My financial goals for 2017

Posted on by FIRE v London

In my professional life I’m a big believer in having clear objectives.  I want these objectives to be SMART – i.e. measurable, timely, relevant and so forth.  I first practised what I preach on my investing side last year, and found the exercise helpful but flawed.  So I’ve been pondering what goals to work towards this year.

Last year’s goals: no longer useful

My three goals last year (debt reduction, sticking to my target asset allocation, income) reflected the major change I made to my portfolio in January 2016.  I had taken on significant debt, which I wanted to know I could control.  I had shrunk and restructured my portfolio, and wanted to know it could generate a certain level of income.  And asset allocation is probably the single most important aspect of managing my (any?) portfolio so that needed to be in there too.

As I look forward into 2017 I am essentially now ‘steady as she goes’ with my portfolio.

2017 Goal 1: asset allocation

I will continue to try to maintain my asset allocation; in fact I am somewhat out of line right now so this will require some work.  This is a worthy Goal 1. In effect this goal should capture the controlling debt aspect too, because my target debt level is part of my target allocation.  So I’m not going to have a separate debt target this year. To be specific – I want at the end of each quarter for each cell of my allocation matrix to be within +/- 2% of the target.

Goal 2: savings rate – stretch target

As it happens my focus is switching slightly from income to expenses.  While I maintain that frugality / expense reduction / tight budgets are not, for me, an aspiration (quite the opposite) – I do track my spending.  I track it in order to understand what my investment portfolio will need to support in my Financial Independence.  And when I look back at spending in the last year or two it is slightly alarming.  So I think some form of spending-orientated goal is in order for 2017. So my Goal 2 will be spending-related.

I think there are all sorts of ways I could have a spending-related goal.  However I’m going to adopt an arbitrary one that touches a nerve for me: I want my un-tax-sheltered savings level to be at least 2x the ISA savings allowance this year.

My thinking here is that it is anathma to me to withdraw money from my tax-sheltered accounts (my ISAs, at this point – I’m not yet old enough to start withdrawing from my pensions).  Long term, for reasons I can’t quite put my finger on (though Gollum probably could), I hope to avoid touching these funds in perpetuity so that they can compound their growth tax-free.

I also want to top up my ISAs to the maximum extent I can.  This means the full personal allowance for both me and Mrs FIREvLondon.  The allowance rises to £20k per person for 2017/18 so I plan to move £40k from unsheltered funds into our ISAs.

Right now my income comes from, in effect, four sources.  I have a fairly small level of salary.  Smaller now than it has been for many years, in fact.  I may take on more paid work this year which might increase it, but I don’t want to have to. Secondly, I have property rental income.  This is now quite significant – thanks to letting my formerly Dream House – but it has significant costs associated with it too so the post tax cashflow is nowhere near what I would make out of equities.  Thirdly, I have un-sheltered investment income (dividends, etc).  Fourthly I have tax-sheltered investment income – as I mentioned above I want all of this tax-sheltered income to be reinvested. I don’t count capital gains as income – so this is not included in this discussion.

So in effect I am saying that I want my spending to be at a level where it, plus £40k of ISA contributions, are covered by my taxable income.  Right now this is looking challenging – even if I relabel some of my Dream Home expenditure as ‘Capex’ rather than the ‘Opex’ that is implied by this goal.  In theory this goal means making net saving of £10k per quarter; this will be hard but I will report on my attainment.

Goal 3: tax efficiency

Finally, as I write this, the last deadline for submitting/paying UK tax returns is a few hours away.  And as it turns out taxes have been a major deal for me in the last 12 months. As an aftershock of my house purchase earthquake a year ago, I have just incurred a very significant capital gains tax – the biggest for many years.  I’ve also just paid more income tax than normal, despite a lower income than usual.  So while I don’t mind paying tax, and don’t begrudge the UK tax rates, there is scope to improve the tax-efficiency of my arrangements.  I’d like to find a Goal 3 which would see me improve my position here.

Right now, my other half is a basic rate tax payer (paying 20% income tax), while I am nudging the top ‘additional rate’ tax tier (where income taxes hit 45%).  This isn’t efficient.  If I can’t avoid the ‘additional rate’ then so be it, but I should definitely ensure enough of my taxable assets are in my other half’s name to make full use of her basic rate tax band.

Based on the 2017/18 tax regime, in which the higher tax rate only kicks in above taxable earnings of £45,000 (ignoring dividend / interest allowances etc), I need to move income of over £5k into Mrs FvL’s name.  If this income were to be taxed at the additional rate of 45% then we would save 25% tax, i.e. over £1250 per year.  Worth having.

I have also recently discovered that my company can make SIPP contributions to my wife over and above her salary level.  Her SIPP is still significantly underweight so this is a tax-efficient way to top it up.

Overall my goal here will be to move £200k into my wife’s name in a tax-efficient way. Bonus points if it is by the end of June.

10 thoughts on “My financial goals for 2017”

  1. Hi FvL,

    Some great goals in there – and also very sensible to be using as much of Mrs. FvL’s allowances as possible – it’s a team effort so better to use as much as possible to avoid the taxman!

    I am looking forward to the £20k allowance each, although to fill that allowance, plus pension contributions is a major amount of post tax cash to get hold of!

    Don’t forget Mrs FvL will get the £5k allowance for dividend income to use up and also your CGT. I worked out we should be able to hit 2x £26k a year tax free from non sheltered income, however before I even worry about that I will be aiming to use up both our ISA allowances, pension allowance and then I can worry about it!

    Good luck for 2017, I look forward to seeing how it pans out!
    FiL

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  2. Hi FvL,

    Some great goals in there – and also very sensible to be using as much of Mrs. FvL’s allowances as possible – it’s a team effort so better to use as much as possible to avoid the taxman!

    I am looking forward to the £20k allowance each, although to fill that allowance, plus pension contributions is a major amount of post tax cash to get hold of!

    Don’t forget Mrs FvL will get the £5k allowance for dividend income to use up and also your CGT. I worked out we should be able to hit 2x £26k a year tax free from non sheltered income, however before I even worry about that I will be aiming to use up both our ISA allowances, pension allowance and then I can worry about it!

    Good luck for 2017, I look forward to seeing how it pans out!
    FiL
    P.S. Sorry if this posts twice it didnt seem to give any notice that it had posted the first time!

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  3. On goal 3, bear in mind that any pension contributions made by Mrs FvL herself (up to the level of her earnings) rather than by her employer extend her basic rate band beyond £45,000 (in 2017/18), so there is potentially scope to shelter even more taxable investment income within her basic rate band.

    For example, if she contributes £10,000 gross herself from earnings (£8,000 net), then no higher rate tax will be payable on the first £55,000 of taxable income (in 2017/18). Obviously I do not know the exact level of her salary/earnings, and you need to be aware that income within the dividend allowance and personal savings allowance counts as taxable income (even though it is taxed at 0%) – i.e. it is not ignored.

    I only mention this as you say her SIPP is “significantly underweight” and not to discourage employer contributions which are a very good way of extracting company profits and can be on top of anything she contributes. Of course you need to take into account if she has available Annual Allowances and Lifetime Allowance and that the pension is not accessible until age 55.

    On goal 2, I think am not sure I understand what your goal is. You say “I want my un-tax-sheltered savings level to be at least 2x the ISA savings allowance this year.” I read that as you want to save £40,000 in taxable accounts this year, which I guess fits with the £10,000 per quarter that you later mention.

    You also say “So in effect I am saying that I want my spending to be at a level where it, plus £40k of ISA contributions, are covered by my taxable income.” I read that as you want your net salary, property income and taxable investment income to cover spending, property costs and ISA contributions. I guess that kind of results in saving £40,000 in taxable accounts, but you’d also be taking £40,000 out of taxable accounts to fund ISAs, so net savings in taxable accounts are zero and you’ve just used your ISA allowances.

    Isn’t the above only really saying “I want to invest £40,000 from surplus income this year”? You can leave where the investments end up to goal 3.

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    1. Thanks John. Good point re Mrs FvL’s allowances being dynamic with SIPP contributions. Her total pension pot is <£200k and she is in her 40s, so the constraint is annual contributions, not the lifetime allowance.

      I think you have understood my savings goal correctly. I don't think "I want to invest £40k from surplus income" is quite right because technically my tax-sheltered accounts produce surplus income, but this is already sheltered; I am saying I want my unsheltered finances to produce at least £40k of cashflow which I can fund ISAs with; I don't want to have to sell unsheltered funds to fund spending + ISA top-ups.

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    2. “and you need to be aware that income within the dividend allowance and personal savings allowance counts as taxable income (even though it is taxed at 0%) – i.e. it is not ignored.”

      This is a good point, I have to keep reminding myself of how it works and not fall into the trap of thinking that is simply tax free income. Based on comments from the blogosphere I have a suspicion many misunderstand this area of tax.

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  5. Hi. I would be interested to know how private investment trusts are taxed in the UK.

    In Australia, a husband and wife as trustees can set up a trust to hold their investments. Income of the trust can be allocated at the discretion of the trustees, i.e. the person with the lowest other income would be allocated the majority, if not all, of the trust’s income.

    The trust isn’t my preferred investment vehicle, but an investment trust may suit your circumstances.

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