The Lemon Fool

I thought it could be a useful exercise to summarise my current position along with the assumptions and choices I am making as part of my retirement investing process. It could well be that some of these have room for improvement or optimisation which would, therefore, make sense to apply sooner rather than later. Feedback/critique is most welcome.


Finances:

SIPP: current value £200k
Plan: three more years of maximum contributions (£40k per year), after which no more additions. This account has at least 23 years to grow so is invested 100% in global equity funds with a relatively high-risk tolerance. A target value of £1m to provide a taxable income of £40k per year (actual amounts will be higher however investment growth is based on an inflation-adjusted value of 6%).

ISA and General Investment account: current combined value £250k
Plan: move £20k each year from the taxable account into the ISA account. Continue to add excess cash into the taxable account, investing in funds that target capital growth rather than income. Monitor CGT liabilities. Hold some VCT investments for both short term income tax benefits as well as longer-term tax-free dividend income (although this is currently reinvested as I am in the accumulation phase).

Cash: current value £120k
Plan: the majority is held in a limited company account so is withdrawn in the most tax efficient manner (a combination of salary and directors dividends). I may look into putting some of this into some fixed term deposits to protect from inflation if I have some spare time on my hands.


Current considerations:

Career / semi-FIRE:
- I don't think I actually want to stop working when I reach FI (for which I'm targetting total cash+investments of £1m), rather, I would like to be able to consider a career change or undertake something different to what I currently do. I suppose that once I have completed three more years of SIPP contributions I should be able to start thinking about this in more detail, although my current role is actually quite enjoyable so it's not the end of the world if I continue for a while longer and build more of a buffer. I estimate that by my mid-40s at the latest, by just letting the above accounts grow naturally I should be there.

Annual cost of living: circa £50k
- The main cost here is £32k rent which we pay in central London, so this would be the easiest thing to reduce if I did decide to take a step back from work or change roles. One option would be to move further out and target annual costs below £40k (in line with the target pot and 4% rule).

Renting vs. Buying:
- We may look at purchasing somewhere in the future however for now renting actually makes more financial sense, and we have been very happy with this so far. We've previously owned properties do appreciate the peace of mind this can bring, so may use some capital for this in the future - this will also have the benefit of reducing our annual cost of living. No strong preference either way so will continue to monitor.


Is there anything else that I should be tracking/considering at this stage? Any flaws in this plan?

I would be worried about paying rent at that level. Just think how much capital you need to generate £32k. Probably about £800k. I'm just looking at how much my own portfolio generates with a yield of about 4%.

I have a feeling that surplus funds might be better deployed in getting yourself into the housing market. Obviously location and prices come into the calculation, but to be mortgage free and owning your own property when you retire makes more sense than paying rent way into the future.

TJH

Indig0 wrote:Is there anything else that I should be tracking/considering at this stage? Any flaws in this plan?

Life. You've not mentioned kids or dependants. There was a 'we' reference.
Stuff happens.

Perhaps buy a modest place in London, and aim to pay it off. Then you’ve covered your housing costs, and you have an asset you can rent out, should you decide to work outside London. Or abroad. Or you can just sell it when you move on. Or you can use it for cheap leverage via a mortgage.

Diverting 10 years of your current rent into a mortgage would make a big dent in the latter.

In the meantime, just keep on saving and investing!

Brodes.

Thanks all, some useful suggestions there.

TJH: agree the rent is currently quite high, however, it would only remain at this level while I continue to work in the city. As soon as I wanted to slow down I would move further out, thus incurring a much lower annual cost, needing a correspondingly lower amount of capital to cover it.

TUK: yes, there is a wife and child already in the picture. My figures exclude my wife's earnings, and those more than cover the current and future costs we expect to incur raising a child so I just tried to keep this simple for now.

Brodes: no plans to buy in London - if we were to purchase our current place, the mortgage would be much more than the rent we pay, so that does not make sense if we will only be here for a few more years (given stamp duty and other costs too). I'd also not want to compromise our quality of life by moving to another area just so we could own a place, and I don't fancy the hassle of then having to think about renting it out in the future, or hoping that I could sell it at an acceptable price when needed. I'm happy to keep money in the markets for now.

Indig0 wrote:TJH: agree the rent is currently quite high, however, it would only remain at this level while I continue to work in the city. As soon as I wanted to slow down I would move further out, thus incurring a much lower annual cost, needing a correspondingly lower amount of capital to cover it.

The only point I would make, is that recently house price inflation has exceeded that of equities, and so having a stake in a property does at least give you a hedge against that sort of inflation.

You may think that £800k now would fund your rental, and could also buy you somewhere to live outside central London. Prices may of course fall, in which case you will be better off sticking with renting. You also have the cost and angst of commuting if you move further out. I have never commuted into Central London and have no desire to do so, but neither have I ever had any desire to live in Greater London, so I can only comment from the point of view of Mid Sussex and the Brighton Line.

TJH

VCT are good, but not as good as they once were.

Next best outside of any wrappers are small cap value. Long term buy hold.

I would avoid property at all costs. Your investments let you relocate on a whim and even consider working abroad or if you have the right skills becoming a digital nomad. Being Non Resident for tax might even be an option.

Throw convention out the window IMO. Fire will come WAY easier.

I wonder why you want to be so aggressive funding your SIPP now, then suddenly stop. I'd use it to keep out of higher rates of tax long term. Why do you only want £320k in it?

Runnygum: interesting suggestion re. small-cap value - are there any particular index ETFs or active funds you would recommend in this area?

JohnB: I would only stop funding the SIPP if I chose to semi-FIRE and was no longer a higher rate taxpayer. £320k with 20 years to grow would also take me close to the LTA so I'd need to consider if it was better to just invest in a taxable account now with the advantage of having earlier access to this if needed.

The LTA is index linked, so already more than £1m. I think you are neglecting its IHT and lump sum advantages a bit.

I'd put more in paying off a mortgage at your age, but expect to put more in a SIPP later

You also need to consider political risk. Best to have a bit of everything, especially what core voters have, so its least likely to be raided. Houses good for that

Indig0 wrote:I would only stop funding the SIPP if I chose to semi-FIRE and was no longer a higher rate taxpayer. £320k with 20 years to grow would also take me close to the LTA so I'd need to consider if it was better to just invest in a taxable account now with the advantage of having earlier access to this if needed.

As JohnB points out, the LTA is index linked.

If you mean to continue working on a part time basis, then funding a SIPP as a standard rate tax payer can still make good ecconomic sense. To start with 25% of the account is tax free. Then, as JohnB points out there are also the IHT advantages. Depending upon your employer it may be possible to become a standard rate tax payer by sacrificing enough into a workplace pension. You don't say how old your child is, but pension contributions are subtracted from household income when calculating how much a student can borrow from the student loan company (though you both would be well advised to research the subject a couple of years in advance). My wife was VERY glad that I have been making large contributions to my pension these last few years, for that reason.

If, despite these facts, you wish to save where you can access it before 55 then a STANDARD ISA, rather than a LISA or taxable account makes good sense.

runnygum wrote:I would avoid property at all costs. Your investments let you relocate on a whim and even consider working abroad or if you have the right skills becoming a digital nomad. Being Non Resident for tax might even be an option.

Hi Runnygum,

Could I ask to expand your views on property here. Do you mean physical property or avoid REITS as well?

Given current mortgage rates for me - 70% LTV, 1.5% my interest costs are substantially below that of renting a similar property. This is without considering piece of mind no landlord can boot me out, I get rent a room relief of 7.5k a year and the house should provide some sort of inflation hedge. So for me - owning your own home makes financial sense.

For additional investments into physical property I am undecided - hence my interest in your view. I'm attracted to direct property ownership due to the higher leverage which boost returns. But then I do not like the lack of flexibility nor the work this may entail - something about been a landlord doesn't quite sit right with the whole idea of the financial independence aspect of FIRE.

My first post on this forum! I have similar considerations but am older and am not at your level of investments. Congratulations on building investments to that level by your mid-30s.

One area you could benefit is you mention moving £20k per year from investment account(taxable) to your investment ISA. What you can do is sell some of these investments (outside the ISA) up to the level of the CGT allowance, and rebuy them in your wife's name. The CGT exemption for current year 19/20 is £12,000.

So in your position I would sell £12k p.a. from your investment account, and put in your wife's investment ISA. Then top up your wife's ISA by a further £8k p.a. Then as a couple you have £40k p.a. going into ISAs, and reduce the taxable account.

As you seem to have surplus, you could (if not already) pay into a SIPP for your wife (to the annual allowance lower of earnings, or £40k (all contributions), or if not working £3,600 pa inc tax relief).

Welcome to the forum, fca2019.

One point, but the CGT allowance is for Gains, not sales. So the OP could sell as much as realises up to £12k of gains and transfer that to his wife.

TJH

Yes you're right. I've not had to Bed and ISA personally. Thanks TJH.

Walkeia wrote:Hi Runnygum,

Could I ask to expand your views on property here. Do you mean physical property or avoid REITS as well?

Physical property.
Its an anchor in many ways, tax, residence, obligations, depreciation, running costs, time costs etc, etc.