How to protect 5K of income from the taxman before April?

vacheron

Hi All.

Following a mid year pay review I am in a position where by April I will be falling into the upper earnings threshold by approximately 5K

As I don't complete a tax return and have no desire to do so I would prefer that my P60 earnings shows me in the 20% band.

My company operates a salary sacrifice pension scheme with Scottish Widows so I should be able to ask them to deduct an additional voluntary contribution of £1250 per month between December and March.

My concern is though that the investment period would be quite short meaning that I do not have the luxury of being able to pound cost average into the pension fund. When taken with the fact that the markets are also currently quite high I am concerned that I could lose quite a bit of my investment by doing things this way.

Does anyone have any suggestions about the best way to go about this in order to minimise the above risks?

Thanks.

dunstonh

My concern is though that the investment period would be quite short

Why short?

When taken with the fact that the markets are also currently quite high

Who says they are high?
What markets are you referring to as its unlikely you are in just one market.

What timescale are you investing over?

vacheron

dunstonh wrote: »

Why short?

Hi dunstonh. I want my P60 to April 2015 to show me below the UEL I therefore have just 4 months to do it in unfortunately.

dunstonh wrote: »

Who says they are high?

Well I suppose I do, based on the fund performance over the last few years (attached). I certailny would have to look long and hard for someone who would say that looked low.
https://www.dropbox.com/s/4t544ruf141fosd/SW%20Fund.JPG?dl=0

dunstonh wrote: »

What markets are you referring to as its unlikely you are in just one market.

I'm currently predominantly invested in the Scottish Widows Balanced Portfolio Series 2
http://factsheets.financialexpress.net/swfc/SL42_SFX.pdf

dunstonh wrote: »

What timescale are you investing over?

Four Months.

green_man

Quote:
Originally Posted by dunstonh
What timescale are you investing over?

Four Months.

What he means it what is your age and when are you looking to retire. Worrying about the market being high is an irrelevance if you are a long while from retiring.

Have you checked your company allow you to adjust your salary sacrifice amount mid year, mine doesn't.

dunstonh

Well I suppose I do, based on the fund performance over the last few years (attached). I certailny would have to look long and hard for someone who would say that looked low.

The UK stockmarket is low compared to long term performance indicators. It is lower than it was 15 years ago. America appears high but there is more to life than the US nowadays.

I'm currently predominantly invested in the Scottish Widows Balanced Portfolio Series 2

So, only 50% in stockmarkets. And that is split largely between UK and US with a little elsewhere.

Four Months.

Your whole pension should be in cash then if you are drawing the whole pot in 4 months. However, as above post, I suspect you have misunderstood the question. How long as you are going to be invested for? Worrying about short term issues over a 30-40 year investing period is not worth it. Trying to time the markets is a futile exercise.

vacheron

green_man wrote: »

Quote:
Originally Posted by dunstonh
What timescale are you investing over?

Four Months.

What he means it what is your age and when are you looking to retire. Worrying about the market being high is an irrelevance if you are a long while from retiring.

dunstonh wrote: »

Your whole pension should be in cash then if you are drawing the whole pot in 4 months. However, as above post, I suspect you have misunderstood the question. How long as you are going to be invested for? Worrying about short term issues over a 30-40 year investing period is not worth it. Trying to time the markets is a futile exercise.

Thanks for the clarification. Makes more sense when I read it now.

I'm 40 and have no firm date when I wish to retire. However I doubt it will be within the next 20 years.

Though I appreciate what you have both said about long haul investing and I have done this consistently through the highs and lows of the last 20 years, I don't fully subscribe to the idea that simply because I'm a long way from retirement that the unit value I get for my 5K purchase is "an irrelevance" or "not worth it". Surely if I was able obtain even 5% more shares / units over the next year or so by not having to buy in a lump sum then this would still translate to a 5% larger return from that share pot when I reach retirement?

green_man wrote: »

Have you checked your company allow you to adjust your salary sacrifice amount mid year, mine doesn't.

My company sets the default sacrifice of 5% of your salary each April and the company contributes 8%.

If you get a pay-rise mid year you have to wait until the next April for the company to raise your (and their) percentage contribution. However we can make additional ad-lib fixed amount contributions through the year.

Dunnit

I think the phrase you are looking for is "time in the market rather than timing the market".
There was a 5% dip in October is there going to be another one next year or will it be 10%? The consensus at the turn of the year was that the FTSE 100 would test 7000.
Over the next 20 years you will never time the market correctly each time so better just to not worry about it and realise that regular investing is the key not timing.

pjcox2005

Just to check a couple of points, moving into a 40% tax rate won't mean you are required to submit a tax return where that income is from employment and automatically dealt with by PAYE/NI.

Also, when you say above upper earning threshold have you taken into account your personal allowance. i.e. for most they will start paying 40% tax on income over £41,866?

It maybe that it's still relevant to look at pension contributions or other salary sacrifice as there could be a tax saving there, but thought I'd clarify your reasoning (e.g. on tax return) in case it's not an issue to be concerned about.

Linton

vacheron wrote: »

.....Surely if I was able obtain even 5% more shares / units over the next year or so by not having to buy in a lump sum then this would still translate to a 5% larger return from that share pot when I reach retirement?

......

By putting the £1250s in as monthly lump sums over 4 months rather than say £450 every month for a year or as one big lump sum, you may lose 5%, but on the other hand you may gain 5%. Its a gamble.

If your pension gives you access to multiple funds you could put the money somewhere safe and then steadily transfer to where you really want it. However it really is far too much effort for peanuts either way in the end. In 20 years as a higher rate tax payer your pot should be worth £100Ks it doesnt make sense to me to worry about 5% of £5K = £250.

bowlhead99

vacheron wrote: »

Though I appreciate what you have both said about long haul investing and I have done this consistently through the highs and lows of the last 20 years, I don't fully subscribe to the idea that simply because I'm a long way from retirement that the unit value I get for my 5K purchase is "an irrelevance" or "not worth it". Surely if I was able obtain even 5% more shares / units over the next year or so by not having to buy in a lump sum then this would still translate to a 5% larger return from that share pot when I reach retirement?

But if you had split your 5k pension addition over 12 months or 24 months there is no expectation that this would somehow obtain 'even 5% more shares'.

Markets generally go up over time - even if the headline 'FTSE' capital value stays static, you receive interest and dividends that are reinvested. So, if you did £250pm x 20 months or even £20 x 250 months, instead of £1250pm x 4 months, the expectation is that you would actually end up with fewer shares / units rather than more units.

I think you are perhaps getting hung up on the fact that if you drip feed slowly into a falling market that then recovers, you get more units. But if you drip feed slowly into a rising market that then falls, you get fewer units. For all you know, it might cost 10% more to invest next year than it does today, averaged out across all the markets to which your pension fund is exposed. Nobody knows what the markets will do in the next 5 minutes or 5 months or 5 years, only that the long term expectation is for it to rise, hence the optimum time to invest a pound is 'whenever you have that pound available'.

If you had known a year ago that you'd have the £5k available, you could have been investing more as you went along. You didn't so now you are stuck with a lump sum choice of 'timing'. But the relevant time horizon to get and spend your returns is 20-60 years from now so you probably don't need to be concerned about whether there might be a better deal next week or next year or last week or last year.

HarryD

Invest it over the next 4 months. You're trying to be too clever by half! Wasn't it Warren Buffett who said the best time to invest is when you've got some money?