New tax code on retirement

EdInvestor

dunstonh wrote: »

I would like to see how an investment of £200k avoids capital gains tax for a basic rate taxpayer with unit trusts.

Err, there is no CGT to pay on unrealised gains for a start.And there is a 9,200 quid allowance on any realised gains before there is any tax to pay.There is no tax to pay on dividends as they are covered by the tax credit.So a person investing 200k could take 5% (10,000) in divis and a further 9,200 (4.6%) in capital gains from the investment each year total 9.6% return all tax free. No further tax to pay of any kind at any time.It's really quite simple.

As has been pointed out many times before, I am an NMA IFA. So commission levels dont make a single bit of difference to me personally as I get paid the same regardless of tax wrapper.

But as you know NMA IFAs are a very small minority.The very vast majority of IFAs go for the biggest amount of upfront commission they can get.It's not fair to people on this forum to pretend that the way you may operate is normal.What the OP is experiencing is much closer to the general experience.

It is oversold and commission bias is a very good reason for that. However, that doesnt make the product bad. That makes the adviser in question bad. The extra commission works well for low cost advisers as it reduces the charges and increases the rebate.

See? You extrapolate from your own approach to the entire advisor universe.That's just plain misleading,sorry.The number of people following your system is vanishingly small.

jem16

EdInvestor wrote: »

Err, there is no CGT to pay on unrealised gains for a start.And there is a 9,200 quid allowance on any realised gains before there is any tax to pay.There is no tax to pay on dividends as they are covered by the tax credit.So a person investing 200k could take 5% (10,000) in divis and a further 9,200 (4.6%) in capital gains from the investment each year total 9.6% return all tax free. No further tax to pay of any kind at any time.It's really quite simple.

So simple that you forget the basic rate taxpayer on £30k or above who has now entered higher rate tax because of the £10k in dividends. Or the over 65 who already has £11k of pension who has now entered the age allowance clawback territory because of dividends. So not tax-free after all.

Or do we just ignore them because it suits your argument?

EdInvestor

These problems at the margins can be resolved by use of the annual ISA allowance over time and other tax free options such as various National Savings products.

jem16

EdInvestor wrote: »

These problems at the margins can be resolved by use of the annual ISA allowance over time and other tax free options such as various National Savings products.

So it's not a £200k investment any longer.

It would take one person 29 years to harbour the £200k into an ISA.

dunstonh

Err, there is no CGT to pay on unrealised gains for a start.And there is a 9,200 quid allowance on any realised gains before there is any tax to pay.There is no tax to pay on dividends as they are covered by the tax credit.So a person investing 200k could take 5% (10,000) in divis and a further 9,200 (4.6%) in capital gains from the investment each year total 9.6% return all tax free. No further tax to pay of any kind at any time.It's really quite simple.

£200k could easy have averaged 15% a year for the last 5 years. So, lets just take one year in isolation and thats £30,000. Miles past the £9200 allowance. Your post infers that you wouldnt realise the investment so lets double that £200k with the investment returns and you now have capital gains tax to pay on £190,800 when you realise it.

But as you know NMA IFAs are a very small minority.The very vast majority of IFAs go for the biggest amount of upfront commission they can get.It's not fair to people on this forum to pretend that the way you may operate is normal.What the OP is experiencing is much closer to the general experience.

NMA IFAs are about 20% of the overall numbers but growing all the time. If the FSAs RDR proposals are accepted then the majority will be working this way.

You constantly tell forum posters to go execution only and tell them which providers to use when buying their unit trusts. So, how come its good for them on unit trusts but not good for them on other products such as this?

All I have suggested is that you compare on like for like distribution channels and not the biased execution only vs full commission examples that you normally use.

See? You extrapolate from your own approach to the entire advisor universe.That's just plain misleading,sorry.The number of people following your system is vanishingly small.

Its its "vanishingly small" how come we have our own dedicated weekly publications and websites targetting us? How come every week the magazine profiles different NMA firms? If it was that small, there would be no justification for the magazine.

Stop trying to divert the attention to distribution channels. There are ample execution only websites that Martin mentions in his articles. The very same ones you have recommended to people at times. So, if it is good for you with some products, it should be for others.

EdInvestor

So it's not a £200k investment any longer. It would take one person 29 years to harbour the £200k into an ISA.

You don't have to put all the money into an ISA- about 5-10% would do. That amount would generate 500-1k income a year, so if it's remoived from equation, the rest of the income will remain below the higher band.Obviously it is sensible to max out your 7k ISA every year (X2 for couples) and many people with large sums like this will also want to use the NS&I tax free accounts particularly if they pay HRT.Over the years the money would by then fully protected particularly on the capital gains front.

dunstonh wrote: »

£200k could easy have averaged 15% a year for the last 5 years. So, lets just take one year in isolation and thats £30,000. Miles past the £9200 allowance. Your post infers that you wouldnt realise the investment so lets double that £200k with the investment returns and you now have capital gains tax to pay on £190,800 when you realise it.

That's assmuning you realise it all at once and had no other losses to set against it.And if you were so disorganised as to run your investments like this, you would still be better off as of next April, as you would only pay 18% CGT on the proceeds, rather than 20% corporation tax within the bond.

You constantly tell forum posters to go execution only and tell them which providers to use when buying their unit trusts. So, how come its good for them on unit trusts but not good for them on other products such as this?

Going e/o would not affect the tax treatment within the bond.

Its its "vanishingly small" how come we have our own dedicated weekly publications and websites targetting us?

Well there's one publication run by the same people who own the website (Citywire).Most of the NMA firms appear to specialise in very high net worth clients, which are not the same profile as we find here.I don't get the impression too many people on MSE have ever run across an NMA other than you.

dunstonh

That's assmuning you realise it all at once and had no other losses to set against it.And if you were so disorganised as to run your investments like this, you would still be better off as of next April, as you would only pay 18% CGT on the proceeds, rather than 20% corporation tax within the bond.

You are assuming that it will be 20% corporation tax next year. I would await the final outcome of the pre-budget report before making such an assumption.

Plus again, you are assuming that 20% is paid on all assets within the funds which in reality is not the case.

Going e/o would not affect the tax treatment within the bond.

It would affect the charges though and make the bond cheaper. In which case the charges can offset the tax differences.

Well there's one publication run by the same people who own the website (Citywire).Most of the NMA firms appear to specialise in very high net worth clients, which are not the same profile as we find here.I don't get the impression too many people on MSE have ever run across an NMA other than you.

I operate in a small town with about 15 IFA firms in the town or surrounding villages. At least 3 other firms I know of operate to NMA basis. So, whilst its a minority, it still has a good showing. I understand one firm is going for charted status as well and that will be close to the NMA model as well. NMA IFAs do tend to focus on higher wealth clients and many have a minimum investment. However, that doesnt change the fact that we all deal with basic rate taxpayers as it is possible to have millions in assets and still pay basic rate. The business model doesnt matter either because the product can be bought on execution only basis exactly as the alternatives you recommend.

You were the one that raised commission bias as being a reason why advisers support this product. I was just pointing out that as an NMA IFA I have no commission bias and there are advantages as well as disadvantages on this product. This isnt about business models of IFAs but the suitability or investment products.

jem16

EdInvestor wrote: »

You don't have to put all the money into an ISA- about 5-10% would do. That amount would generate 500-1k income a year, so if it's remoived from equation, the rest of the income will remain below the higher band.

Initially you said that the £200k investment would generate £10k in dividends each year. So now you say put part of the £200k into the ISA and it will generate around £1k each year. So you still have £9k in dividends outside the ISA.

How exactly does that stop the basic rate taxpayer earning £31k and above from going into higher rate band? Or the over 65s with £12k - £17k of pension from going into age-allowance clawback territory.

All you have done is removed a small part which is not likely to make a big difference.

EdInvestor

jem16 wrote: »

Initially you said that the £200k investment would generate £10k in dividends each year. So now you say put part of the £200k into the ISA and it will generate around £1k each year. So you still have £9k in dividends outside the ISA.

How exactly does that stop the basic rate taxpayer earning £31k and above from going into higher rate band? Or the over 65s with £12k - £17k of pension from going into age-allowance clawback territory.

This was what you originally asked

So simple that you forget the basic rate taxpayer on £30k or above who has now entered higher rate tax because of the £10k in dividends. Or the over 65 who already has £11k of pension who has now entered the age allowance clawback territory because of dividends. So not tax-free after all.

These people on higher salaries are still likely to pay less tax using their ISAs and investing directly after next April because the rate of CGT will be lower than the tax rate on gains within the bond. A person with a 30k salary would not normally use an income based investment strategy except in an ISA or other tax free instrument.

dunstonh

These people on higher salaries are still likely to pay less tax using their ISAs and investing directly after next April because the rate of CGT will be lower than the tax rate on gains within the bond.

This may or may not be the case as it is the item currently most likely to be changed before it comes into effect. Of course the Govt may not change it but apparantly it is the only thing the treasury is looking at after all the various lobby groups have made their cases on all the different things covered in the PBR.

Even if it isnt changed, then the lower charges potential on the bond along with the ability to rebalance the portfolio and switch funds without creating a chargeable event and not pay higher rate tax on the income can make the bond more attractive.

A person with a 30k salary would not normally use an income based investment strategy except in an ISA or other tax free instrument.

Thats one hell of a generalisation. Many people invest into portfolios with higher yields. Especially those that are more cautious or subscribe to the HYP strategy.