Early-retirement wannabe

jamesd

Yes, I remembered that discussion when writing my earlier reply.

Any unused LTA percentage might protect you from future growth and the LTA test at age 75.

Still, if you can do it when it won't matter you're fine anyway, so doing it early is OK or your situation. And actually I think for most people potentially affected. It's more likely to apply to those who are over the limit or can't avoid going over it because they are too young or in DB schemes. Or who could make further pension contributions without losing one of the protections.

bigadaj

jamesd wrote: »

Given your ages and lack of potential for more than 42% relief on the pensions, if I ignore the child benefit aspect I think that some VCT use looks interesting before pensions. Mainly because I assume you wouldn't mind two five year holding periods to get 30% tax relief twice. You have to hold at least five years to avoid having to repay the 30% but then you'll have a stream of them reaching the five year mark that you can take instead of reinvesting in more VCTs if you need the money.

VCTs are broadly regarded as high risk as a class of investment but they do differ. Take a look at the Albion Venture Capital Trust for one that I think is not high risk, in part because it's 100% asset-backed with various types of property.

You'd hopefully do a mixture of things, so some ISA money, some P2P and some VCT as well as the pensions. Mixed up according to your potential need for the money, so that you have prospective maturities/accessibility when you might need it.

Say you're both on 80k you could both in the same year enough in pensions just to get maximum employer match then in the next year both pay 30k into pensions to get your income that's counted down to 50k and full child benefit paid. Or once every three years or whatever else works. If either income is high enough - over 150k - to have your pension annual allowance cut from 40k to 10k with carry-forward banned, that would make it impossible to do.

If the government changes the pension tax free lump sum rule you can do it with income instead, just over a longer time period. Ignoring salary sacrifice, that 25% tax free lump sum is what delivers most of the tax gain for a person who pays in at 20% income tax rate then takes it out at 20% income tax rate so it's not a trivial thing to eliminate it.

What's your experience or research in terms of selling vcts?

They are very beneficial for many when buying new, but their resale potential is then questionable, I'm aware some are effectively fixed term or aim to be but Albion isn't one of these?

jamesd

One attraction of the Albion VCTs is the discount policy, which is 5%. That's the level below the net asset value (NAV, the value of the underlying investments) at which the VCT itself will look to buy back shares in the open market. Subject to change of course but they do report on the policy and the value of purchases made.

The Albion VCTs including the specific one aren't fixed term but assuming it works as expected:

£5000 invested, but say costs cut it to 95%, so share value held is £4750.
£1500 tax relief from HMRC.
£1750 of tax exempt dividends (about 10% of the amount invested after the HMRC relief per year, so five years of £350).
Assuming no NAV change after five years the £4750 sold for 95% is £4512.50.

So anticipated net position after the five years is a gain of £2762.50 plus or minus the NAV change. 1500 + 1750 + 4512.50 - 5000.

They can be held for longer but if a person has the income to sell and buy back after a six month wait (required by HMRC if it's the same VCT) another 30% of tax relief will beat holding on. Unless there's a desire to retain the ability to sell while no longer having to repay 30% tax relief.

The combination of HMRC relief and the per-year payments gets out a substantial chunk of the money even without a sale, 65%. Of course none of this is guaranteed.

bigadaj

jamesd wrote: »

One attraction of the Albion VCTs is the discount policy, which is 5%. That's the level below the net asset value (NAV, the value of the underlying investments) at which the VCT itself will look to buy back shares in the open market. Subject to change of course but they do report on the policy and the value of purchases made.

The Albion VCTs including the specific one aren't fixed term but assuming it works as expected:

£5000 invested, but say costs cut it to 95%, so share value held is £4750.
£1500 tax relief from HMRC.
£1750 of tax exempt dividends (about 10% of the amount invested after the HMRC relief per year, so five years of £350).
Assuming no NAV change after five years the £4750 sold for 95% is £4512.50.

So anticipated net position after the five years is a gain of £2762.50 plus or minus the NAV change. 1500 + 1750 + 4512.50 - 5000.

They can be held for longer but if a person has the income to sell and buy back after a six month wait (required by HMRC if it's the same VCT) another 30% of tax relief will beat holding on. Unless there's a desire to retain the ability to sell while no longer having to repay 30% tax relief.

The combination of HMRC relief and the per-year payments gets out a substantial chunk of the money even without a sale, 65%. Of course none of this is guaranteed.

Fair enough was aware of most of that and hold some Albion but not their idea to buy back at 95% of value, no guarantee obviously. The other element are attractive and I bought some last year, spread across five of their trusts, and all are currently showing a small capital loss of around 5-10%.

Linton

Can anyone reassure me about my worries on recommending the use of VCTs to possibly naive investors? VCTs were designed to encourage the wealthy to make highly risky investments to enable small companies to expand. Now they are being advocated as a tax avoidance scheme for the average richer retiree. This gives rise to 2 questions....

1) Are VCTs really that safe? Is there a reasonable chance that the tax saved could be outweighed by capital losses?

2) If the answer to Q1 is that the ones recommended are pefectly safe what happens when the government closes the loophole as it surely will and, it seems to me, should? Could the fund holders be left with holdings that can only be sold at a large loss?

jamesd

bigadaj wrote: »

I bought some last year, spread across five of their trusts, and all are currently showing a small capital loss of around 5-10%.

Expect a bit more of that because the underlying asset backing is commercial property of various types, so a decrease in the value of that will reduce the NAV. With the hotels and care homes likely to be the largest elements it's more of a short term thing at least for those who have to hold for five years anyway.

Linton wrote: »

VCTs were designed to encourage the wealthy to make highly risky investments to enable small companies to expand. Now they are being advocated as a tax avoidance scheme for the average richer retiree.

Not so much wealthy as individuals. But they have been routinely described as high risk things to avoid so that the opportunities in the ones that are not high risk have seemed to be overlooked. Not all of them are high risk technology startups but that's how they tend to be regarded.

Not solely for the 30% initial tax relief. 10% (on money invested after HMRC rebate) a year tax exempt income can be quite attractive even to those who are basic rate tax payers, let alone higher or top rate. This varies by VCT, this is a bit under what the Albion VCT expects to pay.

The Albion VCT is relatively banal, 100% asset backed investment. Here are the top ten holdings from the 18 February 2016 interim management statement:

14.8% operator of Holiday Inn Express hotel at Stanstead airport
7.6% independent school for 5-18 year olds
7.3% 2MW hydro power scheme in Scottish highlands
7.3% care home in Shinfield, Berkshire being developed
6.3% care home in Cumnor Hill, Oxfordshire being developed
6.0% hotel in Harrogate, Yorkshire
5.6% hotel near Heathrow terminal 5
3.8% 1MW hydro power plant in western Scotland
3.8% care home in Hillingdon, Middlesex being developed
2.7% health and fitness club in Weybridge

The management statement also discusses recent investments that were made.

You can find similar reports for other VCTs, that's just an easy example for me to look up.

Linton wrote: »

1) Are VCTs really that safe? Is there a reasonable chance that the tax saved could be outweighed by capital losses?

Depends on the VCT. I've mostly mentioned here the ones that I think look more like P2P with a bit of extra tax relief because I think that's an interesting combination. If you want a biotech startup or a technology startup you can go for that but personally I don't.

Linton wrote: »

2) If the answer to Q1 is that the ones recommended are pefectly safe what happens when the government closes the loophole as it surely will and, it seems to me, should? Could the fund holders be left with holdings that can only be sold at a large loss?

They aren't perfectly safe, no investment is.

The government has continually varied the investments that are permitted when it has taken the view that they do not have high enough levels of risk. Most recently last year company takeovers by management teams were banned from inclusion. But what has been consistent is that the investments previously made are not affected. So even though new renewable power and hotels have been banned for a long time now, the Albion VCT and others that have already invested in those things are fine. Six of the things in that top ten holding list are no longer permitted for new investments.

More seriously affected recently were the Proven and Northern VCTs that did a lot of now-banned management buyout deals. But again, no impact on their past investments, just no more of those allowed.

There's no reason to believe that a holding would have to be sold at a large loss just because of a change in VCT rules. The underlying investments are still whatever they were and VCTs are too small a part of the overall market to substantially shift the prices for long if they did a lot of selling.

Even so, I do like the nice and regular return of money via HMRC then dividends that quite rapidly reduces the net amount of money at risk after a purchase has been made. Having just 45% of the original outlay still in that Albion VCT would greatly reduce the risk level after five years. Of course no guarantee that the dividends will continue to be paid but sustainability of those is one thing that the independent reviewers looked at.

Just pick your VCTs with care based on your objectives. You can go for high risk, high potential reward if you want or for relatively staid things.

tigerspill

jamesd wrote: »

On the savings and investment side you could do two rounds of 30% tax relief on VCT investing and be out by age 56, having to hold for five years each time or repay the 30% to HMRC.

Your defined contribution plan is good, you could dodge the income tax issue with borrowing, say by taking out a mortgage then repaying once all of the income is in place. You blew this one with the mortgage overpayments, you could have done it with savings instead.

On the face of it you've enough income and potential to mostly eliminate your income tax bill with VCT buying on top of pension contributions. There are some relatively low risk VCTs around, they aren't all high risk speculation.

A SIPP in your husband's name to get the 40% income tax relief is OK but I don't think it's the best plan. Better for him to use VCT buying first to eliminate his income tax while you maximise the value of your salary sacrifice pension contributions. that way he has the chance of a combined 60% relief.

For your pension contributions the salary sacrifice is nice but are you saving more than the 2% employee NI? getting any of the saved employer NI or any more matching beyond a fixed level? Wondering whether VCTs might make sense for you as well.

I have seen VCTs mentioned a few times here. Could you point me in the right direction to start looking in to these?

Cheers

jamesd

Start by doing an advanced search for VCT and reading what you find. Add user jamesd to see only posts by me but be aware that I deliberately filter which VCTs I mention to try to reduce the chance of people picking something on the higher end of the VCT risk range. If I'm mentioning a specific VCT it's probably because I'd be comfortable investing my own money in it, based on whatever I know about it at the time. Not necessarily that I have done so, just that it's at least passed my own initial filtering. Then pay particular attention to the posts where people are doubtful and ensure that you're satisfied with the answers and do the follow up work with things like the independent review places which do some analysis of VCT financials.

At the moment VCTs are about 7% of my total investments and increasing each year. Main constraint is that I'm also making heavy use of salary sacrifice pension contributions that reduce my income tax bill and hence the amount of potential VCT relief I can get. So 7% isn't a cap, just "today".

One way I like to think of VCTs is as "deferred income". If you've accumulated enough money to be able to wait at least five years for some of your income you can use VCTs to effectively remove the income tax bill on part or all of your income. Subject to the variability of investments, so it's not guaranteed and you do need to be sure the underlying VCT investments make sense for you, since it's not primarily about tax relief, that's just the government carrot to encourage you.

If in doubt, don't. Same as for any other investment.

TigerWoods2

Hi all, am new to MSE. Wish I would have found it years ago. Due to ill health I have just taken early retirement and have received a lump sum of 40k. I will get a small monthly pension of about £1200. I have no dependents but do have a mortgage. I have no debt. and am 51yrs old. I will take a loss of £1000 net per month. I will have to make this up by moneysaving and hopefully finding part time work.
I'm looking for advice on the following:

Do I pay NI or tax on my pension?
What should I do with the 40k lump sum. Can I invest for income?
Am I entitled to any benefits?
Sorry if this has been posted in the wrong place but like I say I'm new and its my first post.

badmemory

You would probably have done better to start your own thread as you have specific questions which I will start to help with until those who know much better come along.

Your income tax will be the same as if you were working (under £60 per month) but no NI, which will help to make up some of your loss per month. Have you checked your state pension entitlement. That would be a good idea just in case there are no benefits you can claim which will make up any shortfall