IFA or DIY - any thoughts appreciated

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Paulreno said:

Salary sacrifice pension contribution.

Hi

I was clicking through the MSE page on 'pension need to know' and under salary sacrifice it says this:

Because your pension contribution comes out of your pre-tax salary, you'll pay less income tax at 20%. You'll also avoid your 12% NI contributions on the amount you sacrifice. This means for every £68 you sacrifice from your pay packet, £100 goes into your pension pot.

Could someone please explain.

I understand the part about less tax and NI contribution but I don't understand the part that says

for every £68 you sacrifice, £100 goes into your pension pot.

When my company takes my pension contribution from my salary, the amount taken is the amount deposited in my pension and as this is taken as a sacrifice, I don't get tax relief on it.

Who is right? The MSE website or the company I work for?

Thank-you,

Paul

For every £68 *take home pay* you sacrifice, £100 goes into your pension pot. If you opted out, they would pay you £100 gross salary and you would get £68 *take home* pay. Salary sacrifice is just a way of automating the tax relief, they pay straight into the pension from your gross salary rather than pay the income tax and NI and then claim it back.
Oh, plus the employer's contribution.

Albermarle

I don't get tax relief on it.

That is because you have avoided paying tax on it in the first place. . If we forget about the NI for a minute then here is a worked example.

You contribute £100 from your salary each month via salary sacrifice and that £100 goes into your pension.

If you did not contribute that £100 , it would be then taxed at 20% like the rest of your salary and in your pay packet it would be only £80.

So you get £100 in your pension for a cost of £80 . Then the NI saving + employers contribution means you will get £100 in your pension at a cost to you of around £60 , depending how generous the employer is .

cloud_dog

Perhaps to clarify a little further for Paulreno.... Salary Sacrifice contributions are additional company contributions, and this why there is no personal tax relief, although taxation is legally avoided.

You agree to sacrifice £X or percent and your employer promises to make the same payment in to your pension.

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bowlhead99 said:

tcallaghan93 said:
Take 2000-2020, the only reason the FTSE 100 did so much worse than the S&P 500 was because the FTSE 100's PE fell 3% a year, the S&P 500s by only 1% (30.5-16.5 vs 29-23.5). FTSE 100 earnings growth was about 3.6%, just -0.3% behind GDP, with an average 3.6% dividend yield whereas S&P 500 earnings growth was 5.3%, somehow ahead of GDP with an average 2% dividend yield, and the US had about 0.1% higher inflation.

Oh right, so if I'm reading your data correctly then the only reasons the FTSE 100 did worse than S&P was because:
 
a) the mix of companies making up the S&P index grew their earnings by 5.3% annualised (181% over two decades) while the 'old economy' companies in the FTSE 100 only grew their earnings by 3.6% annualised (103% over two decades); and

b) companies with higher sustainable rates of profit growth are more attractive, so that the price people are willing to pay for a given level of earnings is higher for the S&P index (dominated by Microsoft and Apple and Google and Amazon and Facebook etc) at 23x earnings, than it is for the FTSE (dominated by oil, banking, big pharma, tobacco) at 16.5x earnings

there is also a (c) where sterling has devalued over time such that for a UK investor, the returns from S&P relative to FTSE have been better than might have been presumed from (a) and (b) alone, though this is something that could reverse so we should not pay such attention to (c).

So to suggest the US or global equity is outperforming the UK or is somehow magically going to given the maths (US 1.95 div yield, bubble valuation, UK 4.7% div yield, below average valuation) is unfounded nonsense.

Well, the US equity index *has* been significantly outperforming the particular mix of companies that make up the UK index and that statement is 'founded' on the very facts and data that you put forward - hardly 'unfounded nonsense'.

/
The relative difference is more than explained by relative speculation.

a. You're excluding the total return.

b. The FTSE 100s and All Share's PE were also that high in 2000 so your point that US companies are 'better' and therefore attract a higher valuation doesn't work. Companies maintaining a certain valuation does not affect shareholder's return.

c. As explained, if you're talking about the US vs UK market recently including speculation (or re-rating) and currency changes, yes, if you're talking about the total investment return of dividend yield + earnings growth, no. The FTSE All Share's total return in £ from 2000-2019 inclusive was 4.68%, with negative speculation of -2.405%, so the dividend yield + earnings growth came out at ~7.26%. The S&P 500s total return in $ was 6.06%, with negative speculation of -0.77% (since writing the 31/12/19 PE changed) so the dividend yield + earnings growth came out at 6.88%.

So no, the particular mix of companies that just happen to make up the US stock market have not been significantly outperforming the UK equity index. I would have thought such a prolific and detailed poster on these forums would know this.

Prism

tcallaghan93 said:

bowlhead99 said:

tcallaghan93 said:
Take 2000-2020, the only reason the FTSE 100 did so much worse than the S&P 500 was because the FTSE 100's PE fell 3% a year, the S&P 500s by only 1% (30.5-16.5 vs 29-23.5). FTSE 100 earnings growth was about 3.6%, just -0.3% behind GDP, with an average 3.6% dividend yield whereas S&P 500 earnings growth was 5.3%, somehow ahead of GDP with an average 2% dividend yield, and the US had about 0.1% higher inflation.

Oh right, so if I'm reading your data correctly then the only reasons the FTSE 100 did worse than S&P was because:
 
a) the mix of companies making up the S&P index grew their earnings by 5.3% annualised (181% over two decades) while the 'old economy' companies in the FTSE 100 only grew their earnings by 3.6% annualised (103% over two decades); and

b) companies with higher sustainable rates of profit growth are more attractive, so that the price people are willing to pay for a given level of earnings is higher for the S&P index (dominated by Microsoft and Apple and Google and Amazon and Facebook etc) at 23x earnings, than it is for the FTSE (dominated by oil, banking, big pharma, tobacco) at 16.5x earnings

there is also a (c) where sterling has devalued over time such that for a UK investor, the returns from S&P relative to FTSE have been better than might have been presumed from (a) and (b) alone, though this is something that could reverse so we should not pay such attention to (c).

So to suggest the US or global equity is outperforming the UK or is somehow magically going to given the maths (US 1.95 div yield, bubble valuation, UK 4.7% div yield, below average valuation) is unfounded nonsense.

Well, the US equity index *has* been significantly outperforming the particular mix of companies that make up the UK index and that statement is 'founded' on the very facts and data that you put forward - hardly 'unfounded nonsense'.

/
The relative difference is more than explained by relative speculation.

a. You're excluding the total return.

b. The FTSE 100s and All Share's PE were also that high in 2000 so your point that US companies are 'better' and therefore attract a higher valuation doesn't work. Companies maintaining a certain valuation does not affect shareholder's return.

c. As explained, if you're talking about the US vs UK market recently including speculation (or re-rating) and currency changes, yes, if you're talking about the total investment return of dividend yield + earnings growth, no. The FTSE All Share's total return in £ from 2000-2019 inclusive was 4.68%, with negative speculation of -2.405%, so the dividend yield + earnings growth came out at ~7.26%. The S&P 500s total return in $ was 6.06%, with negative speculation of -0.77% (since writing the 31/12/19 PE changed) so the dividend yield + earnings growth came out at 6.88%.

So no, the particular mix of companies that just happen to make up the US stock market have not been significantly outperforming the UK equity index. I would have thought such a prolific and detailed poster on these forums would know this.

Why do you keep picking 2000 as your starting date? Is it because you know that because of the bursting of the dot.com bubble its one of the only dates that supports your comparison? Lets try summer 2008?

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Prism said:

tcallaghan93 said:

bowlhead99 said:

tcallaghan93 said:
Take 2000-2020, the only reason the FTSE 100 did so much worse than the S&P 500 was because the FTSE 100's PE fell 3% a year, the S&P 500s by only 1% (30.5-16.5 vs 29-23.5). FTSE 100 earnings growth was about 3.6%, just -0.3% behind GDP, with an average 3.6% dividend yield whereas S&P 500 earnings growth was 5.3%, somehow ahead of GDP with an average 2% dividend yield, and the US had about 0.1% higher inflation.

Oh right, so if I'm reading your data correctly then the only reasons the FTSE 100 did worse than S&P was because:
 
a) the mix of companies making up the S&P index grew their earnings by 5.3% annualised (181% over two decades) while the 'old economy' companies in the FTSE 100 only grew their earnings by 3.6% annualised (103% over two decades); and

b) companies with higher sustainable rates of profit growth are more attractive, so that the price people are willing to pay for a given level of earnings is higher for the S&P index (dominated by Microsoft and Apple and Google and Amazon and Facebook etc) at 23x earnings, than it is for the FTSE (dominated by oil, banking, big pharma, tobacco) at 16.5x earnings

there is also a (c) where sterling has devalued over time such that for a UK investor, the returns from S&P relative to FTSE have been better than might have been presumed from (a) and (b) alone, though this is something that could reverse so we should not pay such attention to (c).

So to suggest the US or global equity is outperforming the UK or is somehow magically going to given the maths (US 1.95 div yield, bubble valuation, UK 4.7% div yield, below average valuation) is unfounded nonsense.

Well, the US equity index *has* been significantly outperforming the particular mix of companies that make up the UK index and that statement is 'founded' on the very facts and data that you put forward - hardly 'unfounded nonsense'.

/
The relative difference is more than explained by relative speculation.

a. You're excluding the total return.

b. The FTSE 100s and All Share's PE were also that high in 2000 so your point that US companies are 'better' and therefore attract a higher valuation doesn't work. Companies maintaining a certain valuation does not affect shareholder's return.

c. As explained, if you're talking about the US vs UK market recently including speculation (or re-rating) and currency changes, yes, if you're talking about the total investment return of dividend yield + earnings growth, no. The FTSE All Share's total return in £ from 2000-2019 inclusive was 4.68%, with negative speculation of -2.405%, so the dividend yield + earnings growth came out at ~7.26%. The S&P 500s total return in $ was 6.06%, with negative speculation of -0.77% (since writing the 31/12/19 PE changed) so the dividend yield + earnings growth came out at 6.88%.

So no, the particular mix of companies that just happen to make up the US stock market have not been significantly outperforming the UK equity index. I would have thought such a prolific and detailed poster on these forums would know this.

Why do you keep picking 2000 as your starting date? Is it because you know that because of the bursting of the dot.com bubble its one of the only dates that supports your comparison? Lets try summer 2008?

/
All sufficiently long time periods support my comparison.  If you want to prove me wrong go ahead 
That said, stock market returns are always time dependant, 1929 was a terrible year to invest in the US, 1973 was a terrible year to invest in the UK.

Prism

tcallaghan93 said:

Prism said:

tcallaghan93 said:

bowlhead99 said:

tcallaghan93 said:
Take 2000-2020, the only reason the FTSE 100 did so much worse than the S&P 500 was because the FTSE 100's PE fell 3% a year, the S&P 500s by only 1% (30.5-16.5 vs 29-23.5). FTSE 100 earnings growth was about 3.6%, just -0.3% behind GDP, with an average 3.6% dividend yield whereas S&P 500 earnings growth was 5.3%, somehow ahead of GDP with an average 2% dividend yield, and the US had about 0.1% higher inflation.

Oh right, so if I'm reading your data correctly then the only reasons the FTSE 100 did worse than S&P was because:
 
a) the mix of companies making up the S&P index grew their earnings by 5.3% annualised (181% over two decades) while the 'old economy' companies in the FTSE 100 only grew their earnings by 3.6% annualised (103% over two decades); and

b) companies with higher sustainable rates of profit growth are more attractive, so that the price people are willing to pay for a given level of earnings is higher for the S&P index (dominated by Microsoft and Apple and Google and Amazon and Facebook etc) at 23x earnings, than it is for the FTSE (dominated by oil, banking, big pharma, tobacco) at 16.5x earnings

there is also a (c) where sterling has devalued over time such that for a UK investor, the returns from S&P relative to FTSE have been better than might have been presumed from (a) and (b) alone, though this is something that could reverse so we should not pay such attention to (c).

So to suggest the US or global equity is outperforming the UK or is somehow magically going to given the maths (US 1.95 div yield, bubble valuation, UK 4.7% div yield, below average valuation) is unfounded nonsense.

Well, the US equity index *has* been significantly outperforming the particular mix of companies that make up the UK index and that statement is 'founded' on the very facts and data that you put forward - hardly 'unfounded nonsense'.

/
The relative difference is more than explained by relative speculation.

a. You're excluding the total return.

b. The FTSE 100s and All Share's PE were also that high in 2000 so your point that US companies are 'better' and therefore attract a higher valuation doesn't work. Companies maintaining a certain valuation does not affect shareholder's return.

c. As explained, if you're talking about the US vs UK market recently including speculation (or re-rating) and currency changes, yes, if you're talking about the total investment return of dividend yield + earnings growth, no. The FTSE All Share's total return in £ from 2000-2019 inclusive was 4.68%, with negative speculation of -2.405%, so the dividend yield + earnings growth came out at ~7.26%. The S&P 500s total return in $ was 6.06%, with negative speculation of -0.77% (since writing the 31/12/19 PE changed) so the dividend yield + earnings growth came out at 6.88%.

So no, the particular mix of companies that just happen to make up the US stock market have not been significantly outperforming the UK equity index. I would have thought such a prolific and detailed poster on these forums would know this.

Why do you keep picking 2000 as your starting date? Is it because you know that because of the bursting of the dot.com bubble its one of the only dates that supports your comparison? Lets try summer 2008?

/
All sufficiently long time periods support my comparison.  If you want to prove me wrong go ahead 
That said, stock market returns are always time dependant, 1929 was a terrible year to invest in the US, 1973 was a terrible year to invest in the UK.

I haven't got the FTSE data to be honest, as since I don't use indexes to invest I honestly don't know the answer especially if you are discounting rerating of stocks which is odd because surely thats the point of buy backs.

FTSE 100 over the last 25 years is up 350% and the S&P is up 818% - all with dividends reinvested and local currency. How are they remotely equal. Not that it really matters as the past is the past.

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Prism said:

tcallaghan93 said:

Prism said:

tcallaghan93 said:

bowlhead99 said:

tcallaghan93 said:
Take 2000-2020, the only reason the FTSE 100 did so much worse than the S&P 500 was because the FTSE 100's PE fell 3% a year, the S&P 500s by only 1% (30.5-16.5 vs 29-23.5). FTSE 100 earnings growth was about 3.6%, just -0.3% behind GDP, with an average 3.6% dividend yield whereas S&P 500 earnings growth was 5.3%, somehow ahead of GDP with an average 2% dividend yield, and the US had about 0.1% higher inflation.

Oh right, so if I'm reading your data correctly then the only reasons the FTSE 100 did worse than S&P was because:
 
a) the mix of companies making up the S&P index grew their earnings by 5.3% annualised (181% over two decades) while the 'old economy' companies in the FTSE 100 only grew their earnings by 3.6% annualised (103% over two decades); and

b) companies with higher sustainable rates of profit growth are more attractive, so that the price people are willing to pay for a given level of earnings is higher for the S&P index (dominated by Microsoft and Apple and Google and Amazon and Facebook etc) at 23x earnings, than it is for the FTSE (dominated by oil, banking, big pharma, tobacco) at 16.5x earnings

there is also a (c) where sterling has devalued over time such that for a UK investor, the returns from S&P relative to FTSE have been better than might have been presumed from (a) and (b) alone, though this is something that could reverse so we should not pay such attention to (c).

So to suggest the US or global equity is outperforming the UK or is somehow magically going to given the maths (US 1.95 div yield, bubble valuation, UK 4.7% div yield, below average valuation) is unfounded nonsense.

Well, the US equity index *has* been significantly outperforming the particular mix of companies that make up the UK index and that statement is 'founded' on the very facts and data that you put forward - hardly 'unfounded nonsense'.

/
The relative difference is more than explained by relative speculation.

a. You're excluding the total return.

b. The FTSE 100s and All Share's PE were also that high in 2000 so your point that US companies are 'better' and therefore attract a higher valuation doesn't work. Companies maintaining a certain valuation does not affect shareholder's return.

c. As explained, if you're talking about the US vs UK market recently including speculation (or re-rating) and currency changes, yes, if you're talking about the total investment return of dividend yield + earnings growth, no. The FTSE All Share's total return in £ from 2000-2019 inclusive was 4.68%, with negative speculation of -2.405%, so the dividend yield + earnings growth came out at ~7.26%. The S&P 500s total return in $ was 6.06%, with negative speculation of -0.77% (since writing the 31/12/19 PE changed) so the dividend yield + earnings growth came out at 6.88%.

So no, the particular mix of companies that just happen to make up the US stock market have not been significantly outperforming the UK equity index. I would have thought such a prolific and detailed poster on these forums would know this.

Why do you keep picking 2000 as your starting date? Is it because you know that because of the bursting of the dot.com bubble its one of the only dates that supports your comparison? Lets try summer 2008?

/
All sufficiently long time periods support my comparison.  If you want to prove me wrong go ahead 
That said, stock market returns are always time dependant, 1929 was a terrible year to invest in the US, 1973 was a terrible year to invest in the UK.

I haven't got the FTSE data to be honest, as since I don't use indexes to invest I honestly don't know the answer especially if you are discounting rerating of stocks which is odd because surely thats the point of buy backs.

FTSE 100 over the last 25 years is up 350% and the S&P is up 818% - all with dividends reinvested and local currency. How are they remotely equal. Not that it really matters as the past is the past.

/
I've used calendar year from 31/12/94 - 31/12/19 rather than July 1995-July 2020, I prefer it and it's easier but you have a valid point about the S&P 500 already recovering from the COVID crash and the UK not.
You have to discount rerating, what I call speculation or speculative return as per Jack Bogle because otherwise you assume a long-term appreciative or depreciative trend, whereas the PE for any equity index is always drawn back to its long-term average over time.
Also this isn't precise, I'm only using 1dp, since I can't find FTSE 100 annual returns, but eyeballing the total return from trustnet it's 6x over 25 years which comes to 7.4% and the PE was flat, 16.3 to 16.5.
The S&P 500's total return was 11.4x, just under double, or 10.2% annualised. The PE rose from 14.9 to 24.9, adding increasing the total return by 2/3, or 2.1% annualised. So the investment return before speculation was 8.0%. Also, US corporate profits increased as a % of GDP from ~6.1% at the start of 1995 to 8.8% at the start of 2020, adding 44% to the total return or 1.5% annualised. Unfortunately the same data for the UK isn't available. But discounting that, I'd say 7.4% and 8% aren't so far apart that you consider them not even "remotely equal" 

AlanP_2

TC93 - I have no idea whether your way of calculating and your maths is right but just cannot see how your calculations map on to the total return figures Prism posted.

What is the reason for the dramatic difference in Prism's overall return figures over 25 years and your annual rates?

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AlanP_2 said:

TC93 - I have no idea whether your way of calculating and your maths is right but just cannot see how your calculations map on to the total return figures Prism posted.

What is the reason for the dramatic difference in Prism's overall return figures over 25 years and your annual rates?

/
I don't know where Prism got their figures so I can't comment, I am assuming Prism used 23/7/95-23/7/20, whereas I used 31/12/94-31/12/19. I think the difference is just a matter of which date you pick within the year. The FTSE 100 is about 20% below the start of the year value whereas the S&P 500 has more than recovered, I cba looking at 1995.

S&P 500 total return from yahoo finance and https://dqydj.com/sp-500-return-calculator/, PE from multpl.com, corporate earnings as a % of GDP from St Louis Fred (I used Q4 1994 - Q4 2019 though you could use Q1 or Q4 1995-2030, or take the annual averages)
FTSE 100 total return unfortunately had to eyeball it from trustnet (it looks like I could be a little out, so could be 7.3% could be 7.5%), PE from CEICDATA/markets.ft.com/UK Value Investor.