Retirement – how much money do you need?
by Doug Brodie
In this blog:
/1. The new tax rates and allowances
/2. The student loan interest rates and income thresholds
/3. What is S&P talking about? Active v passive
/4. Cool runnings?
/5. Transitional certificates
/6. Investment maths – 51.5p share price, 34.4% discount
No, not an advertisement for the sales folk at Fisher, the American investment firm, this is research from Northwestern Mutual, one of myriad US financials that operate in the retirement space, with myriad products. For this particular research they split out the answers according to age demographics, and then grouped the answers by the different generations. The end result was published by chartr.co, via the Wall Street Journal:
Looking at the output it seems clear that the boomers have a better idea of the financial reality of retirement, probably due to the accuracy of their knowledge of their own at-retirement cost of living. It is interesting to note that millennials estimate the cost of retirement to be a full 66% higher than their parents.
“Are we spoiling our kids?”
/1. The new tax rates and allowances
The personal allowance remains at £12,570; emergency tax code is 1257L (M1)
The threshold for the additional rate of income tax - £125,140
In Scotland, the top tax rate increases by 1% to 48%
Basic rate (20%) is £12,571 to £50,270
Higher rate (40%) is £50,271 to £125,140
Income over £100,000 – the personal allowance is reduced by £1 for every £2 over £100k, so it is £0 if your income is £125,140 or higher.
/2. The student loan interest rates and income thresholds.
Many of you have kids with student loans – here is the relevant table:
The examples show how much you’d repay depending on your income and plan type:
Examples
You’re on Plan 1 and have an income of £33,000 a year, meaning you get paid £2,750 each month.
Calculation:
£2,750 – £2,082 (your income minus the Plan 1 threshold) = £668
9% of £668 = £60.12
This means the amount you’d repay each month would be £60.
You’re on Plan 4 and have an income of £36,000 a year, meaning you get paid £3,000 each month.
Calculation:
£3,000 – £2,616 (your income minus the Plan 4 threshold) = £384
9% of £384 = £34.56
This means the amount you’d repay each month would be £34.
/3. What is S&P talking about? Active v passive
Are you up to speed with the SPIVA Europe 350 index? No? Don’t worry, neither are we. S&P is a giant, well regarded provider of investment index data and has run its ‘scorecard’ of how active funds rank against its indices. Unfortunately, this institutional data leaks across into the retail space (deliberately?) and so ETF promoters and other passive bonds promote SPIVA information as evidence that UK active funds can’t beat passive: not true. There are many arguments and debates in the arena however what gets our professional goat is that the firms quoting the SPIVA 350 index data are a) quoting European funds and not UK, b) ignoring the fact that SPIVA does not publish data on the UK and c) the European data is calculated in €uros.
So we thought we’d have a quick, cursory look at the five oldest investment trusts (all started before 1889) and see how they compared against the FTSE All Share index (most UK investors have heard of the Footsie, all UK investors invest in GBP).
This isn’t in-depth research, it’s just a 60 second filter and screen grab, however, you can see quite clearly that misquoting European data from a US data provider using a non-mainstream index and a foreign currency can be entirely misleading.
/4. Cool runnings?
Le Monde, the stalwart French newspaper, reported this month that Jamaica succeeded in cutting its debt/GDP ratio from 146% in 2013 to 73.5% today. Once known as the ‘Greece of the Caribbean’, it joins Iceland and Ireland as being the only countries in recent times to have such an achievement. The more remarkable, perhaps, is that this was done over the pandemic lockdown period which effectively closed its tourism industry. The IMF expects the debt ratio to decline still further, to just 60% in 2028.
First they created fiscal rules to identify and fight the issue, then they created a medium-term plan to execute and implement the rules, and to control any slippage from the plans. The finance ministry was simply instructed that by the end of 2016 the annual budget deficit had to be zero, debt/GDP to be 100% and public sector wages to be 9% of GDP. It worked.
A key reason that this did indeed work is that the government had universal agreement across government departments, political parties and employers & unions. Could you imagine trying to get Mick Lynch to support Jeremy Hunt to support Rachel Reeves to support Charlie Nunn?
/5. Transitional certificates
It’s now the new tax year and Lifetime Allowance has officially disappeared, and along with Pension Commencement Lump Sum, which is now replaced with Lump Sum Allowance (LSA).
You might only need a certificate if you have previously crystallised (opened) a pension and have not drawn your full LSA. We have a client who took a final salary pension without taking any tax free cash so he gets one. We have another who took a small amount of tax free cash so she gets one as well. If you haven’t crystallised any pension at all then it should not apply to you as your LSA is simply according to the scheme rules – with the maximum allowed being £268,275 UNLESS you already have Individual or Fixed or Enhanced Protection on your pensions that entitle you to more than that sum. There is no fixed format for a certificate, in practice, it is confirmation from your pension provider of how much tax free cash you have already had – and the answer can be £zero (someone tell Mercers please).
/6. Investment maths – 51.5p share price, 34.4% discount
As an aside, the CIO has come out today and said that mocking the corporate name is ‘corporate bullying’ – well they shouldn’t have picked such a silly name then.
Further travails within abrdn have led to this formerly well respected trust being wound up. Having launched in 2003, it recently tried to merge with one of its peers and failed, so now the directors have chosen to wind it up – I suspect there are one or two key investors who have triggered this, for their own reasons. It currently has a 6.2% dividend yield (we note abrdn’s own website quotes this as 8.23%), £26.7 million revenue and £184 million market cap.
If it is unwound fully, then the assets sold ‘should’ reflect the full NAV – net asset value. The NAV is 78.36p versus today’s share price of 48p (falling steadily as I write). So buying the share at 48p should eventually realise 78.36p.
The maths bit: the share price is 30.36p below the NAV (78.36 minus 48). That is a 38.74% discount from the NAV. If you buy the shares and they are paid out in full you will then have made a 30.36p profit on the 48p price you paid for the share, which is a 63% gain.
Note: it’s not that simple – if it was then Goldman Sachs would Planet Earth and they don’t. There are many things that can screw up that calculation, including things we have no idea about, not understand.