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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Declaration of financial independence?

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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Complexity costs

A recent piece in the FT by Jason Butler mentioned some advice the author received from Peter Hargreaves, one of the UK’s richest men, a few years ago:

I asked Peter if he could share some of his money wisdom. He thought for a moment and then replied: “As you know I’ve got a few quid and I can pretty much have anything I want in life. I’ve got one car, one house and one wife, and that’s the way it’s staying. No matter how much you own or earn, keep your life as simple as possible.

Now, (both) long time readers of this blog will know that I am not a fan of the firm Hargreaves Lansdown (though I have professional respect for it as a very effective way to part wealthy fools folks from their money). Nor, for various reasons I won’t cover here, am I generally an admirer of its founder Peter Hargreaves, notwithstanding that he is clearly a very talented entrepreneur/businessman.

However, this blog believes in playing the ball not the man.

I can recognise wisdom when I see it.  And I think Mr Hargreaves’ advice to keep life as simple as possible is profoundly good advice.

How financial progress breeds complexity

For those of us who manage to grow our net worth, saving money, simplicity is an uphill battle.

That first thrill of making more money than you need to live will invariably result in some temptations.  Time to ‘treat yourself’ with a new holiday?  What about new clothes?  Or some art?  Or some furniture?  Maybe even a new car?   Carry on this way and pretty soon you’ll need more space, parking, garage, a yard, who knows.

But, once you’re making decent money regularly you will start wondering how/where to save it.  Now, don’t misunderstand me, there are definitely simple ways to save/invest.  But if you are tempted by property, EIS/angel investing, or extreme diversification, then care is certainly required.  All of this increases your financial complexity pretty quickly.  Carry on this way and pretty soon you’ll need an accountant to help with your tax return, and you will probably seriously consider talking to a financial adviser.

Once you start investing, time can be a surprising enemy.  Most of us investors learn about ‘buy and hold’ as a strategy pretty early on.  And twenty years in, I would say that ‘buy and hold’ works pretty well.  But buying and holding can nonetheless result in an increasingly sprawling portfolio – as my recent ‘overdiversification‘ blog highlighted.

Property is particularly beguiling.  As a reader of this blog, you probably don’t consider property to be the only way to invest. But is certainly one way to invest.  You might, like me, consider that property has a place in a diversified portfolio, either via REITs or via ‘buy to let’. But have you considered / aspired to owning a weekend place? A holiday home?  A ski chalet? Carry on that way and you’ll probably need a gardener, a handyman, maybe a builder.  That’s one thing if it’s local but it’s another prospect if it’s in another country. Carry on further and you’ll be tempted by a second car, you’ll want access to the business lounge every trip or, worse, you’ll start seeing private jet ads follow you round the web.

Or perhaps, like me, you have become an ‘accidental landlord’.  That ‘accident’ – your first place – is, in London, more likely to be leasehold than freehold, so maybe the maintenance/etc is not your responsibility.  But if it’s leasehold you will have some form of service charge/sinking charge to budget for, and it’s freehold you’ll know all about every roof repair, damp patch, and boiler problem.  Repairs and maintenance are all tax deductible, but make sure you keep those receipts.  Carry on this way and even your accountant will start complaining.

Have I got a complexity problem?

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