Avoiding tax is probably the best-known investment advice, and the mission that unites even the least sophisticated investors with the most financially literate.
How the government wants you to avoid paying tax
As a wise blogger (SHMD, I think it was, but I can’t find the link) pointed out recently, the UK offers unusually generous investing tax breaks (and that’s even before we get onto SEIS and EIS angel investing tax breaks). There’s almost no point in calling Panama.
For most UK investors, the simplest way to avoid taxes involves two manoeuvres, each done annually:
- Topping up your ISA(s). ISAs remain the biggest potential tax break in the UK, but they require multi-year patience; there is an annual ‘use it or lose it’ allowance so to maximise the benefits you need to act annually. The limit these days is £20k per adult, so £40k per couple – which is a lot of money to find from disposable income but not enough to squirrel a large inheritance/windfall/25% pension drawdown away all in one go.
- Making pension contributions. For most retail investors, pensions are a fairly straightforward tax break; in exchange for locking my money up until I’m c.60, I avoid any tax on the money from now until I start accessing it. For more affluent but nowhere-near-retirement-age investors, such as me, the UK policy is pretty crazy, because knowing whether your pot is going to breach the ceiling 20+ years out is a mad Monte Carlo guessing game. A 30 year old expecting to retire at 70 and expecting annual returns of 7% should be careful about taking their pot above £60k.
It is worth stating the obvious that not only are these two manoeuvres both 100% legal but they are in fact actively encouraged by government policy.
Practically all the readers of this blog are at least higher rate tax payers – i.e. their marginal income tax rate is 40% or more. For them the two key rates on offer are 40% and 0%.
One of my readers, Peter, liked my post (or its readers’ comments, more to the point!) about Jane and her £10m quality problem. He’s shared with me his attempt to find a new IFA. Below is his initial introduction email, suitably anonymised, to an IFA he’s been intro’d to.
Peter is very well informed about FIRE. He’s thoughtful and articulate, and lays out a pretty clear strategy.
I’d love comments on this blog about what you think of his approach. I will comment myself, below this post.
In the meantime, it’s over to Peter.
Below is a summary of my situation. I’d be interested to hear how you could help.
- I am 39 years old
- 4 children (all under the age of 10)
- I am not (yet) married
- I am UK domiciled and resident
My work background:
I have been an entrepreneur for well over 10 years.
My investment history over the last 5 years
When I had my big ‘pay day’ from my first business a few years ago, I immediately bought lots of property. Mostly residential. Total deployed was just under £8m in/around London.
At the time, I knew zero about ‘conventional’ investing. “Sharks trying to sell me something I don’t understand”, etc was how I saw it. Thankfully I didn’t fall into the trap of immediately putting it all into an offshore bond and all into high-fee funds (as suggested by the private bank who was trying to become my new best friend back then…)
I did what a lot of people do when they have zero understanding of ‘conventional’ investing and turn to property. The (flawed) logic being “you can touch it”, easy to understand it (or so I thought), you can gear it up with debt to accelerate gains, “you can’t lose in property”, etc.
Fast forward a few years and to cut a long story, I absolutely hate being a landlord. Even with a competent property management company, it’s a constant head ache, so many hidden fees which lower the return, ongoing damage to property, constant management required, a big time sink, etc.
I hate being a landlord so much, that I’ve taken the decision to sell everything (apart from my principal residence, which is debt-free but has significant running costs). Not only do I not want to be a landlord, but I also don’t want to own the assets long term. I don’t want to be trapped in the assets if I change my mind at a late date and there are large inflation-linked gains with CGT due on switching, etc…
So what now?
I am fortunate to know a lot of smart people. Many of these smart people are successful, and make decent money. Many of those have significant positive net worth. But a surprising amount of them – I would guess over half – don’t choose to invest in publicly quoted equities. They are investing novices, and proud to admit it. This blog post is for them, and their friends/family.
Imagine you are under 50, and have £1k to add to your savings. I don’t mean in your pension, which I think most people handle differently to savings. I mean ‘put aside’ but retrievable on a rainy day / for a house deposit / for school fees / similar.
Where would you put your next 1k of savings? Or more to the point, £10k of savings? Or £50k of savings?