Saturday, 27 August 2016

The power of AND

Putting the scores on the doors reveals that I progressed to my Financial Independence number at a rate greater than 0.9% per month.  In hindsight this wasn’t because of any one particular silver bullet but instead was made possible by focusing on the personal finance many, rather than a few, or even the one talked about so often, investment return.  Putting it another way I focused on the personal finance AND.  Mechanically that included earning more and spending less and an appropriate portfolio and minimising taxes and minimising expenses and investment return.  Psychologically that included starting and determination and accepting I’ll make mistakes and never becoming a victim to name a few.

Over the last couple of weeks I think I’ve shown this trait again by maximising pension contributions while also minimising expenses.

I have two low cost SIPP’s (two rather than one is for risk minimisation reasons) in which I buy low cost tracker products.  This is my method of minimising pension wrapper expenses and investment product expenses.  However, even though I have these and they would enable me to defer tax if I invested in them directly I choose not to use this route.  Instead all my contributions enter pension wrappers via my employer’s expensive defined contribution old school insurance company group personal pension.  I do it this way as in addition to deferring tax like I could also do in the SIPP this maximises my contributions in a few more ways:
  • My company does an employer match up to a few percent, which of course I take advantage of, however I also contribute a lot more than this for the two reasons below;
  • My company allows salary sacrifice which means I get an extra 2% contribution into my pension rather than it being lost to employee national insurance contributions;
  • My company adds 10% of the 13.8% employer national insurance contributions that they save if I sacrifice into the pension. 
So I’ve maximised contributions but my employer’s pension scheme then has the big elephant in the room - Expenses.  I try and keep it to a minimum by buying into their tracker funds but even this means I’m paying annual expenses of between 0.6% and 0.87% depending on fund selected.  I can do much better than that in my SIPP’s.  So the trick is to complete a partial transfer into my SIPP when the pot becomes a reasonable size.  The last time I did this it could only be described as a palaver however this time the more appropriate description would be a doddle.

Of my two SIPP’s my Hargreaves Lansdown SIPP was the one with the least wealth in it.  They also now offer the option of an electronic transfer process which includes partial transfers.  I wanted a partial transfer as I don’t want to close my employer’s pension as I still need to contribute into it for a few more months yet.  I took advantage of this which required a simple online form to be completed, no interaction with my employer’s pension provider and I kid you not the funds were in my Hargreaves Lansdown SIPP in 11 calendar days.

The purchases I’ve then made within the SIPP save me significant expenses:
  • Sold expensive insurance company Property Fund with annual expenses of 0.76%.  In the SIPP I topped up my Hansteen (HSTN) REIT with purchase stamp duty of 0.5% only.
  • Sold expensive insurance company State Street Global Advisers (SSgA) Emerging Markets Equity Index Fund with annual expenses of 0.87%.  In the SIPP I topped up my Vanguard FTSE Emerging Markets UCITS ETF (VFEM) with an Ongoing Charges Figure (OCF) of 0.25%.
  • Sold expensive insurance company State Street Global Advisers (SSgA) Europe ex UK Equity Index Fund with annual expenses of 0.6%.  In the SIPP I topped up my Vanguard FTSE Developed Europe ex UK UCITS ETF (VERX) with an OCF of 0.12%.
  • Sold expensive insurance company State Street Global Advisers (SSgA) Japan Equity Index Fund with annual expenses of 0.6%.  In the SIPP I topped up my Vanguard FTSE Japan UCITS ETF (VJPN) with an OCF of 0.19%.
  • Sold expensive insurance company State Street Global Advisers (SSgA) Index Linked Gilts Over 5 Years Index Fund with annual expenses of 0.6%.  In the SIPP I topped up my iShares £ Corporate Bond ex-Financials UCITS ETF (ISXF) with a TER of 0.2%.  Note: I am aware these are very different beasts which was a conscious decision given my current bond allocations.
Positively, I’m also incurring no extra pension wrapper expenses as I’ve only bought shares / ETF’s which pension wrapper expenses wise are capped at £200 in Hargreaves Lansdown.  An expense cap I had already reached previously.

The end result of this piece of work is my overall portfolio expenses have reduced from 0.276% per annum to 0.254% per annum.  Doesn’t sound like much?  How about if I said that’s £234 per annum.  Still doesn’t sound like much?  How about if I said that given my portfolio generates dividends of 3% I’d need £7,806 of wealth to support just those expenses from dividends if I didn’t transfer.

It’s all about the AND.  In this instance maximising contributions and minimising expenses.

As always DYOR.


  1. Dear RIT , How do you feel about your £ 1 Million net wealth target now only being worth £ 850,000 in almost any other currency other than Sterling - as a result of the £'s 15% devaluation post-Brexit referendum?

    In the light of this - should your £1 Mill target now not be around £ 1.2 Mill ?

    The recent performance of FTSE indices and major FTSE companies is unlikely to last that much longer - and whether the £'s devaluation is going to lead to UK increasing exports , reducing imports and thereby improving it's overrall trading status - is highly unlikely. If this supposition is correct - there will be no re-valuation of the £ - and wages will grow at a slower rate compared to price increases.
    Since the £'s devaluation in 1967 ( Harold Wilson ) the CHF ( Swiss franc ) is now nearly 10 times more valuable than the £- and Swiss inflation has been x 1.52 ( 152%) whereas UK inflation has been nearer x 2.5 ( 250% )

    It looks like moving away from UK may prove to be a very good choice - however all your £ assets and income will be worth that bit less - and any house that you buy is effectively going to be about 15% more expensive for you paying in £'s.

    I know that YOU realise all this - and that you seem comfortable with it . It surprises me that more people are not talking about them being 15% poorer since 23rd June. Is that something that those who voted for Brexit thought might happen ?

    1. As I type this my net wealth is already £1,060,000 or in the other currency I am interested in it's EUR1,243,000. £1M still works for me because all my planning assumes EUR1.123 : GBP1 forever and we're still above that. That's probably why I'm not getting overly excited or anxious and is one of the benefits of my approach. As an aside I'm also expecting a big share/bond price crash to occur in the coming years and I believe I've also covered that one off also. Sure I'd like the exchange rate to be 1.3 or 1.4, particularly when handing over hard earned for an eventual home, but the whole point of my conservative planning was for these sorts of events.

      That said, it's funny you mention £1.2M. As I've written about a few times recently FI really did sneak up on me which has meant a delay between FI and FIRE. During that time and of course provided Mr Market behaves him/herself there is every chance I could pull together £1.2M or so. It's going to be tough but I currently have my head down and am just trying to maximise the pot in these final months. That little extra would certainly bring options including exchange rate insurance.

      As for economic effects on the markets I have given up on those for 2 reasons. One, the modern world just contains so much market manipulation that I start to wonder if we still have markets. Think of UK housing, just what would prices be without on the floor interest rates, HTB (I can't believe the taxpayer is now backstopping up to 40% of London home 'value' these days - given I believe punters just borrow the max they can that is some serious ramping), FLS all the QE's and now the Term Funding Scheme. Where would bond and share prices be without all the QE. Two, I tried trading based on economic principles and crystal ball gazing. Very quickly I proved to myself it was the sure fire way to financial ruin.

      Will the exchange rate go below 1.123 for an extend time / forever. Given what I've written about you can probably already guess my answer - I have no idea. What I do know is that I'm sure I'll adapt. Maybe it will be a return to the UK with my tail between my legs, maybe it will mean a job for a short time (although it would definitely not be of the sort I have today), maybe a small side hustle of some description or maybe I'll be happy enough to cut back a little. What I do know is that I'm looking forward to finding out.

    2. Hope that £ 1.2 Ill. comes to fruition - and that you can spend some of that " extra " on your house - once you have committed yourself to wherever you are going to live.

      Considering the London property market - the fact that sales have had a significant decline despite a 15% devaluation of the £ - and assuming that a hefty proportion of London property buyers were from abroad - that seems to spell out a significant decline in confidence in London / UK for the ubers . Falling markets are usually more of benefit to those trading up - rather than down.

  2. Dear RIT,

    How do you feel about the fact that your £1 million will be worth far more in Malta once the Eurozone bust-up starts?

    1. Good point dearieme. The EU is hardly the economy on which to base oneself if you were starting from scratch. Additionally, with many developed economies appearing to have a model where they are trying to be the fastest to debase their own currencies there is every chance that the EUR : GBP exchange rate could get better not worse. As I mentioned to stringvest above though I no longer even try and predict the direction. My mechanical plan (at least for now) seems to hold up in the face of the poor exchange rate so your scenario would have me smiling and sipping champagne.

  3. Best way is to save more and retire and spend it on some so called poor countries. East Europe, Asia.