Tax efficient income help?

toggley

I have a range of UK and global low cost index trackers - all accumulation funds. I have a SIPP, ISA, and once these allowances are used up the rest goes in a normal stocks and shares account. I am 50, and would like to start drawing an income at 55. I plan to maintain a withdrawal rate of 3-4% p.a. from the total of all investments (which I hope will maintain the total 'pot' size relative to inflation and hopefully not risk exhausting them as my wife and I want to leave an inheritance).

In addition I should have some income from buy to let. Of course an increase in interest rates could make that unprofitable, but as things stand I make a profit each year.

So my question is, is there a logic to the amount of income, and the order in which you take it from each type of investment, so as to maximize annual tax free allowances for income and capital gains across all investment types etc.? Or if there are considerations other than tax efficiency that should influence the order or amounts withdrawn from each I'd also like to know.

dunstonh

So my question is, is there a logic to the amount of income, and the order in which you take it from each type of investment, so as to maximize annual tax free allowances for income and capital gains across all investment types etc.?

There are a few different strategies to do this. What investment strategy are you using and what disinvestment strategy are you going to have?

Linton

Why do you need non-tax protected investmentss? How much are you saving/investing each year? Most people I would have thought would have difficulty making full use of a SIPP and yearly S&S ISAs, 2 as you are married.

Will you be a higher rate tax payer in retirement? This is a significant factor as if not dividends are tax free.

My strategy for drawdown is twofold:

1) 25% of my savings/investments are run as a high yield portfolio held in an S&S ISA from which I draw down the natural income.

2) The 75% is held as a 3 level portfolio
- enough cash to cover 2 years or so expenses
- enough safer investments - strategic bond funds, absolute return funds, wealth preservation ITs etc to cover a further 5 years or so. All are held in SIPPs and ISAs
- the rest in higher risk equity.

Once each year the portfolio is rebalanced. So in the bad times money should cease to be taken from the equity investments. I take the maximum from the SIPPs without going into higher rate tax and put the excess into ISAs.

So the only tax paid is that which would have to be paid anyway in taking money from the pensions.

kidmugsy

if you want to leave an inheritance, at the moment it might be irresistible to aim to use the SIPP for that. If you die before 75, the SIPP passes to whoever you have nominated, outside your estate, and they can draw money out tax-free. If you are over 75 on death, then their drawings are exposed to income tax (which might mean tax-free for, say, a student grandchild, or a mother on a career break, or whatever). Before then, you might want to use the 25% TFLS for yourself.

It's also worth keeping your ISAs full, because when you die your widow inherits their husk i.e. the ability to use the tax-wrapper, even if the money itself is left elsewhere (as might be, to a family trust).

So in your shoes, I might concentrate my low-income or no-income investments in the SIPP e.g. share trackers for economies that tend to involve low dividends anyway. They might as well be in accumulation funds. I'd concentrate in the ISAs any income that stays untaxed within them but that would be taxed outside e.g. bonds or bond trackers. That would leave the left-overs to be held outside a tax-shelter; I'd also try to move more money into the tax-shelters every year, especially once past 55 because then the SIPP money would be available freely anyway. I'd be reluctant to use accumulator funds outside tax shelters because I'd dread establishing how much my dividend would have been so that it could be reported on my tax return, and I'd dread the CGT calculations. But maybe that problem isn't a pest for every accumulator.

Note that if you fancy a little gold for your portfolio, Sovereigns and Britannias are free of VAT and CGT. You have to have somewhere to store them though, and they pay no income. I understand that there are SIPPs that let you hold such coins, but not the everyday SIPPs that I'm familiar with.

As for your BTL: the only way of avoiding CGT that I know of is to hold it to death.

The best return on cash at the moment is from current accounts and related regular savers: from next tax year you'll be allowed either £1k p.a. or £500 p.a. of interest from them tax-free, which will add to their attractions. You could always start regular savers now that will pay their interest next tax year.

You could also search out the recent posts of jamesd, who is hugely enthusiastic about VCTs and P2P.

toggley

dunstonh wrote: »

There are a few different strategies to do this. What investment strategy are you using and what disinvestment strategy are you going to have?

Thank you Linton and kidmugsy fo your suggestions. Thank you also dunstonh for your question, but I don't understand what you are asking. In my post I said I want to take out 3-4% of the total value of my stocks and shares investments each year (so as in theory not to run the total pot down) and will make a profit on a buy to let property. What further strategy detail are you asking for?

To all, I should have said, but across all investments, with the profit from the buy to let, plus if I was to take 3-4% of the total value of my SIPP + ISA + stocks and shares, then at current values I would be in the higher rate tax bracket.

kidmugsy

toggley wrote: »

To all, I should have said, but across all investments, with the profit from the buy to let, plus if I was to take 3-4% of the total value of my SIPP + ISA + stocks and shares, then at current values I would be in the higher rate tax bracket.

So why not reverse my earlier strategy somewhat: it was based on assuming you to be a 20% taxpayer. Hold outside tax shelters only assets that give their returns as capital gains. Get your 3% p.a. by selling from that part of your portfolio until it's all gone, leaving everything tax-sheltered (bar the BTL). Could you achieve this by using your and your wife's annual CGT allowances in such a way that there would be no CGT to pay?

I'm not sure I'd want to hold a BTL in the decumulation stage of life - illiquid, indivisible, and a source of hassle.

Linton

Perhaps you have already worked it all out, but if what you have told us is as far as you have got in your planning I think you may have more work to do.

Some questions....
- How much money do you need per year to live the standard of living you want in your retirement?
- Is it clear where this money is coming from? What and when are the other sources of income.
- How much do you need to withdraw from your investments each year? Is the 3-4% what you have worked out you need or just what you think is sustainable?
- What do you need to invest in to provide this money sustainably?
- What do you want to happen to the money you dont use by the time you die? If you want to leave it to your descendents/relations it may be best to keep it in the SIPP. Otherwise, otherwise.
- What is your strategy to ensure your income continues in good and bad times? eg the strategy I outlined in my post.
- How will your drawdown needs change over time?

etc etc

Only then does it make sense to answer the question you have asked in your posting:
- How do you structure your assets to minimise tax?

This, I think is the type of thing Dunstonh was getting at. I am not asking for the answers to the questions, it's just a suggestion of the sort of things you need to have thought through. You may find it helpful to put together a year by year spreadsheet assuming investment return and inflation etc showing how money is moved from and between your different types of account and investment.

toggley

kidmugsy wrote: »

So why not reverse my earlier strategy somewhat: it was based on assuming you to be a 20% taxpayer. Hold outside tax shelters only assets that give their returns as capital gains. Get your 3% p.a. by selling from that part of your portfolio until it's all gone, leaving everything tax-sheltered (bar the BTL). Could you achieve this by using your and your wife's annual CGT allowances in such a way that there would be no CGT to pay?

I'm not sure I'd want to hold a BTL in the decumulation stage of life - illiquid, indivisible, and a source of hassle.

Yes I can see that can makes sense. Although for the BLT I would like to hold it so long as it continues to generate profit from the rental income and as it continues to gain strongly in value. The capital gain will eventually be taxed if and when we sell, but at the moment we feel more comfortable not having all our investment capital in stocks and bonds.

toggley

What is the maximum amount that can be taken tax free each year from a SIPP, stocks and shares portfolio, and a BTL? Can we take up to £10,600 tax free every year from the BTL, and then up to £11,100 in capital gains from the stocks and shares, so up to £21,700 tax free p.a.?

Linton

toggley wrote: »

What is the maximum amount that can be taken tax free each year from a SIPP, stocks and shares portfolio, and a BTL? Can we take up to £10,600 tax free every year from the BTL, and then up to £11,100 in capital gains from the stocks and shares, so up to £21,700 tax free p.a.?

If by BTL you mean net income from rent after discounting expenses and "BTL" includes income transferred from SIPPs, bank, interest, pensions etc you can take what you list plus dividends are tax free as long as your total income (not capital gains) is below the higher rate band. Dont forget the Mrs can do the same if she owns the appropriate assets. So with care you could get £50K or more between you completely tax free.

Of course once you get your S&S into ISAs any income or capital gains is tax free. This obviously avoids a lot of tax hassle and is worth doing for that reason alone.

atush

You want to be tax efficient, yet you hold a BTL.

which is a VERY tax inefficient vehicle?

Ypu pay tax on income, you pay tax on gains? How much do you have in gain now? Is your spouse a co-owner? it could be time to sell it, and move the money to sipp etc to be more tax efficient?