My ISAs need a topup

It’s that time of year again. The start of the new UK tax year (for ancient reasons, UK tax years begin on 6 April).  My favourite time in the financial calendar.

It’s time to top up the annual ISA.  ISAs are the tax-free savings accounts we are – unusually in the world – blessed with in the UK.  While the funds we put into an ISA are net of tax, with no pension-like tax relief when we save, all subsequent returns are tax free.  Forever.  If you are fortunate enough to have £20k lying around, and you move it into an ISA…. by the time it has doubled, say, four times (which it probably will, if you invest in low-cost equity trackers and live long enough) it may well be producing £20k a year of tax-free income. If you can do this enough times, when you are young, your ISA will knock your pension into a cocked hat. 

There are no upper limits on how much you can have in your ISA pots, unlike pensions. Hence, one of my ambitions is to (live long enough to) build an ISA pot worth potentially $100m.  

However, with markets melting down over the last two months, it is definitely a case of two steps forward, one step backwards. Nonetheless, my ISA’s income is £24k – up about 10% on last year – so our (two) ISAs are generating more than one of us can top up every year.  

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Fighting complexity

As I mentioned in my January 2020 report, January is the tax deadline month in the UK. And it is the annual tax filing process where the overcomplexity in my financial affairs becomes most visible, and any problems created by that complexity become urgent and pressing.

In previous posts here and here I’ve discussed the complexity that has arisen in my financial affairs. Partly this is a quality problem, reflecting my higher than average net worth, and the journey I’ve taken to build my wealth. Partly this is deliberate strategy on my part – to diversify across providers, to make use of tax sheltered accounts where possible, to spread funds between me and Mrs FvL. And partly this is just creep – the equivalent of middle aged spread: it happens without you really noticing, until one day in January somebody takes a snapshot of you and you realise how unappealing the image is to outsiders!

Reflecting on the consequences of my overcomplexity, I think three problems nag at me:

  1. The burden I shall impose on my executors. I struggle sometimes to manage my finances. My other half, or my family/friends, or a trained financial/legal professional, would be left with a genuine labyrinth to navigate.
  2. The time I spend managing my money. As it happens, I am sad/bored enough to quite enjoy this. But I suspect I would enjoy it just as much if it took half as long, and I would find more productive/enjoyable things to fill my time.
  3. The hassle/time/expense of the annual tax filing process. Let me dig into this a bit below.

I have used the same accountant for years. She knows my affairs pretty well and we have developed a reasonable system/way of working over the years. My limited company has a separate accountant and process, who/which I am largely ignoring in this blog post. Here are some stats from my personal tax filing process for the last tax year:

  • 82 files that I’ve sent to my accountant. These are statements, EIS certificates (for the UK angel investing tax breaks), payslips, etc. These 82 files do NOT include some important material my accountant gets direct from my broker/private bank.
  • 69 pages: the number of pages in my tax return.
  • 110 emails, exchanged between me and my accountant, over the last 12 months. This is going to cost me….
  • 570 rows in my investment tracking spreadsheet, covering both me and Mrs FvL. One row represents one holding in one account across all our publicly traded investment accounts. We have about 200 holdings in total, so each holding is coming up in almost 3 places (e.g. in my ISA, Mrs FvL’s ISA, and my General Investment account).
  • 10-20 hours a year of my time is spent specifically working on my tax admin each year. Plus at least double this on tracking my activities.
  • 1800+ investment-related transactions for just 12 months in my tracking system on Quicken. This covers me, Mrs FvL, and my personal limited company’s liquid portfolio. Every single one of these transactions has been typed in by me. Of these, about 500 are of a dividend payment of less than £50.

I reflected over the Christmas break on what I might do to curb this complexity.

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Annual FI audit

It’s that time of the year when we take stock. Here at FIREvLondon, that means it’s time to do an ‘audit’ of our Finances, and our financial Independence.

Let’s take a look at some of the key questions an audit should consider.

Q1: What state is the balance sheet in?

I review the portfolio performance monthly, and it’s progress against ‘budget’ (i.e. target allocation). As this post highlights, December saw a very strong performance with net assets up almost 23%. An exceptionally strong performance, by historical or future standards, reflecting the 30% gain in the US stockmarket in 2019.

Liabilities remain very much under control too. The margin loan that provides my account with leverage amounts to just over 10% of the value of the assets.

Off balance sheet, the recent move to sell a key residential property and reinvest the money will provide further strengthening of the balance sheet.

Q2: How does the income statement look?

A year ago I borrowed a framework 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 (updated) image below:

Using this framework, 2019 saw me, like 2018, make a clear ‘profit’, or surplus, between total inflows and total outflows. However, from a Financial Independence perspective, i.e. stripping out earned income (and taxes on them), I saw a slight deficit – with outflows exceeding inflows. The chief reason for this was a very high level of expenditure on ‘wants’.

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