2017-2018 (Tax) Year ahead and Goals

So as I continue to be an outlier in the personal finance space, and do everything based on the tax year, it’s time for me to start thinking about what I want to do in the coming financial year. I haven’t ever bothered putting down goals like this before, so this is quite a new one for me, so be gentle 🙂

It did occur to me the other day that I may be missing a trick as this combines the year end and tax side of things to the same time, so maybe I wont get as many posts out of it, but who knows.

In terms of looking forward to the new (tax) year, I am very optimistic. I think it is going to be an absolute corker of a year, but not without some challenges. Why am I so positive?

  1. Work. I continue to be employed and I am throwing myself into trying to setup for my next promotion. This is a multi-year task / investment and my most optimistic guess is that I will get there by 2020. Like investing, it takes patience and time to get there, but the rewards will be worth it. This will mean my time is even more taken up by work, but it’s an investment I am willing to make
  2. Pay rise. Ok, so I got a 0% pay rise this year. The silver lining is that this month I finish paying back taxes from the 14/15 year so I will actually get a reasonable increase in take home pay from that which will make things a little easier
  3. Assets / Net Worth. The last year was truly spectacular, however this was not due to any particular skill on my side really, but mainly due to overall rising market conditions. This makes me positive on two counts. Firstly, if markets continue to rise (I doubt) then my investments will continue to go up (and hopefully my dividends). Happy days! Secondly, if markets crash, I will be buying even more for my money in the knowledge that at some point they will go up again. Happy days again
  4. Increasing dividends. My other half’s portfolio will continue to throw out increasingly larger dividends which will allow me to pay more and more off the mortgage, or reinvest further. Already it is really starting to throw in some non negligible additional income so this really is starting to be beneficial
  5. Go T’ Pub Portfolio. I am really super excited for this to get started, especially having seen the income grow from my other half’s portfolio I really can’t wait to see this starting to kick out some serious cash. If I can get it to cover my yearly ski trip I will be really chuffed!
  6. Tax Refund. As I am going to put my entire bonus into my pension before the tax year end (assuming it arrives in my March pay!), this means once I have filed my tax return I will get another bonus on it in the form of tax rebate further in the year. This will go straight into my other half’s ISA and further build that income stream

So I have lots of reasons to be positive, and also I think positiveness breeds positiveness. It would be easy for me to look at my dry run goals and say I have failed on them (pending March update and reveal, maybe not), what is the point of even trying and drown myself in a sea of cheap lager and re-runs of Dads Army (or something similar, take your pick). Rubbish I say – look on the positive, I know this should be possible, it will be short term pain potentially, but then I may get a quarterly shop paid for in dividends. Or that trickle of wine will slowly grow in to a full blown river 🙂

With that in mind I started noting down a bunch of goals to come back to and fill out exactly what I would target on them and how to measure them. As I started writing up all the different goals (all financial), it became very clear that a lot of these are really rather similar – increasing my ISA values, reducing my mortgage, increasing my net worth etc. etc. They all boiled down in effect to one thing only.

My Savings Rate.

Yes I can pay down the mortgage or put more in to ISAs or pension, but that is only possible based on the savings rate. Why say I will over pay X on the mortgage and put Y into an ISA. Lets just go back to there is only one target.

I decided that I would put three levels for the goal:

  1. Base. This is the minimum – so what I should hit if I don’t change anything at all, anything below would be an abject failure!
  2. Goal. This is what I would like to achieve, what most would put down as their standard goal, and whilst a challenge shouldn’t be impossible
  3. Stretch. This one really should be something that pushes and hurts to try and achieve, but will have major impact if successful

Goal: Savings rate

My average savings rate over the last year or so has been pretty lousy – I can justify this due to some personal circumstances that has meant I haven’t always been able to plan as well as I would normally, and some special holidays and some unexpected purchases, but there is no getting away from it. If you want to FIRE you need a high savings rate. What I would say is this savings rate excludes my salary sacrifice into my company pension, and the tax uplift I get when money goes into my personal pension, hence it looks lower than it actually is.

I won’t include any bonus payments in this (even though they will go straight into my pension), nor will I include any tax refunds (that will go straight into various ISAs), so this is purely on my normal monthly pay.

Why not include them? Simple, the bonus I feel will warp my savings rate, and I wont get a bonus in retirement (I suspect). My overall retirement savings will continue to jump up and knock months off my retirement date from the added savings, but the amount I save / spend out of the regular income will remain there.

Base So, I know what I have spent over the last 18 months and what my savings rate has been, so I am going to set my base at a 20% savings rate average for the year. If I can avoid some unexpected big bills then this shouldn’t be hard but famous last words and all that.

Goal: Achieve a 30% savings rate average over the course of the year. Whilst I know this should, in theory, be easy to do, it is something I have failed to do over the last year – in fact only 3 months was it above this rate. If I can hit it I will be super chuffed!

Stretch: Achieve a 40% savings rate average over the course of the year. So I showed that I could do this as a one off back in January, but that was not normal circumstances. Will I be able to do it over the year? I honestly doubt it with a few big things this year, but this will hopefully drive me towards the higher 30s rather than the lower 30s

When I refer to savings, this is any money that is put away into one of the following:

  • A regular cash reserve fund
  • My ISA
  • My other half’s ISA
  • My Pension
  • Overpaying the mortgage

So… how will I do? Who knows – watch this space to find out!

What about you – what are your plans for the new tax year, if any?

What savings vehicles I have for retirement

So, I have multiple savings vehicles that I spread my investments around in. Some of which I can access now, others in the future, and some that are a complete unknown. All of these, except for the state pension, count towards my total net worth, but not all are included in my calculations for when I can pull the trigger and retire.

State Pension

Whilst I have regularly paid my NI (although I did contract out for a couple of years), I am assuming by the time I can get my state pension (when I am 67, not really that early!) it will either be means tested or some other idea the government has come up with. I am therefore assuming in all my calculations that I will receive a grand total of £0 per year from the state pension. In effect anything above this will be a nice little bonus (likely with some tax implications, but…) if and when I get to that age. Maybe it will pay for a holiday each year!

Defined Benefit Pension

I realised one of the smart things I did when I first started work was to sign up to the DB pension scheme they offered. I was only there for a couple of years, and on a very low salary, so the amount that it built up is limited, but an inflation linked “guaranteed” (as close as these get) income isn’t to be sniffed at. Granted its about £1,000 per year – so again, this doesn’t feature in my retirement planning, and will act as a nice little bonus when it kicks in at the age of 60. To quote my FA – “Ask them to pay it out once a year as you won’t notice it in a month, and then go out for a nice meal”. I think £1,000 would buy a rather nice meal, but I don’t think I could ever bring myself to spend that much on a meal. I’ll let you know when I get to take it, on the assumption I am still blogging!

Private & Company pensions

I always sign up to the company pension wherever I work to make sure I get the maximum match possible. The minimum amount of total contribution I ever make is 10% (including match) to my company scheme, and then when I leave a company it gets moved over to my private pension. I used to automatically put 10% of my salary in regardless of the match requirements, however my concern now is the Life Time Allowance – I have 17 years to grow my pot. I do worry that with good returns I will breach this. As it stands I do salary sacrifice and also a direct debit into my personal pension, and any bonuses I get I then top up into my pension so it will grow quickly. Why pension first? The tax break, it’s that simple.

As it stands, I will hit the Lifetime Allowance in 17 years if I don’t contribute another penny and I get 9% returns P.A. – if I only get 5% P.A. and maintain my current contributions, excluding one offs, pay rises etc. I will also hit the limit in 17 years. In reality I will probably have to stop contributing before then unless they change the rules. I know, I can hear your heart bleed and oh lucky me. I accept that this is a really fortunate position for me to be in, so I shouldn’t complain – but if it makes me think twice, how do people in their 20’s starting work think? This won’t just affect me though – put away £1,000 per month (£800 pre-tax) into your pension for 33 years and achieve only 5% return and you will be at the limit. Yes, most people wont be able to put that aside, but now think about it over the 37 or so years people will be working, that becomes even less.

I can’t access this (under current rules, which will no doubt change) until I am 57. I want to have hit FI by then, so this means that it is my backstop – I know that the worst case would mean that I can hit FI when I can access it, so not a bad backup plan!

ISAs

I have a number of ISAs and it’s where I try to put the majority of my savings (be it in my name or my other half’s) for a tax efficiency point of view. They are spread among a number of different providers to reduce risk, and from the 2017 tax year I plan to start my “Go t’ Pub” portfolio in another ISA wrapper – but I will detail that in another post. For now – this is my income that will allow me to retire before my pension age, but it’s going to be tough going to get enough income out of it.

My other half’s ISA

The extra income generated from my other half’s ISA comes out of the wrapper to me rather than directly compounding in the wrapper. Not the most efficient some people may argue, however I use it to either pay extra off the mortgage or towards purchases that month, and gives me an easy obvious answer to how my income is tracking up. In the end this will go into the joint bills account, so I want to push to make sure this covers both of our share of the bills, and a bit extra so we can keep it increasing. The money we both contribute is put into other portfolios within the wrapper.

My S&S ISA with my IFA

This just ticks along and isn’t doing much. At the minute the performance isn’t great, so I may need to either transfer it away from him or into a different allocation. I will discuss with him at our next review meeting. It’s still ticking up slowly so I guess at least it’s going in the right direction. Having started this post, I checked my monthly tracking, and whilst I thought it hadn’t gone anywhere over the last 12 months, its still gone up 5% – not a great return, but we will save this for the year end review.

My self managed S&S ISA

This has grown nicely over time and so after this financial year no new contributions will be going into it with this ISA provider for some time but I will continue to report, monitor and grow it. More details to follow.

My Go T’ Pub ISA

This will only start in the new tax year but will build up over time with a different ISA provider, and also help to supply some of my cash reserve. More about this in another post.

My cash ISAs

I only have 1 cash ISA left now as I have moved most of them over to S&S over the years. They are part of my emergency cash pile, but the rates are so crap it’s untrue. That is why I will split this into two, one half remaining in cash, one half in an Investment Trust in my “Go t’ Pub” ISA and we can see how things pan out. Hopefully this will be of interest to others to see the difference, and also why you shouldn’t keep your emergency fund in the stock market! This is not included in any of my calculations for FI (the cash ISA that is).

Cash savings accounts

I have a few of these dotted around for my emergency reserve. I don’t chase the best rate, I go for ease and laziness. I could get maybe 1% extra but to be quite frank, I really can’t be bothered – the returns are just not worth it for my time. As my other income streams in the ISAs increase I will look to decrease my cash holdings. These are also not included in my numbers to hit FI.

Premium Bonds

The other vehicle for my emergency cash, but with the prizes automatically reinvested. Not the greatest rate, but its tax free, and that counts for a lot. Who knows, the million would make a great benefit! Again, these are not included in my plans for FI.

Mortgage

Some may question this as a savings vehicle, but when my mortgage was lower I spent more! We still have a fairly hefty mortgage (in my eyes, although to be fair it is less than 4 times my salary, and about 25% of my net income for my share) which I would like to reduce – there is one big however in this.

ISA allowances are a use it or lose it reward – at the end of the year, what you haven’t used is gone, never to be replaced. If I didn’t have a mortgage (and so also the insurance I pay to cover it), I would have more money than I can fit into the ISA allowances (subject to ever changing allowances!) – granted a great place to be. So for now I took the decision that the money I would have overpaid the mortgage with now goes into my other half’s ISA (see above). It’s going to be slow going and not as fast on the snowball, but means that I have the benefit of that income for the rest of our lives, and I am assuming I still have to pay the mortgage in my calculations which gives me a nice big boost to my income once its cleared!

So what do you use for your savings? Do you overpay the mortgage as well, or just invest as much as possible through your ISA? Or just spend it all down the pub? 🙂

My Approach and Assets

So this initially started as a single page to track and show everything, but as I tried to condense it, I found it just didn’t work, so this is more of an overall statement, along with the necessary links (when they get published), let’s see how it pans out. I have now split it into the various areas, for this post I will focus simply on my approach.

I will also put my target up here, at the top, in full view.

1st June, 2025.

That’s the date I have put in for me to be FI. Right now, I think it’s highly unlikely (read impossible) because of my approach however – aim high! It will encourage me and keep me thinking. Worst case I am off by a few years it’s still giving me something to aim for! Why is this impossible? Simple – the mortgage is too high (and I am not willing to move), I am putting a lot into pensions for tax reasons (and I am not willing to change), and I don’t want to sell off parts of my ISA until I can collect my pension. So it’s all my own fault, and I accept this.

Approach

Like many people in the FIRE community, I have a figure in mind of what I think it will take for me to be able to make work as an optional extra. I even follow Mr Zombie’s experimental withdraw strategy which gives me confidence that these things will work, however there are some complications for me.

Key among them are what does that actually mean in terms of the big number (apart from being a big scary number!), can I actually cope with selling off units to live (the answer is no which increases the number I need) and what can I get at, when.

Firstly, can I actually cope with selling off stock? The simple answer is no. However this isn’t quite the whole picture. If I were to be at close to the Life Time Allowance in my pension then I would have no choice but to sell and take some money, but this is more of a tax decision than a personal one and I think I wouldn’t have a problem with that (in fact I would probably sell them, take them out of the pension and reinvest outside of the pension wrapper). In effect this means no sell down, but living off the natural yield – this means my big scary number needs to be even bigger.

What can I get at when – that’s a much bigger challenge, and so I have put a separate section to go through that as its more complex I think for the UK based folks than those in the USA (I am not sure about other countries but I am sure all of them have their own challenges).

So the short answer is I have a great big number to aim at and I need to get going (faster).

Firstly to make the extra cash above my expenses. A lot of people in the FIRE community go for Buy To Let or side hustles. I didn’t – I invested in myself, worked the extra mile and collected the promotions, moved jobs and worked my way up. Like RIT, this involves long hours, often weekends, but having seen how my total pay has gone up, well worth it.

I want to make it as tax efficient as possible, that means initially using ISAs & Pensions, and then after that what about broker accounts etc. however that would require me using up £40,000 of ISA allowances and then of course my pension allowance on top. That’s a lot of cash to find, but its a good aim to go for.

So I have a minimum figure in mind that I need to hit, however the “problem” here is that of all my assets not all will be accessible until I am older, and can access my private pension – this impacts the date I can achieve FIRE – however I want to make sure I make the most of the tax perks of putting money into the pension so I will continue to do just that. I will document my approach on finances and wrappers, from the very last piece (State Pension) to available now.

I know some people look at running down their ISAs and unwrapped accounts so they are almost empty to time with being able to access their pension. I am not comfortable doing that, so I aim to hit my FIRE number excluding Pension and Housing wealth whilst still building those up. Its a tall order indeed, and hence I don’t think it is going to be achievable by my date above, but I would rather aim high and get close than aim low and make a lower amount.

According to the Mad Fientist and Mike over at 7 Circles (deep link to the spreadsheet here) – I have used both of their spreadsheets  – I could retire before then, however I would have to sell down my ISAs in the run up to my pension, which I don’t want to do. I also rejigged the Mad Fientist’s spreadsheet so I can track full net worth FI, net worth excluding housing FI and then excluding housing and pensions FI. Based on that its 6 years, 17 years and 22 years respectively (this was before my November, a story for another post). That doesn’t fill me with confidence, but heck, I will go for it anyway. If I can look back at this blog in 9 years having made it and go “Wow, I did it” that will be amazing!

What do you think? Am I mad trying to set the bar so high, should I sell down my investments whilst waiting for my pension?