FIRE v London

Death and taxes are the only certainties, right? Not entirely. In the world of investment portfolios in the UK, neither death nor taxes are what they once seemed.

Mrs FIRE and I are both UK resident, UK domiciled fully compliant UK taxpayers. The rest of this post is probably only of interest to similarly UK-based people.

My gross income puts me in the top tax bracket (45pc), and if my earnings were all from salary I would pay an actual tax rate of about 45pc. In fact my actual tax rate paid in recent years is closer to 30pc, and Mrs FIRE even pays less than this. Paying 30pc tax is pretty reasonable to me, so you won’t hear me griping about how the government (that same government which still spends almost £100bn more than it raises, every year) should be cutting taxes. How come as a high earner I pay only 30pc tax?

I avail myself of four key tax structures:
Continue reading “My IPS, 3 of 5: Funds and accounts” →

This post is the second in a series explaining in some depth my Investment Policy Statement (IPS). This IPS is my north star, my lodestone – what I can use to explain to myself, or Mrs FIRE, or a financial adviser, or you dear reader, how I am trying to organise my investments – so that panic, greed, forgetfulness or ignorance don’t influence my decisions for me. Part 1 explained my Philosophy.  The key word was diversification.

This blog post, Part 2, tackles Asset Allocation – a critical thing to decide for any portfolio. I allocate across ETF/fund providers.  In principle this means that if I want to hold an exposure to FTSE-100, then I’ll do it through both a Vanguard ETF (VUKE) and through an iShares one (ISF).  And maybe a DB one or an HSBC one or a SPDR one. My allocation rule here is not a firm one but is loosely that I don’t want my biggest holding (VUKE) to exceed more than 10% of my investment portfolio. My biggest exposures here are as follows:

Fund/ETF provider	% of investment portfolio
iShares (owned by Blackrock)	15%
Vanguard	11%
Fidelity	4%
SPDR	2%
Other (Artemis, AlCentra, Blackrock, DB X-Tracker, GS, HSBC, Hermes, Investec, Jupiter, Kames, Majedie, M&G, Newton, Polar Capital, Schroder, Standard Life)	14%
Total funds/ETF holdings	46%

I also allocate across brokers.  Those VUKE shares are held in multiple places.  And so are my PRU shares.  And my NXT shares.  Why?  Obviously if something happens to NXT then that affects all my holdings in it.  But if there is some accidental or fraudulent co-mingling of nominee funds at broker 1, which contains some of my NXT portion, then I’m going to be affected.  So it’s better to spread the holdings across brokers (see figure).

Continue reading “My IPS, 2 of 5: Asset Allocation” →

One of the best tax-breaks in the UK is the Individual Savings Account (ISA). Each year every adult can invest up to £15.24k (rising with inflation) in one of these accounts. Any income or gains in these accounts is tax free, and doesn’t even need to be reported on the tax return. Awesome.

£15.24k might sound like a lot of spare cash to find, but in reality what this means is selling £15k of existing assets and funnelling them as soon as possible (every April 6, at the start of the idiosyncratic UK tax year) into your ISA. Sure, you take the transaction fee hit, but you then get indefinite tax free income and gains. This is a no brainer. Allowances are use-it-or-lose-it and once you withdraw your funds (and – STOP PRESS from the last budget – don’t put them back again in the same tax year) those withdrawn funds lose their tax-free status for good.

And while UK governments in the last 10 years have been inveterate tinkerers with savings and pensions, the regime for ISAs has only changed in a positive direction – to enlarge the annual allowance, and to improve the inheritance treatment. So ISAs feel like they are reasonably predictable over a decade or two. And £15k per year, for a decade or two, quickly amounts to some real money.

I have always admired the FT journalist and Lord of the realm, John Lee, for becoming one of the UK’s first ISA millionaires. I aspire to equal his achievement, admittedly measured by a much weaker pound than when he reached this milestone some years ago. But they say the first million is the hardest, and compound arithmetic suggests that I can do far better than becoming an ISA millionaire. How much better?

Continue reading “My $100m tax-free account?” →