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A guide on how to effectively use 99designs

The English Investor
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A guide on how to effectively use 99designs

I have been rolling out an updated visual identity for The English Investor. Building a brand is hard and takes time. Some quality content, a consistent publishing schedule and a good dose of creativity are key ingredients to run a successful blog. Similar rules also apply to run a successful business: a great product or high-quality service, responsiveness and creativity.

There is a myth that the brain can process images 60,000 times faster than it does text. The statistic is probably wrong – I could not find a legitimate source – but there is some truth to it. If I mention Apple and Nike, your mind will instantly visualize a silver apple and the Swoosh. Therefore, it made sense for The English Investor to have a proper logo of its own. As my design skills are virtually non-existent, I decided to outsource the job on 99designs.

What is 99designs?

99designs is “the world’s largest online graphic design marketplace.” In other words, 99designs is a crowdsourcing platform for people requiring graphic designs. People in need of a design will prepare a brief to explain what they are looking for. Then, freelance designers submit proof of concepts and ideas.

How does 99designs work?

Your project is essentially a design competition that lasts 7 days. 99designs is the platform where the contest is run. All interactions are between you and the design freelancers. 99designs will guide you through the process but will refrain from getting involved (unless you reach out to customer service with a specific ask).

Step 1: Signing-up

First, you need to sign up to the platform. This is fairly self-explanatory. Note that you must indicate whether you are a designer or someone who simply needs a design.

 

Step 2: Start a new project

Now is the time to launch a new project. At this point, I strongly suggest choosing the “Launch a contest” option, especially if you are a first time user or if this is a one-off project. Launching a contest is the 99designs crowdsourcing feature. Hiring a designer is closer to working 1-1 with a design agency. It is the more traditional route.

 

Step 3: pick a task

99designs allows you to ask for pretty much anything. Logo design, business cards, web pages, apps, clothing & merchandising and the list continues.

I found the number of possibilities to be slightly overwhelming at first. I first thought about the Logo & Social Media Pack as the savings advertised by 99designs seemed attractive. In the end, as I had never used the platform, I went for logo design, which starts from £239. Click on “Start a contest” and you can begin populating your brief.

Step 4: choose your style and populate your brief

The brief is the most important portion of the contest because you set the tone of your desired design. This is the place to say what you want to see in your design.

To help you, 99designs will ask you to pick a few designs in an attempt to assess your style and show potential sources of inspiration for freelance designers.

 

Then, 99designs will help you assess your brand’s style based on the designs that you liked on the previous page. Those criteria are not set in stone so feel free to reshuffle those around if you disagree with the assessment.

 

After the style, you will need to choose the color themes that designers should favor for your design.

 

Then comes one of the most important aspects of your project: the brief. This is where you indicate the name of your logo, any potential slogan to incorporate, give some background on your industry and why you need this logo. You can also upload any images, sketches or documents that might be helpful to freelance designers.

At first, I was not quite sure how to describe what I wanted. I had explained that The English Investor was a personal finances blog with an emphasis on investments and passive income. I had mentioned that I was living in London and that thus the targeted audience was primarily people based in the United Kingdom, although I expected some traffic from the European Union and, to a limited extent, the United States.

It is only when I received the first submissions after a day or so that I thought that I must not have been very clear. The logos submitted were interesting. Some were bad and clearly designed in less than 10 minutes. Others were too serious: they would have been perfectly suited for an asset management firm or a financial institution. I noticed that I wanted something more playful (but not childish), embodied by a character with a touch of Britishness. I also uploaded a couple of pictures that showcased a few design ideas.

Step 5: pricing your contest

The next step is to price your contest, i.e. how much are you ready to offer as a reward to the freelance designers who will win the contest. Note that the prices below are only for a logo. Pricing may vary based on the designs package.

 

99designs recommends the Gold package regardless of the task at hand. I know because I tried a couple of projects (without completing the process) and Gold was always recommended. As you can see, the Gold package is significantly more expensive – by almost £400 – than the starter pack. Why is that?

Remember that this is a contest. Freelance designers are free to decide whether they want to participate or not. If you chose “Launch a contest”, you are not commissioning a specific designer (which would have probably been even more expensive). Therefore, the reward has to be sufficiently high to attract freelancers to participate in the contest. Freelancers don’t even get the full amount as 99designs takes a cut to run the platform. The good ones – the ones vetted by 99designs and the ones who tend to win more contests – are therefore unlikely to spend time on a job that they might not win unless the reward is reasonably high.

I thought that £629 was quite expensive at first. However, it is relatively cheap compared to hiring a studio agency. I also wanted to avoid wasting time. Of course, I could have chosen a cheaper package resulting in less submissions from top-notch designers. But what is the point of doing so if I only have a few low-quality submissions to choose from and end up re-running the contest with a better-priced package? Running an effective contest is time-consuming due to the numerous interactions with designers. Finally, the Gold package guaranteed mid and top designers, therefore potential eliminating less serious candidates. This is a logo that must last at least a couple of years. If successful, it will almost never change. This is not the time to cut corners and save a few pounds.

Note that you can also set your own amount. You are not constrained by the recommended 99designs pricing. However, unless it is absolutely necessary due to budgeting reasons, I would stick to the 99designs pricing. Freelancers will expect this and anything less will be looked at with suspicion.

For those reasons, I felt comfortable following the recommended approach and chose the Gold Package.

Can you really get your money back?

99designs promises that you will get “a design you love or your money back.” It is true that you can be reimbursed if you fail to receive a satisfactory design. The reality is however otherwise. Unless you guarantee the prize – you agree to pick a design no matter what the submissions are and therefore award the prize to someone – top designers are unlikely to participate. If you run another contest a few weeks later, designers might also remember you as the person who made them work for no reason. It is not entirely true and they know that they may not win contests when signing-up to 99desings. Yet, if this is the impression they have, then they are unlikely to participate in your next contest. I took a risk and guaranteed the prize in the hope of attracting more designers. I also wanted to boost my chances so that I did not waste time re-running the contest or finding a designer on another platform.

Add-ons to boost the visibility of a contest

99designs also offers a couple of add-ons that are meant to boost the visibility of your contest on the platform. The more your contest is visible, the better the chances are that designers will see it and hopefully decide to compete. I only bought the Blog item, which listed my contest on the 99designs blog. I presumed that serious designers would consistently check the blog to track contests and any potential design discussions.

Step 6: invite as many people to participate in your contest

99designs allows you to invite up to 50 designers each day. As the preliminary round of the contest runs for 4 days, that’s potentially 200 designers to message. It is a very tedious task. Targeting the right designers is also tricky. To maximize my chances, I narrowed the search to designers who had done logos and who spoke English (it is very important to be able to communicate clearly with your designer). Then, I only invited top-designers and selected them by quickly visiting their page to view sample designs. Some designers have a style and you will quickly know if you like it or not. It took me a solid two hours to invite 50 people. I did not repeat the experience on each day.

Also, the designer who won my contest is someone I had messaged taking advantage of the free invites. So it is definitely worth the hassle!

Step 7: feedback and grading

The success of the contest hinges on the quality of your interactions with designers. On 99designs, you may grade submissions and message each designer (group messaging is also possible). The submissions probably won’t exactly match what you are looking for. It is, however, possible to improve them at the preliminary round (no need to wait for the qualifying round if you can save some time). There are generally three categories of feedback:

  1. Crappy designs and fraud: the designs do not match your requirements, designers did not read the brief, or they came up with a design that is a copy/paste of previous work. For example, I received a design that looked promising, I then went to the designer’s page and noticed that there was already another similar design. I asked him/her if he/she had already provided a similar design to another client as I feared potential copyright issues. The design was withdrawn by the designer and I never received a response. For those designs, only give one star.
  2. Random designs: those designs are interesting but either (a) they fail to fully take into account all requirements of the brief or (b) they are nice but you don’t feel anything special about them. It is difficult to put words on this but your “gut feeling” will tell you if this is the right artistic direction. Give two to three stars with feedback to encourage designers to stay in the running and submit a revised design.
  3. Top and original designs: if you are lucky, a designer will instantly nail it. The design will match the specifications of the brief and be original. This is what happened to me. I still gave feedback: I asked to see revised designs with different colors and a repositioning of the character. You may end up preferring the first version of the design submitted by the designer but it does not hurt to experiment with different things. Four to five stars for those designers. Grant those 5 stars wisely.

 

Feedback at all time is the key. 99designs also publicly displays the percentage of designers to whom you have responded as well as the proportion of submitted designs that you graded. It is important to show that you are engaged in the process and that designers are not spending time on a project without guidance. The more engaged you are, the more serious and committed you appear to be. If you are putting in the work, then designers are likely to go above and beyond to win the contest.

Step 8: awarding the prize and receiving your design files

A normal contest runs 7 days: 4 days of qualifying rounds, and then approximately 3 days of “final rounds” to refine designs and continue to interact with shortlisted designers. I took advantage of the full four days prior to making a selection to ensure that I would receive as many designs as possible. However, at the beginning of day 3, I was 99% sure that I had a winner. Besides the hope of receiving more designs, I also waited for another 24h to make sure I was comfortable with the design that I was choosing. At the end of the qualifying round, I immediately declared a winner and bypassed the final round.

Once you declare a winner, the designer and yourself will sign the 99designs agreement whereby the designer transfers the intellectual property of the designs to you. The designer will then prepare the files for transfer. Those can be downloaded from the 99designs website. You should check that the files work properly. You may download a free trial of Adobe Illustrator to test the files ending with the .ai extension. Make sure that the designer included all the file formats recommended by 99designs. Be thorough although if there is an issue, I’m quite sure customer service can help. If you are happy, you only have to approve the files and you are done!

 

A Note on Blind Contests

If this is your first contest on 99designs, the default setting is for your contest to be visible to everyone. When designers submit proof of concepts and logos, other designers will see their work. As soon as you start grading the first submissions, people will notice the ones you like and may be inclined to copy them or use them as a source of inspiration. Some designers might refrain from submitting a design until they see you grading the first designs.

This will hinder the creative process. The point is to have as many original designs as possible. If you give five stars to one design in the first 24h of the contest, chances are that this design will be copied and you will see many similar submissions.

The answer to this issue is to turn the contest into a blind one where designers cannot see the other submissions. If this is your first time on the platform, you will need to reach out to customer service so that they update your contest. Note that once a contest is blind, there is no turning back.

 

Customer Support

I was pleasantly surprised with 99designs’ customer support. First-timers users will receive emails guiding you through the process. Those are automated emails with tips on how to run an effective contest.

Then, if you have a specific request (i.e. blind contest), then you can reach out to customer support. I first called them but nobody responded. I, however, left a voicemail with my number. Someone called me back less than three hours later. I was in a meeting so I could not respond immediately. Customer support left me a voicemail and followed up with an email asking me to confirm if I wanted to have a blind contest. I found them very quick and very efficient.

 

Pro tips on how to get the most out of your money on 99designs:

  1. Guarantee the prize
  2. Go for a blind contest
  3. Feedback, Feedback, and Feedback
  4. If you can afford it, choose the Gold Package
  5. Check the design files thoroughly

 

(This post is regularly updated. If you notice any discrepancies, please get in touch at theenglishinvestor@theenglishinvestor.com)

Why everyone should have a YOLO account

The English Investor
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Why everyone should have a YOLO account

I love playing guitar. I also happen to love browsing guitar shops and testing the latest gear. Most of my visits are quite innocent and amount to classic window shopping. I’m quite good at resisting temptations when it comes to buying actual guitars. Guitar accessories can be a lot harder to resist because the individual price tag of each time is often reasonably low. This is not necessarily always true for all accessories and even buying multiple reasonably well-priced accessories add up quickly.

Once in a while, I succumb to impulse buying. It’s not as bad as buying a brand new guitar when I already have a few sitting in my living room. Often I will just end up purchasing some expensive effect pedals. The tiny size of the box is often misleading. If I buy a Strymon pedal, that’s almost £300 gone from my bank account. The quality is incredible and I like to think that it justifies the price. Did I really need to spend that on a pedal? Probably not.

Admit it, it does look good.

 

Deep down, we will all have that impulse to buy something that we don’t need or, at best, might need in the (very far) future. I’m not saying that treating yourself is necessarily wrong. If you have diligently saved for that purchase and factored it into your budget, then be my guest. I’m more referring to the situation where you see something, purchase that something and end up with an unscheduled £300 hole in your budget.

As long as you are not compromising your saving rate (i.e. the percentage of your income that you must set aside every month), then impulse buying is not the end of the world. It is not great (you could have saved and therefore invested more) but the situation can be remedied in the long run.

 

Be mindful of Impulse Investing

If impulse buying can be fixed and remains – for most people but not all – quite innocent, “Impulse Investing” is an entirely different matter. I define “Impulse Investing” as splashing a large sum of cash for investment purposes. At least, that is the stated aim. In reality, those so-called investments are only investments in name. They are extremely risky and speculative. Worse, they could set you back years from your saving or retirement plans. Some people might make money with Impulse Investments but the vast majority of people don’t have the discipline or the temper to handle their volatility and riskiness.

The example of crypto-currencies

Crypto is by far the most recognizable form of Impulse Investing. This is the narrative: you first heard that a couple of geeks made millions and you are intrigued. Then one of your friends in consulting or investment banking mentions the buzzwords “blockchain”, “fintech” and “crypto” in the same sentence. He must be onto something. Slowly the press picks up the story and talks about a new category “investment” products. Game-changer. Then your work colleagues and friends start buying small quantities. Everybody does it. Even people who have no background in finance – like your guitar tutor – are buying. Why not you, right? All of sudden, people are “investing” in bitcoin and other cryptocurrencies. You don’t want to miss the boat and you throw £1,000, £5,000 or even £10,000 in it. Suddenly, you are “investing” in cryptocurrencies. Unless you understood what blockchain meant five years ago, I define this as Impulse Investing.

I’m not saying that you should not buy cryptocurrencies. I am however telling you that this is an untested asset class, it is highly speculative, the market is probably somewhat partially manipulated and for those reasons, it should only represent a fraction of your portfolio. Throwing £10,000 is ok when your portfolio’s value is over £1,000,000 but it isn’t when you only have £20,000 in savings and you are not even maxing out your pension contributions.

Yes, some people will make money. But if you are succumbing to your impulse, rushing to follow the crowds, you have probably already missed the (risky) opportunity to be seized.

Other forms of Impulse Investing

Two other examples, which I have experienced first-hand, come to mind:

 

  • Crowdfunding platforms: some investment propositions are worth exploring. The rest is often garbage with improbable valuations. You attend a pitch with some investors. You talk to the founders and they are super excited. They get you excited. Everybody else seems to be a VC hotshot in the room. You grab a drink and people are talking about the second pitch, which was about company X. You don’t fully understand everything that they do but don’t want to miss out so you “invest” immediately when you get home. Unless you have strong experience in angel investing, that’s just Impulse Investing. You have no expertise, no connections and no ability to influence the company you invested in. Strangely, it still better than bitcoins because at least you can claim SEIS/EIS tax relief.

 

  • Speculative and unbalanced stock portfolio: you have a significant portfolio, mostly invested in equities and, to a lesser extent, bonds. Your risk profile is already considered to be aggressive by normal standards. Quarterly earnings for this company are coming up and you want to enter a position (i.e. make a bet). You haven’t really read about the industry but saw the company’s name in a few recent headlines. You’re unsure but you have a gut feeling that you want to follow. To maximize your profits, the day before the earnings announcement, you decide to buy options expiring relatively soon. You choose options over stock for better leverage. Even if you are right about the company, most of your returns hinge on a dramatic movement of the stock price. If it only goes up slightly, volatility and theta will probably cause you to suffer a loss even if you right. To a lesser extent, a similar reasoning applies to 3x leveraged ETFs.

 

Three important steps to survive Impulse Investing

The first step is to recognize that we can all fall for “impulse investing” similar to “impulse buying.” “Impulse investing” takes different forms depending on your net worth but common signs often include: rushing to make an investment with little to no due diligence (i.e. relying on word-to-mouth) in an area where you have limited experience.

The second step is to resist the impulse. That’s easier said than done. If you are reading this, then you are in the category of people who are disciplined and working hard towards financial freedom. Your odds are good and, in any event, much higher than the rest of the population. Yet, there are times when even you might fail. My view is that you can be very disciplined and continue to be so for many years. But then, life challenges us and we are more vulnerable. That’s when you might succumb – and even if that’s the only time – it could take months or more to repair the damage. Everybody has a breaking point.

The third step is to ensure that you have a coping mechanism should you fail to resist Impulse Investing. Endlessly attempting to resist Impulse Investing will prove exhausting in the long run. Instead, the idea is to let go of some of the pressure – like releasing steam from a pressure cooker – in a controlled environment. The obvious benefit of a controlled environment is that you are setting the parameters of the said environment: pain threshold, maximum loss, risk levels to name a few. I would rather see the carnage unfold in the controlled environment rather than in my retirement account. Sure, no carnage at all is better. But unless you are a saint, you will probably do something incredibly risky at some point. The why is beyond the scope of this post. We are interested in the how and outcome of that risky decision.

 

The YOLO account is my controlled environment

When it comes to investing, I feel that the media and the Internet tend to over-report extreme gains and extreme losses. In other words, when the S&P 500 or the FTSE drop 0.4%, no one really cares. To some extent, this makes sense: nobody made much and nobody lost much. It is business as usual.

But when Dr. Michael Burry returns 489.33% to his investors, producers release the movie “The Big Short.” When a teenager opens a fund with his gains from crypto-trading, the Financial Times may interview him. Like you, I read those stories and I sometimes wonder: if this guy can pull this off, maybe I can too.

And maybe you could. However, it often requires a set of unique circumstances – including luck – that could set you back years from your financial freedom goals in the event of failure. Hence, the importance of setting up a controlled environment to mitigate any losses and manage the “Fear Of Missing Out” (FOMO) on some speculative investments.

 

In my case, my weakness tends to be highly speculative bets on the stock market. I find index investing incredibly boring. Yes, I know that timing the market is generally a bad idea and that investing in an ETF tracking the S&P500 with low management fees will probably make me a lot more money in the long run. After all, Warren Buffet said so. But the gains are always limited and it feels a bit tedious when you are someone like me with limited patience.

To mitigate any issues, I set up a specific account with Interactive Brokers. The account has a limited amount and it is certainly smaller than you think (under £10,000). That is essentially an amount I am ready to entire lose. By this, I mean a complete and irremediable loss.

I am in control of that account. Sometimes, I don’t even log in for a month or two. At other times, I am a lot more active with multiple trades over just a few consecutive days. My trades tend to be extremely risky as they involve event-driven investments in short-term options for highly volatile stocks. In other words, if I get it wrong, my options expire worthless and the money is gone. It is very different to shares where you can (often) wait indefinitely in the hope that you will make up your losses.

The Rules of the YOLO account – or how to ensure that your controlled environment functions as intended

While there is no real discipline in how I invest or rather “bet” that money, there are strict rules in operating the account:

  1. Never top-up the account unless I have doubled my net worth: this rule is meant to prevent people from transferring money to the YOLO account once they have run out of funds. The YOLO account – the controlled environment – has to be insulated from the real world, which includes your retirement savings. We are not in a casino and you don’t get to withdraw more cash from the ATM after losing everything at the roulette table. I have one exception to this rule: if you have doubled your net worth, then you are allowed to top up at least the original amount that funded your YOLO account. If you did well enough to double your net worth – an impressive feat – then it’s probably ok to give your YOLO account another shot.

 

  1. Never count the value of your YOLO account in your net worth: think of the YOLO account has an off-balance sheet account. It is essentially a black box. You are not allowed to rely on it because the money could be lost in one single investment. The purpose of that account is not to fund your retirement plan or pay for your stamp duty. You need a regular saving account for those goals.

 

  1. Know your pain threshold: you might have told yourself that this is a YOLO account and therefore you may lose it all. It is one thing to say so but experiencing it is another story. Until early August, I was up 70% this year. I lost it all in the span of two weeks because of a combination of bad decisions, bad luck, and unforeseen circumstances. I knew it was risky but when you think that you are getting it right, the return to reality can be brutal. Truly, only put an amount of money that will make no difference whatsoever to your lifestyle if your investments backfire.
Year to date returns of my YOLO account (as of 16 Sept. 2018)
August and September were not very kind to my YOLO account

 

An insulated portfolio is easy to set up and works well for highly speculative Impulse Investing. If your thing is real estate in high-risk countries such as Turkey right now, then building a controlled environment will take a different form. One golden rule could be not to never borrow against your main residence. Personal guarantees are also a no-go. Borrowing in the local currency is a must.

 

Recognizing impulse investing is tricky because it is not easily spotted when you get a couple of bets right. It usually takes one massive disaster to determine the shapes of Impulse Investing. In any event, setting up a controlled environment will ensure that your financial freedom and financial goals are not in jeopardy when things blow up.

A guide to claiming compensation with Govia ThamesLink Railway

The English Investor
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A guide to claiming compensation with Govia ThamesLink Railway

Like many people, my partner and I hop on a train to go to work. Sadly, that train is ThamesLink, which is run by Govia ThamesLink Railway (GTR).

The service is not cheap. A monthly pass from Croydon to London terminals will set you back £169.40. If you commute from Gatwick, it will cost you £269.20. Paying over £2,500 a year for the right to go to work is a lot of money for anyone. And that’s assuming that the trains are clean, on time, with seating available more often than not.

In recent weeks months, passengers have faced a horrendous commute due to the poor service provided by the Govia ThamesLink Railway franchise. The disastrous rolling out of the new timetable was an epic failure. MPs have already called for freezing fare prices due to the poor service. While the new timetable caused the most chaos, other factors from broken trains to replacement drivers not showing up were the root of significant disruptions.

Given how much you pay each year, it is important that you claim compensation when you are entitled to it as a result of a delay or cancellation. Below is a short guide on how to claim compensation with GTR.

What is Delay Repay?

Delay Repay is a national compensation scheme that most train companies use to compensate passengers for cancellations and delays. There may be some variations in how the scheme is run amongst train companies.

With ThamesLink (and Southern as it is owned by the same parent company), you may be entitled to compensation “for any delay or cancellation that causes you to arrive 15 minutes or more behind schedule, except where delays have been caused by planned engineering works.” As a side note, Virgin Trains require that your train is delayed for 30 minutes or more.

In its Passengers Charter, GTR explains that Delay Repay is “based on the time you should have arrived at your destination station, not the delay to any particular train.” The Charter further states that “if you’re late because a train is delayed en route we will pay compensation based on the time you arrive at your destination station.” I suspect GTR is trying to say the following: what matters is the difference between the scheduled time of arrival and the actual time of arrival of the train at the destination station. Presumably, GTR is attempting to avoid compensation should your train pick you up late but end up (miraculously) arriving on time at your destination. In practice, this is unlikely. Given that most trains have specific arrival time at each destination station, it is hard to imagine how the delay cannot be linked to a particular train.

How and when to claim compensation?

You may apply for compensation online or by post within 28 days of your delayed journey. GTR will respond to the claim within 20 working days. If the delay occurs October 1, assuming that October 1 is a Monday, you may not receive a response before October 26. This is almost a full calendar month. Therefore, based on my experience, I strongly suggest you fill out the compensation form when you are at the station or on the (delayed) train. You could also fill out the form as soon as you arrive at the office or at home. I would not, however, recommend that option: you wasted enough time as a result of a delayed or canceled train, why should this now penalize your work or personal life?

If you are claiming online, you will need to create an account and register. Below is a screenshot of what the standardized claim form looks like. Note that the information required may vary on the type of ticket you hold.

If you, however, prefer to claim by post, you will have to populate and mail by post a form, which can be found here. Below is an extract of the form (clicking on the form will lead you to the actual form on GTR’s website.

The online form is evidently easier to fill out than the postal form. GTR may be incentivizing passengers to claim online by making the paper version incredibly difficult and time-consuming to fill out. Imagine that this form must be completed for every single delay, within 28 days. Even if your claim is eligible, it might easily take another month before you receive a response, let alone compensation.

Unless you are using a Key Smartcard and presumably purchasing your ticket online, the website will not allow you to claim compensation unless you have uploaded a picture of your ticket. This means scanning or taking a picture of your ticket, emailing it to you and uploading it to the website. Not the easiest to do on an iPhone on a delayed train with patchy network service.

It is also worth noting the compensation methods. Bank transfers and cards are an acceptable compensation method when it comes to claiming online. However, if claiming by post, then you will receive a “National Rail Voucher” or a cheque. Filling this form could easily take at least 15 min. Then, you are asked to take further time off and go to the bank to cash a cheque. This is hardly acceptable.

How much will you receive?

Sometimes, a picture is truly worth a thousand words. Here is how much you can expect:

I understand that the various types of fares make it difficult to apply one compensation regime to all passengers. I also appreciate that the methodology is set forth on their website. Yet, it is still incredibly difficult to calculate how much you will get. Even if you could figure out how much you will get in compensation, is it still worth another 15 minutes off your personal time to run the numbers? Probably not.

From my experience, you can get around £5 or so for each claim approved by GTR. First, it takes forever to submit a claim. Second, if your claim is successful, the amount is incredibly low in light of the time that was wasted. Time is our most valuable resource and simply cannot be recovered.  People missed important work meetings and school events because of the delays and cancellations. The least GTR could do is to simplify the compensation process. Yes, some people who are not eligible may receive compensation. But a quicker compensation process is the least that can be done to the other passengers who already went through a difficult commute. And not just once.

To be fair, GTR is implementing an Auto Delay Repay scheme for Key Smartcard holders. Whenever GTR determines that you are delayed, it will automatically generate a claim in your online account. You can review those claims and ensure that they are accurate. Unfortunately, this is only available to Key Smartcard holders.

Enhanced Compensation

Enhanced Compensation starts with a good intention: if you paid a lot of money as a season pass holder, then you should receive more because you suffer the most. The more you travel, the more likely you will suffer from the delays and cancellations. Sadly, those have been very common since the new timetable.

Enhanced compensation may be payable in addition “if a journey is delayed by 30 minutes or more on any 12 days in a business reporting period.” The periods are shown below:

Again, this seems incredibly complicated. Would it be simpler to grant enhanced compensation to anybody who was delayed more than 5 times in a calendar month? It is unclear why there is a need to determine specific periods. It seems somewhat arbitrary.

How to claim Enhanced Compensation?

If you are claiming Enhanced Compensation, you need to print and post a claim form. I could not find an online claim form and the website does not state that there is one. It is all paper-based. The form may be found here.

Below is an extract of the claim form:

In my opinion, this is where things get a bit silly. This form requires you to fill out the scheduled departure time and length of the delay for every single journey. This is incredibly time-consuming.

I queried with Thameslink whether this form can be used a single compensation for all journeys. Do I have to first fill out the standard Delay-Repay compensation form and then fill out a second form for the Enhanced Compensation? Or can I do everything through the Enhanced Compensation and also receive cash compensation as entitled under Delay-Repay? This would be incredibly tedious.

Below is Thameslink’s response on this issue. You do not have to claim Delay-Repay fist to then claim Enhanced Compensation.

If you are eligible, you will receive either a “2 day-return journeys for anywhere on the entire GTR network, valid for 12 months” OR “National Rail vouchers to the value of a single journey between the stations covered by your season ticket.” You will notice that there is no cash compensation, which leads me to believe that Enhanced Compensation is a separate compensation scheme in addition to the Delay Repay scheme. This would mean filling out two compensation claims if you are a frequent traveler and entitled to Enhanced Compensation.

Additional Compensation Scheme

The delays and cancellations were so bad that GTR felt compelled to implement a third compensation scheme. The Additional Compensation Scheme is designed to compensation season and non-season ticket holders most severely affected between 20 May and 28 July 2018. This period coincides with the rollout of the new timetable. For readers who did not travel on the GTR network during that time, imagine going to work with all trains canceled or extremely delayed during multiple weeks. The chaos meant that even the live information displayed on screens and online was completely wrong. Passengers desperate for information had to turn to Twitter. Late night passengers had to take taxis and then claim additional compensation.

Information on the Additional Compensation Scheme is available here. The additional compensation is being rolled out in phases:

Again, the scheme seems quite complicated as it distinguishes between Level 1 and Level 2 stations. Why differentiates passengers? Everybody suffered and it involves additional complexity in the treatment of claims.

We have not been contacted as of today but will let you know if we are. If so, I will update this post. I am eager to hear from people who have been contacted by GTR in relation to the Additional Compensation Scheme. If this is the case, please share your experience by emailing me at theenglishinvestor@theenglishinvestor.com

How to make a lot of money during the next recession

The English Investor
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How to make a lot of money during the next recession

The S&P 500 recently hit fresh highs, which also coincided with the longest bull run ever. The S&P 500 is an American stock market index based on the market capitalization of the 500 largest companies having stock listed on the New York Stock Exchange or the Nasdaq. The index is a useful snapshot of the economic health of the United States, focussing on the biggest US businesses. As of 31 August 2018, it closed at 2,901.52.

Source: S&P Dow Jones Indices

I live in the United Kingdom, why should I care? Good question.

Given the United States’ prominent economic role in this world and the US dollar’s status as the (still) leading reserve currency in the word, whatever happens in the US usually ends up affecting other economies. This includes the European and British economies. The last recession started in the US but quickly spread to the rest of the world.

Also, the recent strengthening of the dollar is linked with the plummeting of the currencies of countries such as Argentina and Turkey. Finally, even central bankers pay close attention to the Federal Reserve’s latest moves to determine the impact of any US rate rise on their currencies and their respective economies.

In other words, the US may not cause the next recession but if its economy is in trouble, be sure that we are also in trouble.

The ride has not always been the smoothest.

The charts do not lie. Even if stocks tend to go up over the long run due to a growing population and increased production, there are drops, corrections, and even bear markets. This bull run will come to an end and when it does, I hope your contingency plans are ready.

This post is especially addressed to millenials who have started investing in the stock market but who have never encountered a true bear market. For too many people, the only recollection of the 2008 crisis revolves around one movie: The Big Short. Now, it is a great movie. Watching it though won’t prepare you enough for a 20% loss in your stock portfolio.

 

Steps to make money in the next downturn

  1. Acknowledge that the downturn is here to prepare yourself mentally

This is arguably the hardest step because it assumes that you can determine early on that the downturn is here. According to the US National Bureau of Economic Research, the last recession began in December 2007 and ended in June 2009. I, however, suspect that many people only acknowledged the crisis when Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008. Based on that assumption, there was a 9-month lag where you may have continued to “buy the dip” or “double-down.” Yet, the bottom was only reached a year later in June 2009. This is a long time to bleed money.

Determining the beginning of a downturn is hard. Some people are better at it and they have an early advantage. But eventually, you will come to that determination, and it will occur before the indeces hit the bottom. Take the last recession as an example. Unless you were living under a rock, it was hard not to imagine that a downturn was coming after the bankruptcy of Lehman. The dramatic tone of newsreports is often a good hint that something is happening.

At last, countries in the midst of a downturn do not export a recession instantly to other countries. Even with the US, there is a time lag before people start to realize that the downturn might be global and not country specific. For instance, people living in the UK had a slight advantage as long as they were paying attention to the unfolding events in the US and taking precautionary steps. According to the ONS, the GDP only started to nosedive in Q1 of 2018. This is almost a year after the beginning of the US downturn and 6 months after the collapse of Lehman.

Source: ONS

  1. Be OK with not making any money

As soon as you realize that the downturn is here, you must come to terms with the fact that you may not make any money at all for an extended period of time. In other words, the first step to make money is to understand that you may not make any money in a downturn.

For the past ten years or so, investing in an index fund made you money without doing anything. Investing in Amazon and Apple made you a lot of money without doing anything. The point is that you could sit back and enjoy double digit gains. During a downturn, this does not work. You need to (i) come up with a plan and (ii) understand that your plan may only mitigate losses and not make you any money, which seems unfair if you look back at the effort you put into your index fund or Amazon gains.

It is hard to miss out on gains but the only way not to lose is to not play the game at all. If this has been your strategy for the past four years, you lost tremeduous potential gains on top of having inflation eating your buying power. But if disciplined, you may have a lot of disposable cash to deploy in the next downturn.

Timing the right asset allocation is everything. A proper asset allocation will minimize risk exposure during the next recession.

  1. Come up with a plan and an asset allocation strategy – and stick to it

Some plans are usually better than others.

The ideal plan is to determine that a downturn is coming, sell risky assets such as stock and real estate, and go short the market. That is the ideal plan: you made money during the bull market, and you are making a killing in the recession. Unfortunately, it is incredibly hard to do. Even in the movie The Big Short, remember that Dr. Michael Burry was 20% down at some point. And that was someone who had properly timed the housing crisis.

There are however other strategies. The returns might not be as impressive but they are worth a look:

  • Do nothing

The most expensive mistake is to panick and sell in a hurry. Nine times out of ten, the selling will occur at the worst possible time, which is when the market is about to bottom out and recover. Many millenials or younger investors are prone to making that mistake because they have never lived a downturn. They simply do not have the experience and the composure to sit tight and watch the world burning.

The charts above show that stocks tend to go up over the long term. If your portfolio is well-diversified, your stocks are likely to recover. You may suffer a complete loss if you purchased a Bear Stern or Northern Rock. It might take ten years to recoup your initial investments. But in the long run, based on precedents, your porfolio will slowly recover and increase in value.

Doing nothing is far from being the best strategy. But doing nothing is still better than suddenly changing strategy, panicking, selling in a hurry at a massive loss and missing the early recovery post-recession.

  • Go cash and deleverage

Bull markets last on average approximately 8 years. If you assume that the recession ended in 2009, we are in our tenth year of the bull run. In other words, a downturn or recession is overdue. From discussions with investment bankers and economists (not a representative sample), it is likely that a significant downturn will occur by the year 2020. In the UK, Brexit could potentially move forward the timeline by 6 months if there is no deal with the European Union in order to account for short-term disruptions. Caveat: I am not claiming that Brexit is good or bad in the long run. I am however claiming that short-term disruptions due to a chaotic exit of the European Union could amplify the negative effects caused by a global downturn.

If you believe that the downturn will occur in 2020, the strategy is to move to cash. Progressively selling stocks and building up cash reserves, including with your ISA account, should be the priority. For real estate, the picture is mixed in the UK as it depends on the type of asset and the location of that asset. As a rule of thumb, do not sell your principal residence even if you think that real estate prices in your area are about to nosedive. It is not worth the stress and the transaction costs. If living in London, it is probably almost too late to sell buy-to-let properties without a loss. Outside of London, the market is picking up after stalling for a decade, so there should be opportunities. Be mindful however that the government has been punishing buy-to-let investors recently. Run the numbers based on your situations.

Going cash in the UK is a bit more painful than other countries because inflation is high due to the depreciation of the pound and saving rates remain stubbornly low in spite of the recent Bank of England quarter-point increase. Still, you should be able to earn 1.3% to 1.5% in a flexible cash ISA, and maybe a 1% in a standard savings account. Avoid blocking your cash for a long period in the hope of locking a higher interest rate. In a downturn, you will want the flexibility to deploy your cash and go bargain-hunting. Also, the higher interest rate is unlikely to make any difference to your net worth.

  • Short the market

To make money, you need to take risks. If you do nothing, you will lose money but it won’t be as bad as panic selling. If you go cash, you will not make money for a while but will be in a good position to pick up cheap assets and stocks when the recovery begins. But if you truly want to make money in a downturn, you need to go short. This means losing almost everything if the downturn never comes.

 

How do I short the market?

For the average person, buying an ETF that aims at replicating the inverse performance of an index is the easiest way to short the market. In the UK, the following ETFs are available:

  • The FTSE 100 Short Daily UCITS ETF (ticker: XUKS) seeks to reflect the inverse daily performance of the FTSE 100 Index. To achieve its goal, the ETF uses derivatives such as swaps.
  • The FTSE 100 Super Short Strat2X GBP GO UCITS ETF (ticker: SUK2) aims at replicating twice the inverse daily exposure of the FTSE 100.
  • The ETFS 3x Daily Short FTSE 100 ETF (ticker: UK3S) aims at replicating three times the inverse daily exposure of the FTSE 100.

There are plenty of other ETFs available and they are regularly reviewed by the institutions managing them so do some research first.

Prior to continuing, ETFs have a major weakness, which can prove deadly in the long run. Due to how compounding works, an ETF’s performance will diverge from the index’s performance in the long run. ETFs are meant to replicate daily performances. If you hold them in the long run, in a volatile but flat market, you may lose money. There is a good blog post explaining this phenomenon on Monevator.com and I invite you to check it out.

To short the US market, below are a couple of inverse ETFs:

The second option is to short individual stocks. This means borrowing a stock, selling it and rebuying it at a later date once the stock price has (hopefully) decreased. This tactic is a bit more involved as it supposes that you have done some research or at least that you have an edge in stock-picking. You can also short a company by buying put options. Be mindful that options are not for beginners: if you do not understand the risks associated with time decay and volatility, then you are probably not ready. In a downturn, stocks with limited to no earnings and weak balance sheets are the most vulnerable (small tech startups and biotech companies that are not profitable are prime suspects). Utility providers are however safer.

 

Other options to bet against the market

Long Gold

Gold is an asset that tends to well in a recession. As a hard asset, it is generally viewed that its value will at least hold itself over time. Look at how people in countries with spiraling inflation and no access to foreign currencies always fall back on gold to safeguard the value of their savings.

The GLD ETF did well in during the 2008 crisis until 2012, which is when the bull market took off around the world. Beware that gold does not generate a dividend. Also, buying an ETF does not allow you to trade the commodity itself as it is only an instrument to gain exposure.

Long Gilt

Gilt-edged securities are bonds issued by the UK Government. There are similar to the US Treasury bonds in the United States. For readers based outside the UK, the gilt referred to the paper certificates which had a gilt (or gilded) edge at the time.

Because this is government debt, it is presumed to be safe. Yields are typically low. In a downturn, even a low yield is better than suffering a sell-off in stocks. Also, the value of your security may appreciate if investors all seek refuge in government-backed debt.

There are usually two ways of buying gilts. First, you can go to the Government’s Debt Management Office where new securities are issued. Second, you can buy gilts through a stockbroker or through the Bank of England’s broker. Most online brokers should also be set-up in a way to allow you to buy gilts.

Long yourself

It sounds cliché but investing in yourself is an investment that does not depreciate. Whatever you learned, that skill will be yours and you own it. It’s also the easiest asset to carry around and it is (essentially) tax-free.

Investing in yourself does not necessarily amount to getting an MBA. That is the traditional route, one that will cost you to the tune of at least £80,000 in the UK or $200,000 in the US. If you intend to get an MBA, please try to aim for the top schools only, whether in the UK or in the US. With that price tag, there is little room for mistake. The other option is to go through a bootcamp (coding bootcamps are popular) or even start learning through one of those free platforms such as EDX or Coursera.

Better study something fun than watching your portfolio burn to the ground.

How to build a financial safety net in five concrete steps

The English Investor
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How to build a financial safety net in five concrete steps

I often read the same question: how should I save? Where should I invest? Should I quit my job and launch this super cool business?

All of those are valid questions but they often lack context. The advice will not be the same whether you have saved £10,000 or £100,000. The advice might also be different depending on whether your pension contributions or medical insurance are tied to your employer.

This blog post is about financial survival. If you have invested most of your savings or have quit your job to pursue a business venture, and if things don’t work out, how do you recover? The answer is to build a safety net. If you have not built a safety net prior to making your big move, you may have a problem. You potentially have to start from scratch, re-make whatever you used to earn and compete with younger professionals who might have taken your old job while you were gone. Not fun.

I personally feel we tend to over-celebrate failure. Failure sucks. It is a setback. It is not the desired outcome. You might learn a few things along the way but more importantly, all your hard work did not pay off. The following steps are meant to soften the blow. None of those steps are ground-breaking. But combined, they form an extremely powerful financial safety net. Your entrepreneurial adventure may not work out the first time but it could the second time. This assumes that you are in a position to have a second chance and that you are not completely broke.

If I seem to address my advice to people who are about to make a big change of career that could seriously impair their financial viability, that’s because those are the people who probably need it most. Note however that the advice below can definitely be applied by anyone, including those who intend to stay in their job for the foreseeable future. This was actually my mindset when I came up with that step plan.

  1. Pay-off your debt

Unless you are paying off a mortgage for your main home with a 3% interest rate, you should repay any debt you have as soon as possible. Repaying off debt has two main advantages. First, you free up cash flow for future investments. Second, you don’t owe anything to anybody, and that is a significant step. As a bonus, it may even improve your credit score for when you truly need debt such as to buy a house with a mortgage.

The highest types of debt to repay on the list are student loans and credit card debt. Student loans are the next financial bomb in the United States and have quickly grown in the United Kingdom. Credit card debt is acceptable if you pay the amount due in full every month. Subject to that condition, I don’t see significant issues using your credit card to amass airline points. But again, make sure you pay everything in full every month without fail. Similar to a credit card is any financing offered by retailers or tech companies to purchase a TV or the new iPhone. Even if you managed to obtain a 0% financing, this is not a great deal. Tech purchases tend to depreciate very quickly and by the time you have paid off the financing, the purchase is essentially worthless. If you can’t buy an iPhone or MacBook fully in cash, you cannot afford it. Period.

While rates are slowing going up in the United States and the United Kingdom, they remain historically very low. In other words, it is very hard to make money out of savings in the current environment. Paying off your debt should be your first financial move to build your safety net. If you don’t owe any money, nobody can come after you.

  1. Buy medical insurance and additional covers for critical illnesses

Always make sure you have appropriate medical insurance. Sadly, relying exclusively on the NHS is not the best idea. It takes forever to see a doctor through the NHS. Sometimes, there is an emergency and one cannot wait. In such a case, you should be able to see a private doctor using a private medical insurance. Insurance will not pay for everything but it will prevent medical bills from bankrupting you.

I also strongly suggest that you subscribe to a critical illness cover. This type of insurance will pay you a tax-free lump sum if you are diagnosed with a specific medical condition. For instance, critical illness policies typically cover cancer, heart attacks, liver failure stroke, third-degree burns, etc. Your basic medical insurance will cover the bulk of the treatment costs. However, the lump sum from your critical illness cover comes handy to pay the non-insured portion of your treatment as well as ancillary medical devices required for your recovery at home. The lump sum can also serve as compensation for the temporary loss of income due to your inability to go to work, which is especially important if you are self-employed.

  1. Build up your pension pot

If you are thinking of leaving your job, make sure you contribute as much as possible to your pension pot. This is especially true if your employer matches your employee contributions. Remember that contributing to your pension is tax-free money. For more details on how to contribute, check out this post here.

The failure of a significant investment or venture should not comprise your retirement plans. Under no circumstances should you “invest” or gamble with money meant for your retirement. A pension provider should be managing your pension contributions based on an appropriate risk profile. Once this is done, leave it and forget about it.

The idea is that you don’t start from scratch if your business or investment failed. If you contributed to a pension pot beside making your big move, you should have something to go back to. It might not be much but it is something. Besides health, which we discussed above, you should cover as many angles as you can for your retirement. Save aggressively to contribute to your pension.

I appreciate the advice here may seem harsh. After all, if you followed those three steps so far, you still haven’t saved a pound in your bank account. I cannot stress this point enough: saving for retirement is the easiest and most-efficient form of saving due to the tax relief. Also, if you are still unconvinced, think about this way for a second: if you think it is hard to find a job in your thirties, try finding one in your seventies with poor health.

  1. Open an Individual Savings Account (ISA)

In the UK, the main tax-free savings account is the ISA. The account can hold cash or stock and shares. In both cases, the annual allowance is £20,000.

When you start saving, you should open an ISA account. The cash version is the easiest to start with. If you don’t mind taking more risks, the share and stock option has the potential to be more profitable in the long run but be mindful of the charges billed by some providers. If you intend to take the money out within the next five years, maybe opt for the cash version (i.e. saving for a downpayment to buy a house). If you are holding an ISA as a way to complement your pension pot – a valid choice – then opt for the share and stock option. Note that you can open more than one ISA account as long as you don’t breach the annual allowance. There a few types of ISAs such as the Lifetime ISA and the Help-to-Buy ISA. If this is your first savings account, I would opt for a straightforward cash ISA and then you can do some research to see what second ISA would be the most suited to your needs.

The reason to start with an ISA in lieu of another savings account is to take advantage of the tax-free allowance as soon as possible. Remember, you cannot carry-forward the £20,000 tax-free allowance from one year to another. If unused during the tax year, it is indefinitely lost. Therefore, the sooner you open an account, the quicker you can save and potentially maximize your savings until the cap.

My guidelines are simple: save as much as you can until you reach that £20,000 threshold.

  1. Make a will

Making a will allows you to decide what happens to your money and possessions when you die. In the will, you can also foresee other situations such as who should take care of your children. Properly done, it will mitigate inheritance tax.

If you don’t have a will, then the law will say who gets what. Your spouse and children will usually be the main beneficiaries. If all is well, this may be a perfectly fine option. But if you have given a lot of money to one of your children and want to make his or her sibling whole at the time of your passing, then a will is probably a better idea. If you are divorced or own a business, then getting a will is also important.

I sometimes read that paying £150 plus VAT to a solicitor to draft a basic will is not cheap. It ’s not anything but remember that £150 is incredibly cheap if your descendants can avoid years of litigation with the State, HMRC or various third parties. When you are seeking to draft a will, please get it right. Hire a solicitor specialized in will-writing and don’t fall for some free will template found on Google.

Your descendants will save in taxes and avoid litigation. Where are you going to get such a return for a £150 investment?

 

Conclusion: None of the above will make you a millionaire. Few will even be in a position to complete all the steps listed above and that’s ok. Think about it: if you can save half of the pension and ISA allowances, you should be sitting on a neat £30,000 (the current pension allowance is £40,000 and the ISA allowance is £20,000). Even if you only achieve step 1, you will be in a significantly better financial position. If you managed to complete all steps, then congratulations, buying a house (maybe by using that cash ISA as a downpayment?) or venturing into riskier investments should now be your next priority.

Pension contributions in the United Kingdom: a crash course

The English Investor
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Pension contributions in the United Kingdom: a crash course

The United Kingdom posted the biggest July government surplus in 18 years, according to figures published by the Office for National Statistics. Given the withdrawal of tax incentives for buy-to-let investors and significant income taxes, it is no wonder that the government’s coffers are in better shape. Yet, don’t bet on any significant tax breaks in light of the Brexit uncertainties, an unfunded commitment to spend billions on the NHS and a very high level of debt-to-GDP ratio.

In this day of an age, what is the best move to improve your tax bill? Two words: pension contributions.

Tax relief on contributions.

What is a pension? It is essentially a tax-free saving account for retirement.

Pension contributions are one of the only effective means left in the UK to reduce your tax bill. The Government has a policy goal that incentivizes people to save money for their future retirement. Unlike other countries, a pensioner cannot live off state pension in the UK. The basic State Pension currently stands at £125.95 per week. Good luck living off that amount in London.

Therefore, it is important to save money to supplement the basic State Pension with additional income for when you retire. For each pound saved in your “pension pot,” the Government will give you a tax break. Since 2014, you can start withdrawing funds from your pension pot at age 55.

The basics: tax relief on pension contributions

If you are under 75, tax relief is granted on pension contributions, subject to a £40,000 annual allowance.

If you contribute money into your pension pot yourself, or if it is taken by the employer through your salary (i.e. salary sacrifice), you automatically get a 20% top-up from the Government. Note that this is not the Government giving you back 20% of the amount contributed via a transfer to your bank account. Instead, the Government will add an additional deposit worth 20% into your pension pot.

If you are a higher rate taxpayer (i.e. marginal income tax rate at 40%) or an additional rate taxpayer (marginal income tax rate at 45%), you can claim respectively claim an extra 20% and 25% tax relief. If you contribute through your employer’s scheme (i.e. through “salary sacrifice”), you may not have to reclaim this additional tax relief if your employer ends up deducting fess taxes from your salary. If your employer does not reclaim the tax relief on your behalf, then you have to make the claim yourself to HMRC by completing a self-assessment tax return.

There are therefore two ways to contribute to your pension pot: through your employer’s salary sacrifice scheme (if your employer operates such a scheme) or by simply transferring the funds to your pension provider. As a rule of thumb, it is better to use your employer’s salary sacrifice scheme if available for two reasons.

First, your employer deducts your contributions from your gross pay, before deducting taxes. In other words, your employer puts the cash straight in your pension pot from your gross pay so your contribution is never taxed in the first place. There is no need to claim when completing your self-assessment and then wait for HMRC to reimburse you the difference. This is called a net pay arrangement.

Second, as your pension contribution is deducted from your gross salary, you also avoid the full paying national insurance contribution and taxes on your pension contribution. As a basic-rate taxpayer, you avoid 12% of National Insurance contributions on the amount contributed to your pension pot. As a higher rate and additional rate taxpayer, you don’t have to pay the 2% rate. As a reminder, all taxpayers pay 12% of their earnings above £162 a week and up to £892 a week. For earnings over £892 a week, the rate drops to 2%.

On the contrary, if you wire the funds yourself, you will have paid national insurance contributions and income taxes on that amount. You will have to reclaim the income tax relief when completing your self-assessment form, which takes longer. As the tax relief is only available for income tax, you will not be able to reclaim the national insurance contributions.

Below is a brief summary to illustrate the income tax boost:

Source: The English Investor

As you see, higher rate and additional rate taxpayers will effectively disburse less money but will end up with the same amount of contribution as a basic rate taxpayer due to the higher tax relief that they get. For years, pension contributions have been the most tax efficient way to stash cash for high earners. New rules introduced in the past few years have significantly reduced the tax relief available to high earners.

Limits on how much you can contribute

There are limits on how much you can contribute so that people cannot take advantage of the tax relief forever.

Limit on Earnings: tax relief on pension contributions is only available up to your annual earnings. Therefore, if you earn £30,000 a year and want to contribute a lump sum of £40,000, you can only get tax relief up to £30,000.

Tapered allowance (high earners only): you can only contribute up to your allowance, which is made of £40,000 (base allowance) plus any unused allowance from the previous three tax years. Since April 2016, any high earner making more than an adjusted income of more than £150,000 will be subject to the tapered annual allowance. The more you make, the more your allowance is reduced, which means that a lower amount of pension contributions is eligible to tax relief. Once your adjusted income is £210,000 or more, your annual allowance is reduced to £10,000. Presumably, the assumption is that high earners can use supplement their savings through other instruments such as ISA accounts or other investments. Those who make less than £110,000 are not affected by this change.

Lifetime limit (mostly relevant to high earners): In the 2018/2019 tax year, the lifetime limit is £1,030,000. If your pension pot is above the £1,030,000 threshold, you will not get tax relief on additional contributions.

How to optimize your pension contributions

Employer’s pension

If you are employed, your employer may top up your pension contribution. For instance, my partner’s employer has the following bands:

Employee’s contribution Employer’s contribution
1% 2%
2% 4%
3% 6%

As you can see, her employer doubles the employee’s contribution up to 3%. Subject to the above-mentioned caps, this is essentially free money (or a pay rise). 2% of your salary is unlikely to make a big difference in your day to day lifestyle. However, an additional 3% a year from your employer will make a significant difference over the years thanks to compounding interests. Therefore, you should absolutely max out your pension contribution. If your employer matches your contributions, make sure you contribute as much as possible.

My former employer offered a generous 5% contribution but did not top up. Whether I contributed 1% or 10% of my salary did not make a difference.

Contributing to your pension or paying off debt?

The more you contribute to your pension, and the sooner you start, the better your retirement income will be because your pension pot will have had more time to grow. The benefits stemming from the tax relief and compounding of interest will help you in increasing your pension pot.

Contributing to your pension is still a sacrifice of short-term cash for the promise of a larger amount in the future that will serve you in retirement. Is it still worth contributing to your pension if you have outstanding debt? As a rule of thumb, I would advise repaying the debt first, especially if we are talking about credit card debt or student loans. For a mortgage, the reasoning is a bit different: as you will probably take over 15 years to repay that mortgage, you should not postpone contributing to your pension for such a long amount of time. It is better to repay your mortgage and contribute small amounts to your pension pot, rather than repaying your mortgage in a hurry but with no retirement pot in sight. Obviously, don’t borrow to increase your pension contributions as this will prove unsustainable very quickly.

Watch out for those management fees

Pay off your debt and then contribute to your pension pot as much and as soon as possible. One additional area that tends to be neglected is the fees charged by the pension provider. There are many pension providers (Scottish Widows and Aegon are amongst the most common ones (note, I refer to those providers because I have or held an account with them but I don’t get paid to mention them)). In truth,  I tend to think that all providers offer similar funds and strategies. What differentiates them is the amount charged in management fees. A management fee of 0.50% will end up costing you thousands of pounds more than a fee at 0.25%. It is not just because you are paying a higher fee. You are also missing out additional interest and capital appreciation that would have had a compounding effect, and therefore made you even more money.

Are there alternatives to the pension pot?

The sad reality is that even if you reach the £1,030,000 threshold, this might not be sufficient to sustain your lifestyle in retirement. You, therefore, need to create additional saving pots: the Lifetime ISA is one possible option but it remains to be seen for how long it will remain available. There are few providers of LISA and I would not be surprised if the Government decided to scrap the scheme at some point. A standard cash ISA is better than nothing although the saving rates won’t get you very far. You may be better with a stock and share ISA, but only if you are still far away from retirement.

 

If you are not contributing to a pension, you are essentially forfeiting your future. You will have no choice but to work forever. Even if you are lucky to have a good health, potential employers may be unwilling to hire due to your age. It is therefore important that you remain on top of this topic. We will regularly update and add to this post when significant developments are rolled out by the Exchequer and HMRC. Make sure you understand this cheat sheet and check regularly for updates.

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