RIP RPI – pensions in the cross-hairs?

The Treasury has lined up the Retail Price Index (RPI) for a 2030 retirement. In its place will be the much wordier, and ultimately lesser in value, Consumer Price Index + owner occupiers’ housing cost (CPIH). The change has brought a modicum of grumbling, predominantly because of the negative impact on those with defined benefit (DB) pensions.

As with the NHS Pension, other DB pensions undergo annual revaluation to ensure that their value isn’t too sorely eroded by inflation. For a number of DB pensions, the amount of revaluation is linked to the RPI. As the (lesser) CPIH will be used from 2030, people’s pensions won’t grow as quickly and therefore will be worth less when they retire.

You might argue that the change for those with affected pensions is irrelevant, as CPIH is the measure of inflation. Therefore the value of these pensions will still rise with inflation and won’t succumb to its sapping effect. Two points in rebuttal of this. Firstly, I’ve made clear my thoughts on true inflation before. Secondly, I’d still be miffed if my pension was being revalued by a lesser amount than it had been previously.

PR hot potato*

The NHS Pension is not impacted in the same way, as its revaluation is by Treasury Orders + 1.5%, not RPI. Although Treasury Orders can in theory be whatever HM Treasury decides, it is often near enough the Consumer Price Index (CPI; not to be confused with the CPIH!). This exempts the NHS Pension from the effects of the aforementioned RPI – to – CPIH changeover.

Although Thursday clapping is no longer de rigueur, and windows are noticeably deplete of rainbows, the NHS is still an apple in the eye of many as Coronavirus Wave II: Covid Strikes Back continues. Healthcare workers have been immune to the recently announced Public Sector pay freeze; some may see a pay rise. Government spin doctors have probably decided mixing the healthcare workforce up in this latest fiscal rejig is a PR battle better not fought. ‘Tis better not to bite the hand that heals you.

It would, however, to be naive to think that healthcare professionals will exhibit this immunity indefinitely. No, the NHS is a black hole of public spending that won’t go away. It mayn’t be in the next few years, but at some point in the future the axe will fall on the pensions and/or salaries of NHS workers.

Many of those reading will be 2015 NHS Pension scheme members. This is the third and least generous iteration of the pension in the last 20 years. A future reworking of the numbers seems inevitable. Only the purest of optimists could envisage a potential rehash improving the conditions of the scheme.

More legs to stand on

I think that changes to the NHS Pension are a certainty. After all, the government has to pay for all those nepotistic PPE contracts somehow. It makes, in my opinion, putting all your retirement eggs in the NHS Pension basket a dangerous game to play.

Don’t get me wrong, I still think it’s a valuable asset to have and I’ll continue to be a member of the scheme. I am, however, diversifying my post-retirement funding in much the same way as I keep my investment portfolio diversified. It’s not all NHS Pension. It’s not all SIPP. It’s not all ISA. It’s not all rare, mint condition Beanie Babies. It’s a blend; a multi-faceted backstop designed not just to maximise returns, but to be a resilient and flexible strategy as well.

TTFN,

Mr. MedFI


*For those in the medical field, I’m sure the phrase PR hot potato brings with it a hilarious mental image.

One Track Mind

Focus is a noun most frequently used in a positive context. As is often the way there are a host of idioms exalting such a state of mind: being on the ball, getting in the zone, putting your nose to the grindstone, knuckling down.

Focus is an example of the ‘system two’ thinking that counterbalances our emotional, spur of the moment, rapid-response thought processes. A necessary part of the way our brains work. Perhaps it’s what separates the truly elite from the merely good – pure focus on being the best, a gaze undeviating from the prize, the goal, the dream.

Sometimes, however, focus can be detrimental too.

FIRE focussed

When I first stumbled upon FIRE, it was utterly engrossing. Not merely as a principle but also as a mode of living. Financial prudence? Generating free time by reducing (/eliminating) ‘normal’ work? Eschewing wastefulness and consumerism? It was a path inherently attractive to me. My focus narrowed to start the ball rolling. Investments meticulously set up. Spreadsheets lovingly crafted. Spending wholly reigned in.

Yet it didn’t slack off once I had set the wheels in motion. I found myself so consumed by obtaining a state of financial independence that I cut the amount I was spending right back to bare basics. As if I could achieve it that very year through my extreme frugality. Nothing else seemed to matter, I could only focus on the dream of being financially free.

All save and no spend makes Jack a dull boy. Life became a drab shade of grey. I had missed the point. I had gone too far. Scrimping and saving was undoubtedly doing my financial quantity some good, but to the (severe) detriment of my life’s quality. Some variety is, after all, the spice of life.

I can’t remember what broke the stranglehold of my FIRE-focus, but I managed to relax back into spending a bit more with obvious positive consequences. The curtains were drawn back and the sunshine of life returned. I’ve since maintained that happy medium, enjoying a satisfying progression to financial independence whilst maintaining a good quality of living.

Necessary focus

There are times in life when bursts of focus are required, certainly so in the medical world. Tricky technical procedures, emergent scenarios and important decisions at 4am of a night shift all deserve a healthy dose of your attention. Once again, however, too much focus may be unhelpful. Task fixation may leave you perilously blinkered to other life-threatening processes occurring around you. Consumption of bandwidth by that one task, that one patient can be harmful to those who remain in the umbra of your cognitive spotlight.

My recent tango with an exam is another example of the negative consequences of a focus that is too unwavering. I’ve been all-consumed by passing said exam. Every waking moment spent either working towards it or feeling guilty for not doing so. Many sleeping moments equally preoccupied by dreams (/nightmares) revolving around jumping over this one hurdle. Everything else was thrust on the back burners. As my colleague put it: “you’re ready to sit the exam when you’re utterly miserable and hate your life“.

The outcome is as you might predict. Much like my descent into unadulterated FIRE-focus, life’s usual vibrancy took on a rather unexciting hue. Perhaps fortuitously the second national lockdown stripped some of the pleasures of life away anyway; I can’t blame my exam for sapping all the enjoyment away.

Even writing MedFI articles ceased. It wasn’t writer’s block, it was more akin to a writer’s apathy. How could I enjoy doing something not related to passing this test? It has led to the longest gap between posts in the year-long history of the blog. Not that I work to a schedule, but I enjoy the creativity and catharsis involved in the writing process and that has been lost for six weeks.

Stepping back, stepping forward

Focus can be both a force for positivity and a funnel to despair. To be without any focus, to be constantly inattentive, would lead to minimal productivity and perhaps too a lack of enjoyment. A focal point that is too small or too restricted may be equally dissatisfying. My lesson learned is to try to keep some perspective, to recognise when the blinkers are on and take them off on occasion to remember that a wider world exists. Easier said than done, I know.

TTFN,

Mr. MedFI

Red Alert

As any Trekkie will surely be aware, the term ‘red alert‘ is synonymous with critical or imminent danger. Yellow (amber) alert is a slightly more mellow affair – if you’ve ever seen a traffic light then you get the drift. In what is presumably a sort of frequency illusion, I’ve been seeing alerts everywhere recently.

Pay All You Earn

I can’t say that I hadn’t fair warning. HMRC had let me know that I was undertaxed in 19/20 and would be footing the bill for it this year. What I hadn’t expected was said deficit to be taken from me in one fell swoop – a more than doubling in PAYE last month. This cut my take-home pay (and thus savings rate for the month) by nearly 40%.

The sudden drop was an unpleasant surprise, and my usual financial tranquility was certainly piqued. It wasn’t quite full red alert aboard the Starship MedFI; essential spending was wholly unaffected. Although discretionary spending could have been maintained at previous levels, I found myself engaging in a sort of amber alert. The generally well-oiled automaton of financial goings-on was subjected to a bit more QC than usual. This was mostly as a protective measure should I fall foul of more HMRC recompense requirements, or any other financial misfortune, in the near future.

Negativity

The murmuring surrounding negative interest rates has upped in decibel level this week as the BoE laid down the gauntlet for UK banks: you must be prepared for negative rates. Others have written fairly succinctly on the topic already and I won’t re-hash their summaries here.

All-in the arrival of negative interest rates wouldn’t have devastating effects on the masterplan. Operating in a near-cashless way, in part thanks to my Emergency Fund 2.0, things wouldn’t look altogether that different if negative rates were implemented. Their introduction would, however, be another gentle rocking of the ship, another ripple in the pond, an added perturbation. Amber alert indeed.

Tiers beget tears?

The fabric of our everyday lives is inextricably linked to the ebb and flow of the Covid pandemic. The Government’s new trifecta of tiers has only put the Liverpudlians on Covid red alert so far, with a smattering of amber tier two zones too. One model predicts that the majority of the UK will be Covid hotspots in a fortnight’s time; most data is trending in the wrong direction. Though regionalisation, via the tier system, in theory absolves the government from having to introduce a total nationwide red-alert (lockdown), I still agree with my past self’s opinion that it is an inevitability.

In-hospital patient flow is subject to a similar arrangement. Though ‘green’ patients are in theory proven Covid-free, and red the opposite, some have slipped through the net. Unintentional exposure to Covid-positive patients, and an un-healthy dose of coryza, has kept nearly 20% of staff in my department from working this week. Presumably the frequency of coughs, colds and Covid will continue to increase in the coming months. The workforce being laid so low as the clinical pressures mount will surely be cause for red alert.

Problems in engineering

I’m sure we all wish we could jump to ward speed, whether that’s to accelerate the journey to FI or leap to a future time when Covid no longer taints our lives. The sad truth is that the warp drive is out of action and there’s no escape pods either. Much like children on a bear hunt, we’ve just got to go through it. My internal financial emergency alert system will remain at amber, at least until I know I won’t be taxed through the nose again. In terms of the other fiscal and non-fiscal shenanigans, there’s little merit in engaging in constant red alert – it will simply leave you feeling blue.

TTFN,

Mr. MedFI

Flight distance: a P2P story

We’ve all seen seaside holidaymakers strolling along the boardwalk, proudly (naively) sporting their paper cone of chips. In swoops a seagull – chips are lost, pride is wounded. The daring seagull has demonstrated a fairly short flight distance – how close it will get to a human before retreating (NB flight distance is not the distance it has flown in order to steal its salty, vinegary snack).

The same phenomenon is observed watching pigeons in the park; those that get close enough to humans are rewarded with the crumbs fresh from your sandwich. If they get too close (short flight distance) they may get a lazy foot swung in their general direction, risking injury. If they stay too far away (long flight distance) they’ll miss out on your carbohydrate detritus. A well-judged, balanced approach is required to survive.

Financial flight distance

This risk/reward assessment by pigeons, seagulls and all the beasts of the earth is analogous to some of our financial interactions. Our financial flight distance isn’t necessarily which assets we choose to invest in – there’s a separate risk/reward decision about whether to put our money on 16 red, under the mattress or in Tesla stock.

Rather, our financial flight distance reflects how we behave once we’re already invested in something. We’ve already decided we want to earn interest on our investments (pilfer a chip, in seagull terms). The financial flight distance is the point at which we bail out and seek those returns elsewhere. You might withdraw investments from an asset because of mounting risk, worsening losses, opportunity for better returns elsewhere, or change in circumstances.

The investor who flees at the first sign of trouble (long flight distance) risks missing out. If you sold off your entire equity holdings every time they hit -1% you’d probably miss out on gains and possibly suffer prohibitive fees. Conversely, the investor who tries to get out too late (short flight distance) might not actually be able to get out at all, losing capital as that niche cryptocurrency’s value or company’s stock trends to zero.

One’s financial flight distance is borne of the many factors and biases that determine our behavioural approach to finance. Understanding your flight distance and the why behind the decisions you’re making is important for growing as an investor and minimising the risk of losing capital.

P2P flight

The value of my P2P lending portfolio between February 2019 and January 2020. The rise in value represents an equivalent 3% annual return. The September-November plateau reflects withdrawal of capital from the loan market, while in January 2020 I withdrew from P2P altogether.

Peer-to-peer (P2P) lending has always made me slightly unnerved. For sure it’s above board; it’s not exactly betting on backstreet cock fights. Plenty of people have made good medium-term returns with P2P investments. It even has its own ISA subtype – the innovative finance ISA (IFISA). And still it’s never sat quite right with me. My inner instinct said: avoid it. Using this sort of financial gestalt isn’t always robust as a decision-making tool – how many people have lost money believing that ‘X is the next big thing’? So I decided to go against the gut feeling and try P2P out.

You can see that, following my initial investment in February 2019, things ticked along fairly nicely. I was receiving an equivalent annual interest rate of 3%. Not spectacular and certainly well below (expected) equity returns, but better than the returns on a host of non-equity investments.

Come September 2019, Ratesetter (the lending platform I’d been using) changed the rules of the game. The spidey-sense was tingling. You can see the plateau as I took money out of the loan markets. I was unsure whether the returns still merited the risk, and wanted to see the after-effects of the announcement. The boat appeared to be relatively un-rocked, so I dove back in for another french fry month in December 2019.

Reading the tea leaves

P2P lending platforms Lendy (May 2019) and FundingSecure (October 2019) had already collapsed during the year. This provoked tighter FCA regulations for P2P in December 2019. This should have reduced my concerns about P2P investing, yet come January 2020 I decided enough was enough. I felt too close to risk – it was time to flee. I pulled the plug on my P2P investments.

To say that I foresaw the great global catastrophe that was brewing would be a lie. Back then, Covid-19 was still a blip on the edges of our radar. I am, however, glad that I got out of Dodge when I did. It’s been a tumultuous year all-round and P2P has been no exception. There’s been closure to new investors, new account fees, sorely depleted provision funds, slashed investment rates and delays in withdrawal.

Perhaps my flight distance was too long; another month or two might have eked out more interest. The overall percentage of my net worth invested in P2P was never more than a couple of percent, so the total loss of capital wouldn’t have been catastrophic. Even still, I can’t help but feel it was the right decision then.

Diving back in?

I suspect that there’s more misery to come for P2P lending. The extended furlough scheme, soon to evolve into the Jobs Support Scheme, is still doing some propping-up. There’s an increasing number of localised lockdowns within the UK and it’s barely autumn – the chance of second national lockdown is non-zero. Oh and the small matter of Brexit too. I can’t see myself diving back in for another round of P2P investing, certainly not for a good while. As such it’s probably best I keep my equity flight distance fairly short for the meanwhile. Blue-chips do sound rather tasty…

TTFN,

Mr. MedFI

Exam Hustling

In the MedFI household, in-between the exuberant frivolity of the summer season and the joyous festivity of the Christmas season, lies sandwiched a season without joy, exuberance, frivolity or festivity – exam season.

Burning holes

Doctors are not unique in their requirement to sit postgraduate exams. What seems different to other professions is that medical exams aren’t one-offs nor career-boosting achievements. They instead feel like intermittent patches of treacle, oil or black ice – traps to slip and slide on, become stuck in, slog through. They are a necessity, another hoop that must be jumped, another box that must be ticked.

They are not without their cost, either. Estimates for the cost of postgraduate training are anywhere from £7,000 to £25,000, depending on the specialty. Surgical specialties and anaesthetics rank among the most expensive. It’s a considerable expense to be shouldered by the individual, all for mandatory training. Anecdotally other professions have their exams paid for by their employer, although I’m sure that’s variable too.

Most specialty trainees will pay in the region of £2,000 (1) for the privilege of sitting post-graduate exams; more if they’re not passed at the first time of asking. Longing glances are often thrown by UK clinicians towards the Antipodes – the New Zealand health boards’ policy of paying for the first attempt at a postgraduate exam is just one of many reasons why. Perhaps those across the pond cast equally jealous gazes our way, given the high cost of their medical education.

The temporal cost of exams is not to be sniffed at either. Often many months of study is required. The meagre number of dedicated study days provided by employers necessitates using days off, evenings, weekends or any spare waking moment to engrain knowledge. Certainly it’s a case of hustling one’s derrière to be prepared in good time.

Covid-19, 2020’s unforeseen curveball, has wreaked havoc among the Royal Colleges examination plans. Some were binned entirely over spring and summer. The majority have, along with vast swathes of human interaction, migrated to online fora for the foreseeable future. Despite one Royal College claiming this was their plan all along, the IT snafu that followed would certainly belie that. The online move has stripped away the need for exam halls and the usual examination accoutrements, yet the cost of exams hasn’t changed. Though there’s some outlay required on online platforms or test centres, perhaps the exam boards are engaging in some hustling too.

Making one’s bed

The price of exams and postgraduate training is just another expenditure that must be factored into the aspiring medical FIREe’s plan. Without exams and the associated career progression, there’s a relative glass ceiling on pay (short of hefty locum work, which doesn’t suit everyone). It can be a tough pill to swallow, but one that may ultimately bring about financial independence that bit quicker.

It’s not my intention for the blog to become a vitriolic commentary on the life of a medical professional. The exams are not surprises sprung, but a known part and parcel of the career. Good luck to those who’ve recently sat or are soon to sit them. If you require some motivation, I’ll leave you with the fitting words of the electrician who was around at ours this week: “Well…you wouldn’t want any old muppets being your doctor”.

TTFN,

Mr. MedFI


1 – Cost of Training. Academy of Medical Royal Colleges. (2017). Available here.

Crypto Commentary II

The first part of this series took a broad look at the arguments for and against crypto-assets. Building on that, this second part covers a variety of other considerations when it comes to investing in cryptocurrencies.

If you can’t beat them…

Despite being lauded as free from government interference, the sale of Bitcoin has not managed to escape the clutches of HMRC. Trading of cryptocurrencies is a chargeable event and therefore subject to capital gains tax. More information on paying tax on crypto-assets can be found on this Government page. It would be wrong, however, to suggest that the economic bodies of the UK have been engaging in idle thumb-twiddling when it comes to crypto-assets. The Bank of England (BoE) has published several reports on the topic over the past few years.

As cash continues to decline, the Bank of England is looking at alternative methods of providing the public with the ability to buy goods and services. One of these is the mooted introduction of ‘electronic money’ – a Central Bank Digital Currency. Image from source.

Using suitably British terminology, the BoE believes Bitcoin won’t “cut the mustard”22. They describe multiple factors preventing its widespread adoption in both the near future and longer term. As they point out, even if a crypto-asset does fulfil the economic definition of a currency, this doesn’t mandate its recognition as money for legal or regulatory purposes23.

Overall the BoE labels cryptocurrencies as unsafe, untrustworthy and unlikely to take over the currency market. Variations on the theme are equally dismissed, such as Bitcoin’s supposedly less volatile24 second generation cousin ‘stablecoins‘. The BoE concludes that cryptocurrencies do not pose significant risk to the stability of the UK monetary and financial systems25.

Having said all that, the BoE does concede that “a variety of potential risks to financial stability could emerge if a digital currency attained systemic status as a payment system26. Although this is felt to be extremely unlikely, the Bank of England is unsurprisingly keen to bring cryptocurrencies within its regulatory perimeter.

…join them

Although they are dismissive of crypto-assets, the Bank of England does recognise the potential of the technology underpinning them27. They are modifying the spine of the UK’s payment system to be compatible with distributed ledger technology, and collaborating with other countries to facilitate inter-bank, cross-border payments based on the same tech28. One of the threads of research spawned from the emergence of crypto-assets is whether the UK should develop its own Central Bank Digital Currency (CBDC)29. This is as of yet undecided.

The EU are singing from a similar hymn sheet – they too seem unconcerned about Bitcoin’s threat to financial stability, although are keen for enhanced regulation30. Sweden are prototyping the e-Krona; others will surely follow suit. Overall, to suggest that crypto-assets can remain uniquely and indefinitely outside the reaches of all government bodies seems naïve.

Ethical/environmental considerations

Socially responsible investing is on the rise. Does crypto fit in to a greener, greater investing strategy? Ethical arguments against Bitcoin arise from its historic use, and on-going potential for use, in criminal activity. One study demonstrated that the total percentage of ‘dirty Bitcoins’ (i.e. those from verifiably illicit sources) was less than 1%18 and another that the use of Bitcoin in illegal activity may be declining19. Conversely others have found that nearly half of Bitcoin transactions were associated with illegal activity20. During an interview, Nobel Prize winning economist Eugene Fama wryly quipped that the censorship-resistance of Bitcoin would only have value to drug dealers.

A counterpoint is that just because something can be used for unethical means does not make it in-and-of itself unethical. Fiat currencies and gold have been used in illegal activity; shunning them on this basis isn’t widespread. Furthermore, not all Bitcoin-related activity is nefarious – there are examples of cryptocurrency being used for philanthropic or humanitarian means.

Estimated energy consumption of Bitcoin mining in terawatt hours (2016-2019). The energy required to mine Bitcoin has been increasing and is seen by many as prohibitive to both its continued rise in value and ability to become a dominant currency. Adapted from source.

The nature of cryptocurrency does not make law enforcement impossible, merely reactive. There are also philosophical arguments to be had about the nature of illegality. The US Government leant on third-party payment providers to prevent donations to the Wikileaks Foundation21. Would using Bitcoin to bypass this block be illegal? Or merely an expression of individual freedom against a self-interested government?

Perhaps more worrying is the environmental impact of Bitcoin mining. Often the global electricity consumption and carbon footprint of Bitcoin is compared to that of nations such as Austria, Denmark or Ireland. It is thought to represent half a percent of the world’s electricity consumption and this may rise over time. Some have postulated that the environmental impact may be less than previously thought31, while others are developing techniques to reduce said impact32. Of note, no research has compared the environmental impact of cryptocurrencies against that of existing currency systems.

Celeb watch

It wouldn’t be a post on investing without the inclusion of a quotation from Warren Buffet. Although Buffet concedes it’s a “very effective way of transmitting money“, him and partner Charlie Munger have between them called Bitcoin a “mirage“, “asinine” and “poison. These have prompted various rebukes from those high up in the cryptocurrency world, although the ad hominem nature of their polemics is perhaps in itself revealing.

Tesla eccentric Elon Musk is sometimes proposed to be the real face behind Bitcoin’s anonymous creator Satoshi Nakamoto. The reported owner of a quarter of a Bitcoin, he’s apparently “neither here nor there” on cryptocurrency, though does describe it as filling a niche as an illegal-to-legal bridge.

Über-philanthropist Bill Gates has described going long on Bitcoin as “super risky“. He’s previously said that its role as an unregulated anonymous currency has inevitably led to deaths in a direct fashion. Overall, however, Gates seems to relish the proof-of-concept that Bitcoin has afforded in promoting financial access to those who are impoverished. His Foundation has provided grants for improving use of mobile money and other blockchain-associated technology in Africa33.

Gates’ feelings are echoed by others. Kevin Kelly (of Wired magazine) says that Bitcoin functions as a “lottery“, but that blockchain technology will be useful where central banks are “not very effective…too greedy and charge too much11. UK billionaire Jim Mellon labels Bitcoin a “bubble“, but blockchain a “revolution“. His company are interested in the concept of frictionless micropayments and have invested as such. The prevailing sentiment is that it’s blockchain, and its various applications, that will prove to be enduring rather than Bitcoin or other cryptocurrency.

The value of Bitcoin (blue line) and Ether (red line; the second largest cryptocurrency) over the past year. Changes in their price appear to correlate. Close correlation of cryptocurrency performance would limit within-class diversification, despite the large number of crypto-asset options. Both of these cryptocurrencies fell sharply during the Covid-crash, a sign that crypto-assets may perform poorly in market downturns. Adapted from Yahoo Finance.

Diverse?

If diversity is the only free lunch in finance, should cryptocurrency be part of the buffet? Cryptocurrencies are considered by some (but not all) to be a ‘major’ asset class and perhaps therefore worthy of inclusion in a diversified portfolio8. Crypto-assets are presumably a geographical diversifier on account of their statelessness. Whether cryptocurrencies are suitably lacking in correlation to other asset classes in order to be considered a diversifying part of a portfolio remains to be seen34,35.

In the future, crypto-assets might behave like other currencies (which is part of the argument for their inevitable adoption). If so, we know that securing consistent returns with Forex trading is fraught with difficulty. Cryptocurrencies might behave like gold or other commodities. If so, its future returns mayn’t match those of equities in the long run. Cryptocurrencies might behave like an entirely new asset altogether. If so, we haven’t the historical data to make evidence-based estimates of its future performance. Every which way, long-term investing seems a risky strategy.

Alternative investments

Many baulk at the high-risk nature of direct crypto-asset investing. ETF’s might be a better way to temper that risk, while still enjoying a slice of the crypto cherry pie. Widespread introduction of cryptocurrency ETF’s is, however, currently beset with regulatory/legislative issues, sparse choices and high costs36,37.

Crypto purists will argue that owning an ETF defeats the whole purpose of engaging in the nature of Bitcoin. For those who see it as merely another asset, it might be a perfect alternative. If it is the underlying technology that you see as being most valuable in the future, blockchain ETF’s could be the way forward.

Towards the other end of the risk spectrum, the burgeoning bitcoin derivatives market might tempt investors with an appetite for leveraged products. The floodgates holding back crypto-related investment products will surely open in the not-too-distant future.

FIRE and Crypto

Some say cryptocurrencies are ‘not in keeping with the FIRE mentality’. I think this overly generalises what is ultimately a highly individual approach to personal finance, investing and life planning. As I discovered myself when calculating the average FIRE blogger portfolio, there is no uniform investment strategy involved. (Of note, cryptocurrencies made up <1.5% of the average portfolio.) If Bitcoin continues to display the same volatility in the long run, it would certainly make a poor holding as a major part of a post-retirement portfolio.

Final comments

The quasi-religious fervour surrounding cryptocurrency often makes it difficult to thresh out bona fide points of consideration from pure speculation. There is a poignant conflict of interest in articles written by those who own Bitcoin – its value is dependent on crypto-evangelism stirring up hype and enticing investors.

It’s tempting to ‘get in on the ground floor’ of cryptocurrencies – but the lift mayn’t still be on the ground floor or even going up! As ever with evolving technology, there are vocal supporters on both sides. Certainly the realm of blockchain technology has garnered significant interest and may be a more prudent investment than cryptocurrency itself.

Crypto-assets may come to represent an entirely new class of investment. This doesn’t, however, necessitate an entirely new shape to one’s investment strategy. The future is promising yet unclear; a watchful eye on crypto-assets and their underlying technology is certainly reasonable for the time being.

TTFN,

Mr. MedFI


References
18 – T. Robinson et al. Bitcoin Laundering: An Analysis of Illicit Flows into Digital Currency Services. Centre on Sanctions & Illicit Finance, 2018. Available here.
19 – M. Boddy. $515 Million in Bitcoin Spent on Illicit Activity This Year. Coin Telegraph, 2019. Available here.
20 – S. Foley et al. Sex, Drugs, and Bitcoin: How Much Illegal Activity Is Financed through Cryptocurrencies? The Review of Financial Studies, 2019, 32(5); 1798-1853. Available here.
21 – S.V. Lucey. More on the Ethics of Bitcoin. 2016. Available here.
22 – H. van Steenis. Future of Finance: Review on the outlook for the UK financial system: what it means for the Bank of England. 2019. Available here.
23 – R. Ali et al. The economics of digital currencies. Bank of England Quarterly Bulletin. 2014, Q3, p276. Available here.
24 – B. Dyson. Can ‘stablecoins’ be stable? 2019. Available here.
25 – Financial Policy Committee statement from its meeting. March 2018. Available here.
26 – Cryptoassets Taskforce: final report. 2018. Available here.
27 – R. Ali et al. Innovations in payment technologies and the emergence of digital currencies. Bank of England Quarterly Bulletin. 2014, Q3, p262. Available here.
28 – M. Carney. New Economy, New Finance, New Bank. 2018. Available here.
29 – Central Bank Digital Currency: opportunities, challenges and design. A discussion paper. 2020. Available here.
30 – EBA reports on crypto-assets. 2019. Available here.
31 – Estimating the environmental impact of Bitcoin mining. Science Daily. 2019. Available here.
32 – Researchers invent low-cost alternative to Bitcoin. Science Daily. 2019. Available here.
33 – Bill & Melinda Gates Foundation Grants: Bitsoko Ghana Limited | Jomo Kenyatta University of Agriculture & Technology | Denominator Group
34 – C. Deka. Bitcoin’s low correlation with other asset classes aids as a portfolio hedge. 2019. Available here.
35 – A. Xie. Bitcoin’s Correlations With Global Financial Assets Soar Amid Coronavirus Crisis. 2020. Available here.
36 – M. Tatibouet. The Trajectory Of Crypto ETFs So Far. 2020. Available here.
37 – T. Deng et al. Crypto ETFs: A Game Of Benefits and Risks. 2020. Available here.

Welcomes and wiltings

August is a transitional month in the medical world. For many it represents the end of their time in one locale as they start anew in a fresh place of work. New hospital. New people. New systems. New responsibilities. The metaphorical leaf has been turned.

This is most apparent for the new doctors, many of whom enjoyed their first day as fully-fledged clinicians on August 5th. Often they’re akin to Bambi on ice; uncertain, unsteady, unsure. The extraordinary events of 2020 have, however, given ice skates to many of these fawns. After working in hospitals for the past few months in interim roles, they are more certain, steadier, more self-assured. Whether skating or sliding, a warm welcome to the new clinicians across the nation.

Inducing ennui

There was a novelty to hospital induction this year. No longer was it merely drawn out, vague and hopelessly disorganised. This year it was socially distanced too. Gone was the packed, hot, narcoleptic lecture theatre. In its place – Microsoft Teams.

The administrative staff tried to coax Teams into working. What is surely now part and parcel of daily office life seemed insurmountably difficult. The staff did battle; they were routed. “Everything that could go wrong is going wrong” we were told. If there was any faith in the induction process left, it was in that moment crushed.

Yet they regrouped and managed to get Teams working! Broken sound, check. Laggy video, check. The lecture on fire extinguishers – back on track. Then the laptop died. Nobody had thought to plug it in. The rout was complete. The war had been lost, all hope abandoned. A mercifully early end to the day.

Fees please

The new academic year also marks a renewal of professional subscriptions. Hundreds of pounds paid just to stay in the game. A big sigh and muttered grumblings mark the occasion. I remind myself that I’ll see some VAT back at some point – it adds something of a silver lining. New role, added responsibilities, added expectations, added pressure. Stagnant pay. Another sigh, more grumblings.

Wilting

Workplace chatter is often repetitive, on occasion inane. The opinions of every Tom, Dick and Harry on the future of the Covid situation can get slightly wearisome. PPE this, AGP that. As such, the reversion to the true British conversational trope was somewhat welcome – the weather.

The hospital’s air conditioning plant had failed because the weather was too hot! A hopelessly redundant piece of equipment then, it would seem. The wall thermometer read 30’C. With PPE on top the environment was tropical. And not ‘piña colada on a beach’ tropical, either. More like ‘wading through Amazonian jungle being eaten by insects’ tropical.

Cooler weather might bring some reprieve – colder weather will bring none at all. I hear the hospital is full, even though it’s the middle of summer. The winter months seem daunting already. Is it ‘flu? Is it norovirus? Is it Covid? No, it’s superman resistant bacterial infection! Fantastic.

Press on

I hope that everyone medical is settling into their new jobs. May your inductions have been short, your subscription fees be minimal, your workplace be well cooled and your PPE be adequate. I’m sure 2020 has more to throw at us yet, so look after yourselves and each other. Once more unto the breach, dear friends, once more.

TTFN,

Mr. MedFI

Crypto Commentary I

Cryptocurrency is an exquisitely divisive topic. Its ‘marmite effect’ generates a vacuum of reasoned discourse, which is problematic for uninformed investors. Understanding the balance of risk/benefit is important in deciding whether cryptocurrencies might form part of your portfolio. Investing without due diligence, based on the opinions of those who fawn over its ‘world-changing potential’, might lead to significant losses. Conversely neglecting cryptocurrency, on the grounds that some ‘would rather play roulette’ than invest in it, could lead to loss of potential returns for those with the appropriate appetite for risk.

NB I’ll use the terms cryptocurrency, crypto-assets, and Bitcoin (the archetypal cryptocurrency, which commands the majority market cap1) interchangeably. This is for the sake of simplicity and variety, although I appreciate they are different. I won’t be detailing either the mechanics behind Bitcoin/blockchain or its history, as this has been summarised elsewhere2,3.

Crush on crypto

Bitcoin certainly doesn’t lack for ardent admirers. It was designed as a peer-to-peer version of electronic cash, aiming to cut out the middle man4. As such, its decentralised nature is supposed to render it immune to government interference. Crypto-assets are also supposed to protect you from (hyper)inflation and government corruption, growing in value all the while. The rhetoric is that in the future, ‘the people’ of tomorrow’s (brave) new world will seek freedom from untrustworthy governments. They’ll need a monetary system to support this – cryptocurrency.

ROI

If we acknowledge that the goal of investing is to increase the value of one’s initial outlay over time, then Bitcoin could certainly have done that. Since 2014, the price of a Bitcoin has risen from $123 to over $11,000! The returns on this juvenile investment option have run laps around pretty much every other asset class over that timeframe. You’d have had to stomach some fairly spectacular volatility along the way, however. For example Bitcoin’s value fell from $18,000 to $3,000 in a single year (December 2017-18). This potential for huge gain/loss is what’s attractive/off-putting for many investors. The pertinent question is, as always, what does the future hold for crypto-assets?

Bitcoin value in USD since inception. The price of Bitcoin has (overall) increased dramatically, but fluctuated wildly too. Adapted from Coindesk.

World domination

Those bullish about crypto’s trajectory aren’t shy about predicting an inexorable rise in its value. The basis of this is the idea that Bitcoin will supplant all existing fiat currencies as the dominant world currency3. Consequently the (maximum) 21 million Bitcoin will contain the value of all the wealth in the world, giving any one Bitcoin a valuation of millions or tens of millions of dollars5. If this is the case, you only need to own 0.003 of a coin to own more than your ‘fair share’ of Bitcoin6 and thus be disproportionately wealthy.

The step-down from these bold claims is that ‘even if Bitcoin only reached the market capitalisation of gold, its price would still dwarf current-day valuations forty-fold3. The argument is that one should therefore spend the ~£30 on that fraction of a Bitcoin, because it might be worth many times that in due course. Sometimes this argument is extended into posterity; ‘you should buy Bitcoin now to benefit your descendants as it will take one or two generations for Bitcoin to reach its zenith’.

The foundations for these ideas of omnipotence are numerous. Bitcoin’s suitability as a currency has been lauded. Its lack of history is a presumed future victim of the Lindy effect. Some believe Bitcoin’s incipient monetisation is making headway, as its value follows both Gartner hype cycles and the sigmoid curvature typical of technological adoption7. Overall, ‘crypto-bugs’ seem extremely confident in the ascendency of cryptocurrencies, both in terms of adoption and, consequently, value.

The adoption of various technologies over time. Bitcoin’s growth is thought to mirror these adoption curves, which is used to support the argument that it will inevitably become ubiquitous. Adapted from source.

Being mean

More impartial crypto-commentators are less optimistic, suggesting that Bitcoin’s value will revert to its (unknown) mean8 or trend to zero. As Bitcoin is not based on any underlying asset, estimates of its value are little more than baseless pseudo-valuations. Some research would suggest that the value of Bitcoin is linked to the cost of mining it and that the price may not end up at zero9, though there is no strong evidence for a robust method of valuation.

Perhaps the ‘best’ reason to invest in Bitcoin is because of innate human irrationality. We’re evolutionarily hard-wired to go with the flow. Greed, fear (of missing out), the ‘what if?’ factor – these drive the market for cryptocurrency. This is an example of greater fool theory. As long as people want to ride the Bitcoin wagon, it will likely hold some value. It’s easy to dismiss the effect of this ‘soft’ psychology in light of cold, hard numbers. It should be said, however, that secondary market sentiment is predominantly what drives gold prices, which have continued to climb on the back of Covid-induced fear.

Auric ambitions

Indeed some see cryptocurrency as gold sans histoire; a commodity that relies heavily on market sentiment for its value. This has led to suggestions for treating Bitcoin like gold, particularly when it comes to asset allocation8,10,11. There is, however, already a debate about whether to own gold or not. Gold bugs are perhaps more likely to be tempted by the allure of crypto-assets, especially those who anticipate an eventual degradation in the current societal structure. For those already reticent to invest in gold, unsecured and volatile cryptocurrency is unlikely to be more attractive.

Performance of Bitcoin (BTC; red line), gold (blue line) and Vanguard’s FTSE All-World equity ETF (green line) over the past year. Bitcoin has been exquisitely volatile, losing 50% of its value during the ‘Covid-crash’. Gold has been less volatile and maintained/gained value since the market downturn in Spring 2020. Adapted from Yahoo Finance.

Bad Bitcoin

The number of issues surrounding crypto-assets are legion. Some are relevant predominantly at the personal investment level. Others are broader issues that will likely preclude the total ascension of Bitcoin as the world currency. Even if a crypto-asset were to become the overarching global currency, there’s no reason that the eventual ‘winner’ has to be one of those that exist today. As the space matures it may be an entirely different entity, evolved out of today’s prototypes, that takes pole position.

Some of the issues facing cryptocurrency
• Personal investing: volatile nature, difficulty in valuation, lack of a compensation scheme, tax uncertainties, technical demand to buy/hold, risk of fraud.
Technical factors: electricity consumption, scalability, protocol risk, exchange shutdown risk, imitators (‘forking’), competitors.
Psycho-social factors: short history, poorly understood, no social accountability, no self-regulation, environmental and ethical concerns.
Economic factors: no underlying asset, volatility, high fees, slow transactions, compromised fungibility of tainted coins, oligopoly of Bitcoin mining, fixed supply of Bitcoin, unlimited supply of cryptocurrencies.

Arguments mitigating some of the above issues have been made:
• Concerns about volatility are brushed off as a function of crypto’s nascency.
• Scalability issues are being tackled (e.g. the Lightning Network).
• Concerns about overt competition are rebuked on account of the network effect.
• Bitcoin’s value must be maintained because of fixed supply.
There are, however, still enough stumbling blocks to make the future of cryptocurrencies rather clouded. As such, many use the term ‘speculation’ to describe buying cryptocurrencies rather than ‘investing’; some use ‘gambling’ instead12.

Insurance, security and fraud

The FSCS scheme currently lets us sleep a little easier. There’s no widespread compensation scheme for crypto investors, although crypto platform Ziglu recently announced a £50,000/customer compensation scheme13. Good on paper, this has been likened to the ‘provision funds’ of peer-to-peer lending platforms, which are barely weathering the Covid storm. Some crypto-asset investors have been stung by insurance that turned out to be fraudulent14.

Not only are bona fide Bitcoin investments unbacked, but cryptocurrency has proved a fertile stomping ground for fraudsters15,16. Naïve investors are low hanging fruit; they’ve been primed by the crypto hype and have rushed to join the gravy train. Concerns about fraud are strong enough that there have been reports of banks blocking transfers to Bitcoin exchanges17. Cautions about the risk of putting money into crypto-assets seem to be largely unseen or un-heeded. Perhaps they are diluted or drowned out by the existing regulatory warning-cry: ‘past history doesn’t predict future performance, investments can go down as well as up, capital at risk’. A ‘boy who cried wolf’ effect, if you will.

Enough to be getting on with

I’ve split this summary of my research into cryptocurrency in half, as it would otherwise be too lengthy for one post. In Part 2, I’ll take a look at what the Bank of England and various renowned investors think of cryptocurrencies, as well as examining the ethical and environmental concerns surrounding them.

TTFN,

Mr. MedFI


References
1 – Top 100 Cryptocurrencies by Market Capitalization. Available here.
2 – The Definitive Crypto Guide for Beginners and Veterans Alike. Available here.
3 – V. Boyapati. The Bullish Case for Bitcoin. 2018. Available here.
4 – S. Nakamoto. Bitcoin: A Peer-to-Peer Electronic Cash System. 2009. Available here.
5 – Email exchange. Bitcoin v0.1 released. 2009. Available here.
6 – Bitcoin As Real Estate; A Thought Experiment. Available here.
7 – B. Armstrong. What will happen to cryptocurrency in the 2020s. 2020. Available here.
8 – Craig, A. (2019). How to Own The World: A Plain English Guide to Thinking Globally and Investing Wisely (3rd ed.). John Murray Learning. Available here.
9 – A.S. Hayes. Bitcoin price and its marginal cost of production: support for a fundamental value. Available here.
10 – J. Dorfman. Bitcoin Is An Asset, Not A Currency. 2017. Available here.
11 – K. Kelly. The Future of Blockchain . 2020. Available here.
12 – M. Lewis. Should you invest in Bitcoin? Four things you need to know. 2017. Available here.
13 – J. Martin. Ziglu Insures Cryptocurrency Holdings up to £50,000 Against Cybercrime. Coin Telegraph, 2020. Available here.
14 – Online cryptocurrency trading platform shut down by courts. Government Press Release, 2020. Available here.
15 – Cryptocurrency fraud leads to £2 million worth of losses this summer. 2018. Available here.
16 – J. Redman. Hackers Have Looted More Bitcoin Than Satoshi’s Entire Stash. 2019. Available here.
17 – I. Woodford. Santander denies blocking payments to Coinbase, but says some exchange payments are subject to checks. 2019. Available here.

SIPPs and NHS Pension

This post builds on our existing NHS Pension series. Throughout the post we’ve put links, where relevant, to the appropriate prior material. We do, however, suggest refreshing your understanding of the NHS Pension prior to reading on.

One method of saving money for retirement is to use a Self-Invested Personal Pension (SIPP). How does a SIPP fare when compared to the NHS Pension? What are the pearls and pitfalls of using both together?

Head to head

Direct comparison of the NHS Pension and a SIPP is a relative ‘apples versus oranges’ affair, on account of their different styles (defined benefit vs defined contribution). Assuming equal pension contributions, you’d need consistently strong returns (5-6% real returns) on your SIPP’s investments to match the retirement income that’d be provided by an NHS Pension*.

Although the SIPP’s pension pot might compound up to a large amount, you will have to subtract from said pot to provide an income. If you wanted to retire early, your pot would have to be even bigger to afford you an equivalent longer lasting income. The NHS Pension, by comparison, has no pot and will provide you with a consistent retirement income for as long as you live. In sporting terms, the NHS Pension is the marathon runner. It has great stamina and just keeps the same pace up mile-on-mile. By comparison the SIPP is more like a middle-distance runner. It has reasonable stamina so can keep up for a while, but eventually it’ll fade as the NHS Pension continues to jog along.

There are scenarios where you may want to totally eschew the NHS Pension and plump solely for a SIPP. For example, if you see your long-term employment outwith the NHS you may consider using a SIPP instead of having to later transfer your NHS Pension§. It’s unlikely, however, that you’re weighing up the choice between the two and instead are considering contributing to both.


SIPP and NHS Pension

The Taxman Giveth

Pensions are powerful tools to moderate income tax, especially so for those in the higher (40%) tax bracket. This is best shown with an example.

Example 1a
Dr. Danielle is earning £60,000/year. In addition to her NHS Pension, she decides to contribute to a SIPP. She contributes £4,800 to a SIPP. The government will add 20% basic tax rate relief, which takes the total pension contribution to £6,000.
Dr. Danielle is in the higher rate tax bracket, so she claims a further 20% tax relief and receives £1,200 back from HMRC. As such, the overall cost to Dr. Danielle of her £6,000 pension contribution is only £3,600!

Hopefully you can see how significant the tax benefit is. Although pension contributions are tax-free on the ‘way in’ to a SIPP, you will be taxed on that money on the ‘way out’ i.e. when you start drawing a pension. That doesn’t mean you can’t make overall savings though:

Example 1b
Dr. Danielle has now retired and is drawing a pension from her SIPP. She is withdrawing £50,000/year in pension income. This is subject to income tax. She pays no tax on the first £12,500 (personal allowance) and 20% on the next £37,500 (basic rate).
Therefore Dr. Danielle got 40% tax relief on her pension contributions (example 1a) but is now only paying 20% tax on her pension withdrawal – an overall saving of 20%.

You may end up paying the same income tax on your pension as you got in tax relief initially (e.g. 40% tax relief on way in, 40% income tax on way out). There is still gain to be had though – that money has been invested and hopefully significantly increased in value in the intervening period. Contributing to a SIPP in addition to the NHS Pension may help reduce your current tax burden and possibly your future one too.

Flexibility

The NHS Pension is a relatively inflexible beast, although it does have some bells and whistles when it comes to buying more pension. By comparison, using a SIPP will enable you to exert more control over your pension strategy.

There are a plethora of providers and with them a broad range of investment choices. Various industry big hitters offer SIPP’s, stocks & shares ISA’s and general investment accounts. This allows you to have a one-stop-shop for your private pension and investing needs. Should you want to stick to one investing strategy, you could hold the same investments in three separate accounts; the tax-deferred but inaccessible SIPP, the tax-free relatively accessible ISA and the taxable, accessible GIA.

Arguably the most punitive aspect of the NHS Pension is the reductions for claiming your pension prior to your State Retirement Age (SRA). These are hefty. For example, it’s a 45% reduction in pension income for claiming ten years early. A SIPP, however, can be accessed up to ten years before your SRA without penalty. Should you wish to retire early, you could use a SIPP as an income ‘bridge’ for the decade leading up to your SRA. This will allow you to leave your NHS Pension untouched and therefore unpenalised.

Diversifying

Relying on the NHS Pension scheme for your retirement income is an ‘eggs in one basket’ approach. It’s possibly a matter of when, not if, meddling politicians will prune the NHS Pension tree again in the future. There have been iterations of the scheme in 1995, 2008 and 2015. If the trend continues we might expect another repackaging within the next decade. Although we can only speculate, it seems unlikely that it’d be more generous than the existing scheme. 

Using a SIPP might help reduce your ‘pension interference risk’, making you less vulnerable to future reforms. We should note that SIPP’s aren’t immune to future fiscal policy changes either, though it’d perhaps be unlucky for both SIPP’s and the NHS Pension to suffer significant detriment in tandem. A diversified approach is good for income streams and investment strategies, why not retirement strategies too?

The Taxman Taketh Away

The biggest throttle on any SIPP contributions are the Annual and Lifetime Allowances. I covered these pension tax thresholds in relation to the NHS Pension in a previous post.

It’s possible to calculate how much Annual Allowance (AA) remains after your NHS Pension contributions each tax year. To avoid incurring a tax bill it’s a simple matter of avoiding contributions to your SIPP that push you over the AA. In this regard ensuring your maths is correct is vital, as well as being aware of other pitfalls such as AA tapering. It’s possible (/probable) there’ll come a time where you breach the AA with your NHS Pension alone, thus rendering any SIPP contributions taxable.

Example 2
Dr. Dinesh earns £42,000/year and wants to contribute to a SIPP, but is wary of the annual allowance. He uses his Total Reward Statement to work out how much NHS Pension he’s already accrued.
From this he can calculate the opening value (say £8,000) and closing value (say £18,000) of his pension for the year. That makes his pension input amount £10,000 for this year. As the AA is £40,000/year, Dr. Dinesh can contribute up to £30,000 to his SIPP.
Dr. Dinesh contributes £2,400 to his SIPP. He gets 20% basic tax relief on this, which takes the total pension contribution to £3,000.
As his total pension contribution is £13,000, Dr. Dinesh has not breached the AA.

Determining whether you’ll breach the Lifetime Allowance (LTA) with your NHS Pension is difficult. Both LTA and NHS Pension growth are linked to inflation, while the latter also accrues based on your salary. It’s therefore probable one will breach the LTA, but not necessarily certain*. Contributing to a SIPP as well will increase the likelihood of accruing a pension whose value exceeds the LTA. It’ll also bring about an LTA breach more quickly.

There may well come a time when you’ll need to decide whether the benefits you derive from contributing to a SIPP outweigh the tax bill for breaching either of the two pension allowances. Retiring early, or a cessation/reduction in pension contributions, may mitigate against or even negate this issue. There are numerous factors involved here, including the timing of claiming your pension. Optimising this timing, and the impact of these benefit crystallisation events, falls outside the purview of this post.

At What Cost?

Membership of the 2015 NHS Pension scheme costs a set percentage of your salary each year. In return you get a revaluation process that provides a guaranteed real (i.e. after inflation) growth of 1.5%. This is not to be sniffed at – a consistent, assured, compounding machine. 

SIPP’s have membership costs too. Typically this involves an annual ‘platform’ fee and possibly also charges for buying shares. If fees total 1% of the value of your pension pot, you’ll consequently need returns of 1% on your investments just to break even. You’ll have to consider the effect of inflation too (which could be any number, but let’s say for example it’ll be in the region of 2%). Already you’ll have to make a 3% return on your investments just to stop real-term devaluation of your SIPP. This is not insignificant – the returns on the investments you hold in your SIPP are far from certain. Historical investment data would suggest that over a long enough period of time you’ll come out on top, but this is not guaranteed.

To mitigate the effect of fees you can use the cheapest SIPP that meets your requirements. Employing an investment strategy that maximises returns in accordance with your risk appetite and tolerance will hopefully ensure your investments outgrow inflation and then some.

A minor, but non-zero, cost of using a SIPP is a temporal one. Calculating your remaining annual allowance, managing the account, tracking performance, claiming tax back from HMRC. These cost time; the faff factor may be off-putting for some. 

The sweet spot: a theoretical pension strategy that will:
• require minimal effort to set up and maintain
• maximise the tax relief earned from pension contributions
• reduce future pension interference risk
• minimise the cost of a pension
• increase in value in real terms i.e. grow faster than inflation
• facilitate unpenalised drawing of pension income before SRA
• avoid breaching either annual or lifetime allowance

Crystal Ball Gazing

There are too many personal, professional and financial variables for us to suggest a ‘one size fits all’ winning pensions strategy. For each individual there’ll be a strategy that’s in the sweet spot, optimised for their particular plans. It’s equally impossible to predict how future governments will enact NHS and fiscal policy and its consequent effect on our pension(s). All we can do is plan for the future using what we know today and avoid over-speculating.

I hope that this chapter in our NHS Pension series has given you some factors to consider as you decide whether a SIPP is an appropriate accompaniment for your NHS Pension.

TTFN,

Mr. MedFI


*I’ve made a significant number of assumptions when doing these calculations – many of them pertain to my own circumstances, which may not necessarily reflect yours. You should do your own research in this regard. As ever, the material in our disclaimer applies.

§It is eminently possible to transfer your NHS Pension to another scheme. The NHSBSA provide a guide and factsheet; the BMA also has information on this.

Basic-rate tax relief (20%) is claimed at source by your SIPP provider who receives this directly on your behalf from HMRC. Tax brackets current as of 2020/21 tax year.

Thankfully the fine folk at Money Saving Expert and Money To The Masses have done the heavy lifting by creating comparisons of the cheapest SIPP providers.

Pay rise half-truths

The government this week announced a pay rise for a swathe of public sector employees, among them doctors. If you thought this would bring about high fives, congratulatory back slaps and the medical community celebrating a Covid-induced financial reward you’d be very much mistaken. The announcement contains an (un)healthy dose of spin, papers over cracks and belies the reality for the majority of doctors.

The beneficiaries of the rise

The headlines would have you believe that all doctors are in line for an ‘above inflation’ 2.8% pay rise. This is not the case as the 2.8% figure only applies to Consultants*. This group represents a minority, albeit the most senior portion, of UK doctors. 

The remaining majority of the clinician cohort are ‘junior’ doctors. This unhelpful term describes a broad spectrum of medics, from those in their mid-20’s fresh out of medical school to those with up to a decade’s worth of on-the-job experience. The latter doesn’t seem very ‘junior’ to me. Junior doctors won’t be beneficiaries of the 2.8% wage increase. Indeed it is akin to stating the pay rise applies to teachers (but actually only headteachers), police officers (but only superintendents) or the armed forces (but only generals).

Non-Consultants remain on pay trajectories negotiated in 2018. Both junior doctors (increase of 8.2% over four years) and other NHS staff including nurses and physiotherapists (6.5% over three years) are receiving less than the vaunted 2.8% rise. I’ve posted before about how bona fide inflation might be significantly higher than published figures. If so, all of these pay rises simply don’t cut the mustard when it comes to matching the rise in cost of living.

Behind the curve

If we’re talking about this Consultant pay rise as ‘inflation-beating’ then we must describe their current salary as ‘inflation-decimated’. Wage growth has lagged behind CPI since 2008 and has also been below DDRB recommended increases. The basic starting salary for a Consultant in 2020 is nearly 20% below what an expected, inflation-adjusted wage would be. 

Consultant basic starting salary since 2005. Actual wage (blue line) has not risen as it should have according to inflation (black line). Source for salary figures is the NHS Employers pay circulars 2005-2020.

For junior doctors, sweeping salary changes were made after the 2016 contract negotiations. These have permitted basic pay to (barely) hang on to the coat-tails of inflation. However, the changes to how ‘unsociable’ hours of work are paid may have led to overall pay cuts for some**. Significant pay progression is also lacking as one ascends the medical hierarchy despite the added responsibility and experience – pay is stagnant for up to five years at a time during registrar and Consultant years.

First year doctor [FY1] basic pay (blue line) vs. expected inflation-adjusted pay (green line). Only the new junior doctor contract in 2016 (black arrow) has kept pay near, although still below, inflation corrected levels.
Registrar [ST4] basic pay (blue line) vs. expected inflation-adjusted pay (red line). The new contract (black arrow) has brought basic pay to ‘only’ 3.5% below expected, inflation-adjusted, wage. These ‘junior doctors’ have at least six years’ experience on top of their five year degree.

A word on context. On the spectrum of salary-related changes, a pay rise is better than static pay, which is in turn better than a pay cut or being let go. The reality in the current clime is that many lie towards the latter end of the spectrum. There are also more pertinent contemporary economic issues than doctor’s pay, for example widening wealth inequality. I appreciate this. On the other side of the contextual ridge, there’s a cohort of healthcare workers who have endured supra-normal occupational risk and worked incredibly hard during the zenith of the Covid-19 pandemic. They’re seeing all the lip service to ‘NHS heroes’ and ‘saving the NHS’ backed up with…more hot air. The government’s announcement has been met with derision on social media by some, dubbed as lacking in substance by others.

Inflation-matching increases in salary should surely be the minimum for any job, otherwise you’re being devalued year-on-year. To dole out an ‘inflation busting‘ Consultant pay rise and claim the moral or fiscal high ground in the context of long-term pay stagnation is insulting. Some feel this is little more than government PR point-scoring, conceding an inch now to reclaim a metaphorical mile down the line. A significant proportion of UK doctors already feel undervalued beyond just the financial aspects – the numbers that flock to the Antipodes each year is evidence enough of this. This most recent turn of events will do little to assuage these widespread feelings of under-appreciation.

TTFN,

Mr. MedFI


* And specialty doctors; a senior, non-Consultant, specialist role. In Wales the pay rise is across the board for doctors.

** A quirk of doctors’ pay is that a significant proportion of their salary comes from time working ‘unsociable’ hours. These include night shifts, weekend shifts and work outside the classic ‘8am-6pm’ bracket. The 2016 contract increased basic pay, but both re-defined unsociable hours and reduced renumeration for them. The net effect may have been a pay decrease for those who work a significant number of unsociable hours.