My ISA’s tax-free income: now over £20k

Time for an update on my ISA progression.

Regular readers will know that if I have a top tip for any UK investor, it’s this: make the most of the ISA tax break, and do it via Stocks & Shares ISAs. Note: definitely not Cash ISAs – saving tax on 1% interest isn’t the way to build your savings pot, whereas saving tax on 6-10% equity returns can make a real difference. 

The annual ISA allowance remains £20k per person. I have enough of my savings outside a tax-shelter that I move as much as I can into an ISA every year, for both me and Mrs FvL.  I’ve been posting updates annually about this (e.g. here). Touch wood, I am hoping to build my ISA pot into £millions over the next 30 years.  

In case you are wondering about whether pensions are a better way to save than ISAs, remember that pensions have a lifetime pot maximum of around £1m before unfriendly taxes apply.  If you are about 40 years old and planning to retire at about 70 (or 30, and aiming to retire at 60), then you start to approach the  level where your lifetime limit could bite with a pot as ‘small’ as £125k. In contrast there is no limit on how large your ISA pots can grow while remaining tax-free.  

We are starting to see more and more investors reach the £1m ISA milestone.  It appears there are about 500 such investors in the UK at the moment.  I’m not at £1m yet, but I am on track to reach it in a few years’ time, barring any change in government policy and/or market meltdown.

Last year saw disappointing market returns.  My own ISA fell slightly before income/contributions, and while Mrs FvL’s ISA rose a little it still left my overall ISA pots down in value before income and contributions.

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Does this house really believe it should be included in the FIRE net worth?

I had some fun this week teaming up with Mr YFG to debate whether your primary home is one of your FIRE assets or not.

The great housing FIRE debate

Or did I? The mighty Monevator was kind enough to host the post and the comments following the post are excellent, and flesh out the debate brilliantly. And as they highlight, everybody’s milage will vary. In particular, one needs to be careful to define whether the net worth calculation is the FIRE net worth calculation.

One of the things I enjoyed about writing that post was having to argue the opposite case from what I normally would say. Hats off F Scott Fitzgerald and Charlie Munger.

To set the record straight, my actual approach is to exclude the value of my residence (the Dream Home) from my FIRE calculations. What I try to explore in my blog, is the challenge of FIRE (Financial Independence, roughly) without needing to change my lifestyle. For me, London epitomises this challenge – it has an excellent lifestyle, but it is expensive. So the FIRE dynamics are particularly challenging here, at least compared to the ‘frugal’ approaches followed by some in the FIRE community.

Clearly, if one is prepared to sell up and reorganise one’s housing arrangements, in Cyprus if need be, then one’s house is just one asset among many. But if, like me, you are happy where you are, and want to know when working becomes optional without having to move neighbourhoods / sell assets / disrupt the pets, then it is easier to focus on your investment income (and decumulation potential) and your spending (and potential spending).

So, my own calculations about investment income and spending assume I need to continue to fund the (considerable) expenses of living in the Dream Home, and that I need to do so from other assets. No Rent-a-Room for me.

March 2019/Q1 review

Well well. It’s the 31st of March and we appear to still be in the EU. Much as I am delighted we haven’t left, this does leave some much-sought-after clarity postponed. More on this later.

The wider world

In ‘mover and shaker’ terms, what’s been going on?

  • Mueller reported on Trump’s alleged collusion with Russia. Rather anticlimatically, from a London point of view.
  • Trade-related noises continued to emanate from the White House. Without much clarity.
  • Apple announced, erm, that it has spent $2bn on TV content. Yawn.
  • And UK democracy wriggled and writhed around the incoherent fantasies of Brexit and politics combined.

The markets

From a markets point of view, this backdrop felt rather similar to January and February, and sure enough March markets felt fairly similar to January and February markets.

As a ‘no deal Brexit’ scenario looked more likely, the pound declined off recent highs. We are back to £1:$1.30. That was the major currency movement to note; in the meantime the Euro has been declining against other currencies and the AUD is bouncing around in its own electorally-driven world.

Bonds had a stronger month than normal. The logic here evades even an avid FT reader like me. I think what matters is well put by Monevator:

A quick way to be called a moron by people who know more than they understand over the past 5-10 years has been to suggest that bonds still have a place in most portfolios. A wealth-destroying crash was “obviously” imminent, you see.

But markets often move in the way that surprises commonplace assumptions, and that’s certainly been true of bonds.

Monevator’s Weekend reading: Oops, bonds did it again, 22 March 2019

This lot left March markets looking as follows:

Market movements in March 2019, with weighted totals

Looking back 12 months, March saw equities return (admittedly briefly) to a positive return, leaving the Q4 20% correction very much behind us – though equities haven’t yet recovered to the heights of last summer. In the meantime bonds, which have been losing value through 2018, are now up about 5% from their Q4 nadir. A blend of both would, as so often, have stood an investor in reasonable stead.

Global equities & global bonds, over last 12 months, in USD

My portfolio

The March market movement, weighted for my target allocation, was up 2.6% (0.75% from FX, the rest from the leveraged play on equity/fixed income). My portfolio lagged this slightly, rising ‘only’ 1.9%. But for the year to date, and indeed over 12 months, I’m up 9%. That’s despite the Q4 correction setting negative records.

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