Month: January 2019

Declaration of financial independence?

FIRE v London21 Comments

Over the new year break I found myself really enjoying the blog post by {indeedably} in which he breaks down his assets and income.

He has an unusual way of looking at his state of financial dependence, as shown by his image below:

i-own-buying-control-of-my-time-e1535807204287

His core point is that his level of financial independence depends on

  1. the amount of his expenses – some of which are ‘wants’ rather than ‘needs’,
  2. the level of investment income he can expect and
  3. how much ‘time he wants to sell’ (i.e. paid work he wants to do). He isn’t fully independent, but only ‘sells’ about half his time.

One thing that shows up clearly in {indeedably}’s graph is that investing can be expensive. In his case, a significant portion of his assets are property, and as a result his investing expenses appear to include a) mortgage costs b) property management and c) property maintenance – among other things.  I think they will also include his investment fund expenses/fees too.

Putting on {indeedably}’s glasses

I spent a few hours bashing my expense tracking data into a similar format to {indeedably} and now can view my cashflows on a broadly comparable basis.

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Avoiding tax in the UK

FIRE v London21 Comments

I was asked to help a friend of mine, a (~50 year old) widow, complete her UK tax return recently. In the UK the final deadline for filling in your own tax return is 31 January, and the process these days can all be done online via the taxman’s excellent website. Her finances were illuminating.

What is a rich widow?

This widow’s income is roughly as follows:

  • £45k of earnings. She is a freelance creative.
  • £25k of investment income, about half of which was taxable (‘unsheltered’). She has about £700k of investments, roughly half in tax-free accounts (ISAs/SIPPs), and half unsheltered. She has no other income-generating assets.
  • £10k of contribution to her pension. She is a (non-executive) company director of her ex-husband’s company which doesn’t pay her but does make £10k per year payment into her SIPP.
  • £12k of (realised) capital gains last year, all in unsheltered accounts .

This lady’s total income/gains last tax year amounted to over £90k. This puts her in the top 10% of the UK by income, but not the top 5%.

But how much does an ‘average striver’ pay in tax?

Now, before we continue with my widow friend, let’s have a think about ‘average Joanna’, a typical striver in the UK.

Consider Joanna, a (hypothetical) 50 year old who works full-time for the NHS, earning £45k (roughly the London average wage). For a like-for-like comparison, her pension (contribution, from her employer) and (NHS pension investment equivalent) income on top of this would add about £25k to her taxable income, all tax-free.

Joanna pays £6.6k of tax, and £4.4k of national insurance, totalling £11k of tax/NI. This works out as 24% of total gross pay.

How much tax does this ‘rich widow’ making £90k pay?

“the art of taxation consists in so plucking the bird as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” – Colbert, paraphrased

What total tax/social charges (National Insurance, in the UK) do you think she owes on her annual income/gains?

Before continuing reading, think of a number.

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December returns and 2018 review

FIRE v London10 Comments

Well, what a month.

The October bloodbath resumed in December, and then some, after a brief November hiatus. US stock markets fell by over 9%, just in the single month. Even Donald Trump has subsequently conceded that stock markets “hit a glitch”.

Given the reality TV show that is the Trump presidency it is hard to say exactly which news story drove such a drop, but you can take your pick from:

  • Trump attacking the Fed – which calls into question American economic governance.
  • The ongoing ‘trade war’ between the USA and China.
  • The government shutdown in the USA, due to the standoff between Trump and Congress over the $5bn border wall. This has resulted in hundreds of thousands of American workers not being paid/not working; I am never clear whether, if the shutdown stops, they then get backpay, so I’m not quite clear how severe this actually is but it clearly can’t be good.

On top of the Trump nonsense, I think that we saw the first rumours in December of a more significant slowdown in China. As 2019 started Apple shocked markets with (slightly Polyanna-ish) tales of Chinese woe.

While UK news was feverish about the inability of the Tory government to pass its EU Brexit deal through parliament, this had very little discernible impact on UK markets; I tend to agree with the commentators who say that this outcome was ‘priced in’ (i.e. expected) by the market already.

Continue reading “December returns and 2018 review” →