fees available if you can’t access your wealth for another 10 years.  Come to think of it maybe the third bullet point above is actually right.  Maybe it will result in “...better outcomes in true later life”.  It’s just unfortunate that those better outcomes will be for the Pensions industry rather than the punter.

As always some great Comments in response to last week’s post which included some questions around my International exposure.  Rather than give half an answer in a Comment I thought I’d spend some time and give a more thoughtful detailed answer.

As of this morning my Asset Allocation looks like this:

Click to enlarge, Retirement Investing Today Low Charge Investment Portfolio

In pounds, shillings and pence it is £819,004 and represents everything I own.  Let’s work around the pie chart to uncover my Globall exposure.

Further UK Equity Diversification

I am a disciple of Tim Hale who in my humble opinion is the investing granddaddy for UK investors.  From the emails I receive it’s rare that I can’t refer a reader to his book Smarter Investing: Simpler Decisions for Better Results for the answer to their question.  It’s a must read for anyone serious about investing from the UK.

It’s therefore probably no surprise to find out that my investing strategy is largely based around the teachings of his book (I started in 2007 and so I used the first edition as a basis).  At its most basic he starts with what he calls a Level 1 portfolio mix consisting of Level 1 UK equities and Level 1 UK bonds.  He then goes on to show how you might diversify a portion of your wealth away from these to create a portfolio for all seasons.  Importantly though no matter what your investment horizon large allocations always stay with the Level 1 building blocks.  So the question then becomes what Index should be used to represent Level 1 Equities?  As always Hale has the answer with “For your Level 1 equity allocation, the return benchmark should be the return of the whole domestic market, which provides a diversified and representative benchmark as it includes most public companies, be they large or small and weighted according to their market size... The FTSE All Share is the index of choice for the rational investor.”

I followed this guidance with no other exposure to UK Equities other than the All Share until late 2011 when I realised, that for me at least, I wanted more dividends than my strategy was forecast to give me at the end of my accumulation stage.  I therefore started to diversify a percentage away from Level UK Equities towards a UK based High Yield Portfolio (HYP).  Today that HYP contains 17 companies with 83% of them by valuation coming from the FTSE100 and 16% coming from the FTSE250.  I then continued with this strategy until I reached the point where it looked like my total portfolio would enable me to live off the dividends.  I’m fairly comfortably there now and so don’t need to keep growing my dividends at such a great rate.

FIRE takes Determination

So that’s October 2015 pretty much done.  Another month where spending has been kept firmly in check with spending excluding rent and work costs weighing in at a hefty £529.

Click to enlarge, RIT October 2015 Spending

This week has been a killer work wise.  One where I'm not even brave enough to add up the hours worked and energy expended for fear of even embarrassing myself.  This week has also reminded me of one of the key unspoken elements required to FIRE (financially independence retired early) – DETERMINATION.  Let me explain.  Most of the themes that I'm using to FIRE are quite formulistic – Earn more, Live below your means to spend less, Invest tax efficiently, Minimise investment expenses, A diversified investment portfolio, Rebalance etc.  The one formula that I'm not using is that of an easy get rich quick scheme.  Instead my path requires commitment and dedication every day, every week, every month and every year until FIRE is reached.  For me that’s likely to be a bit less than 10 years.  For others it could of course be more or less time but still a relatively short time compared to those who intend to retire at State Pension Age.

... and that concludes the 8th year of my FIRE journey

I wandered aimlessly in the consumerist, save 10% of your earnings for the future, let compound interest do its magic (great post on this by ermine this week), with others taking care of my financial future giving me time to spend the rest, world for some 12 years before I woke up and realised I wasn't really getting anywhere from a personal finance perspective.  Sadly, early on that even included a stint in debt for a new’ish car because “I was worth it”.

Avoiding Tax via a not so well known Tax Haven

Think of a tax haven any tax haven.  Where did you come up with?  I bet many of you immediately thought of that fabulous tax haven for the rich - Monaco.  Some of you probably also came up with tax havens such as Andorra, The Bahamas, The Cayman Islands, Costa Rica, Panama and even Switzerland.  Did you think of any others?  How about the United Kingdom?  Now before you go spitting back into your tea bear with me here for a minute.

If you go out and work hard for a living as an Average PAYE Joe then I'm firmly with your current scoffing.  These guys and girls are I agree taxed heavily here in the UK.  20%, 40% and 45% are the well known tax rates.  On top of this you have the less well known effective 60% tax rate that is in play once you earn a £100,000 until you've lost all your personal tax-free allowance.  We also shouldn't forget about 12% employee and 13.8% employer national insurance contributions which are just taxes via another name and which add onto those well known tax rates.  It’s a very tax hungry country for a worker.

Let’s however now enter the world of FIRE (financially independent retired early) or even just Retired.  What can you now ‘earn’ and not pay tax on (of course these rules also apply to PAYE workers):

• From 06 April 2016 the personal tax-free allowance for earnings will be £10,800.  The Tories have also stated that they will increase this to £12,500 by April 2020.  Only after that are we into the 20%, 40% and 45% tax discussion.  Our retiree's pension drawdown will be considered earnings so will be taxed according to this.
• From 06 April 2016 the current Dividend Tax Credit will be replaced by a new £5,000 Dividend Allowance meaning you will be tax-free on the first £5,000 of your dividend income no matter what non-dividend income you have.  So let’s say our retiree has non-tax sheltered shares that are giving 4% in dividends per year.  They could have share wealth of up to £125,000 outside any tax shelter and be tax free on all the dividends.
• Similarly from 06 April 2016 a tax-free Personal Savings Allowance of £1,000 (or £500 for higher rate taxpayers) on the interest that you earn on your savings will come into play.  At current interest rates that allows a lot of capital in savings accounts outside tax shelters before tax comes anywhere near.  Perfect for somebody like myself who intends to live off the dividends in FIRE and needs a cash buffer.
• On top of this you can also take whatever you've accrued within your ISA’s tax free.  This could be a substantial sum.  I started investing in ISA’s late and even though I’ll FIRE relatively early I still expect my ISA pot to be £150,000 or so at the point of FIRE.  Take 4% in dividends/interest/capital from there and you have another £6,000 or so of ‘income’.
• If you need to do any non-tax sheltered tinkering then also don’t forget about the capital gains tax-free allowance.  That’s another £11,100 for tax year 2015/2016.
• Then finally the icing on the cake.  Our retiree is not exposed to National Insurance contributions but they can get free healthcare at the point of use.