Alternatives to Annuities

bigfreddiel

Don't cash in your entire pension

Take the 25% tax free bit if you have plans for it that beat your current investments. Then look at drawdown.

Work a few more hours per week for an extra £500, that's your £12k survive income done

Get a sp forecast now

Do more planning

All your property options including b&b are very hard work and stressful. Could you cope? Do you want the hassle?

Good luck Fj

Btw pay an IFA for some professional advice, it will be very well worthwhile.

Thrugelmir

scaredofdebt wrote: »

Thanks, this is interesting and I will give it some more thought, if I can reduce the tax then obviously that is good.

:beer:

If VCT's were that good a route. Why isn't every one pursuing this option. That's the question I would want answering.

dunstonh

I certainly can't guarantee any of those would produce a decent income for 30 years, but I can't guarantee I will live for 30 years so another reason I don't like annuities.

Why do you think that eliminates annuities? Annuities can have a range of death benefits now.

Thanks, this is interesting and I will give it some more thought, if I can reduce the tax then obviously that is good.

That is a very long winded, complicated/advanced and high risk method of reducing tax. Using income drawdown is simpler and mainstream. Going away from mainstream to resolve problems you created by doing something you shouldn't do in the first place is the wrong way about it.

If VCT's were that good a route. Why isn't every one pursuing this option. That's the question I would want answering.

Because it would be classed as a mis-sale if it was advised in the way James is describing it. James is not wrong but it is a solution to a problem that doesnt need to exist in the first place. An adviser would be taken to task for doing it. VCTs are also treated as high risk, low liquidity advanced investment options. So, recommending them to a novice would not be considered good.

Thrugelmir

dunstonh wrote: »

Because it would be classed as a mis-sale if it was advised in the way James is describing it. James is not wrong but it is a solution to a problem that doesnt need to exist in the first place. An adviser would be taken to task for doing it. VCTs are also treated as high risk, low liquidity advanced investment options. So, recommending them to a novice would not be considered good.

I was also thinking of the extremely high fees that the schemes incur. Which can negate much of any potential benefit.

maximumgardener

for ease of counting lets say you end up with £360K in your Pension in a couple years time.

take your £90 k tax free lump sum (25%).......what do you want to do with that?

that leaves £270 k to be further invested in say flexible drawdown

perhaps you have further investments in ISA's and also some cash?

factor that in and get some good advice from an IFA

don't rush it

xylophone

Have you obtained a new state pension statement?

https://www.gov.uk/check-state-pension

Shylock

Thrugelmir wrote: »

I was also thinking of the extremely high fees that the schemes incur. Which can negate much of any potential benefit.

This article slating VCT's for their fees was published over 2 years ago. Has the sector got any better since then?
http://moneyweek.com/why-you-should-steer-clear-of-venture-capital-trusts/

jamesd

Thrugelmir was being a bit misleading by not mentioning the fees of alternative things, just as he was by calling them high risk when so is a share in just about any company. But liquidity is more of an issue (except vs say many small cap shares) because of the five year holding time and limited buyer range, so VCT buyback discount policy is important.

To put the costs in a bit more context, typical P2P like Zopa or RateSetter will take between 30% and 60% of all non-capital payments by the borrower while paying taxable 5-6%, a higher cut if rates are lower. More like 50-60% at the moment. I've no idea whether Thrugelmir would consider that routine P2P charging to be excessive. Nor for that matter whether he'd consider a money market fund charging 0.5% and paying out 0.1% to have excessive charges. Meanwhile an equity fund might be charging openly disclosed 0.75% and spending another 3-6% in advice, trading cost, legal fees, custody fees and a whole range of other things before delivering around 5% a year real total return.

I doubt that the VCT sector overall today has lower charges than described in the article. The returns delivered for them are reasonable enough compared to other options and there's plenty of investor demand. In particular, lower volatility (for the ones I use) and higher anticipated returns than a typical UK equity fund, for which I'm prepared to accept the other properties.

Similarly, looking just at fees is missing a big part of the point on P2P: it's delivering very low volatility and minimal correlation with stock markets. Though I tend to go fore P2P paying 11-12% before bad debt allowance.

Lower fees would be nice but that doesn't stop me from investing in all of those things, because the after costs returns make sense.

The returns I mentioned are after all charges and for the Albion VCT (AAVC). I think the story was about a different one. Here's what is expected after all fees for say £40k purchased:

• About 2% on initial charges, assuming you buy with a typical broker discount. So £39,200 spent to buy the shares which will start out with that value.
• 30% of the £40k back from HMRC, £12,000.
• At that point you have £12,000 back and have spent net £28,000 to own shares having value £39,200.
• AAVC is projected to pay 10% of the £28,000 in tax exempt dividends a year, in two pieces with perhaps 1% of that coming out of capital, according to an independent report.
• So over five years you'd expect to get a further £14,000 from the dividends. But since some is coming out of capital the NAV is expected to reduce from £39,200 to £39,240 (actually not that much to deduct but I'll use that for simplicity).
• The Albion-operated VCTs have a discount policy to buy back at about 5% discount to NAV and have historically done it at about 6% discount. So expected sale price in a buyback is about 0.94 x 39240, £35,005.60. Also tax exempt even if there were capital gains, not deductible as a capital loss.

So after five years the projected outcome is £40,000 spent and return of £12,000 + £14,000 + £35,005 = £61,005.

And along the way initially you get to take out more of the pension pot because it's the income tax you would have been paying on the pension money that is providing the tax relief money indirectly via HMRC.

VCTs aren't just about the initial tax relief. The dividends and for some the potential capital gains are significant, though I tend to go for the lower risk end with low anticipated capital gains and relatively predictable dividend payment rates.

The next Albion VCT offer is likely to start in November so you'll be able to read in the prospectus what the various fees are before deciding if it's of interest to you.

It's delivered pretty much what I expected at the time I invested though for diversification I'm using others as well, of broadly similar properties.

None of this is guaranteed, of course, since this is an investment.

jamesd

dunstonh wrote: »

That is a very long winded, complicated/advanced and high risk method of reducing tax. Using income drawdown is simpler and mainstream. Going away from mainstream to resolve problems you created by doing something you shouldn't do in the first place is the wrong way about it.

The "problem" was created by investing into a pension. With 75% of a pot of this size taxable there is no realistic way to use drawdown to get out the 75% without paying income tax using only income drawdown. Even if the whole personal allowance was available the likely growth is high enough to cause the pot to grow in value, or only shrink at at a rate that would take a century to drain.

To solve the tax problem that exists, just using income drawdown can work for smaller pots.

But this one is too big for that, so the choice is guarantee the loss to income tax or do something to reduce it. Or encounter a 12 month life expectancy or emigrate to a place with lower income tax and a tax treaty with the UK that provides for pension income to be taxed at local rates.

The original plan was foolish and would have greatly magnified the tax cost but the tax cost is still there if the money is taken over more years, just lower.

Up to each person whether they prefer the guaranteed loss to income tax or prefer to use investments where the projected returns are a profit, not a loss, on top of the tax benefit.

Personally I've been taking the I like the investment properties and the income tax saving approach and wish I'd learned more about VCTs and got started sooner than I did.

dunstonh

The "problem" was created by investing into a pension.

The "problem" is created by taking all the money out of the pension in one go. Rather than leaving it in the pension and taking it under drawdown.

With 75% of a pot of this size taxable there is no realistic way to use drawdown to get out the 75% without paying income tax using only income drawdown.

But 20% above personal allowance is a lot better than having the bulk of it on 40% and 45%.

The pension is outside of the estate. No IHT, has tax free growth and income within the pension. Its only the draw that becomes taxable. The draw required to meet the income need is sustainable. A bit more between now and state pension age but after that, a lot less. So, there is no need to involve non-mainstream, high risk, advanced investor options.

Up to each person whether they prefer the guaranteed loss to income tax or prefer to use investments where the projected returns are a profit, not a loss, on top of the tax benefit.

The "guaranteed loss to income tax" only happens if the op decides, foolishly, to draw the whole pot. Leaving what is not needed in the pension means no tax is paid on that amount.