Like others who work hard and save diligently, Matthew Jones, 36, has a plan to take early retirement. By 60, he wants to have saved enough to achieve a £35,000-a-year income for the rest of his life. But can this be achieved?
He has lived in Hong Kong for the last 3 years with his wife, Claire and they have a young son together. He earns around £80,000 a year working in IT for a financial services firm, and has over a year’s salary saved in his HSBC bank account. He may return to the UK within the next five years.
The couple live rented accommodation in Kennedy Town on Hong Kong Island. This is paid for by his employer. Matthew owns a buy-to-let property worth £150,000 in Manchester in the UK. He has around £60,000 of equity in it and around 15 years remaining on the mortgage.
Pension-wise he currently has around £50,000 in his SIPP (Self Invested Personal Pension). He is a passive investor and has just opted to reinvest dividend income for further compound growth.
Matthew wants to know if he is on track to reach his goals. With the new tax changes for buy-to-let properties, he is also worried he will be paying more tax on his buy to let. Based on what we know today, this is what the expert suggests:
Chris Land, A leading Hong Kong Financial advisor said:
Retiring so early on £35,000 will be a challenge. Based on Matthew’s current situation, his pension could be worth £154,000 by the time he gets to 60. If he took 25pc of this as a tax-free lump sum (£38,500) he would be left with a fund of £115,500 which would provide an annual income of around £5,000. This is well below his target of £35,000, but this does not take into account any future contributions. From age 68 he will start receiving the state pension, which based on today’s guidance would be around £155 per week. However this assumes 30 years of qualifying national insurance contributions. If he remains offshore for longer he may receive a reduced state pension.
He also has £300 per month net income from his buy-to-let property to take into account. However buy-to-let, profitability may be reduced by recent tax changes announced by George Osborne.
The chancellor of the exchequer unveiled a tax change in 2015 which will remove landlords’ ability to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax.
In effect, Osborne wants to tax landlords on their turnover rather than profit, meaning that tax will be payable on nonexistent income. The tax increase will be phased in from 2017 and fully implemented by 2020.
As Matthew’s yearly property income is currently below the personal allowance and he does not have any other UK income these changes will only have an impact when he returns home and becomes a UK tax resident.
If at some point he does decide to sell, then any gains he has made would be potentially liable to capital gains tax. However, looking at the numbers involved, his annual capital gains tax allowance, which is currently £11,100, should be enough to absorb any gains and, if it isn’t, he could also look to use his wife’s capital gains tax allowance.
For now, two things are clear: Matthew needs to consider increasing his pension contributions each month and ensure his investment strategy is right.
He should squirrel away at least £1,000 each month from his monthly income and explore ways of investing some of the £90,000 he has saved in his bank account which is currently not achieving any growth.
As Matthew is an expat he may wish to invest some of his £90,000 into an “personal portfolio bond” (PPB). Simply defined, PPB’s are structures within which multiple savings and investment solutions can be housed.
They are also referred to as “wrappers”, because all your savings and investment solutions are basically “wrapped up” inside the one account. Portfolio bonds are available from leading, well-known financial institutions (AXA, Old Mutual, Friends Provident).
Within these secure structures you can hold virtually any asset.
There are some sound financial reasons for investing in a PPB:
- Wrappers have no tax deducted until a withdrawal is made. Upon withdrawal it’s possible to significantly reduce any tax liability on income taken from the portfolio.
- For Britons considering moving back to the UK one day, it is possible to take five per cent income tax-free for 20 years from a portfolio bond – meaning that expats who repatriate aren’t necessarily caught out with their assets offshore and punitively taxed.
- As you can hold such a wide array of assets within a portfolio bond, you have maximum investment choice and maximum portfolio diversification benefits.
- Because anti-money laundering and “know your customer” due diligence only has to be done once when you establish the portfolio bond, from then on you can swap and change how you save and invest very easily. This avoids a great deal of red tape, which can have time- and stress-saving benefits.
- An individual’s portfolio bond should be personally tailored to suit their investment objectives, risk profile and financial goals. What’s more, you can maintain such a structure for as long as you like; they are not close-ended.
- Portfolio bonds can be utilised by those seeking an income from their investments, or those concentrating on wealth growth.
- Administrative simplicity. Usually a transfer form is sufficient to move and change how your money is saved and invested
Matthew’s case is very common: even though he has a good income, he isn’t quite on-track for retirement. Investing idle money, properly planning and committing to a savings plan, and managing risk by avoiding excessive undiversified investments and carrying enough insurance are all simple adjustments that could put him in the right direction.