UK - Financial independence journey - requesting portfolio critique

[jakinvegas]

Hello,

Sharing a snapshot of my fire journey progress. Grateful if anyone reading has any thoughts or critiques on my current strategies.

Country of residence: UK
International lifestyle: UK (hold Australian pension / passport)
Age:42, no kids, tech salary 123k.
Desired asset allocation: 100 % stocks aiming to move towards global exposure. Will look at rebalancing when I get closer to 50.

Goals:
Aiming for a fire target of ~900k based on the 4% rule. Current projections get me there in about 5 years, although in likelihood, I’ll purchase a larger family home before this so won’t actually retire at 47. Age 55 is a more likely scenario. Aiming to have high-risk investment posture that prioritises long-term growth and tolerates short term fluctuations.

Current Total Net Worth is 476k.

• Cash: 12k
  ISA: 118k
  SIPP: 192k
  Australia Pension:124k
  House Equity: 20k
  LISA: 10K

ISA, growth is tax free, taxable on withdrawal like income

Have a regular £100 direct debit going into the ISA. Most likely will use this as a bridge between stopping work and potentially taking pension at 55. In reality this is also acting as my emergency fund. While Scottish Mortgage, and Edinbugh Worldwide are down, I’m planning to hold on these and expecting a recovery over 5-10 years. Where I need to pull money out of the ISA to support cashflow for pension salary sacrifice and house renovations, I’m liquidating the investments that are up, and in general moving away from FTSE UK All Share, and towards the Global index trackers for more balance.

ISA (OCF) amount
ISA Index (0.32) L&G Global Technology 41,192.50
ISA Fund (0.34) Scottish Mortgage 9,535.80
ISA Fund (0.72) Edinburgh Worldwide 562.36
ISA Index (0.06) Vanguard FTSE All Share (VAASA) 8270
ISA Index (0.13) HSBC FTSE ALL WORLD 10,591.90
ISA Index (0.23) Vanguard FTSE Global All Cap (VAFTA) 37,124.90
ISA ETF (0.22) Vanguard FTSE Emerging Markets UCITS VFEM 5,614.38



Pensions

UK SIPP - retirement savings account: 192k
100% SIPP: INDEX (0.15) Vanguard: Global small cap (IE00B3X1NT05)

Australia Pension:124k
100% Index Tracker on ASX

Because of the tax efficiency, my investment priorities are SIPP, LISA, then ISA. Salary sacrifice is the greatest contributor to wealth creation over the last few years. I’m keeping salary well under 100k and take advantage of the carry forward allowance. This is the last year I’m playing catch up of the 40k additional amounts from 3 previous years. I understand that annual allowance has now gone up to 60k, so could continue to max this out this year and next. There’s additional benefits to salary sacrifice as employer pays in Employers NI (about £774 a month on a 50% sacrifice). Periodically transferring WGP from Scottish Widows into Vanguard SIPP to reduce fees and to have more investment control. Choose index trackers rather than limited to SW funds, and vanguard fees are lower. It’s a way off yet, but thinking about how to best use the pension pot to generate retirements income. Annuity, lump sump extraction, etc. I appreciate there’s some tax implications here to consider. SIPP is majorly in the Vanguard Global Small-Cap Index Fund which tracks the MSCI World Small Cap Index. (IE00B3X1NT05)

As the SIPP pot has grown a bit, I’m thinking about having a stock-take of the investment fees and potentially finding a lower cost broker that caps the fees rather than has a percentage based one. Looks like Fidelity has a SIPP cap of 90 pounds cap for ETFs, so considering moving to an equivalent index tracker.

State Pension:
Ensuring the national insurance contributions are going in.

LISA: 10k

100% Invested in Fidelity Index World Fund which tracks the MSCI World Index. (GB00BJS8SJ34)

Maxing out LISA each year to gain 25% tax relief boost. Max of 4k deposited gets a 1k tax relief bonus. This year I’ve pulled money out of ISA to support this. Can only access LISA at age 60, and only continue to put money in until age 50.

Cash / Emergency Fund: 12k

House Equity: 20k

About 108k remaining on the mortgage, £600 monthly. I’m at 2.14% until March, when I’ll need to remortgage. Putting a fair bit of cash into the renovation at the moment, but considering these one-off fixed costs, and paying attention to what will increase property price for an eventual sale. Bought at 130, valued at 140-155 on Zoopla (haven’t updated equity based revaluation).


Thanks for reading if you got this far. Curious if anything jumps out at you as an idea or optimisation.

[TedSwippet]

Welcome to the forum. You're holding a lot of cheap tracker funds, so well along the right tracks. Comments below are more along the lines of tweaks than red flags.

You have a very large bias towards small cap stocks. I presume that's intentional, but all the same worth noting that it's a reasonable distance from 'mainstream'. Your results will probably be much more volatile than -- and perhaps diverge over time from -- large cap benchmarks, then; could be positive or negative.

You have (I think) shown your SIPP charge as 0.15%. If held at Vanguard, that's just the platform charge. This fund has a 0.3% TER, which would be on top. If using Vanguard for your SIPP, at £192k you can find a cheaper platform. For example, Interactive Investor SIPP-only is £13/month = £156/year. Add £4/month for a trade, if you need it, comes to £204/year. Compare to 0.15% of £192k = £288/year. Not a life-changing difference, but why pay it if you don't have to.

In a similar vein, which platform holds your ISA? Some are okay for ETFs but overcharge for funds/OEICs, and you have a fair few of the latter.

Do you plan to retire in the UK, or return to Australia? That might skew your decisions.

The UK/Australia tax treaty is good on pensions, Article 17 paragraph 1, taxed only by country of residency, and symmetrical. Unfortunately, the UK system isn't entirely benign even so to Super plans. In Australia you can (apparently) withdraw from these plans tax-free after age 60. However, the UK seemingly views all withdrawals as taxable. In the other direction, if in Australia when withdrawing from the SIPP, it looks to me like you'll lose the ability to take 25% tax-free.

Additionally, Australia won't recognise UK ISAs as tax-free (not mentioned in the treaty), so if you retire to Australia you would lose any tax benefit from ISAs.

If planning to relocate, you can mitigate both of the above by timing moves carefully, for example taking your 25% PCLS and liquidating your ISA before becoming Australian resident, and so on, but these strategies might not fit with your life plans.

[Valuethinker]

The long term performance of small cap stocks is:

- only long term
- there are long periods in the data when it just didn't play out
- since the discovery of the effect in the late 1980s, it has diminished in magnitude
- some of the original work was just wrong - Rolf Banz made a mistake in his Phd research. Correcting for that, the effect was of smaller size than he originally calculated

To go "all in" on small cap is a heck of a risk. Plus historically you buy a lot of IPO stocks, and these tend to underperform. Knowing a little bit about the way an IPO process is conducted (to maximise the gains to exiting investors & privileged clients of the investment banks who buy in at the IPO price, which is undervalued compared to the close-of-first-day price) doesn't make me want to participate as an investor. (TBF I believe many small cap funds exclude newly IPO'd stocks for just this reason).

[Valuethinker]

About 108k remaining on the mortgage, £600 monthly. I’m at 2.14% until March, when I’ll need to remortgage. Putting a fair bit of cash into the renovation at the moment, but considering these one-off fixed costs, and paying attention to what will increase property price for an eventual sale. Bought at 130, valued at 140-155 on Zoopla (haven’t updated equity based revaluation).


Thanks for reading if you got this far. Curious if anything jumps out at you as an idea or optimisation.

£20k equity + £108k for your home? Must be one of the least expensive parts of the UK?* Is your equity in your home really that little, or is that just your down payment when you bought it? (Or: you are in a part ownership situation?).

When you come to refinance the mortgage you are looking at paying 6%+ right now. That's an after tax return and it is guaranteed. It's impossible to beat that -- guaranteed - from investing. Even equities are likely to pay c 5% return (so 7-8% nominal) before tax and before expense ratios, in the long run. The only merit of keeping the mortgage is it is true long term money - and at 6-6.5% that's a lot less attractive than it was. So just as a counterpoint.

On the Small Cap point I would say you do not want more than 20% of your total equity portfolio to be Small Cap. Maybe 25%. Roughly 5x the market weighting (depending on which index for the world you use).

* I see on "Homes Under the Hammer" on TV houses in depressed Northern mill towns for that sort of money, but not even a Council Flat in the south east.

[Genghis]

I’d think a bit before you sacrifice too much into your pension. Do a little bit of modelling to see the likely effect.

On the way in
Ie every £1.138 into your pension above £100k costs you 38p, so 67% tax relief on the way in. But below £100k, it’s £1.138 into your pension for 58p, so 49%.

On the way out
But if the lifetime allowance comes back - and you may breach it, depending on how long you continue to work etc - it’ll cost you - assuming same rules as before - 40% as a basic rate tax payer with the charge or 55% as a higher rate tax payer on the way out, ie more than the relief that you got in the first place.

Given the meddling that politicians like to do with pensions, I think a more prudent way forward would be to sacrifice down to the £100k and then put the rest in ISAs.

[Valuethinker]

I’d think a bit before you sacrifice too much into your pension. Do a little bit of modelling to see the likely effect.

On the way in
Ie every £1.138 into your pension above £100k costs you 38p, so 67% tax relief on the way in. But below £100k, it’s £1.138 into your pension for 58p, so 49%.

On the way out
But if the lifetime allowance comes back - and you may breach it, depending on how long you continue to work etc - it’ll cost you - assuming same rules as before - 40% as a basic rate tax payer with the charge or 55% as a higher rate tax payer on the way out, ie more than the relief that you got in the first place.

Given the meddling that politicians like to do with pensions, I think a more prudent way forward would be to sacrifice down to the £100k and then put the rest in ISAs.

This is reasonable advice. HOWEVER if OP thinks they might retire to Australia, see Ted Swippet's remarks. i.e. pensions are likely tax-recognised in both jurisdictions, but ISAs will not be.