the million pound question

Oct11
by TFS on October 11, 2018 at 6:30 am
Posted In: Random Thoughts

One Million Pounds….!

 

So this is the first part of a hopefully ongoing series of posts organised by new UK FI Blog kid on the block The Saving Ninja, where he will pose a question or “thought experiment” and many bloggers will chip in with their answers. I’ll let him describe this in his own words:

 

This article signifies the start of a new post category which I’m going to name, “Thought Experiments”!

The way this type of post will work is by starting off with a question, like “What would you do if you got given £1 million?”, and the blogger will have to write whatever they first think of. No pre-planning or major editing allowed and blabbering is definitely encouraged! It should read like an internal monologue.

Right at the top of the post, I’ll post a link to all of the other bloggers that have participated in the thought experiment (I encourage other bloggers to do likewise!) You’ll then be able to see a vast array of different opinions to the same question.

I’ll also be taking question requests in the comments below!

So, without further ado…Thought experiment number 1!

 

What would you do if right at this very instant you got given 1 million great British pounds? This could be from a lottery win, an IPO, a scratch card, you name it. No tax needs to be paid, it’s just been plopped directly into your run of the mill bank account.

 

Before we get to my answer, here is a list of links to other bloggers who’ve participated so far:

The Savings Ninja

Quietly Saving

Ms ZiYou

 

My Answer

My first reaction would be just to stick it in an index tracker like VWRL, start withdrawing 4%/year and call FI. Then obviously hand in my notice at work the very next day! However that would make for a rather short and boring answer so let me think a bit deeper on that one.

Other topics which are immediately spring to mind are:

Total Net Worth

Having an extra £1 million would actually put our investable Net Worth at £1.2 million. According to the 4% rule we could withdraw £48k which would easily cover our current expenses, so we’d definitely be FI! Whoop!

 

Mortgage schmortgage

It would be nice to be mortgage free. I probably wouldn’t pay it off in a lump sum so as not to get any “early repayment” penalty 1 but would pay the maximum overpayment every year until it was discharged or my 10 years were up. Therefore I would be mortgage free within 9 years time. Sounds pretty good to me! This is assuming we wouldn’t move house of course (see below!)

 

Tax!

It would seem horrendously tax inefficient to just stick everything into one fund because you would easily go over the yearly limits on both ISA and SIPP. I think you can back date SIPP/pension limits for 1 year so I could stick about £55K into that and get around a £13.75K boost in tax relief (sweet!). {Correction – just looked this up and you can actually backdate it up to 3 years so I guess that’s up to £120k?}

Then there is the ISA which I could put £20k/year into. If I were to fill up the ISA and SIPP (£40k/year) including back dating the first year it would take around 16 years to get through 1 million. Of course I could gift half of this to Mrs T (I believe you can do this with a spouse without incurring any inheritance tax, but I would have to reconsult YoungFIGuy’s excellent guest article on Monevator to double check that and stay within limits etc!) and then fill up those tax efficient investment accounts in around 8 years. Awesome! This should also avoid us hitting the lifetime limit of £1.03 2 million in your pension before you start getting shafted on the tax front, having around £330k (Mrs T) and £395k (me) in our SIPPS. One final thing to note is that this may be weighted too much towards pensions, considering we won’t be able to access them until we are 57/58 or whatever it is for the TFLS 3 for our age group nowadays, so there would almost certainly be a slight variation on the exact final figures for when using this strategy.

We’d also set up a Junior ISA for TFS Jr and start up a fund for her to access when she is 18 or whatever.

 

Buying shit

As much as I preach moderate frugality on this blog, those who have read any of our monthly reports will surely already realise that I don’t think I could honestly say I’d receive a cool million without buying some shit or going on a few *awesome* holidays:

  • House – If I’m perfectly honest I could imagine us actually moving house and so blowing the whole mortgage pay off thing out of the water. Obviously our new house would still be pretty modest, and paying off the mortgage early would still be a priority, but I could just imagine we’d want to move to somewhere just slightly larger. Let’s call this an extra £100k down the drain including all fees, that should get us a decent semi in our area with a bigger garden and an extra room for a home office (key!) and so on.
  • Car – I can’t imagine I’d be bothered about any supercars or anything like that but I would probably go and buy a really nice new or very nearly new electric car with at least 200 miles of range (maybe wait 6 months to see what comes out). This would set us back around £30-35k I would have thought.
  • Holidays – We would surely go on a holiday or two and probably treat close family to it as well. Let’s call this £25k
  • House stuff – I would probably fit our new house with some “green tech” such as air source heat pumps and other stuff like that. Although this is kind of an investment as it would save on bills, the cost would still be large up front so makes sense to call it spending within the scope of this thought experiment. Maybe we’d also need to decorate / do the house and garden up to our tastes, and we’d drop around £25k on all of this.
  • Charity – There is no way I could receive this amount of money gratis without giving some away to causes that are far more deserving than myself. I would maybe shoot for 10% here so £100k.

All of the above comes to around £285k. Let’s round it out to £300k just in case there is stuff I haven’t thought of 🙂

This may actually make it touch and go whether we’d be properly FI but let’s see how the numbers add up at the end…. I have a feeling we’ll be OK.

 

Entrepreneurship / New Investments

I’ve always wanted to have a go at working for myself so I would almost certainly try setting up a new business or two (after having a 6 month or so rest from working no doubt!). This would most likely be in the form of a couple of websites for various ideas I’ve had over the years but never had the time to implement. The great thing about these sorts of businesses is that they don’t really cost much if anything to set up, so I won’t even include this into spending any of the 1 mill. These will mainly need my time which I will have an abundance off once I quit the day job!

I would also probably have a crack at buying a BTL property or two, if the numbers made sense. Maybe even look at Airbnb’ing a property as well!

I’m not sure I’d go after any more high risk/reward investments like Cryptos or mining stocks because I’d already have “won” the game of FI and so wealth preservation should now be paramount. However, knowing my gambling nature I could not honestly rule out having say a £50k fun money pot to stick into some more fun/interesting investments that aren’t just Vanguard and the like. Again just being honest!

 

Golf

Those in the know will know my first love, after Mrs T and TFS Jr of course, is hitting a little white ball around a field. I would most definitely play a bit more golf and try to get my handicap down!

 

Final answer!

OK so let’s put all of the above thoughts into a more concrete final answer then:

  • I would definitely quit my job immediately!
  • I really like the sound of being half a man of leisure, and the other half of the time working on my own businesses and looking after investments etc… so this is the sort of life I would end up building for myself.
  • Due to the *need* for a home office 😉 given the above we would definitely move house.
  • We would spend some of the money on family and experiences, and charity.
  • I will reserve some money for property and “fun” riskier investments
  • The rest would be chucked into tax efficient wrappers as soon as possible

The breakdown of the money would then be as follows:

  • £100k house move
  • £300k spending
  • £150k other investments

This leaves £550k to invest for boring  stuff like sticking it into index funds and/or pay off the remaining mortgage (which we could theoretically do straight away actually if we moved house!). If we ignore paying off the mortgage, with our current investable Net Worth of around £200k that would give us £750k and therefore a SWR (“Safe” Withdrawal Rate) of £30k/year. This wouldn’t quite cover our current spending but I think it is such a big buffer and given other investments in property and so on, we’d have enough passive income coming in to not worry about working (although I would be anyway on said businesses, so either way I am sure we’d be fine financially).

I would imagine we’d deploy the funds something like this:

Year 1

  • £120k invested in my pension (due to being able to backdate contribution allowances up to 3 years) and to claim as much tax back as possible while in a tax year where I have earnings to claim back from. Assume I get a 25% bump on this so total in would be £150k.
  • £20k into Mrs T (Less because she has paid much less tax so may not be worthwhile filling hers up as much). Not sure if tax bump would be available so let’s leave it as £20k.
  • £40k to max out both our ISA limits
  • £4k for TFS Jr’s Junior ISA
  • £40k spending

This leaves £296k

Year 2

As we would now not be earning I’m not sure it would be worth filling up SIPPs anymore as there may not be any tax to reclaim?

  • £40k into ISAs
  • £4k Jr ISA
  • £40k spending

The following years would look much the same as year 2, and it would take another 2.5 years to deploy the rest of our funds.

This would leave the following in investment accounts assuming no growth whatsoever:

Pension/SIPPs: £275k

ISAs: £206k

Cash/Other investments: £130k

Property investments: £100k (will be leveraged so hopefully providing some good cashflow!)

Considering the Pension/SIPP pot would continue compounding for nearly 20 years before we can touch it, and could easily double in that time in real terms, I feel we’ll have more than enough to see us through, especially considering the fact that I’ll be playing entrepreneur guy and will surely be making some sort of money on the side. I also haven’t included any growth at all so it could be looking much more rosy! On the other hand there could be a massive market crash and be looking much worse.

 

The bottom line is though I am sure we’d be having a blast trying out a new lifestyle and having far more free time to do what we feel is valuable, which would be awesome 🙂

 

Thanks to The Saving Ninja for such an interesting thought experiment!

And finally… I have to ask of course…

What would you guys do? 🙂

Notes:

  1. Unless it was really small, say sub £1000 or something like that ↩
  2. That extra 0.03 is totally worth it. Cheers tax man! ↩
  3. Tax Free Lump Sum ↩