Savings and Investments thread

Huskaris

PragueAddick said:

I don't know why this got into my head this afternoon, but I decided to ask Claude AI this question:

If a British person aged 70 at the end of 2024, had started smoking aged 18, consistently smoking 20 cigarettes a day, how much would this have cost them overall (calculation adjusted for general inflation over the whole period? And if this person had never started smoking, but instead invested the same amount as the cost of the cigarettes in a general UK equity market fund, how much would his investment be worth today?

Answer:

Summary

I've calculated both scenarios for someone born in 1954 who smoked 20 cigarettes daily from age 18 (1972) until age 70 (2024):

Total Cost of Cigarettes (Inflation-Adjusted)

£155,171 in 2024 purchasing power

This is what they actually spent on cigarettes when you adjust all those historical costs for inflation. The nominal amount paid over 52 years was £87,567, but in today's money that represents £155,171.

Value if Invested in UK Equities

£511,596

Had they instead invested that same nominal amount each year into a UK equity market fund (FTSE All-Share with dividends reinvested), their portfolio would be worth approximately £511,596 today.

The Bottom Line

• Lost opportunity: £356,425
• The investment would have grown to 3.3 times the inflation-adjusted cost of smoking
• That's the difference between having spent £155k (in real terms) and having £512k in assets

This calculation includes investing through all the major market crashes (1973-74, 1987, 2000-02, 2008-09, 2020) and uses actual historical UK equity returns with dividends reinvested. The stark reality is that early, consistent investing - even in relatively modest amounts - combined with compound returns over five decades creates substantial wealth.

This analysis doesn't even account for the additional costs of smoking - healthcare expenses, higher insurance premiums, lost income from illness, or reduced life expectancy.

I like that!

One of these finfluencers (bell ends on LinkedIn/Tiktok) did some thing where he showed you what your $6 a day Starbucks coffee would be worth over 5 years of every day you invested $6 in Starbucks stock rather than buying a coffee, similar to what you've done here. It was staggering and actually made me think!

Dippenhall

bobmunro said:

Dippenhall said:

Rachel in Accounts is keen to tell us how generous the Government is paying away £27bn in pensions tax relief on contributions. This sound bite is no doubt to justify ending the anomaly of salary sacrifice avoiding NI contributions. 

But what Rachel and the general public seem uneducated about is that pensions tax relief is tax DEFERRAL. You pay income tax not only on the original contribution but all the investment growth you accrue as well as the invested tax relief - as and when you draw your pot as income in retirement. You can produce numbers showing many will pay more income tax on their pension than received in tax relief.

So when you hear the sob story about excessive tax giveaways for pension savers, I suggest you contact Rachel and ask how much tax HMRC collect from pensions in payments. I have been fobbed off in the past when asking this question.

It’s a classic case of Govt misrepresenting the facts and solving short term cash flow problems with decisions that increase today’s tax revenue at the expense of tomorrow’s tax revenue while reducing savings and pensioner prosperity.

Higher rate tax relief on contributions is also not a giveaway for the same reason - the tax relief is invested and taxed when paid out as part of the higher pension it produces. The more the higher paid are encouraged to save the bigger their pensions and more likely to be taxed at the higher rate. The policies of penalising tax relief for higher earners is lunacy in terms of encouraging savings and its wider and long term negative impact. 

Some of that I agree with.

However, most 45% tax payers will not max out on pension contributions as in reality with the tapering the max that really high earners can put in now is £10k a year. They will use other financial instruments e.g. they will likely have pretty big investments in ISAs between a couple. In retirement they will draw on those other tax free investments and restrict drawings from DC pensions so that their taxable income in retirement stays below or not much above c£50k and pay tax at 20(22)% or certainly the bulk of it at basic rate, yet all of their pension contributions, especially prior to tapering came in, attracted 45% relief. So not all tax deferral!

The fact is, that at macro level, DC pensions in payment deliver minuscule tax revenue to the Exchequer. Current pensions in payment are, I would guess, 90% paid by the public sector and legacy corporate final salary schemes.

So there is a lag between Govt giving the tax relief and receiving tax on pension payments. My point is that this lag allows tax relief to be seen as a one-off tax giveaway. Regardless of the level of tax mitigation through planning, it is a tax deferral system, not a tax giveaway system - say like the company bike schemes.

My point is that the correlation between (1) the cost of PAST tax reliefs on PAST contributions and (2) the tax revenues when those contributions emerge as taxable income, should inform the view on what is a fair pension tax relief policy, not the Govt’s short term budget constraints. In the past, the benefit to society by encouraging pension saving with tax incentives was well understood, and the salary sacrifice loop hole only exists I think as a nod to the idea of increasing pensions saving. But pensions are now a political football and so salary sacrifice is now in the game.

Instead of suppressing tax reliefs to reduce short-term Exchequer outflows, the system needs simplification. It would provide a boost to genuine pensions savings, and reduce State pension dependency, by having no limit on pension funding, save a nominal monetary limit as was introduced with the first tax “simplification” (£240,000?). In return, remove potential arbitrage by applying 20% tax relief for all tax payers. Tax on pensions could be a stand-alone rate of 20% in this scenario.

In my view, the 25% tax free lump sum benefit is illogical, it encourages people to make a decision based solely on avoiding tax, not financial needs. Its origins lay in the Public Sector, where it was an add-on benefit to a pension, not an option between cash and a pension and would not object at all to its removal to permit simplification.

cantersaddick

PragueAddick said:

PragueAddick said:

IdleHans said:

cantersaddick said:

IdleHans said:

Possibly I'm being thick here, but wouldn't the lost opportunity be the difference between the positive equity value and the cost (negative) of the cigarettes, or 511,596 PLUS 155,171 so 666,767?

No, its assumed you got some level of utility from purchasing the cigarettes therefore they are a benefit and on the same side of the scales. The opportunity cost being the difference between that and the greater benefit of investing the cash. 

Of course to a non-smoker the idea of getting utility from buying cigarettes seems a bit odd!  

Good point. But setting aside the pleasure of smoking, you'd now be £667K better off if you hadn't smoked and had instead invested. And there would surely be some enjoyment derived from watching your investment increase...

I must say that that’s what i thought too. I will ask Claude…

Wish I hadn’t now🤣 Basically he says we are double counting. I think I get it. As a non- smoker I would still have had to find the same amount of money to put into investment as the smoker who does for his fags.

Yeah it's the same pot of money for the appraisal calculation. You either do option A, in this case smoke it, or option B invest it. Both have returns (in a sense) but are assumed to do one or the other.