The Windfall Diary

gadgetmind

WindfallWinnie wrote: »

Could/should I use the 3 year carry forward rule & make pension contributions for those years?

I'm not aware of any rule that allows you to contribute more than your taxable income in any one tax year, but that doesn't mean that there isn't one.

Carry forward is to avoid the annoying new annual contribution caps that apply no matter what your income.

WindfallWinnie

OK, so yesterday I wrote cheques to the value of almost £230,000 :eek: (I'm not freaking out, I'm not freaking out, I'm not freaking out...)

We have:
1) Topped up hubby's ISA to the maximum £10,680 for this year.
2) Made a lump sum contribution of £60,000 to hubby's pension using carry forward rules. This increases the value of his pension to £250k.
3) Opened a Standard Life Stocks & Shares ISA for me to the full value.
4) Deposited £50k each into: Barclays Defined Return Plan-Dual Index-Annual Kick Out (annual return 12.5%), L&G Structured Investment Plan (annual return 11%) & Standard Life Investment Bond. All of these in my name to take advantage of my CGT allowance/non-tax payer.

Everything else sitting on deposit earning 3.2%.

Stomach churning slightly...

jamesd

west23 and WindfallWinnie,

Forget annuities in a pension until he's 75. Capped income drawdown is likely to pay out more and there's ample money around for it. There's also flexible drawdown that blocks all further tax relief on pensions but allows all of the capital to be taken out once an annuity or final salary or state pension income combined are at least £20,000 a year.

Using his pension was a good idea because the tax relief is a big multiplier of the value. Lets look at that £60,000 lump sum.

In, £60,000. 25% added as tax relief, £15,000, another 25% returned by HMRC after he claims it. So that's £75,000 in the pension at a net cost of £45,000 once he gets the money back from HMRC.

Now he's over 55 so he can immediately take the 25% lump sum from that £75,000. That's £18,750 more out and £56,250 left in.

Net cost? Now down to £26,250 to get £56,250 in the pension. 2.14 times as much left in the pension as it cost to buy it.

Know anywhere else you can multiply your money by 2.14 times in a few months with no investment risk at all?

Now lets move on to the £56,250. Moderate risk investments on that can pay about 5-06% income but at his age your husband is currently capped by the GAD limit to taking out no more than about 4.8% (table here, read the 2.5% line). 4.8% is £2,700 a year and he can recycle that into new pension contributions, subject to the annual cap and whatever his higher rate earnings are. So now he's multiplying that £2,700 a year by 2.14 times as well.

Of course, he can go into capped drawdown now with all of his pension pot, so he can really do it for a lot more each year.

There are differences in how inheritance is handled when in drawdown like this but the key point is that you still get to inherit 100% of the pension pot with no tax. For others who aren't dependents there would be a tax charge. Where this matters he buys a life assurance policy to ensure that the intended beneficiary gets the desired amount of money.

So that's a description of why pension contributions at higher rate and income recycling into a pension can be a huge boost to the ongoing income potential of a higher rate tax payer.

Pension lump sum recycling is also possible but there are limits that must be adhered to, discuss with the IFA. The easy limit is that the windfall of £381,000 means that at least £381,000 can be paid in without triggering the recycling penalties, because that lump sum is the obvious source of the money, even if lump sums are taken. The lump sums can be used to do what the windfall would have done without triggering the rules designed to limit high value recycling. But even though the tax benefits of lump sum recycling are great, it's perhaps worth considering accumulating them outside the pension in S&S ISAs instead. Or they can be cycled through the pension once and then the income and second lump sums can be used to accumulate desired capital.

A significant part of the picture here is when you two want to retire and how much money you want to spend.

Your IFA should be able to explain the capped drawdown income recycling and lump sum recycling rules, though the recycling is easy in this case because of the windfall.

Even if you got really, really bad pension income levels and it was taxed, that initial 2.1 times multiplier makes it a steal.

jamesd

Unless you are also a higher rate tax payer it's probably better for you to concentrate on taxed investments and ISAs. A 40% tax payer gets such a boost that it's hard to compete with. Except, do you have a salary sacrifice pension setup at work? The NI saving in them can make them very good for basic rate tax payers, increasing the effective tax relief to at least 32% (20% income tax, 12% employee NI).

jamesd

What was the reason for using the investment bond instead of just holding funds outside it? Is it onshore or offshore? Any plans to permanently leave the UK? Investment bonds are typically a tough thing to justify but it can be done sometimes - depends on the investments and income needs.

jamesd

Hubby should think more about VCTs. 30% tax relief and there are some that pay out about 5% income tax free, a boost for a higher rate tax payer. Worth considering say the Northern and ProVen ones to see what he makes of them. £20,000 or so would get him a tax refund of most of his basic rate tax. The 30% is limited to the income tax actually paid in the year.

No need to go really heavily into these, sticking to 5% or so of total investments is nicely cautious even for something that'd be inherently high risk, and the two I've mentioned aren't particularly high as VCTs go, though still higher than the FTSE All Share Index.

gadgetmind

WindfallWinnie wrote: »

Stomach churning slightly...

IKWYM. It's a lot easier if you build up to it slowly, maybe by putting a few £k into investments, and later a few £10ks, but you didn't have that choice!

jamesd

Yes, gradually is a lot easier on the stomach! Other than wondering about the investment bond use reasoning I'm happy enough with the sort of thing the IFA has been suggesting so far.

Ark_Welder

Regarding the investment bond, what funds are to be held inside? CGT is not an issue when funds within an IB are swapped into other funds within the bond. For a basic-rate taxpayer, the tax treatement of income taken might be relevant if the income would move the individual into the higher-rate band.

In addition the the VCT companies mentioned, I would add YFM (for British Smaller Companies and BSC2), Baronsmead (but check some of the performance fees) and Albion. Beringea (i.e. Proven) is more media-orientated for its investments, and the others more generalist in nature. But all five companies have managed reasonable returns over the years, although with different methods of doing so (some pay larger, occasional lump sums, whereas others will pay more consistent dividends). But these are higher risk investments than ordinary equities, so look at them from that angle, and see the tax benefits as a bonus rather than motivation. VCTs can also show a low correlation with equities, though, which can bring some benefits: mine provided some reasonable positive returns last year, but they can also return less than mainstream markets when the latter are rising strongly (then you might be better off with listed private equity investment companies - more research!).

WindfallWinnie wrote: »

:eek: (I'm not freaking out, I'm not freaking out, I'm not freaking out...)

It's OK if you do. And if you should wish to do so, keeping time with the following might help....

http://www.youtube.com/watch?v=UETwkMqtzMU&feature=related

atush

WindfallWinnie wrote: »

OK, so yesterday I wrote cheques to the value of almost £230,000 :eek: (I'm not freaking out, I'm not freaking out, I'm not freaking out...)

We have:
1) Topped up hubby's ISA to the maximum £10,680 for this year.
2) Made a lump sum contribution of £60,000 to hubby's pension using carry forward rules. This increases the value of his pension to £250k.
3) Opened a Standard Life Stocks & Shares ISA for me to the full value.
4) Deposited £50k each into: Barclays Defined Return Plan-Dual Index-Annual Kick Out (annual return 12.5%), L&G Structured Investment Plan (annual return 11%) & Standard Life Investment Bond. All of these in my name to take advantage of my CGT allowance/non-tax payer.

Everything else sitting on deposit earning 3.2%.

Stomach churning slightly...

Along with the stomach churning is there no relief you have done it and it's over (for now, until april when I assume more ISAs?).

Writing checks for large sums is always a little freaky. and last time i wrote one (for 30K) my bank called me to make sure as they know I don't ever spend that much lol.

So be prepared for your bank to call if you haven't already alerted them ;-)