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Article in Telegraph on ISA Millionaires

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PeterBill
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Article in Telegraph on ISA Millionaires

#206364

Postby PeterBill » March 8th, 2019, 4:41 am

Article in Telegraph ... which discusses investments in ISAs and the increase in ISA Millionaires ... More interesting reading ... I've always had a preference for Investment Trusts over Unit Trusts ...

https://www.telegraph.co.uk/money/consu ... ion-widget


Six steps to build up a £1million portfolio

1​ Make the most of the Isa allowance
2 Buy investment trusts over funds
3 Reinvest your dividends
4 Take a measured level of risk
5 Look to invest for the long term
6 Stick out the tough times

IanSmithISA
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Re: Article in Telegraph on ISA Millionaires

#206365

Postby IanSmithISA » March 8th, 2019, 6:13 am

Good morning

I have a hatred of this type of advice, :D

3 Reinvest your dividends
4 Take a measured level of risk
5 Look to invest for the long term
6 Stick out the tough times

on the basis that the person giving it won't be around when it turns out not to be true.

Below are the numbers if you bought £5K worth of Barclays shares starting in 2002 and reinvesting dividends, and selling at today's price you would lose around £5,255 more than your original investment!

I appreciate that this is the performance of a share not a trust or fund but in 2002 buying banks was seen as something that was safe over the long term.

.                                Share             Dividend
Pot Pot Qty of Price Dividend Amount Per Dividend New Shares
Cost Value Profit Shares Pence Date Share(p) Amount(p) Bought
£4,998 £4,998 899 556
£4,998 £3,811 -£1,187 899 424 Aug-02 6.35 5708 13
£5,055 £3,184 -£1,871 912 349 Feb-03 12.0 10949 31
£5,165 £4,322 -£842 944 458 Aug-03 7.05 6653 15
£5,231 £4,629 -£603 958 483 Feb-04 13.45 12889 27
£5,360 £5,112 -£248 985 519 Aug-04 8.25 8126 16
£5,441 £6,064 £623 1001 606 Feb-05 15.75 15760 26
£5,599 £6,037 £438 1027 588 Aug-05 9.2 9445 16
£5,693 £6,402 £709 1043 614 Mar-06 17.4 18143 30
£5,875 £6,809 £934 1072 635 Aug-06 10.5 11259 18
£5,987 £8,611 £2,623 1090 790 Mar-07 20.5 22344 28
£6,211 £6,833 £622 1118 611 Aug-07 11.5 12860 21
£6,339 £5,571 -£768 1139 489 Mar-08 22.5 25634 52
£6,596 £4,362 -£2,234 1192 366 Aug-07 11.5 13705 37
£6,733 £6,011 -£722 1229 489 Mar-08 22.5 27656 57
£7,009 £4,706 -£2,304 1286 366 Aug-08 11.5 14786 40
£7,157 £4,244 -£2,914 1326 320 Nov-09 1.0 1326 4
£7,170 £3,578 -£3,592 1330 269 Feb-10 1.5 1995 7
£7,190 £4,521 -£2,669 1338 338 May-10 1.0 1338 4
£7,204 £3,958 -£3,246 1342 295 Aug-10 1.0 1342 5
£7,217 £3,689 -£3,529 1346 274 Nov-10 1.0 1346 5
£7,231 £4,202 -£3,029 1351 311 Feb-11 2.5 3378 11
£7,264 £4,100 -£3,165 1362 301 May-11 1.0 1362 5
£7,278 £3,047 -£4,231 1366 223 Aug-11 1.0 1366 6
£7,292 £2,279 -£5,013 1373 166 Nov-11 1.0 1373 8
£7,305 £3,535 -£3,770 1381 256 Feb-12 3.0 4143 16
£7,347 £2,990 -£4,357 1397 214 May-12 1.0 1397 7
£7,361 £2,302 -£5,059 1404 164 Aug-12 1.0 1404 9
£7,375 £3,248 -£4,127 1412 230 Nov-12 1.0 1412 6
£7,389 £4,255 -£3,134 1418 300 Feb-13 3.5 4964 17
£7,439 £4,505 -£2,933 1435 314 May-13 1.0 1435 5
£7,453 £4,606 -£2,847 1439 320 Aug-13 1.0 1439 4
£7,467 £4,000 -£3,468 1444 277 Nov-13 1.0 1444 5
£7,482 £3,927 -£3,555 1449 271 Feb-14 3.5 5072 19
£7,533 £3,640 -£3,892 1468 248 May-14 1.0 1468 6
£7,547 £3,198 -£4,349 1474 217 Aug-14 1.0 1474 7
£7,562 £3,553 -£4,009 1481 240 Nov-14 1.0 1481 6
£7,577 £3,880 -£3,696 1487 261 Mar-15 3.5 5204 20
£7,629 £3,872 -£3,757 1507 257 May-15 1.0 1507 6
£7,644 £3,781 -£3,863 1513 250 Aug-15 1.0 1513 6
£7,659 £3,903 -£3,756 1519 257 Nov-15 1.0 1519 6
£7,674 £2,576 -£5,098 1524 169 Mar-16 3.5 5336 32
£7,728 £2,536 -£5,191 1556 163 Aug-16 1.0 1556 10
£7,743 £2,943 -£4,800 1566 188 Mar-17 2.0 3131 17
£7,774 £2,975 -£4,800 1582 188 Aug-17 1.0 1582 8
£7,790 £3,261 -£4,529 1591 205 Mar-18 2.0 3181 16
£7,822 £2,763 -£5,059 1606 172 Aug-18 2.5 4015 23
£7,862 £2,607 -£5,255 1630 160 Current


Bye

Ian

johnhemming
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Re: Article in Telegraph on ISA Millionaires

#206366

Postby johnhemming » March 8th, 2019, 7:04 am

This all comes down to the question of how to treat reinvested dividends. Banking shares have had their ups and downs recently (I hold quite a few)

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Re: Article in Telegraph on ISA Millionaires

#206367

Postby nmdhqbc » March 8th, 2019, 7:05 am

IanSmithISA wrote:I appreciate that this is the performance of a share not a trust or fund but in 2002 buying banks was seen as something that was safe over the long term.


So you already understand that this example ignores number 4 (too risky). So your example is not following the advise you profess to hate.

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Re: Article in Telegraph on ISA Millionaires

#206370

Postby JohnB » March 8th, 2019, 7:22 am

If you'd chosen the FTSE All Share Index, and used Total Return values,

http://www.johnbray.org.uk//ftseallshar ... eturn.html

"From the start of 2002 to the start of 2017, £5000 would have grown to £12902"

I don't think you should claim you've "lost" 5255, its 2400, still poor though,

Dod101
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Re: Article in Telegraph on ISA Millionaires

#206373

Postby Dod101 » March 8th, 2019, 7:35 am

IanSmithISA wrote:Good morning

I have a hatred of this type of advice, :D


So you consider that you have demolished the argument, by quoting what turned out to be one poor share. The sort of example you have quoted is worse than the advice given in the telegraph, a lot worse. It is selective and thus proves nothing and besides it is not even illustrating the advice the Telegraph article was giving. It is in fact a complete waste of space.

I am sure plenty of us could have been, in fact probably, are ISA millionaires. I am not although I have been using ISAs and their forerunners since 1991, but that is because life has intervened over the years. I have had to use chunks of money over the last 30 years or so for other things and so have not been able to leave money to accumulate, withdrawing dividends for a start but also capital at times. It is of course perfectly possible if you reinvest dividends and leave capital untouched over a long enough period. There are plenty of examples.

Dod

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Re: Article in Telegraph on ISA Millionaires

#206390

Postby Alaric » March 8th, 2019, 9:29 am

PeterBill wrote: 2 Buy investment trusts over funds


That's somewhat misleading as the article notes that shares, the usual ones discussed on TLF, form a higher percentage of the assets than either OEICs or ITs.

Historically I could believe that ITs would out perform OEICs as the former didn't have their management charges loaded for paying renewal commissions.

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Re: Article in Telegraph on ISA Millionaires

#206397

Postby tjh290633 » March 8th, 2019, 9:48 am

Alaric wrote:
PeterBill wrote: 2 Buy investment trusts over funds


That's somewhat misleading as the article notes that shares, the usual ones discussed on TLF, form a higher percentage of the assets than either OEICs or ITs.

Historically I could believe that ITs would out perform OEICs as the former didn't have their management charges loaded for paying renewal commissions.

The argument for buying collective investments is that they have diversity built in. The Barclays example shows that diversity is vital.

Reinvesting dividends is automatic in accumulation OEICs at no cost. Often with income funds it is done at the bid price, if dual priced, or without an initial charge if single priced. With individual shares you may be able to reinvest in the same share, but it is more usual to let the dividends accumulate, then invest in the share of your choice.

Which approach gives the better result depends on what you are measuring. I know from my own experience that it is possible to beat an index for capital performance and the RPI for income growth. Not every year, but over sustained periods, and it does need some work to achieve this. LTBH is an essential feature, but having set limits for weight of individual holdings, and share of income from any one share. The limit on weight was breached by RIO on Wednesday, but going XD the next day solved that problem. It doesn't happen very often, but if you are serious about diversity, then you have to act.

TJH

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Re: Article in Telegraph on ISA Millionaires

#206411

Postby paulnumbers » March 8th, 2019, 10:34 am

Something to note...

If you invest in funds with HL, a £1m portfolio will cost £3000 pa in fees. In investment trusts, it costs £45 per pa.

If you had £1m in funds, you'd be far better off in a fixed fee broker such as IWEB. So we've got two groups of people, the IT investors who are picking one of the cheapest brokers for their investing habits, and the other group (fund investors) picking one of the most expensive brokers for their investing habits. And then the Telegraph are surprised that the first group are out performing the 2nd? Doesn't seem surprising to me at all, for multiple reasons, ie, if you can be bothered to pick your broker with intelligence, perhaps you are doing all sorts of other things better too!

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Re: Article in Telegraph on ISA Millionaires

#206419

Postby JohnB » March 8th, 2019, 10:57 am

HL's lower charge band isn't merely for ITs and shares, but for ETFs too. "Fund" is a loose term, but if you can find an ETF rather than an OIEC version, you can benefit.

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Re: Article in Telegraph on ISA Millionaires

#206433

Postby thegreatzulu » March 8th, 2019, 11:32 am

They sometimes post the langcat investment tables on telegraph, I always trust their table when I'm checking I am using the right broker. It makes such a difference in the long run!

Alaric
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Re: Article in Telegraph on ISA Millionaires

#206439

Postby Alaric » March 8th, 2019, 11:41 am

PeterBill wrote:Article in Telegraph ... which discusses investments in ISAs and the increase in ISA Millionaires ...


If statistics for ISA millionaires are coming from Brokers, they almost certainly understate the head count as those with more than one Broker are likely not to have been included.

Itsallaguess
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Re: Article in Telegraph on ISA Millionaires

#206463

Postby Itsallaguess » March 8th, 2019, 1:03 pm

IanSmithISA wrote:
Below are the numbers if you bought £5K worth of Barclays shares starting in 2002 and reinvesting dividends, and selling at today's price you would lose around £5,255 more than your original investment!


Is there a rule in there that states that re-investment of dividends always needs to go back into the company paying out the dividends?

It's always struck me as odd that this would ever seriously be considered, so I think it's a poor example on that basis alone, and that's before anyone gets into highlighting the problem of specifically selecting a single worst-case scenario to de-bunk a whole piece of general advice....

I personally think there's a great deal of sense in the six steps, but then I suppose I would say that, as it's more or less what I've been doing for nearly 20 years now, and I've certainly no complaints....

1​ Make the most of the Isa allowance
2 Buy investment trusts over funds
3 Reinvest your dividends
4 Take a measured level of risk
5 Look to invest for the long term
6 Stick out the tough times


Cheers,

Itsallaguess

tjh290633
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Re: Article in Telegraph on ISA Millionaires

#206499

Postby tjh290633 » March 8th, 2019, 3:08 pm

Itsallaguess wrote:Is there a rule in there that states that re-investment of dividends always needs to go back into the company paying out the dividends?

It's always struck me as odd that this would ever seriously be considered, so I think it's a poor example on that basis alone, and that's before anyone gets into highlighting the problem of specifically selecting a single worst-case scenario to de-bunk a whole piece of general advice....

No, there is no such rule, but it is what you get with accumulation units in funds.

Perhaps a good argument for not investing in them

TJH

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Re: Article in Telegraph on ISA Millionaires

#206502

Postby JohnB » March 8th, 2019, 3:17 pm

With a fund the dividends get invested in the fund as a whole, normally weighted by market capitalisation. So if one component, like Barclays, drops, then you tend to be buying other things with its dividends.

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Re: Article in Telegraph on ISA Millionaires

#206504

Postby Itsallaguess » March 8th, 2019, 3:24 pm

tjh290633 wrote:
Itsallaguess wrote:
Is there a rule in there that states that re-investment of dividends always needs to go back into the company paying out the dividends?

It's always struck me as odd that this would ever seriously be considered, so I think it's a poor example on that basis alone


No, there is no such rule, but it is what you get with accumulation units in funds.

Perhaps a good argument for not investing in them


Thanks Terry - I would have much less of a problem with such an approach by the majority of already internally-diversified funds, but I just find it odd that a worst-case example might be used to try to dismiss the OP article, by using an example where it's assumed that single-company dividends are to be re-invested in the originating company.

I don't think it's at all realistic to use such a scenario to de-bunk the OP article's advice, and that's before we even get to the point regarding using a worst-case hindsight-scenario to then do so....

In fact I'd go so far as to say that it probably shows the general strength of the OP article's advice if such an outlier example is being used to try to dismiss it......

Cheers,

Itsallaguess

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Re: Article in Telegraph on ISA Millionaires

#206537

Postby Lootman » March 8th, 2019, 7:38 pm

I suspect that anyone who invested the maximum in PEPs and ISAs since they started (1987 or so), and who put in the maximum each year, and who bought an index fund with low fees, and who reinvested dividends, and who made no withdrawals, would probably have a million by now.

Maybe someone with better maths skills than me could do the sums. But I'd guess that such contributions probably amount to 250K, and it would not take a stellar performance to accrue that to a million over those 32 years.

If I were starting over I'd bung the lot in a All-World ETF and sit back.

Backache
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Re: Article in Telegraph on ISA Millionaires

#206540

Postby Backache » March 8th, 2019, 8:19 pm

Lootman wrote:I suspect that anyone who invested the maximum in PEPs and ISAs since they started (1987 or so), and who put in the maximum each year, and who bought an index fund with low fees, and who reinvested dividends, and who made no withdrawals, would probably have a million by now.

Maybe someone with better maths skills than me could do the sums. But I'd guess that such contributions probably amount to 250K, and it would not take a stellar performance to accrue that to a million over those 32 years.

If I were starting over I'd bung the lot in a All-World ETF and sit back.

Indeed this article points out exactly that.
https://www.ft.com/content/3b8e19e8-3c1 ... 04d3811663

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Re: Article in Telegraph on ISA Millionaires

#207701

Postby Gengulphus » March 14th, 2019, 4:25 pm

Lootman wrote:Maybe someone with better maths skills than me could do the sums. But I'd guess that such contributions probably amount to 250K, and it would not take a stellar performance to accrue that to a million over those 32 years.

I think it would be easier still just to let a spreadsheet do the maths! ;-) The biggest difficulty is knowing just what calculations one wants to do, or possibly getting the figures to enter into the calculations (how hard it is to get them obviously depends on what calculations one settles on - it can vary from pretty easy, as it turned out in the following example, to very hard and/or expensive indeed). The calculations themselves are generally just a matter of knowing which spreadsheet functions to use.

For example, a very simple calculation of some sort of average rate of return (*) that one would have needed to achieve would be just to enter the amounts and dates of the subscriptions that one wants to assume, plus the current date and a pretend liquidation of the account by withdrawing a million pounds from it today, and apply the XIRR spreadsheet function to them. E.g. if I do that for maximum subscriptions on the earliest possible dates in each of the last 10 years, assuming the investor was under 50 years old in the 2009/2010 tax year, I enter the following data into a 2-column, 12-row area of the spreadsheet:

06/04/2009 £7,200
06/04/2010 £10,200
06/04/2011 £10,680
06/04/2012 £11,280
06/04/2013 £11,520
06/04/2014 £11,880
01/07/2014 £3,120
06/04/2015 £15,240
06/04/2016 £15,240
06/04/2017 £20,000
06/04/2018 £20,000
14/03/2019 -£1,000,000

If that area is cells A1:B11, entering the formula =XIRR(B1:B11,A1:A11) produces a result which, when formatted as a percentage, tells me that I would have had to achieve rates of return averaging somewhere in the region of 39.83% to have become an ISA millionaire in the last ten years, starting from scratch. Not very surprisingly, that's distinctly unlikely!

I got those figures from TMF's historical ISA allowances page, which explains in footnotes to its table why the 2014/15 allowance is split in my data and the reason for the comment about the investor's age. It gives ISA allowances back to the start of ISAs in 1999, and as a bonus PEP allowances before that back to their start in 1987. It was also the first non-advertising result I got from a web search for "history of ISA tax allowances", so the data I wanted for my chosen calculation turned out to be pretty easy to obtain!

Putting the data for all 20 years of ISA allowances through the equivalent calculation says that one would have needed to achieve rates of return averaging somewhere in the region of 15.55% to have become a 'ISA-only millionaire' over those 20 years (**). That's a very high rate of return for an investor to have averaged long-term - not one that's totally unheard-of, but only a very small percentage of investors will have managed it. So at present, achieving that rate of return for 20 years is almost certainly the biggest hurdle to being an 'ISA-only millionaire'.

If one adds in PEP subscriptions for the previous 12 years back to 1987 (***), the rate of return would have had to average somewhere around 7.58% over that period for one to have become an 'ISA/PEP millionaire'. That's probably quite a typical average rate of return for an investor to have averaged over 32 years, provided they have avoided withdrawals, high fees and other costs, and not fallen foul of various 'get rich quick' ideas like jumping into the late 1999 / early 2000 tech boom (****). The biggest hurdle for such an investor to have had to overcome is probably no longer the average rate of return they need to have achieved, but to have both lived that long and been able to afford to invest the full ISA/PEP allowances in each of the years concerned.

As the years go by, the average-rate-of-return hurdle can be expected to continue to get easier, but the invested-full-allowances-that-long hurdle can be expected to get harder. And actually, the average-rate-of-return hurdle is still getting easier by an appreciable amount each year. To give an idea, here are the average rates of return needed to become an 'ISA/PEP millionaire' (or an 'ISA-only millionaire' for the figures in brackets) by April 5th of each year from 2015 to 2025, assuming maximum subscriptions to PEPs and ISAs since 1987 (or ISAs since 1999), on the (admittedly shaky) assumption that the ISA allowance remains at £20k and ISA rules remain unchanged until April 5th, 2025.

2015: 9.84% (22.65%)
2016: 9.22% (20.51%)
2017: 8.64% (18.65%)
2018: 8.08% (16.97%)
2019: 7.56% (15.47%)
2020: 7.07% (14.13%)
2021: 6.61% (12.93%)
2022: 6.18% (11.84%)
2023: 5.77% (10.86%)
2024: 5.39% (9.97%)
2025: 5.03% (9.16%)

So someone who's subscribed the maximum contributions since PEPs began would have had distinctly superior investment performance to have been an 'ISA millionaire' by 2015, and if things remain unchanged until 2025 will do so even on rather lacklustre investment performance. Right now, we're roughly halfway between those two, so it would be rather surprising if the number of 'ISA millionaires' weren't rising quite rapidly... For 'ISA-only millionaires' who have only been subscribing since 1999, very superior investment performance is still needed - but it's coming down year-by-year, and can be projected to reach a similar stage in about 2027 if ISA rules and allowances remain unchanged.

One final note about the above is that it doesn't take two particular sources of ISA funding into account. One is the pre-1999 TESSA accounts: ones that matured after new PEPs and TESSAs were no longer available and ISAs introduced could have their capital (which IIRC was at most £9k subscribed over 5 years) but not their earned interest rolled forward into an extra 'TESSA-only' cash ISA, and eventually (I'd have to look up when!) that cash ISA became transferable into a shares ISA. So with perfect timing, one could add an extra £9k to the subscription on 6 April 1999, which would shave about 0.2 percentage points off the required average rate of return needed - but it would also have imposed a requirement to earn cash returns rather than equity returns on a small part of the capital for several years.

The other is the fairly recent introduction of 'inheriting ISAs', giving widow(er)s the ability to effectively take over their deceased spouse's ISA without losing the tax shelter. Someone in that position could have the benefit of twice all the above subscriptions, so that all the above average rates of return are for being an 'ISA double millionaire', and the average rate of return required to just be an 'ISA millionaire' today is just 3.58%.

(*) "Some sort of average" is deliberately vague wording - what the XIRR() function actually calculates is the effective fixed interest rate one would have had to get from a deposit account to achieve the million pound outcome with the same cash inputs. In reality, of course, rates of return are highly variable from year to year, and any single figure such as the XIRR() result can at best be some sort of average - but I wouldn't like to have to say exactly what sort of average!

(**) Note that this only counts the "Share ISA/Total allowance" column, as the "Cash ISA" and "Lifetime ISA" columns are only maxima for how much of that total allowance one can use for specific purposes, not additional to it, and the "Junior ISA" column is basically an alternative to it. (I have not investigated the exact interaction of the subscription rules for Junior ISAs and 'adult' ISAs between the ages of 16, when one can apparently open an 'adult' cash ISA and still be subscribing to a Junior ISA, and 18, when Junior ISAs automatically change into 'adult' ISAs. There are doubtless detailed rules about it, but anyone affected can at most have had any sort of ISA since 2011: it will be many years before them being an 'ISA millionaire' is more than a very remote possibility.)

(***) Counting both the "General PEPs" column and the "Single company PEPs" columns because they were separate allowances and could both be used without affecting the other.

(****) Which may seem at odds with what I've seen elsewhere about having made my pile in that tech boom, but isn't: in late 1999 and early 2000, I was jumping out of it - the only questions in my mind were how soon and how far to jump! Being in it at all was mainly a rather accidental consequence of employee share options awarded many years earlier: the only investment insight I can claim for it is that from the mid 1990s onwards, I did recognise that those options could potentially become quite valuable (though I didn't realise just how wildly OTT the stockmarket could go in that direction!), and the only important decisions that I made because of that were ones not to be tempted by a few job offers made by headhunters...

Gengulphus

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Re: Article in Telegraph on ISA Millionaires

#207726

Postby tjh290633 » March 14th, 2019, 6:07 pm

This is my record of PEP, Single Company PEP and ISA allowances since inception in 1987:

Yr to 5 Apr   PEP         SCPEP       ISA          Total     
1988 2,400.00 2,400.00
1989 3,000.00 3,000.00
1990 6,000.00 6,000.00
1991 6,000.00 6,000.00
1992 6,000.00 6,000.00
1993 6,000.00 3,000.00 9,000.00
1994 6,000.00 3,000.00 9,000.00
1995 6,000.00 3,000.00 9,000.00
1996 6,000.00 3,000.00 9,000.00
1997 6,000.00 3,000.00 9,000.00
1998 6,000.00 3,000.00 9,000.00
1999 6,000.00 3,000.00 9,000.00
2000 7,000.00 7,000.00
2001 7,000.00 7,000.00
2002 7,000.00 7,000.00
2003 7,000.00 7,000.00
2004 7,000.00 7,000.00
2005 7,000.00 7,000.00
2006 7,000.00 7,000.00
2007 7,000.00 7,000.00
2008 7,000.00 7,000.00
2009 7,000.00 7,000.00
2010 10,200.00 10,200.00
2011 10,200.00 10,200.00
2012 10,680.00 10,680.00
2013 11,280.00 11,280.00
2014 11,520.00 11,520.00
2015 15,000.00 15,000.00
2016 15,240.00 15,240.00
2017 15,240.00 15,240.00
2018 20,000.00 20,000.00
2019 20,000.00 20,000.00


Totals 65,400.00 21,000.00 209,360.00 295,760.00

Note that the Single Company PEP figures are my recollection, and may be a year adrift.

Making the current value of maximum contributions £1 million gives an XIRR of just over 8%. My actual IRR is 9.8%, which would give a current value of about £1.4 million.

That assumes no withdrawals, of course.

TJH


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