New tax code on retirement

Newly_retired

I retired on Aug 31 and am now on my fourth different tax code since then, having had three different calculations in the last week from HMRC. I 'm struggling with the sums, but my main issue is over a "chargeable event" last Feb when I cashed in an investment. I was led to understand that as I had held it for 4 years I would only be taxed on a quarter of the gain. Being taxed on the lot pushes me into the higher tax band- not what I wanted to hear.
Can anyone advise me if this is correct please?

CLAPTON

its a little light on detail for anyone to be able to help... was this a business assett?

dunstonh

I 'm struggling with the sums, but my main issue is over a "chargeable event" last Feb when I cashed in an investment. I was led to understand that as I had held it for 4 years I would only be taxed on a quarter of the gain. Being taxed on the lot pushes me into the higher tax band- not what I wanted to hear.
Can anyone advise me if this is correct please?

As claption says, its a bit light on detail. My response is geared to a life assurance investment.

An investment giving rise to a chargeable event would be life insurance based. Quite useful for those that are retired and close to £20,900 income as it can save tax. However, if you cash one in too early it can cause an increase in taxation.

Take the gain, divide it by 4 (assuming 4 whole years, if not 3). Add that to your income and if it takes you into higher rate, you then have to take the amount that is chargeable to higher rate and multiply it back by 4 (or 3 if not whole years). You then pay the additional tax on that.

I think you have forgotten to multiply the bit in higher rate by the number of years.

With hindsight, cashing in the investment after just 4 years when you were likely to see such as gain on your income was not a good thing to do. Alternatively you could have rolled over the investment into a new investment bond within 30 days and continued the deferment.

Newly_retired

Yes it was an AXA life insurance investment. My IFA advised me to cash it in and reinvest the proceeds which I did, via him, with a different company within 30 days. There was a penalty for early encashment which his firm covered by additional payment into my new investment He warned me I would have about £300 additional tax to pay, but HMRC made it over three times that at first, but now they have taken off "Top Slicing relief " of £344.80. bringing my unpaid tax to £618. As everything else is straightforward this must be entirely down to the chargeable event.
I would gladly have waited until the next tax year as I am now only a basic rate tax payer. Even last tax year it is only this that has pushed me into higher band. My IFA is currently on holiday otherwise I would be on the phone to him now. I am not happy, to put it mildly.
Many thanks for your help

dunstonh

AXA's unit linked bond, whilst not the cheapest, is coming out about 4th place on my last research and they have a very good fund range.

Why did the IFA recommend you change it into another investment bond?

Hopefully, he sacrificed the bulk, if not all, his initial commission as I wouldnt want to think that the recommendation was done purely to generate an initial commission. Especially if he sold the original one.

Obviously, we dont have all the facts to hand and switching products can make sense if the old product it obsolete and better is around. If it was out of an old legacy bond into a new lower cost one then fair enough but you suffered an exit penalty and a tax penalty. Plus, many bonds claw back some of that initial allocation over the first 3-5 years in an increased charge. So, if you recieved say 105% allocation, and pay 0.5%p.a. of that back in increased charges over 5 years meaning you are really only getting an extra 2.50%. Take a look at your illustration to see what your initial allocation rate was and what the extra percentage charge is and for how long. Also, look at the reduction in yield over 10 years (near the back of the illustration... putting it another way, if growth was 6% the charges would have the effect of reducing this to 4.9%) - what is the figure there (i used 4.9% in that example)

My IFA is currently on holiday otherwise I would be on the phone to him now. I am not happy, to put it mildly.

Dont assume the worst yet but you do have good reason to be on guard. There could be a good reason but it could be a classic churn to generate commission.

Let us know the allocation rate and extra deductions for how many years and what fund(s) were recommended and I will give you a list of questions to ask him for is return. Also let us know the reduction in yield and initial commission.

Newly_retired

Oh dear I am not sure I have ALL the original paperwork still, as I had a major clear out 6 months after it had all gone through. Don't think I kept the Key Features documents. Are you suggesting I have a possible case against my IFA?
Meanwhile, this was a tax question originally!

dunstonh

Are you suggesting I have a possible case against my IFA?

Not enough info to say for sure but there are enough warning signs for it to be potentially an issue.

1 - Why switch from one bond to another whilst in the initial 5 year period and incur charges?
2 - AXA's bond has a very good fund range (one of the best). What was the choice for using another bond to invest in?
3 - Why recommend surrender in a tax year where you were likely to get a chargeable gain that took you into higher rate?
4 - Was the initial commission rebated as the adviser would have earned on the original AXA sale? if not, it smells of churn. Especially if it is full upfront commission.

If you phone your provider, you can ask them to send you another illustration. Most will. If they cannot, you could always ask them what the initial allocation was, what the initial commission was and what establishment charges exist on the contract and for how long.

I dont want you putting in a mis-sale complaint yet but I think you need to have these facts to hand as the transaction could have cost you more than you realise. (exit charge, tax charge, establishment charge). Plus, what fund(s) are you in now and why couldnt the AXA bond be used with those funds avoiding all the charges mentioned?

Newly_retired

Thanks to both dunstonh and jimmo for your helpful comments.
jimmo you are absolutely right and have helped me to see the wood for the trees. Everything you said makes sense now and the new coding is related to my state and works pensions. Yes they said that underpayment can be paid now or can be dealt with by a new code next year. As the underpayment relates to chargeable gain on investments can you explain top-slicing relief please? If I think they have got it right I might pay it off.

dunstonh I have got nowhere with AXA on the phone as yet and have definitely not got the info you asked for. I'll try again. My replacement investment is with NU - portfolio step down guaranteed policy. Again this was what my IFA advised, though I did not reinvest the whole sum this time. Have kept some in cash savings too this time.

dunstonh

NU is a cracking investment bond. It is one of the best ones available and the guaranteed fund is a very good alternative to the rubbish GEBs that we see people often bring up in the investments section. Indeed, this week already I have started research on a 100k which will could end up with a little in the guaranteed fund with a 108.25% initial allocation.

Take a look at your policy booklet from NU and see what the initial allocation was as that will tell you what commission was taken. Anything around 107-108.25% allocation is perfect. That "suggests" nice size rebate and advice wasnt done to generate an initial commission. Anything around 102% suggests no rebate and full commission and probably done to generate a commission. My reason would be that AXA have a range of guaranteed funds and they could have been used without creating a chargeable gain.

Plus, if it is around 102%, then you are losing money by transferring to AXA. Not just because you paid an exit penalty and a chargeable gain but because NU charge an extra 0.5% p.a. for the first 5 years. You have to look at what they give you and what they take back and what the net result is.

So, as we stand now, the use of NU is positive as their pricing is good and product is good. However, AXA could have had their equivalent used without cost. If the allocation rate on your policy booklet is high, then that would be a positive. If its low it would be a negative. Indeed, unless its above 106% then I would really be thinking about having a strong word with your adviser.

Newly_retired

105.25%
Glad to hear NU is a good fund even if allocation not quite the best I might have got.

dunstonh

That allocation rate suggests 4% initial commission and 0.5% p.a. trail (although NU will indemnify 4 years worth of trail and increase the intial commission). I did an illustration today with NU of 108.25% for new money which would be 109.25% on product switch for existing money. So, that gives you an idea of where your 105.25% sits.

NU charge an extra 0.5%p.a. for 5 years on new investments. AXA charge 1.35% p.a. extra but only for 3 years. You has just finished paying these with AXA but then left as the charges dropped only to go to NU where you pay an extra again.

You had a 4% exit penalty from AXA (between year 3 and 4) and will be paying an extra 2.5% in allocation charges with NU (with growth the 0.5% p.a. for 5 years is actually higher than 2.5% but just keeping it simple here).

So, the product charges to you for this transaction means you gained 5.25% on initial allocation but lost 4% on exit penalty. You will also lose 2.5% on establishment charges (which you had just finished paying with AXA). Meaning it has cost you 1.25% to move from AXA to NU just in product charges.

Add the tax from the chargeable gain into that and it seems like bad advice to me. Better advice would have been to wait until 5th anniversary and move without penalty and when top slicing relief wouldnt have given you any higher rate tax and you would have gained more of the intial allocation and in the meantime use the AXA funds to give you the equivalent of the NU guaranteed fund.

You can work out how much commission that 4% has paid him and perhaps decide if that was a driver in the recommendation rather than actual best advice.

I think you need a chat with him.