Only living boy
by Doug Brodie
In this blog:
/1. Buy your pension at a discount
/2. The maths is simple
/3. Putting the jigsaw pieces together – use the data, not the crystal ball
/4. Recycling your ISA – don’t forget it
/5. Are you wealthy? How do you rate?
Paul Simon wrote ‘The Only Living Boy in New York’ which was part of the 1970 album Bridge over Troubled Water. The second verse starts with the line ‘I get the news I need on the weather report’ – is that not the right approach for your retirement? The relevant information you should need is whether you should go out at all, wear wellies or boots to take the dog for a walk, is it going to be a good day for a run, doing gardening, hitting the golf course, heading for the hills?
You’ll have seen this diagram before – the line on the right is the person running retirement life according to the weather. The scraggly line on the right is radio/tv/website/paper/magazine news covering the state of the Venezuelan bolivar, the collapse of China’s largest property company, the latest Houthi rebel attacks, the world’s biggest traffic jam[1], and whether or not the backbench committee things that MP was disrespectful to this MP.
[1] August 2010, Beijing, 100 kms lasting 12 days
Your pension needs to match your retirement, and for most folk that is the line on the left; the line on the right is our problem, and we get paid to straighten out those wiggles; collectively in our company we spend around 60,000 hours per year producing straight lines so our clients don’t have to. Clients need to understand how their pension income is created, because that removes the anxiety created by volatile markets, they also need to understand why natural income is the safest, most dependable way of generating predictable pension income that will never run out. They don’t need to understand the difference between the macro views of Will Meadon at JPM Claverhouse, fed by research nor Bruce Stout’s view on how much sovereign debt Murray International should hold.
We think a proper retirement should be this kind of life:
What a successful retirement feels like
We don’t think your days in retirement should be spent here:
What an anxiety riddled retirement involves
Don’t worry about Nvidia – and you’ll hear a lot more about its share price. Why? Because the current rate of growth in its value will slow, stop, then reverse and the big players with leveraged positions to buy stock will flip into leveraged positions to sell stock. Like a sea anemone, the values will spike down when unnerved.
How do we know this? At the current rate of growth, Nvidia will hit $2.76962 quadrillion in value within ten years, whereas the global economy in 2022 was $100.88 trillion. It’s an interesting ‘factoid’ but completely irrelevant to your retirement.
/1. Buy your pension at a discount.
First off let’s agree that by ‘pension’ we mean pension income: you won’t be reading this blog unless you’ve already accrued. The main focus of our research is not about creating reliable income streams – to us, that’s relatively straightforward – it’s about ensuring as much as possible that over the term of your 25/30/35/40+ years retirement your income deals with inflation.
The freebie that comes with inflation protection (if you wanted guaranteed RPI you need a linker gilt) is that the earlier you buy your income portfolio, the cheaper the price you pay per £1 of income. Don’t wait, don’t procrastinate, you know that in ten years’ time the maths will tell you that you’d have a higher income if you swapped out of that tech ETF and bought your investment trusts. We eat what we cook in Chancery Lane, in my own SIPP my yield to cost is 7.2% and five holdings are above 8% - more importantly though, the annual growth of income, on a rolling 5-year basis, is 4.3%. I don’t know what the yield was when I bought the assets I hold, and I have then muddied the maths by reinvesting all the income, what I do know is that in three years’ time my yield to cost will be over 8% per annum – job done?
This is how chatGPT will produce the Excel formula for you, to grow 7.2 by 4.3% per year for three years: (try it, it is scarily good and easy to use).
/2. The maths is simple
As an example, a quick look at Chelverton UK Dividend Trust
Four years ago, the price of this trust hit 93p. The dividend in 2020 was 9.7p, so the yield that year was 10.4%.
The price today is 139p and the last twelve months’ dividend was 12.4p, so the current yield is 8.9%.
If you bought at 93p your price (cost) is fixed, it doesn’t change, however, the dividend does change.
a) this means that an investor buying Chelverton today has to pay £11.23 per £1 of income,
b) whereas the investor from 2020 has only paid £7.52 for that same £1 of income.
Before you rush off to buy some, we don’t use Chelverton because it is small at only £30m market cap, and is highly geared via zero dividend preference shares.
/3. Putting the jigsaw pieces together – use the data, not the crystal ball.
If we combine the requirement to have a ‘hands-off’ reliable annual cashflow together with how to pay the cheaper cost per £1 of income for the rest of your life, we end up with this very simple chart. The dividend returns are not guaranteed – we have annuities for that, just ask – however income reliability is much more predictable than capital, and just because the word ‘guaranteed’ is not applied does not mean it will not happen – your car does not guarantee the wheel won’t fall off when you’re on the motorway and although that sometimes happens it’s unlikely.
If you want your retirement income to look like this then you need to talk to us.
/4. Recycling your ISA – don’t forget it.
If you’re drawing cash from your ISA then don’t forget you can put it back in.
Several years back the rules on ISAs were changed, with a tweaked version called a Flexible ISA. This type allows any withdrawals that have been taken to be paid back into the ISA as long as it is in the same tax year, and in addition to the usual £20k annual allowance.
This is particularly useful if you are drawing income from your ISA – tax free of course, and you have access to capital as well, perhaps from your pension. It means you can take money from a ‘normal’ investment account (a GIA) and instead of bed & breakfasting you can bed & ISA, replacing the drawn income from a taxable GIA into a tax free ISA.
Aloysius is a 40% tax payer, aged 64, retired, drawing £1,500 tax free income per month from his ISA.
He also has £180k in cash and a GIA where he pays 40% tax on income, 28% on CGT and 33.75% on dividends.
Before 5th April, he pays in £20k plus £18k into his ISA from his cash and GIA, which will add another £175 per month to his tax free income.
It’s quite legal, it’s not contentious, it’s known as a Flexible ISA, AJ Bell’s is a flexi-ISA but not every provider will allow you to do so. Clearly there’s money in recycling:
/5. Are you wealthy? How do you rate?
For the UK, at today’s $ / £ rate to be in the UK’s top 1% that wealth figure is £2,442,950.
