Taxing Issues

I was reading an article on the dreaded Brexit the other day – it’s still hard to read anything that doesn’t refer to it – about the hotly disputed claims over the amount of weekly money going to Brussels that could go the NHS. Cutting through the chaff and spin, the main point was that those Big Bad Brexiteers quoted a gross figure, not net.

Well, the last time you quoted your salary, or an employer quoted one to you, what figure was used? Gross or Net? Daft question, isn’t it? On salaries, everyone quotes gross. In this way, a gross number has some sort of legitimacy and credibility, even if it has a long distance relationship with the “bottom line”.

When I stop working I won’t have a salary of course, but I will have a pension, including one from the State which is probably going to be around £8,000 a year. But – is that gross or net? That depends on (a) what other pensions and income I’m taking and (b) how I choose to look at it.  Worst case scenario, the government will give me £8,000 with one hand and then take 40% of it back with the other. In a real horror scenario, they might take 55% of it back (as I understand it) although that could be quite a nice problem to have as your pension pot will then be north of a million quid.

The subject of pensions and taxation is one that lingers on the periphery of many dialogues I have with myself on retirement income. It’s on the periphery because I often just don’t allow it in to the inner circle of my calculations on the basis that it’s an uninvited guest who I may, or may not, ask to join the party. However, if I cannot totally exclude the taxman from the party, I assume I will be doing everything to minimise his presence. It’s just that I’ve not yet really dug into the detail of how I do that.

I once constructed a spreadsheet that did factor in the knowledge I thought I had about the tax situation in retirement for both my wife and myself. It soon became an unwieldy, over-formatted monster that included so many “ifs and buts” it threatened to crash my computer. Needless to say, I haven’t opened it since I thought I’d finished it. Instead, exhausted by scenario planning, I told myself, “Keep it simple”. Stick to the big things you do know and, if you have those correct, you’ll not make any massive mistakes.

What do I think I know about tax and pensions? Firstly, the big tax free bonus that applies to me is that I can currently take 25% of any pension pot tax free when I hit 55. For my Direct Contribution pension that’s a simple calculation. Secondly, when it comes to income tax, both myself and my wife can withdraw up to £11,850 a year tax free which, when you tell yourself that’s a net number, is quite a substantial amount. What gross salary would you have to earn to take home, after tax and NI, an income of £23,700 a year? I can’t be bothered doing that calculation (because I’m frightened I will get it wrong) but it must be close to thirty grand, which is above the national average wage. Anything you add on top of that is cream on the cake, taxed or not.

Perhaps, if I left things at that, then I’d have a much more relaxed and stress free life. Unfortunately that’s not the way I’m made and, I think, I didn’t get where I am today by letting my money take care of itself. You have to work on your cash to ensure it’s working for you. Plus there’s the whole question of getting value for money when you spend it – after all, isn’t that why we work to earn it? At some point you have to choose to spend and, when I do, I want to ensure I gain maximum value at the point of withdrawal to give maximum value at the point of purchase. (I also give myself a hard time about mulling over “First World Problems” like these, but that doesn’t change anything except my mood and level of guilt).

I’ve already become lost in various forum threads that try to answer the question of how best to withdraw retirement funds in a tax efficient way. There are a lot of strategies because just about everyone has a different set of circumstances that apply to them. In a way, it reminds me of those examples newspapers always run post-Budget that take a variety of households and calculate “Here’s how the budget will affect you”. In all the years of reading them, I’ve yet to find one that actually applies, a hundred percent, to me.

As ever, when it comes to personal finance, a good outcome will probably be related to the amount of work put in. I could pay a professional to give me some pointers but, with those fees running into potentially thousands of pounds, I doubt I’m ever going to do that.

It would be easier, and possibly saner, to just plan to live on £23,000 a year net, with any excess sitting there as an “Emergency” or “Fun Fund” to be called on as necessary. In a lot of ways, I really like this idea. It’s really simple. I just can’t shake the feeling that it’s also really dumb, as I worked hard to save the money that I’ve accumulated, telling myself that one day I’d be able to enjoy it. I just don’t think it’s a sensible option now to sit and watch the pile grow. For what?

So, in lieu of any other great ideas, it’s back to the financial grindstone of the forums and blogs, and the never-ending debate about what to do for the best.

Calculated Risk

One of the most infuriating arithmetical questions that has bugged my life off and on for decades is this: “If your salary was increased by ten percent to raise it to fifty thousand pounds a year, what salary were you previously on?” My gut response is always to say that you were on forty five thousand, because 10% of fifty is five and……wrong, wrong, wrong! (again)

I pondered this as I smugly reviewed my investments on Fidelity recently, mentally warming my hands against the financial glow from the growth, and a somewhat disquieting thought disturbed me – how do I know they’ve got their arithmetic right? All those dividend payments, currency fluctuations and compound returns, minus their management charges across a variety of accounts – I mean, who’s checking the sums on my portfolio are correct? Because I, unable to calculate a simple percentage sum, sure as Hell can’t do it.

I then began to remember the legions of financial controllers and directors I’ve worked with over the years and the errors they (often cheerfully) made in their own numbers. Too many numbers and variables, you see, to ensure that everything was a hundred percent checked. But even the most complex business I’ve worked in, I imagine, would be simplicity itself versus running Fidelity?

Later in the week, I heard on the radio that the government’s state pension forecast tool, which estimates what your state pension will be, was in hot water for giving erroneous projections. Okay, we expect the government to cock up any and every computer system it invests in, but still, it underlined my suspicion that it’s relatively easy for anyone to get their numbers wrong. 

The thing is, they could err either way. My investments and pensions could be over or under stated (I can’t actually decide which would be worse). If they wrote and informed me of this, what would my recourse be? Ask for the data so that I could check the numbers?

Ever since Primary Six at school, when I think I first encountered tackling fractions in maths lessons, I’ve struggled with percentages, ratios and functions. Perhaps if that had been a more positive experience maybe I’d have gone on to be an accountant, but I was intimidated by the numbers (and by the teacher). I’m sure many people are entranced by the prospect of puzzling out answers that stack up when they face a difficult calculation, but me, I’m just ever so slightly terrified.

It’s also been my experience at work that if “You don’t know your numbers” then that can be a powerful criticism. There’s little to match the horror in a business presentation than when someone points out that you’ve made a basic error in a spreadsheet calculation. You feel your credibility in just about everything else has just been completely blown out the water (yes, I have been there and got the T-shirt. In fact, a small collection of them). For some reason this can happen to finance people too, but they seem to be able to generally laugh it off. Which I can only put down to confidence in their own ability in this area. When I made such an error I felt like an utter clown and would be genuinely mortified, but if I saw other people do similar I felt it made them a bit more human. (That’s probably two reasons right there why I never made it to “the top”!)

The trick, in your career, is to latch on to someone who really does know the numbers and is willing to check yours. Perhaps that would be a good idea in investments too? Unfortunately they’d probably charge a small fortune to do it and, of course, I’d continually be asking “How do I know you’re right?”

So there you go. I’ve no option but to take my investment performance “on trust”. It’s a lot to ask when I consider that this is my life savings I’m talking about, but I don’t really see much option. Then again, the whole monetary system is built upon trust and very little else. It only exists because we all choose to believe that it does.

As an investor I like to tell myself that I’d never invest in something I don’t understand – and then I read over what I’ve just written, and realise that I don’t actually understand anything.

Well, at least I understand that.

Are You Experienced?

It can be good to talk about retirement with friends, but it can be a bit of an awkward discussion. How much are your pensions worth? What age can you go? What about your other half? What will your income be? You’d like to give your thoughts, and receive some back, but without some basic information, this can be hard to do.

I was thinking about this at the weekend as I chatted to a mate in the pub who’s considering retirement as soon as possible from a job he hates. He’s passed the landmark 55 birthday, so knows what lump sum he can take today. I’ve no idea what kind of sums we’re talking about, but he mused, “You know, I’m thinking about buying a decent motorbike, and building an extension to the garage for it.”

“How much will that set you back?” I wondered.

“Well, maybe ten grand for the bike and six or seven for the garage”.

I tried to disguise the spluttering into my beer. “Yeah, well, if that’s what you’re comfortable spending that amount of money on”, I said, eyeing the sleet hitting the pub window and imagining tinkering with the bike as your hands turn blue.

“It’d give me a hobby, a project, something to do”, he said, and I could certainly see the point of that. After all, I’m looking for retirement projects too.

“”Quite a lot of cash to spend on a hobby”, I ventured, trying to calculate how many months earlier he could retire if he didn’t blow the money on that project.

“Some folk would spend that on holidays in a year and all they’ll have is memories”, he mused. “The bike will last me the rest of my lifetime, if I look after it.”

So there’s the funny thing. I think I would consider spending seventeen grand on holidays if I had the money to spare. That would be up near the top of my things to do with that kind of spare cash.  In fact, with a bit of budgeting, seventeen thousand pounds could take you on holiday for a year – and think of all the experiences you’d have, the places you’d see, the people you’d meet, the stories to tell. That would be a worthy spend, in my book, so I told him as much.

He looked at me aghast. “Are you mental?”, he asked. “No way would I squander that kind of money on a bloody holiday, even if it did last a year.”

Different strokes for different folks, of course but, while we’re talking in cliches, no man is an island. My mate had a motorbike before, but gave it up after a few scares and resultant pressure from his family. I’d happily traipse off around the world for a year, I dream, but the reality is I’d be going myself if I did it. So would I consider doing so? “No”, is the simple answer. My family and friends are more important to me than far flung places at this time of life.

This is where I start to think that money in retirement isn’t maybe as important as I sometimes think it is. True, it can give you options, but how realistic are they, all things – including loves ones – considered? In fact, especially when considering loved ones. Or at least I’ve come to believe that this is a truth for me. I feel happy and content when my family are happy and content and, if I live my life doing only what only appeals to me, then I’d consider it selfish. Which I like to think I’m not.

There can be compromises in all of this and I’d have to admit that money probably facilitates those, given that “it can give you options”. Sometimes just knowing that you could do something, or buy something, takes the pressure off the need to have it. Plus, like me and Oscar Wilde, you might suspect that the worst thing in the world is not getting what you want, and the second worst thing is getting it. With such I thoughts I give myself mental succour, shoulder the sky, and drink my ale.


In 2018, I Will…..

Being a long term fan, and implementer, of personal goals, I tend to look on New Year’s Eve in the same way as heavy drinkers do: it’s “amateur night”. Resultantly, I like the reminder, but I tend not to sit down and right out objectives for the year ahead, so I’ve pretty much none to review from January 2017.

This year, however, knowing the power of the discipline, and turning 55 in November, there’s a dangerous goal that I could write at the start of this year, namely, “This year, in November, 2018, I will retire from work for good”. That’s because I can access my pensions in that month and that income can replace the current wage I receive from employment.

Eek! Should I do it? Should I commit? As some of you may know, I went this route before and ended up kicking off this blog by writing a post about the Top Ten Downsides of Early Retirement as I realised retirement wasn’t quite working out what I expected it to be. Since then I’ve reflected that maybe it was because I didn’t mentally commit to the idea and couldn’t quite believe it myself. Never work again? That wasn’t me, was it? I’d worked for almost thirty years and enjoyed most of them. What would I do now?

Despite philosophical kickings from Ermine about getting my head into the right place, I couldn’t do it – I felt I wanted to work, even if I didn’t need to (something I was always questioning anyway when it came to the financial side of the equation) and, eventually, back to work I went.

I haven’t regretted the decision, although I have regretted that I realised a goal only to discover that I hadn’t really prepared for it. Not that this seems realisation seems to have changed my behaviour to date – no new “hobbies” started, no new social structures created, the garden lies untouched, I will never stand in on lead guitar for Kirk Hammett in Metallica, no book written, no classic motorbike repaired and rebuilt, no marathons run, no flying lessons taken. I’m almost proud of all the things I haven’t achieved.

One of the truest things I think I read about retirement stated that if you weren’t doing something before retirement, then you won’t be doing it afterward either. Clearly that applied to me, so the idea was, and is, to start doing some new things today, while still at work, and then I can find out what I might like to do with my time when I have plenty more of it.

New Year Resolutions provide the ideal time to start this stuff, but I can’t answer the major question I ask myself over making them: Why? I’m happy right now with my life as it is. What’s missing that I can’t actually take steps to resolve if I really want to? I mean, I could go and build a train set like Rod Stewart to occupy my quiet hours, but I don’t have many quiet hours. Perhaps this is because I’m still working, but then I could reframe that to state that one of my major hobbies is my work – after all, I’m choosing to do it. What’s a hobby if it’s not something that interests you, entertains you, keeps you occupied, keeps you socially connected, teaches you new skills and pleasantly fills boring Tuesday afternoons when otherwise you really would be bored?

And I get paid for it. (Let’s hear it for working, maybe that’s my New Year Resolution!)

I probably will make some pledges to myself that I will follow through on, but I suspect they will pertain to things that I already am doing. I’ll tweak some of the things I’m already working on. Some of them might be connected to my work too, because I know how useful it can be to set yourself goals in this area. I know I’ll continue to ask myself that retirement question too, however, and I hope that the irritation I feel in asking it will help me to decide what to do.