Part 228: British ISA and The State Pension

Hello and welcome back to Mortgage Advisor on FIRE.  This week I discuss pensions and the British ISA announced in the recent budget.

Weekly Update 

How has your week been?  Mine has been decent for the most part.  I feel like I’m slipping into a nice routine, and that’s so much more positive than I felt last summer.  I’m not great and I’m still struggling with my brain trying to sabotage things, but I’m better than I was.  Much better.  

I don’t have much exciting news to report this week, with it being a week of working Monday to Friday, it doesn’t leave for much else other than chilling out with Oana and Poppy of an evening.  Sometimes it’s the small things that are best; being at home with the ones you love.

The big financial news from this week was the budget, which included a further cut in National Insurance, and a proposed £5k increase in ISA allowances for people to invest in British stocks or funds.  I’m not sure how this is going to work in practice.  It could be a separate account you need to sign up for or an increased allowance on existing accounts.  The definition of British seems a bit vague also.  I’m not sure if it will include any stocks on the London Stock Exchange, or funds that might be based elsewhere but heavily weighted to British stocks.  I’m not saying this is a bad idea, but I need to see specifics on how it will work.  

The cut in NI seems strange.  I think it would make sense to streamline the tax system though.  As things stand there are three main “taxes” I pay; income tax, NI, and council tax.  I would much rather pay just one tax that comes directly out of my salary.  I’d also look at the income tax bandings because I think more could be done there.  I’d go as far as to suggest that there should be a link between the minimum wage and the lowest bracket of income tax so that someone working full-time on minimum wage would not be expected to pay tax.  I would then have progressively higher brackets rather than the 20%/40%/45%.  In practice, this would mean that everyone would have a basic tax-free allowance that matched the minimum wage, and then you would pay tax on earnings above that amount.  If we used the minimum wage as of April 2023 and assumed a 35-hour working week, this would result in a personal allowance of approx £19,000.  

This change would shift the burden of tax further up the income ladder so that those earning higher amounts pay more.  There would also need to be more done about companies paying their fair share of tax.  The elephant in the room is the state pension.  It’s just not sustainable in its current form.  In basic terms the state pension works like this; you pay national insurance which goes to the government, who then use those funds to pay the state pension to those in receipt of it now.  It’s a movement of money from the working population to the retired population, but this all depends on there being enough working people to fund the pension payments needed.  As the population lives longer with more years on the state pension, and with fewer people having children the workforce can’t be replenished.  With more demand for payments and fewer people funding those payments, it’s not hard to see why the current system is not sustainable.

Any major reform of the pension system will result in that government losing the following election, and that’s why no government will make sweeping changes.  I fully expect the system to be slowly chipped away at.  The age at which someone qualifies to receive the pension will keep increasing and if people don’t start seriously investing in their private pensions, we could be left with people working until they drop.

Another possibility I would not put past a Tory government is an indirect assault on the triple lock.  In the UK we have a guarantee that the pension will increase each year by whichever of the three measures is highest from inflation, earnings growth, or 2.5%.  The easiest way to scrap this is to simply change the way you measure inflation and earnings growth, and then tweak the triple lock so it’s an average of the three measures.  If you can control it so that inflation and earnings growth are lower than 2%, you can make the triple lock much less of a problem.  

The thing is, even at the current level, the state pension is not sufficient for anything other than a very basic standard of living.  I fear we are kicking a can down the road and that in the coming decades, we’re going to have an issue with retirees not having enough income to live, but merely exist.

BTL

Although I didn’t expect people to be lining up down the street to view our house, I’m a bit surprised at how little interest there has been.  It’s a decent area and a decent property.  It’s set at what the agent thinks is a reasonable price, and a price I think is reasonable based on market data.  Maybe it’s just a lull in the market, but I’d hate to have to drop the amount we’re asking for.  If we don’t find a buyer in the next month or so, we might have to make some hard choices about how to proceed.  I’d rather not rent it out again but at the same time, we can’t keep it empty indefinitely.  

Looking Back

I posted a second part of my Looking Back series which you can find here…

What Am I Doing?

TV: Get Out (Netflix); 11.22.63 (Amazon).

Audiobook: Stolen Focus by Johann Hari.

I already knew something of the plot of Get Out, having read an article about it some time ago.  Even knowing a bit about the film though, I thought it was great.  It was creepy, funny, and extremely well-acted and directed.

11.22.63 is one of my favourite Stephen King books and seeing as though the TV series is free to watch on Amazon, we thought we’d give it a try.  We’re four episodes in and it’s not too bad, although it’s streamlined much of the plot so far.  I think I’m going to revisit the book as it’s a great story.  The idea is that an entrance to 1960s America is discovered and our protagonist, teacher Jake Epping, decides to go back and stop the assassination of JFK.  The problem is that the passage only leads to 1960, and JFK is killed years later, so Jake has to live several years in the past to try and arrive at the right time to stop it from happening.  

What Would You Take?

I asked Oana this question, as we were watching 11.22.63; If you were going back in time and could only take a backpack with books, music, videos etc from the present day, what would you take?

If I was going to cheat, I’d take a laptop and an external hard drive with all my media on it.  It would have to be stored on the device itself rather than in the cloud, as the internet was not a thing in the 1960s.  If I could only take one book, it would be some sort of encyclopedia of sporting results over the decades, or perhaps the prices of all major companies on the stock market.  I could then make a living from picking the right winners.

Financial Update

Assets

Premium Bonds: £13,175.00. 

Stocks and Shares ISA: £62,022.91. 

Fuck It Fund: £6,048.51.

Pensions: £74,657.40. 

Residential Property Value: £228,116.00. 

BTL Property Value: £147,203.00.

Total Assets: £531,222.82.

Debts

Residential Mortgage: £172,897.27. 

BTL Mortgage: £104,891.96.

Total Debts: £277,789.23. 

Total Wealth: £253,433.59.

Investment Income in 2023: £928.01 (target £10,000).

I was looking over my pension fund value and it’s surged over the last few months.  In just 20 weeks it has increased by £13k.  That’s an impressive increase over such a short period.  Other than the increase in my pensions, it’s a bit of a dull week financially.  It’s the lull between paying off the mortgage and receiving the next set of investment income.  

The £5,000 British ISA

I mentioned earlier in this post but I wanted to come back to it briefly.  As I said earlier, I don’t think this is necessarily a bad concept, but I think people will have to be careful how they use it.  

If you are starting with zero balance in an ISA, and you max out the £25,000 allowance, then an absolute minimum of 20% of your total portfolio will be British-based, despite the fact our economy accounts for just over 2% of the global economy.  Assuming a 20% minimum is also quite conservative as many global funds will have a sizable holding in British stocks.

If you have been investing for a while, and you are reasonably diversified in your funds; something like the Vanguard FTSE Global All Cap Index, then you maybe don’t need to worry too much about taking up the extra £5k allowance.  I would definitely suggest that anyone using the British ISA allowance pays close attention to how diversified they are across the global economy.   

That’s all for this week.  I hope you have a great week ahead, and please remember to like, share, comment, and subscribe.  

Disclaimer

The views and opinions in this blog are my own, and do not represent the views or opinions of my employer, nor should they be considered advice.

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