Protecting personal allowance & our plan

jamesd

There's a trick involving salary sacrifice that you might not know about.

Income tax is calculated annually. NI isn't, it's calculated for each pay period. This means that those who are higher rate tax payers can save NI by concentrating their sacrifice in a few months with pay cut to just above minimum wage. Because in those pay periods much of the sacrifice will be on money in the 12% basic rate range NI band you can get 12% NI saving as well as 40% income tax saving on it.

If you spread out the sacrifice evenly more of the pay would be sacrificed in the 2% NI band and your NI saving will be lower.

There used to be HMRC restrictions on changing pension sacrifice levels. Those would have banned use of salary sacrifice with auto-enrollment pension schemes so a few years ago HMRC removed that restriction and now you can change the at any time. Some employers may still try to discourage changes. Mine used to and also had a 50% cap on sacrifice levels. More recently they introduced a form to make it easy to ask for changes and allow going over the cap for those with suitable reasons, since it's just intended to ensure that employees have enough income.

bowlhead99

jamesd wrote: »

Performance fees tend to be the charges that get most attention but that can be misguided because VCTs tend to pay out most gains in tax exempt dividends. The performance fee is based on the value of the VCT, called the net asset value (NAV), and is higher the greater the gain in NAV. For VCTs that anticipate paying most gains in dividends the NAV won't grow or might decrease, reducing or eliminating the potential performance fee. Albion is in this category.

It's very rare for a performance fee to be based on a capital return, (change of NAV only) and to ignore dividends or other distributions made to investors.

The purpose of having a performance incentive structure is to align the fund managers' interests with those of the investors and incentivise them to perform. If you said to a fund manager that if he distributes some of the return to the investors (decreasing NAV and increasing the money in the investors' pockets) then his performance fee for that year would be 'reduced or eliminated', then he would be disinclined to do it, and there would be no incentive whatsoever to make cash available to increase dividends.

It would skew the fund towards holding onto its assets and reinvesting rather than paying out, meaning that investors could only access their returns by selling in the secondary market (which may involve selling at a discount). Introducing a performance structure that rewards a manager based on the NAV alone and says that if the NAV is static or drops we will eliminate your potential performance fee, even if the reason for lack of growth is because you generated profits and paid them out to us - would be ridiculous. So fees being only based on NAV growth not total return from year to year is likely a misconception.

Albion's performance fee is in fact based on total return (NAV increase plus dividends). If the return hurdle is not met, the shortfall is carried forward to future periods. The reason that Albion has not paid a performance fee for a long time is simply because in the 12 years since the clock was last reset at March 2004 to the last annual accounts at March 2016 they have failed to deliver a total return of 5% a year, and the performance fee is only payable on the excess over that. If they exceed the 5% target this year, like they did last year, they are still only catching up on what they have missed in previous years - they are well below the curve so may not ever catch up given their conservative investment strategy.

I'm not averse to paying performance fees per se, but it is always worth checking them out to see how they work. There can be advantages sometimes in buying into a fund that has done poorly allowing you to feel the effect of the recovery without paying anything in fees until the high watermark is reached again. Understanding the likely economics on what would happen to the investor's share and the manager's share if the fund delivered X at a gross profit level from its current start point is important for any investment evaluation. But for performance measurement it is nearly always the total return considered for a given year, NAV only would be bizarre.

Apologies to the OP as this is a bit off topic, that's the problem when you have someone like Jamesd pumping out loads of good ideas whose merits can be worth exploring!

Workerbee999

Wow Jamesd! Than you for all the great input. I will need to go through it slowly with a strong coffee (bowlhead99, think I will need a dark room and something stronger than a coffee before I fully understand everything you have said....).

So,

1) I need to dig out my last statement to work out the commutation factor. I had not previously considered the impact on taxable income, just keeping as high a risk free pension as possible, so something to consider

2) one option I need to investigate is that I have heard I can transfer some of my DC pot to my now closed DB for the purposes of being able to withdraw it as the tax free portion, without having to touch the actual DB. They are part of the same company schemes as the DB was closed. This would mean I could take out more tax free.

3) Mortgage. Well yes, I cannot argue against you, but we are where we are. We both come from family backgrounds where the focus was work hard and clear your debts as early as possible to be secure. And didn't really question it. I have only started switching on to the idea of smarter financial planning in the last few years since the DB closed, but OH still has that DB security. There is some possibility of changing the mortgage situation next year as the mortgage is in 2 parts and one finishes then, so we shall see. I am also risk adverse, but probably would have built up savings in ISAs instead, even if I hadn't put it in pensions or VCT. The is around £120k left, the culprit mainly being that we have already bought a boat which never fits well with financial planning, but is part of "living for now" too. Unfortunately though the boat would need replacing by the time we come to retirement ..

3)I'm really interested in the VCT potential as it could help nicely for the gap between giving up work, and drawing the pension at 55, so I will look at the links you suggested. Albion sounds like the risk level that would fit more with me.

4) Portugal. Well, that turns things on its head and now I have so many questions to research. (Does the money have to go into Portuguese banks / investments, how long do I need to be there or can I become a resident and then sail elsewhere, how long before I can come back to the UK, can I visit UK for any periods, will BREXIT take away this exciting option now that I have only just heard about it, and so on). Lots for me to investigate! Thank you!

5) Salary sacrifice timing tricks. That's smart. I will need to see what is possible.


Thanks again

ex-pat_scot

Another observation that has not yet been raised:
if your TOTAL remuneration, including employer pension cntributions and bonus, exceeds £150,000 then you gradually reduce the Annual Allowance for pension tax relief.
You get the full £40,000 relief at £150,000 but this tapers down to a minimal £10,000 relief at income of £210,000.
This is a rather complex process, and your bonus makes it quite possible you will tiptoe into the zone.

Other things to consider, whilst in the 62% marginal rate:
- sal sac on charitable giving.
- cycle to work scheme

I'm in similar circumstances. The entirely separate issues are:
- keeping out of the punitive 62% marginal rate (it's higher if you get the ers NI refunded...)
- keeping out of the £150k+ tapered AA
- keeping below the LTA
- aiming to get to 55 and then work out the options
- DB transfer

peterg1965

Great thread, I am in a similar position to the original poster and there are some excellent pointers on this thread. James has mentioned VCTs a number of times and I simply have not got the chance to get my head around them and if they could work for me.

Good luck workabee999.

neilvw

ex-pat_scot wrote: »

Another observation that has not yet been raised:
if your TOTAL remuneration, including employer pension cntributions and bonus, exceeds £150,000 then you gradually reduce the Annual Allowance for pension tax relief.
You get the full £40,000 relief at £150,000 but this tapers down to a minimal £10,000 relief at income of £210,000.
This is a rather complex process, and your bonus makes it quite possible you will tiptoe into the zone.

We covered the taper in post #2. Not an issue here because the threshold income is not above £110,000, and won't ever be if the bonus is always sacrificed.

jamesd

See Extracting pension pots: the Portugal plan.

The money doesn't have to go into Portugese banks or investments. You have to reside in Portugal, including its islands, for more than half a UK and Portugese tax year, not continuously. You can spend significant time in the UK and you need to read and understand the Statutory Residence Test rules to ensure that you do become and stay not UK resident. Takes at least five years not becoming a UK resident again, depends on the exact timings.

You don't need to stay in Portugal after becoming tax resident. You can even establish tax residence somewhere else if desired after the tax year of getting the money, maybe Malta or Cyprus, both of which have interesting tax treatment.

Since boats are both a very effective way to increase the amount of money you spend and always need work, the six months in and around Portugal could fit nicely with plans.

Don't know how Brexit would affect it but it is intended to encourage foreigners to relocate. I just didn't check the immigration permissions it provides because it wasn't necessary pre-brexit.

It's unlikely to be troublesome for anyone who likes boat life to spend time in Channel Islands, French, Irish and Isle of Man ports and spend a lot of time in the UK via commuting and/or port visits. If boat life proves tiresome Ireland is definitely not a bad place to live and also has excellent transport links to the UK.