Investing after LTA?

jamesd

zagfles said:

BTW I notice you don't bang on about P2P any more, why is that?

An artefact of the change in forum software that changed how I participate here by making it less convenient to follow conversations, particularly across different sections.

It happens that I spent half an our or so discussing various things with Ablrate earlier today.

jamesd

Albermarle said:

After looking at VCTs , I came to the quick conclusion that they were not suitable for a non professional investor ( like me ) and just paying LTA if necessary would be a more sensible ( and easier ) option. 

Definitely don't use them or any other investment that you're uncomfortable with.

I started back in 2014 and this year I'm buying £25,000 worth to cover the tax cost of pension withdrawing to use my full basic rate band. But that's me, not you.

Newnoel said:

VCT: high risk, but gives a decent longer term tax free dividend stream, in addition to the 30% up-front tax back.

OP explained one of the other nice features of mature VCTs: AAVC Albion has been paying me tax exempt dividends of about 10% of my after tax relief purchase price since 2014.

Croeso69 said:
I work in financial services and i struggled with what @jamesd was trying to explain.

1. The likely amount of pension withdrawing needed to avoid a lifetime allowance charge on growth at age 75. £88,200 if we assume unvarying average UK equity market growth. Vs the often lower safe withdrawal (spending) rate.
2. Calculations on how to use VCT buying to offset the tax on that withdrawing.

Just skip the VCT bits and look at what you need to withdraw from the pension to avoid unnecessary age 75 LTA charge if VCTs don't interest you.

I didn't skip them because our OP is interested and they can make it a better deal to pay the initial 25% income LTA charge instead of the 55% lump sum one. The VCTs let you recover the income tax on withdrawing income but you can't recover the extra 30% lump sum charge. 

AnotherJoe

Newnoel said:

I am in my late 40s and my SIPP has recently tipped over £1.2m, due to a bit of luck from getting in early with Scottish Mortgage Investment Trust (SMIT), so the question becomes ... what next in terms of pension planning? I have moved out of SMIT, and into Vanguard Emerging Markets fund

SMIT is Schmitt Industries, which has done well the last year, pretty much as well as Scottish Mortgage.

So even if you bought SMIT by mistake, you've lucked out.

Good luck with Vanguard Emerging Markets, I'd have stayed in SMT myself, indeed I am, though not sure about SMIT.

zagfles

jamesd said:

zagfles said:

jamesd said:

...
While zagfles is right about 4% SWR income that's a very bad case and more will be needed to be confident of not having a bill at 75. At a minimum, using the full basic rate band every year.

Oh really? "Very bad case"? Wade doesn't think so, it looks to be a very good case internationally https://retirementresearcher.com/4-rule-work-around-world/

Yes and the page you linked to is of the worst cases for many other countries. In each case it's the highest withdrawing rate that would have worked in the worst sequence of investing conditions in the previous century or so. Not merely very bad, but actual worst.

Presumably you'll agree that the worst sequence in around 125 years for the US that set its safe withdrawal rate qualifies as a "very bad case" and that 4% rather than 3.7% for the UK is also very bad, if not quite the worst.

It shows failure rates >50% for some countries at a so-called "SWR" of 4% !!

The problem with most of these analyses is they're mostly US studies and US biased. Just like the links you post...

What you've done is mix up several different things:

1. a safe withdrawal (spending) rate, which is for the worst returns sequence in a century or so. On the part tax free and part taxable £1,528,275 projected for this case 3.7% (UK SWR before costs for a common mixture) would be £56,546 while the comparable variable Guyton-Klinger 5.5% (I usually use 5% after costs) would be £84,055. Though note that 3.7% is for 30 years and 5.5  for 40 so 30 in particular looks too short for an age 55 plan start.

2. what a safe withdrawal rate is, which is very well explained by Kitces in The Extraordinary Upside Potential Of Sequence Of Return Risk In Retirement , where he observes that "taking a 4% initial withdrawal rate has an equal (10%) likelihood of leaving all the retiree’s principal left over at the end of retirement… or leaving 6X the starting account balance remaining instead". Understanding this is important for 3...

3. the rate at which money needs to be withdrawn from a pension for tax efficiency, with the amount above the SWR reinvested outside the pension. This one needs to use reasonably likely return plus a safety margin, well above the SWR worst sequence. Tax thresholds like basic rate band and loss of personal allowance also matter.

Well yes, then you need to consider the disadvantages of being outside the pension, eg IHT, possible tax on investment returns if outside an ISA etc. 

You also need to think about hedging. If things turn out badly, it's far more important that you've planned things in a tax efficient manner as having an income much lower than you planned is far worse for most people than having an income much higher but paying a bit more tax than they would have done had their crystal ball told them the future.

In this case our original poster is already considering VCT investing in a sensible choice, Octopus Titan, though they might want to consider Proven and Albion as well for diversification; I anticipate buying £25,000 combined of all three myself this year.

VCTs are collective investments like investment trusts and funds that invest in younger and smaller businesses than most funds, though there are some micro-cap conventional funds around. That can make their prices more volatile than say a small cap fund, in part because younger businesses held in the VCT are more likely to fail. The underlying investments (businesses) start out almost totally illiquid because they are spending the money to grow. But mature VCTs have a mixture of new and old investments and the gradual maturing and selling provides internal liquidity. But for investors, VCTs are shares traded on the stock market so you can sell or buy (no initial 30% tax relief but still exempt from tax on dividends). Trading can be thin so it's routine for VCTs to buy back their own shares. Ordinary deals have the usual settlement three days after the trade like any other UK share deal.

It's worth remembering that everything except cash in pensions is also risky and some, like property funds, can be illiquid at the direction of the FCA for a year or more. A basic fund covering the UK stock market can expect periodic 40-50% drops with the potential for 80%.

Yeah and people who don't smoke can get lung cancer etc etc... You seem to be missing the point.

zagfles

jamesd said:

zagfles said:

BTW I notice you don't bang on about P2P any more, why is that?

An artefact of the change in forum software that changed how I participate here by making it less convenient to follow conversations, particularly across different sections.

It happens that I spent half an our or so discussing various things with Ablrate earlier today.

Do you normally spend half an hour discussing cash investments with a provider?

Nothing to do with the above, but I've heard of some people who got their fingers burnt with P2P and tried blaming the FCA.

jamesd

zagfles said

Do you normally spend half an hour discussing cash investments with a provider?

Nothing to do with the above, but I've heard of some people who got their fingers burnt with P2P and tried blaming the FCA.

I'd hope that the cash case would be so simple that such time wouldn't be needed or useful, though I have needed to use that much and more.

You're probably thinking of the case where the FCA wrongly told investors that a business was a P2P firm and was being monitored by them when neither was true. In such cases I think that it's correct for the regulator to be liable for the losses incurred by those it was supposed to be protecting.

Newnoel

AnotherJoe said:

Newnoel said:

I am in my late 40s and my SIPP has recently tipped over £1.2m, due to a bit of luck from getting in early with Scottish Mortgage Investment Trust (SMIT), so the question becomes ... what next in terms of pension planning? I have moved out of SMIT, and into Vanguard Emerging Markets fund

SMIT is Schmitt Industries, which has done well the last year, pretty much as well as Scottish Mortgage.

So even if you bought SMIT by mistake, you've lucked out.

Good luck with Vanguard Emerging Markets, I'd have stayed in SMT myself, indeed I am, though not sure about SMIT.

My mistake - I meant SMT. I don't do individual shares - I dont have enough time or knowledge to manage the diversification risk


One of the other Baillie Gifford funds I am considering is Edinburgh Worldwide Investment Trust
Seems to be less focussed on tech - but offering similar returns to SMT.

Newnoel

jamesd said:

I started back in 2014 and this year I'm buying £25,000 worth to cover the tax cost of pension withdrawing to use my full basic rate band. But that's me, not you.

Have you drawn out the cash to buy back into the VCT in the same tax year to double dip the 30% tax rebate? Is it possible to do this every 5 years?

jamesd

Newnoel said:

I started back in 2014 and this year I'm buying £25,000 worth to cover the tax cost of pension withdrawing to use my full basic rate band. But that's me, not you.

Have you drawn out the cash to buy back into the VCT in the same tax year to double dip the 30% tax rebate? Is it possible to do this every 5 years?

@NewnoelNot yet. With tax exempt dividends of around 10% of my after tax relief largest holding AAVC - Albion Venture Capital Trust - I'm content to take that ongoing money and diversify. That choice will become more interesting in 2-3 years, when I get to the point where I can expect to withdraw all remaining taxable pension money within my income tax personal allowance. That will largely end my recycling opportunity. And effectively eliminate income tax for the rest of my life, the income being from exempt sources or within allowances.

Around then I may have around 100k in VCTs if I haven't sold so prudence would require doing a fair bit of selling for diversification.

Yes, you can do it every five years so long as you have an income tax bill. To keep diversification adequate you'll need to systematically do that, else you'll end up way too high in VCTs. And even then you'll still be higher than really desirable and need to pay attention to using many for diversification.

jamesd

zagfles said:

jamesd said:

zagfles said:

 then you need to consider the disadvantages of being outside the pension, eg IHT, possible tax on investment returns if outside an ISA etc. 

You also need to think about hedging. If things turn out badly, it's far more important that you've planned things in a tax efficient manner as having an income much lower than you planned is far worse for most people than having an income much higher but paying a bit more tax than they would have done had their crystal ball told them the future.
...
 You seem to be missing the point.

You did mention some things that I agree with and didn't expand on for that reason. Being inside tax wrappers, including pension, ISA and VCT can make a big difference and just about all of my own money is, or out temporarily to exploit a better opportunity. Inheritance needs to be considered and pensions have good treatment below the lifetime allowance; above and lifetime allowance charge mitigation combined with giving while alive can be more beneficial, as it can be anyway due to the benefits of lifetime giving. I also agree about hedging (and diversification) and the importance of tax efficiency if things go badly. 

Our OP has some 5+ years to pension access age then 20 more until the lifetime allowance charge on growth can't be avoided any more if it hasn't been mitigated. Plenty of time to adjust based on the investment results actually experienced.