The Good The Bad and The Ugly – New Year’s Resolutions 2017

The Good The Bad and The Ugly

Today’s post is about The Good The Bad and The Ugly of investing. It’s my version of a set of New Year’s Resolutions.

Investment Resolutions

Making specific resolutions about your investment portfolio is simply creating a hostage to fortune.

It’s certainly been the case for me over the past two years:

  • in 2015, setting up this blog took so much time that I didn’t achieve half of what I intended
  • during 2016, macro events (the Brexit vote and the US Presidential election) meant that I was out of the markets for half of the year

So for 2017 I will instead give a “State of the Nation” summary of how things look from the perspective of a UK Private Investor, and end up with some resolutions for the industry and the economy as a whole.

The theme of the summary is The Good The Bad and The Ugly.

  • Sadly, there’s a fair bit more of The Bad and The Ugly.
The Good

Regular readers will know of my obsession with three things:

  1. costs,
  2. taxes and
  3. asset allocations.

Get these three things right and 90% of the investment job is done.

The best thing about being a UK Private Investor is the tax breaks.

  • Each year you can shelter £55K from the tax-man (£40K in a SIPP and £15K in an ISA – soon to rise to £20K).
  • You can build up a £1M pension pot tax-free, and an ISA pot of unlimited size.

And since the pension freedoms of 2015, you can do what you like with your money on retirement.

  • Hint: I suggest drawdown.

There’s also a tax-break on capital gains from your primary residence, which can be very useful over the long-term.

And for the lucky few who can make it work, profits from spread-betting are also tax-free.1

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The second great thing is the internet.

Being an investor in the UK has improved immeasurably since I started in the 1980s.

  • Everything was done by phone then, and if you were unlucky, by paper and post.

Now we have an abundance of (mostly free) information and news, including live prices.

  • We have lots of helpful blogs2 and Twitter3
  • We have cheaper trading4

Disintermediation – cutting out the middleman – has made it easier than ever to go DIY, and to work and trade from home.

[hr]

The third great thing we have in the UK is our markets.

The UK markets offer almost anything you could wish for.

  • The FTSE-100 is very large and liquid, considering the size of the UK economy, and offers unparalleled international diversification through buying home stocks.
  • The FTSE-250 is the regular UK stock market, as seen on other national exchanges.
  • And the AIM market is the best small company market in the world, notwithstanding the fact that 75% of the companies on it are rubbish.

That’s it for the Good news, now onto the Bad.

[hr]

The Bad

Although we have some great tax breaks, we also have some Taxes and Allowances that are badly calibrated.

  • They have limits that act as disincentives to trading and liquidity.

The most obvious is the lifetime allowance for pensions (the LTA).

  • At age 55, when you can draw down your pension, £1M will buy you an income of just £26K pa.5
  • The £1M cap is also a punishment for good investing.
  • It should be abolished – the annual cap on contributions is more than enough, but even a lifetime cap on contributions would be better than a limit on pot size.

The DB conversion factor for pensions is also wrong.

  • It’s just 20, which means that someone in a DB scheme (usually in the public sector) can have a pension of £50K pa before they hit the £1M tax-free limit.
  • That’s almost double the amount that someone in a DC scheme can have.

The conversion factor should be raised to closer to 40, or linked to the annuity rates that determine a DC pension.

[hr]

The second bad tax is inheritance tax.

  • This is a tax on money that has already been taxed.

The current limit is £325K, and a new allowance of £100K (rising to £175K) of property comes into force in April 2017.

  • So by April 2020 the limit will effectively be £500K.

But a prudent person should be able to pass on their wealth to their family, including their home.

  • So the allowance needs to take account of property prices in the South of the UK, and particularly London.
  • It should also include the £1M pension pot, and your ISAs.6
See also:  The Job Guarantee

We’re looking at something north of £3M here, not £500K.

  • It sounds like a lot, but the US allowance is $5.45M.

[hr]

The third bad tax is stamp duty, on both houses and shares.

  • It’s a transaction tax, and so it reduces the number of transactions.

Liquid housing and stock markets help everyone, and stamp duty should go.

[hr]

The next bad thing is the recently introduced auto-enrolment scheme for workplace pensions.

  • It’s a good idea, but the contribution levels are too low (currently 3% of salary, rising to 8% in a few years).
  • And it has an opt-out.

Contribution levels should be raised to 15% pa and they should be compulsory, with no opt-out.

[hr]

My next gripe is about investment funds.

  • We’ve come a long way over the 30 years I’ve been investing, and for someone prepared to put in the time, you can make a good and reasonably priced portfolio from ETFs and investment trusts.
  • But we could do a lot better.

I’d like the government to put together a Sovereign Wealth Fund.

  • This would be a low-cost multi-asset fund that would be the default investment for public sector pension schemes.
  • It should also be available to private sector schemes and to individuals via ISAs and SIPPs.

We could also do with more innovative funds, including trend-following funds and a shorting fund.

[hr]

We’re also short of options when it comes to decumulation (spending your pension in retirement).

At the moment you have to choose between:

  1. an annuity (bad value) and
  2. drawdown (good, but a bit of work to manage).

We need more options, including:

  1. Guaranteed drawdown
  2. Deferred annuities
  3. Pensioner bonds from the government
    • with something like the State Pension’s triple lock’s inflation protection
    • note that the £3K of 2% bonds announced in the Autum Statement fall way short of what is required

[hr]

While we’re talking about the State Pension, it needs to be increased.

  • Yes, increased, not capped or frozen.

We have a Minimum Wage that will be £15K pa next year, and a benefits cap that is £20K pa even outside London, yet the State Pension is only £8K a year.

  • It should be much closer to the Minimum Wage – at least £10K pa.

[hr]

My next gripe is about investment advice

The government distinguishes between guidance (which is not specific to the person)7 and advice, which is specific to the individual.

You need to be regulated to give advice.

  • Being regulated is expensive and so advice is expensive.

Advice used to be funded from (hidden) commissions on the products recommended.

  • Since the Retail Distribution Review, the costs of advice need to be made explicit.
  • Which means that lots of people won’t pay them.

Effectively, advice is too expensive for those with less than say £250K to invest.

  • And that’s a lot of people.

I would change the regulatory regime so that advice wasn’t so restricted.

At the moment advice comes either from firms with an interest in profiting from you, or from so-called independent advisors who feel they need to charge hundreds of pounds per hour.

  • So most people don’t get the advice they need.

I’d like to see a new category of guidance introduced – let’s call it financial coaching or financial life coaching – so that experienced and successful investors (like me) could help people.

[hr]

On a related note, it’s very hard (and expensive) to set up a small investment fund in the UK.

  • I’d like it to be easier to set up a “mini-fund” based around a limited company or partnership – something like Warren Buffett’s original vehicle.

At the moment you can only really do this for sophisticated (high income or high net worth) individuals.

  • I’d like to make something available to ordinary people.

There are ways of using the investment club structure to create things like funds for small numbers of people, but even this comes with limitations.

[hr]

Like many other private investors in the UK, I’d like to see corporate voting rights for nominee investors in ISAs and SIPPs.

  • Perhaps then we could do something about excessive executive and boardroom pay, amongst other things.
See also:  I Wish Money Had Never Been Invented

[hr]

I’d also like to do something about the standard of mainstream financial journalism.

  • Too many commentators and writers in the general media – the ones with the biggest audiences – seem to have very little experience of real investing.

[hr]

We also need to do something about financial education, particularly in schools.

  • We teach kids a ridiculous amount of things that will be no use in their adult lives, but we don’t teach them how to manage their finances.
  • I had to learn everything for myself, and it took me into my thirties to feel on top of things.
  • I’d like to get involved with bringing financial education on to the curriculum.

[hr]

We also need to do something about house prices.

  • The solution that is staring us in the face is to build more houses.

But they need to be in the right places.

  • They need to be close to big cities, with good transport links
  • There are lots of cheap houses up north8 but not many people want to live there at the moment.

So alongside the new houses, we need new transport links.

  • We should cancel HS2 and use the money to build HS3, linking the cities of the Northern Powerhouse.
  • We should also create an Enterprise Zone along the line, with tax breaks for investment.
  • That would activate the existing cheap housing nearby.

We should also build CrossRail 2, so that we can build more housing outside London.

The Ugly

I’ve saved the worst thing until last – low interest rates.

  • I grew up in a high interest rate climate and I never expected to see rates like this.

We’ve had them for so long now (more than seven years) that everyone is used to them, but they are a bad (and Ugly) thing.

The negative effects of low interest rates have been widely reported, but they include:

  1. low returns on cash, punishing savers
  2. low returns from annuities, which are currently ridiculously poor value
  3. a bond bubble (which distorts portfolio asset allocations away from the optimal
  4. low pension fund valuations (and hence high deficits)
  5. poor allocation of capital (eg. zombie companies instead of creative destruction)
  6. risks of negative interest rates and deflation

Let’s hope things change soon.

New Year’s Resolutions

So after all that, here are my New Year’s Resolutions for the investment industry and the economy:

  1. Abolition of the lifetime pension allowance
  2. Exclusion of primary residence, SIPPs and ISAs from your estate for inheritance tax purposes
  3. Abolition of stamp duty on share purchases
  4. Reduction / abolition of stamp duty rates on houses over £250K
  5. Make workplace pension contributions of 15% (8% employee net, 2% tax, 5% employer) compulsory
  6. Better and cheaper funds (sovereign multi-asset, trend-following, shorting)
  7. New decumulation products (guaranteed drawdown, deferred annuities, pensioner bonds)
  8. Keep the triple lock on the State Pension for many years to come, until the Pension is closer to the Minimum Wage.
  9. Advice deregulation
  10. Make it easier to start a fund
  11. Nominees’ voting rights
  12. Make financial journalists reveal their experience and explain their portfolios
  13. Put financial education on the curriculum
  14. More house building
  15. Better transport links: CrossRail 2 for London and HS3 to join the northern cities (plus an Enterprize Zone)
  16. Higher interest rates

[hr]

If you can think of any more to add, let me know in the comments.

Until next time.

  1. This is because most people lose money and if the government taxed profits, they would be morally obliged to let you offset losses against tax []
  2. Like this one, I hope []
  3. If you’re not on there yet, do it today – it’s great for investors []
  4. Though not cheap enough []
  5. That’s from an index-linked annuity, a product which I strongly recommend that you don’t buy []
  6. You can pass on your pension if you are under 75, and you can pass your ISAs to your spouse, but there should be no restrictions []
  7. It’s a bit like education, similar to the kind of thing you’ll find on this website []
  8. I own a share in one that I inherited from my father []

Mike Rawson

Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 35 years, with some success.

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2 Responses

  1. Avatar A Brace says:

    As the owner of a fairly expensive property I still feel that its time council taxes were updated. How many properties have been extended in the past 20+ years? Surely if all council tax was reviewed and updated, there would be an enormous increase in the money raised.
    Yes, I know everyone would moan, but after the first shock everything would revert to normal. The funds we need have to come from somewhere.

    • Mike Rawson Mike Rawson says:

      We need to raise the money somewhere, but I think that (1) we need to reduce the size of the state and so the amount of money that we need to raise and (2) the only justifiable taxes are income tax and VAT.

      Property shouldn’t be taxed at all. Taxing one kind of asset but not another makes no sense.

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