Monthly income from £140,000

Chrismaths

EdInvestor wrote:

Outside the bond,dividends arrive with a tax credit, which pays the notional tax, and are thus effectively tax free for the basic rate taxpayer.

As they do in an insurance bond. What's your point?

In addition, they are not tax free, just ask someone close to age allowances, or someone like me, who owns a share in my business. If I take in £1000 in fees, I've got to account for the VAT (£851), and pay corporation tax @ 30% before I can pay myself a dividend. So I pay myself a dividend of £595.74 from the company, that is effectively a 40% tax rate on my income, even though I'm a BR taxpayer. Even if you pay corporation tax at the lower 19% rate, it's still a 31% tax rate. So what if I have no ADDITIONAL tax to pay. God forbid I was a HR taxpayer...

There is no "annual exemption" from CGT. Every year there is a CGT allowance of approx 9k. Tax is only payable on realised gains over this amount.So if you sell shares and make a profit of 8,999 pounds, no tax is payable.If you sell no shares/funds, no tax is payable.If you hold shares for a few years you get taper relief which reduces any tax payable.

It's really quite hard to have a problem with CGT.:)

Which is what my example was showing - what was the difference between holding assets directly or in a bond - so what's your point?

You have an annual exemption (not an allowance - if you don't know tax law, don't correct someone who does) of £8,800 of realised, tapered gains. Taper relief (which replaced indexation), is not especially useful, it takes 3 years before the gain is reduced by 5%, and 10 years before it is reduced by 40%, where it stops.

Thus it's not normally sensible to put your investments in an expensive investment bond where you are forced to pay CGT on unrealised gains when you would not be paying it, if your investments were outside the bond.

Unless you are in the situation I outlined at the end of my post.

Did you even read it?

EdInvestor

OK let's take the OP's case with an 140k lump sum to generate an income.

First s/he saves 40k in high interest accounts. The other 100k is invested in a portfolio of 25 diversified household name large blue chip shares, with 4k invested into each share.*This portfolio pays out annual dividend income of 5%. These dividends arrive with a tax credit attached which has already paid the tax due, so the 5,000 pounds income is tax free.

The portfolio additionally makes a 5% return, ie a further 5,000 pounds. Using his annual CGT allowance.exemption, he cashes in gains on shares to the value of 5k.These gains are also tax free as they are less than the annual exeomption/allowance of 8k+).

In addition he has say 5% interest on his 40k - say 4% after tax, for a further income of 1,600 - a net 11,600 in total income. Only the savings has been taxed, and a bit of that can be avoided by using an ISA. Why bother with high charges and confusing products like these investment bonds?

Keep it simple, that's what I say.

*To set up such a portfolio, it is best to open an account at a discount online broker with no annual fee.Dealing costs and stamp duty to buy the 100k's worth of shares would cost c.64O pounds at the start but there is no charge for holding the shares or for transferring the dividend income to your bank account. This would compare with as much as 5-7000 pounds upfront to get an investment bond. In year two , charges would be virtually nothing - perhaps 25 pounds for two sales to cash in some profits.There is no stamp duty payable on sales, only purchases.

kenshaz

A brilliant thread,information flowed ,with adverse opinions ,every point covered.I realise that two posts have different views but that draws further informaton

dunstonh

Please can anyone else reading this thread tell me if its just me or is Ed ignoring all the points raised and just repeating a load of misinformation?

kenshaz

dunstonh wrote:

Please can anyone else reading this thread tell me if its just me or is Ed ignoring all the points raised and just repeating a load of misinformation?

Sure,but it is still a good package

Chrismaths

Ed. Final chance.

The OP may be eligible for pension credit - which is means tested. The capital in an insurance bond is not deemed to be capital for pension credit. For every £500 of capital you have (over £6000), you are deemed to have an income of £1 PER WEEK for every £500 of capital they have. So having £140k in capital means the Govt assume you have an income £268 per week. This will kill any chance of getting pension credit, and all the valuable side benefits that come with it (prescriptions, council tax benefit etc.). This will dwarf the piddly amounts of extra tax that the op might pay. In addition, if in some years time the OP needs residential care, the local authority can't touch the investment bond, but will take ALL of the OPs hard earned savings if you hold investments directly.

No one is saying you should therefore have the most expensive type of insurance bond going, just that an insurance bond is a highly suitable investment in this case (one of the rare cases where it is), and if the OP implemented your suggestions, they would be significantly worse off.

Not only do you not understand the issues at hand, but you seem incapable of admitting that in this case, an IB is a fully suitable investment. Your prejudice against them (which to be frank I share on the whole) has clouded your judgement.

Chrismaths

And stop calling dividends tax free!!!!

A question for you - If you are £5000 from the HR tax threshold (so a basic rate taxpayer) and you receive a dividend of £5000, how much extra tax do you pay?

Answers on a £5 note to the usual address.

EdInvestor

The OP is aged 58 so much of the comment is irrelevant.

She is obviously in some fairly high risk funds judgung by the reported volatily - a lower risk HYP share portfolio as suggested only dipped by 3.5% in May and rapidly recovered. Some of her money could go into commercial property funds/trusts as well to reduce the risk further if desired.

She's definitely paying more tax in the IB and of course much higher charges.

The position can be looked at in two years time when she is 60.Does this lady have any pensions or is this lump sum providing her only income? If she has pensions she can access now being over 50, she should probably do so, as she is wasting her tax free personal allowance.

Chrismaths

Err... Wrong again Ed. You have to have the insurance bond BEFORE you are 60. Give up dear.

dunstonh

You can apply for pension credit 6 months before the age of 60 and the means test can ask for evidence of statements etc for 6 months before that (they can go further but 6 months is the starting point). So, everything has to be in place before 59 really and the further back the better as it doesnt look like you did it to get pension credit and associated other benefits.

She is obviously in some fairly high risk funds judgung by the reported volatily - a lower risk HYP share portfolio as suggested only dipped by 3.5% in May and rapidly recovered.

We dont have a clue what she is in and your suggestion is not only going to cost her a lot of money but also be way above her risk profile. I would bet money on it being the monaged growth/income fund or distribution fund. All are lower risk than an HYP (still poor quality but lower risk).

She's definitely paying more tax in the IB and of course much higher charges.

Broken record.... Despite facts pointing to the opposite, you continue to repeat this.

The position can be looked at in two years time when she is 60.

Its too late then.

The problem Ed is that everyone is different but you are treating every single post person that posts about pensions/investments as if they were you in your situation.

Your suggestions are above the risk profile of this person, almost certainly above her investment experience and willingness to take on a high risk investment strategy involving a portfolio of shares and going to be costing her more in tax than the alternatives suggested and would remove pension credit and associated benefits you get with that.

In other words, your method costs more and charges more in tax despite you saying the opposite.