Case Study: Ways to optimise? Better retirement planning? (UK)

[KathrinS]

In light of a brand new UK tax year starting today, I'm posting a case study to get some opinions - generally on my situation and habits, but also specifically in terms of UK retirement planning.

Life Situation:  female, 25, no kids or pets. Currently renting in London.

Gross Salary/Wages: Self employed, so it will vary by year. This tax year was my first full working year, and I made almost exactly £42k. This doesn't include £500 matched betting income.
I work as a German teacher and Pilates instructor.

Other Ordinary Income: About £2-3k holiday gifts from family (I know, they're super generous!) and cash-in-hand income from doing admin for my dad.

Taxes: Not sure yet, but according to the online calculators it will be between £7-8k this year.

Current expenses:

Rent: £815

Bills: I budget £203. It's usually less, never more. Includes: gas/electric - variable, water £15, council tax about £80, internet £19, phone £12, Spotify for work £10.

Food: £60-70 per month

Entertainment: about £220-230 per month. Usually less, but I put a bit of this aside for bigger purchases such as flight tickets or work necessities like workshops or educational materials.

TOTAL: pretty consistently £1300 per month. As I mentioned, if it's less, I put aside more for the larger expenses, so that I can then afford to visit family or take a short trip.

Transport: Prepaid £1600 for a Zone 1-3 yearly card at the beginning of the year. I used my birthday/ Christmas/ working for dad money for this, so am not counting it as part of my monthly budget this year.

Assets:
ISA 1: £1958 - cash ISA, 0.75% interest. I am no longer contributing to this in the new tax year.

ISA 2: a bit over £18500 - Stocks and Shares ISA, mostly in Vanguard LifeStrategy 80 and 100.

HSBC: £1000 in current account.
£750 in a 5% regular saver's account, with a direct debit of £250 going into this every month.

Easy Access savings account, 1.5% interest:
- £4000 emergency fund
- £3000 ready to be invested now that the new ISA is open
- £8500 tax money I've saved up for the past year.
- Some rent money as I pay 6-monthly, a bit of interest that's collected already, etc.
Total: just over £20 000

Accounts in home country: probably about £20 000 remaining now. Not sure what to do with this, as it's just sitting there at the moment. I did transfer about £5000 to the UK last year, to put into my ISA.


Liabilities: None at this time.

Specific Question(s):
I have been in the UK for less than two years. I will stay for at least another two, but not sure whether I'll stay or move after that. I may have to move house in 7 months. That's why I haven't opened any retirement accounts so far, and have only been saving in my ISA - although I managed to max it out this year. Here are my questions:

1. UK people: is there anything else I should be doing? Any account I should open? I am hoping to (semi) FIRE at about 35-37, so I don't really want to lock too much money away until I'm 68. In light of this and the fact that I'm not sure I'll stay long term, what do you think?

2. What to do with the money in home country? It's in a different currency, so should I keep it there? Or transfer it and bear the currency risk in case I go back?
If I were to invest it in home country, I might have to pay account fees of £300/year as I'm an expat, so not an ideal situation.

3. Any general advice, anything I'm missing or any place where I could cut costs?

[Playing with Fire UK]

Hi there!

£20k seems like a lot of cash. But e-funds are an inherently personal matter. Is this your first year of self-assessment in the UK, do you know that you may need to make payments on account for this year? And are you self-employed and taking income or are you taking dividends and leaving money inside your own company?

Are you including National Insurance in your tax bill? If you were employed I'd expect a tax bill of £6k and NI of £4k. It'll be different for you as you pay NI on profits rather than income, is that the difference? It might make sense to do your self-assessment ASAP so you know what you'll need to pay in January. [I'm not an expert here, not at all]

What are the risks to your income? Could an injury stop you teaching Pilates for a long time? Could you pivot and teach more German if that happened? For your rent, do you pay it 6 monthly in advance? Is there an option to pay monthly if you had an issue with cash flow (so could your rent fund double as part of an e-fund)?

In terms of retirement accounts. If you opened a SIPP (self-invested personal pension) you could access it from 58(ish) in the UK. There are ways to move it to other countries, some of them can be favourable from a tax perspective, but it's a gamble to rely on them 30 years out (look up Qualifying Recognised Overseas Pension Scheme (QROPS) if you have a country in mind).

I'm not certain a SIPP makes sense for you right now. If your plan is to semi-FIRE in your mid-thirties, you might want some old-age pension provision for when you transition from semi-FIRE to retirement or some additional cash to set aside for medical treatment or health care (or to buy a property to settle down in?). But your semi-FIRE stash is likely to grow so that pension provision would likely be back-up, but tax-efficient back-up. So the question would be when (and where) is it most tax-effective to contribute to a SIPP. If you think your UK profit could breach £50k in a year then that would be a good year to contribute to a pension. If taxes are higher here than in your next or home country then it might make sense to contribute to a pension before relocating.

Is the money in the home account earning interest? How does it compare to inflation? What has the currency done compared to the pound? How likely do you think it is that you'll relocate there or have expenses there?

You're doing really well.

[KathrinS]

Hi, Playing with FIRE, thank you so much for your reply!

Of the £20k cash, £8500 are tax savings, as this is what I'm expecting to pay for self-assessment, and £3k will be invested in the next 2 months, so I won't be keeping that much in the account permanently.

Re - tax: Yes, in this case study I have put my profit as my income, but for my self-assessment I will be deducting about £4k from this due to expenses. That's why, according to the calculations, the £8.5k should cover my tax bill. But yes, it will be a good idea to do this ASAP, so that I know for sure.

Risks to income: I guess a severe injury could stop me from teaching, but not a minor/ common one. I don't actually have to exercise most of the time, just tell the clients what to do. I am thinking of getting some kind of insurance for these risks, especially if I'll be doing this kind of work for a longer time period.

Home country account: no interest earned unfortunately, but the currency is very stable, and getting stronger compared to the pound.

[Watchmaker]

When/if you leave, will you be returning to your home country, or going somewhere else? What are the chances that you'll say in the UK permanently?

Your budget looks pretty good, and I don't know enough about UK retirement accounts to give any meaningful advice.

 £300/year account fees (1.5%) is too much to pay for that 20k back in your home country. I'd look into moving it to the UK. How quickly can you get your hands on that cash, could you use it as part of your emergency fund and keep less cash in your UK accounts?

[KathrinS]

Not sure - probably either back to my home country or somewhere else in the EU. I don't have any immediate plans to do so, but it depends on how my life turns out over the next few years.

That's actually something to think about. I can get at that 20k immediately. Maybe I could put the £4k emergency money into a higher yielding account, even if it's tied up for a year or two. I don't want to put it in my ISA, as I'm already filling that up by pound cost averaging. Thanks for your input, @Watchmaker !

[Kwill]

Watchmaker's point about the home country money being like another emergency fund seems good. Right now, between the two countries and the various bank accounts and ISA 1, you have about £43,708 in cash and £18,500 in mutual funds. It seems like an awful lot of cash if your annual expenses are only about £15,600.

I have a double country situation myself. I'm an American living long-term in the UK, and I have some accounts in both countries. For me, I feel a little safer keeping something back in the States at the moment with the currency in flux here in the UK. I can't easily invest in the States because of UK tax laws, but I was able to get interest-bearing accounts at least. It'd be great if you could find something with even a little interest for that amount.

For transferring money, I've found Transferwise helpful. I can send money between my US and UK accounts online with a better rate than the bank and low fees. It shows up within a few days, and I've never had a problem with it. I also used it once to pay a fee once that had to be sent to an account Germany or somewhere else in Europe.

[KathrinS]

Thanks for your thoughts and tips, @Kwill !
You're right that it's all a bit cash heavy right now, but I only started investing a few months back, and have been saving in cash accounts for many years. In the next year, I am planning on filling up my Stocks&Shares ISA completely, so then it'll be more evenly distributed.

The only reason I'm hesitating to invest my £4000 emergency fund is that I may be moving to a different rental in about 6 months, so I might need a deposit and some cash. Not sure about this yet, so I may just want to wait.

Here's another question for UK investors: If I've filled up my ISA allowance, what's the next best thing to do with any extra money? Should I just keep investing in taxable accounts then? Or get a one-year bond for about 2.5% and then invest the money in the next ISA season?Any other options to consider?

[Playing with Fire UK]

My vote is for taxable accounts. You may end up paying no tax anyway (dividend and capital gains allowances). Don't let tax efficiency drive your strategy too much.

[KathrinS]

Thanks, that's what I thought. I guess I could just invest a bit more in my ISA now, and in case it fills up before the year is up, I'll start using taxable accounts.

[KathrinS]

Update:

I have switched things around and have increased my investments. I now have:

About 31k in my Stocks+Shares ISA (transferred my Cash ISA into this account)
Almost 3k ready to be invested in my 1.5% account
4k emergency fund at 1.5%
£1750 in a 5% account
1k in RateSetter at 3.5% plus 5% welcome bonus in the first year

So, £32k of around 40k are in investments.

The same amount as before (18-20k) is still in the foreign account, but rapidly gaining in value compared to the £.

I seem to be using up my ISA allowance fairly quickly this year and will probably fill it by February, so I might need to use taxable accounts after that.


Re - tax: I ended up owing £8200 after completing my self assessment, so I had actually saved £300 more than I needed to. That is because I was able to deduct almost £4k in expenses, so I am not paying any tax on this money at all. I hadn't fully understood payments on account until I'd completed the return, but it shouldn't be a problem, since the payments are only due in January and I am saving my tax money monthly.