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The Windfall Diary
Comments
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Know anywhere else you can multiply your money by 2.14 times in a few months with no investment risk at all?
Having read all your posts in the ISAs vs Pensions thread this was what swung it for us.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.
He has additional uncrystallised? pension of £79,000. Could/should that be added to the £56,250 = £135,250. 4.8% of that = £6,492...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.
This hasn't been mentioned at all & is something we need to look in to.A significant part of the picture here is when you two want to retire and how much money you want to spend.
Hubby has good earning potential from now to 65 so probably won't retire till then. Because I am younger I won't reach state retirement age till 2030! We plan to keep some on deposit for expenditure on large items: car, holiday, etc.
We also have an offset mortgage of £130k, which of course is completely offset at present. So, if necessary we could always access that.0 -
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.
IFA had exhausted pension, tax-free & investments which fell within CGT allowance rules, he presented this as the next option. Might it have been to do with our attitude to risk? Its onshore & we have no plans to leave the UK. It seemed relatively 'user-friendly' in that tax is taken care of at source & it come within Standard Life's wrap service. We see it as a longer-term investment, say 6-8yrs.0 -
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.
I was keener on the VCTs than hubby. The tax relief is particularly attractive. I'll work on him!0 -
Ark_Welder wrote: »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.
Funds as follows: Aviva Investors Property Trust 7%, M&G Property Portfolio Sterling 8%, Fidelity Moeybuildrer Income 4%, Henderson Strategic Bond 4.5%, Cazenove UK Growth & Icome 6%, Standard Life Inv UK Growth 6%, BlackRock UK Dynamic 6%, M&G Recovery 6%, Threadneedle American 6%, JPM US 6%, M&G American 6%, Fidelity American 6%, Schroder US Mid Cap 3%, JOHCM Continental European 5.25%, Schroder European Alpha Plus 5.25%, Schroder Tokyo 4%, Invesco Perpetual Japan 3.5%, First State Asia Pacific Leaders 3.5%, Fidelity SE Asia 4%. You asked!
I'm a non-taxpayer at present.Ark_Welder wrote: »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!)
Indeed! It's something I'll look into between now & April when we need to do the ISA investments.0 -
WindfallWinnie wrote: »I was keener on the VCTs than hubby. The tax relief is particularly attractive. I'll work on him!
If I were you I'd never have decided on anything yet, let alone written cheques. It beggars belief that you're acting on the very doubtful advise of just one IFA and several annonymous bloggers. Life is not all about the often doubtful benefits of taxrelief, its about living. After all, your financial situation before the windfall was not in anyway precarious.0 -
If I were you I'd never have decided on anything yet, let alone written cheques. It beggars belief that you're acting on the very doubtful advise of just one IFA and several annonymous bloggers. Life is not all about the often doubtful benefits of taxrelief, its about living. After all, your financial situation before the windfall was not in anyway precarious.
We've used our IFA for several years & he's given us very pertinent guidance to date! I also respect the opinions of several of the contributors on here, particularly jamesd & dunstonh who are experienced in giving financial advice.0 -
WindfallWinnie wrote: »We've used our IFA for several years & 1)he's given us very pertinent guidance to date! I also respect the opinions of several of the contributors on here, particularly jamesd & dunstonh 2)who are experienced in giving financial advice.
1) Beg to differ. 2) Of course they are. But the question is this, is it any good.0 -
I'd reject that advice unless the money is being used for income generation, which it seems it isn't.WindfallWinnie wrote: »IFA had exhausted pension, tax-free & investments which fell within CGT allowance rules, he presented this as the next option. Might it have been to do with our attitude to risk? Its onshore & we have no plans to leave the UK. It seemed relatively 'user-friendly' in that tax is taken care of at source & it come within Standard Life's wrap service. We see it as a longer-term investment, say 6-8yrs.
For just £50,000 an investment bond isn't worth it. The main potential gain is CGT saving but with two people and free of CGT transfers between spouses you can have over £20,000 gain in a year without having any CGT to pay. Not likely that you'll get that big a gain and be forced to sell. Just use your CGT allowance in each profitable year by swapping funds from one profitable investment to a similar one up to the CGT allowance limit so you don't accumulate a large gain. Over time you can shift the money into ISAs and eliminate the CGT issue more efficiently than can be done with an investment bond.
Sometimes no tax wrapper is best and this seems like one good case of that.
Though please do note that unlike your IFA and dunstonh I'm not in any way professionally qualified in this field, just a decent learner...WindfallWinnie wrote: »We've used our IFA for several years & he's given us very pertinent guidance to date! I also respect the opinions of several of the contributors on here, particularly jamesd & dunstonh who are experienced in giving financial advice.
I'm generally happy with what your IFA has been suggesting, except just the investment trust bit and some lower priority items like pension recycling which may just be on the to do list to avoid overwhelming you both at the start. 0 -
Yes, I'd look to taking benefits from all of the personal pensions. Partly for recycling with its nice tax advantages.
But there's also another advantageous wrinkle. Given the anticipated time to retirement your husband might end up exceeding the lifetime allowance and paying penalties if growth is good. The percentage of the lifetime allowance used is calculated when benefits are taken. Taking them early as proposed means that only a small percentage will be used, then all the growth in the pension pots in drawdown will never again be tested against the lifetime allowance, no matter how much it grows to.
So other than noting the inheritance issue it's some cheap protection from hitting the lifetime allowance that comes with really nice tax benefits.
You need to watch out to make sure that you keep enough capital around but you can top that up from the ongoing income.
I'm glad that you are using an offset mortgage rather than just paying off a mortgage. That means you have a nice chunk of capital around that you can use for more pension recycling and top up with lump sums and income.
My personal inclination is just to offset whatever's convenient then clear the mortgage finally only just before retirement. It's really useful as a convenient chunk of money until then and I really like the tax relief boon of using pension lump sums and VCT and pension income to clear it tax efficiently after investment growth.
I agree with Ark Welder about the other VCT companies, spread it around, diversification is good. VCT income is particularly good for topping up the mortgage offset account because it's tax free. Pension income is less good because income tax has been paid on it so the natural thing to want to do is make more pension contributions with pension income - but you need to watch the amount of capital that's still available and not go below the amount you want.0 -
The main potential gain is CGT saving but with two people and free of CGT transfers between spouses you can have over £20,000 gain in a year without having any CGT to pay. Not likely that you'll get that big a gain and be forced to sell. Just use your CGT allowance in each profitable year by swapping funds from one profitable investment to a similar one up to the CGT allowance limit so you don't accumulate a large gain. Over time you can shift the money into ISAs and eliminate the CGT issue more efficiently than can be done with an investment bond.
Hubby has shares in the company he works for & it was suggested that he reduce (sell) part of his holding up to the value of his CGT allowance on an annual basis.
The returns generated by the structured investment plans in my name could potentially produce in excess of my CGT allowance.
Hence the investment bond.0
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