Most tax efficient and low risk way to invest £1m today for an income

OldScientist

unitedwestand said:

Say you win £1m in the lotto and chuck your job. Now savings rates are higher what would the most tax efficient way to invest it for a return. 

To start off I was thinking. 
£20k in an cash ISA
£50k premium bonds

Open 5 savings accounts with £80k each and 1 with £40k (FCA protection) for a total of £440k with a target return of 3.99% p/a
This would give you £17,556 of interest.
Because you have no income I believe you would qualify for the starting savings rate of 0% for £5k plus still have a personal allowance of £12,570 so £17,570 total would be tax free.

Then you could try invest to make £1000 in dividends and £6000 in capital gains both of which are 0%.

If I'm correct/ this is possible at this point in the first year you've been able to invest £94,570 essentially tax free in year one.

There's also pension allowances/ backdated allowances however the aim would be for current income assuming not of pensionable age.

Next you could focus on dividend income which if you're not getting an income believe would only taxed at 8.75% at the basic rate after the £1k allowance.

I can't think of any other simple ideas for income that won't be taxed fairly significantly thereafter, any ideas? 

Depending on your age:

1) For those aged 50:  Build a 50 year ladder of index linked gilts that would give approximately £22.5k index-linked per year (given real yields of about 0.5%).
2) Aged 60 or so: A shorter ladder (40 years) would give a real income of £27.5k per year.

Capital gains on gilts are tax free, if gilts with 0.5% coupons or less were chosen, then interest would (in the initial years) be no more than the £5k mark (many bonds have 0.125% coupons, so interest would be lower) and, therefore (I think) tax free.

Of course, the money would be gone after the ladder ran out (but little or no tax would have been paid)! A purchased life annuity might be better from a longevity point of view (assuming that inflation linked versions can be bought and the payout rates aren't too far below those from pensions, currently £30k per year aged 55, single life).

GoldenOldy

OldScientist said:

unitedwestand said:

Say you win £1m in the lotto and chuck your job. Now savings rates are higher what would the most tax efficient way to invest it for a return. 

To start off I was thinking. 
£20k in an cash ISA
£50k premium bonds

Open 5 savings accounts with £80k each and 1 with £40k (FCA protection) for a total of £440k with a target return of 3.99% p/a
This would give you £17,556 of interest.
Because you have no income I believe you would qualify for the starting savings rate of 0% for £5k plus still have a personal allowance of £12,570 so £17,570 total would be tax free.

Then you could try invest to make £1000 in dividends and £6000 in capital gains both of which are 0%.

If I'm correct/ this is possible at this point in the first year you've been able to invest £94,570 essentially tax free in year one.

There's also pension allowances/ backdated allowances however the aim would be for current income assuming not of pensionable age.

Next you could focus on dividend income which if you're not getting an income believe would only taxed at 8.75% at the basic rate after the £1k allowance.

I can't think of any other simple ideas for income that won't be taxed fairly significantly thereafter, any ideas? 

Depending on your age:

1) For those aged 50:  Build a 50 year ladder of index linked gilts that would give approximately £22.5k index-linked per year (given real yields of about 0.5%).
2) Aged 60 or so: A shorter ladder (40 years) would give a real income of £27.5k per year.

Capital gains on gilts are tax free, if gilts with 0.5% coupons or less were chosen, then interest would (in the initial years) be no more than the £5k mark (many bonds have 0.125% coupons, so interest would be lower) and, therefore (I think) tax free.

Of course, the money would be gone after the ladder ran out (but little or no tax would have been paid)! A purchased life annuity might be better from a longevity point of view (assuming that inflation linked versions can be bought and the payout rates aren't too far below those from pensions, currently £30k per year aged 55, single life).

Blimey, I could do with someone like you to advise me. The ifa’s i’ve been to only get excited re investments with varying levels of risks involved. I tried two different ones and a third last year who wanted to charge me 4,000 per year which seemed excessive to me. As I get older I feel many dont have the understanding of older peoples needs. It was great to see your post…just need to win that million now!

OldScientist

GoldenOldy said:

Blimey, I could do with someone like you to advise me. The ifa’s i’ve been to only get excited re investments with varying levels of risks involved. I tried two different ones and a third last year who wanted to charge me 4,000 per year which seemed excessive to me. As I get older I feel many dont have the understanding of older peoples needs.

It was great to see your post…just need to win that million now!

No problem - this (at least partly) is what we would do if we ever won anything major... however, you have identified the flaw in my plan (no million yet)... fingers crossed for PB and lottery (we buy one ticket per week)!

Malthusian

OldScientist said:

Capital gains on gilts are tax free, if gilts with 0.5% coupons or less were chosen, then interest would (in the initial years) be no more than the £5k mark (many bonds have 0.125% coupons, so interest would be lower) and, therefore (I think) tax free.

If you have a million pounds invested in risk-free assets and are not paying tax on interest, the tax tail isn't just wagging the investment dog, you are swinging the investment dog round and round your head by the tax tail and throwing it out of the window  
A purchase life annuity would likely make more sense if you are willing to sacrifice the capital for guaranteed income in your lifetime. If you are buying an annuity at 50 or 60 then the insurer is going to cover the potential income after your centenary basically for free.
(Putting it another way, if you asked an insurer for a fixed term annuity that expired at 100 with nil value, and a lifetime annuity, the rates would be virtually identical. I.e. you are getting no real reward in exchange for the risk that you find yourself alive and penniless at 100.)
Unless you have existing health issues, there is no reason someone with a million quid in the bank and an aptitude for long-term planning should not hope to get their telegram from King Wills.
Purchase Life Annuities generally have a lower rate than pension annuities (around a percentage point for level annuities, not sure about inflation-linked) because it is a niche market with fewer competitors, and a lower mortality premium. (Translation: people with lower life expectancy buy purchase life annuities more rarely than pension annuities and therefore contribute less to the pot to pay people who live longer.)

GoldenOldy said:

Blimey, I could do with someone like you to advise me. The ifa’s i’ve been to only get excited re investments with varying levels of risks involved.

Old Scientist's proposed investment is mega-high-risk. It would have been absolutely demolished in value last year as it's mostly in long-dated gilts. 
It's all very well saying "but I don't care if the market value of the gilts falls because I intend to hold them to maturity", but what if your circumstances change? Say, you want to buy a house (OS doesn't mention if they're assuming the investor is already a homeowner) or help out your family or have medical bills. Professional advisers are not allowed to handwave away the fact that plans change. 
Its ability to keep up with inflation also depends entirely on the UK Government. The gilts are inflation-linked, so the Government can't reduce the value by printing money. You could argue that the UK Government defaulting on the debt, or even on just the inflation-linking, is too outlandish to worry about. However, there's nothing to stop them changing the definition of "inflation" to one that doesn't match your own cost of living increases. Again.
Most things consumed in the UK are made outside the UK so the cost of living is not under the Government's control, whatever it may like to pretend. A diverse portfolio of equities offers a reasonable hope of maintaining the value of your capital without relying entirely on the UK Government being able to keep up with the global cost of living.

I tried two different ones and a third last year who wanted to charge me 4,000 per year which seemed excessive to me. 

Would be very competitive for a million quid, less so for £400,000 invested. Was that the IFA's fee for advice or the "all-in" charge including fund charges and platform charges?

GoldenOldy

Malthusian said:

OldScientist said:

Capital gains on gilts are tax free, if gilts with 0.5% coupons or less were chosen, then interest would (in the initial years) be no more than the £5k mark (many bonds have 0.125% coupons, so interest would be lower) and, therefore (I think) tax free.

If you have a million pounds invested in risk-free assets and are not paying tax on interest, the tax tail isn't just wagging the investment dog, you are swinging the investment dog round and round your head by the tax tail and throwing it out of the window  
A purchase life annuity would likely make more sense if you are willing to sacrifice the capital for guaranteed income in your lifetime. If you are buying an annuity at 50 or 60 then the insurer is going to cover the potential income after your centenary basically for free.
(Putting it another way, if you asked an insurer for a fixed term annuity that expired at 100 with nil value, and a lifetime annuity, the rates would be virtually identical. I.e. you are getting no real reward in exchange for the risk that you find yourself alive and penniless at 100.)
Unless you have existing health issues, there is no reason someone with a million quid in the bank and an aptitude for long-term planning should not hope to get their telegram from King Wills.
Purchase Life Annuities generally have a lower rate than pension annuities (around a percentage point for level annuities, not sure about inflation-linked) because it is a niche market with fewer competitors, and a lower mortality premium. (Translation: people with lower life expectancy buy purchase life annuities more rarely than pension annuities and therefore contribute less to the pot to pay people who live longer.)

GoldenOldy said:

Blimey, I could do with someone like you to advise me. The ifa’s i’ve been to only get excited re investments with varying levels of risks involved.

Old Scientist's proposed investment is mega-high-risk. It would have been absolutely demolished in value last year as it's mostly in long-dated gilts. 
It's all very well saying "but I don't care if the market value of the gilts falls because I intend to hold them to maturity", but what if your circumstances change? Say, you want to buy a house (OS doesn't mention if they're assuming the investor is already a homeowner) or help out your family or have medical bills. Professional advisers are not allowed to handwave away the fact that plans change. 
Its ability to keep up with inflation also depends entirely on the UK Government. The gilts are inflation-linked, so the Government can't reduce the value by printing money. You could argue that the UK Government defaulting on the debt, or even on just the inflation-linking, is too outlandish to worry about. However, there's nothing to stop them changing the definition of "inflation" to one that doesn't match your own cost of living increases. Again.
Most things consumed in the UK are made outside the UK so the cost of living is not under the Government's control, whatever it may like to pretend. A diverse portfolio of equities offers a reasonable hope of maintaining the value of your capital without relying entirely on the UK Government being able to keep up with the global cost of living.

I tried two different ones and a third last year who wanted to charge me 4,000 per year which seemed excessive to me. 

Would be very competitive for a million quid, less so for £400,000 invested. Was that the IFA's fee for advice or the "all-in" charge including fund charges and platform charges?

It was for 400k investments, 180 pension . It was to pay every year for ongoing advice and didnt include other charges. It just felt wrong somehow, so I didnt fo for it. 

OldScientist

Malthusian said:

OldScientist said:

Capital gains on gilts are tax free, if gilts with 0.5% coupons or less were chosen, then interest would (in the initial years) be no more than the £5k mark (many bonds have 0.125% coupons, so interest would be lower) and, therefore (I think) tax free.

If you have a million pounds invested in risk-free assets and are not paying tax on interest, the tax tail isn't just wagging the investment dog, you are swinging the investment dog round and round your head by the tax tail and throwing it out of the window  
A purchase life annuity would likely make more sense if you are willing to sacrifice the capital for guaranteed income in your lifetime. If you are buying an annuity at 50 or 60 then the insurer is going to cover the potential income after your centenary basically for free.
(Putting it another way, if you asked an insurer for a fixed term annuity that expired at 100 with nil value, and a lifetime annuity, the rates would be virtually identical. I.e. you are getting no real reward in exchange for the risk that you find yourself alive and penniless at 100.)
Unless you have existing health issues, there is no reason someone with a million quid in the bank and an aptitude for long-term planning should not hope to get their telegram from King Wills.
Purchase Life Annuities generally have a lower rate than pension annuities (around a percentage point for level annuities, not sure about inflation-linked) because it is a niche market with fewer competitors, and a lower mortality premium. (Translation: people with lower life expectancy buy purchase life annuities more rarely than pension annuities and therefore contribute less to the pot to pay people who live longer.)

GoldenOldy said:

Blimey, I could do with someone like you to advise me. The ifa’s i’ve been to only get excited re investments with varying levels of risks involved.

Old Scientist's proposed investment is mega-high-risk. It would have been absolutely demolished in value last year as it's mostly in long-dated gilts. 
It's all very well saying "but I don't care if the market value of the gilts falls because I intend to hold them to maturity", but what if your circumstances change? Say, you want to buy a house (OS doesn't mention if they're assuming the investor is already a homeowner) or help out your family or have medical bills. Professional advisers are not allowed to handwave away the fact that plans change. 
Its ability to keep up with inflation also depends entirely on the UK Government. The gilts are inflation-linked, so the Government can't reduce the value by printing money. You could argue that the UK Government defaulting on the debt, or even on just the inflation-linking, is too outlandish to worry about. However, there's nothing to stop them changing the definition of "inflation" to one that doesn't match your own cost of living increases. Again.
Most things consumed in the UK are made outside the UK so the cost of living is not under the Government's control, whatever it may like to pretend. A diverse portfolio of equities offers a reasonable hope of maintaining the value of your capital without relying entirely on the UK Government being able to keep up with the global cost of living.

I tried two different ones and a third last year who wanted to charge me 4,000 per year which seemed excessive to me. 

Would be very competitive for a million quid, less so for £400,000 invested. Was that the IFA's fee for advice or the "all-in" charge including fund charges and platform charges?

I think my proposal is one way of meeting the barebones 'brief' of the thread title, "Most Tax Efficient and low risk way to invest £1m today for an income". However, I'm not going to disagree with you over the risks involved - the risk of government default is definitely not zero (although such a default or, indeed, changes in the definition of RPI/CPI would also affect inflation linked annuities in a similar way - I did mention PLA as an alternative). As far as I am aware, to date there has been no country that issues inflation linked bonds which has undergone severe inflation (e.g. even a sustained period of 10% or more). Hopefully, the UK won't be the one to test this out!

Constructing a ladder (or purchasing an annuity) to provide a baseline of (probably ) inflation linked income to cover essential needs (together with state pension) with the remaining portfolio (e.g. global equities) covering discretionary income or lump sum requirements, is a more realistic approach.

jcuurthht

All in Vanguard FTSE All World. Withdrawl 3% a year, adjusting for inflation. That gives me almost 30k a year to live on. Bin my job, grab my bike and cycle across Europe and perhaps beyond.

OldScientist

Whether you can become 'economically inactive' with a £1m win depends on your age. Assuming investing in index funds and taking an inflation adjusted income (so-called 'safe' withdrawals), historically, the maximum initial percentage of the portfolio as a function of retirement duration and stock allocation for UK investments (these values assume an annual fee of 0.2% and bonds with about 10 year duration) was

                       Planned retirement years

Stock(%)       60      50      40      30      20

0                   0.8     0.9     1.2     1.8     3.2

25                 1.3     1.4     1.7     2.3     3.4

50                 1.8     1.9     2.2     2.7     3.7

75                 2.2     2.3     2.6     3.0     3.8

100               2.3     2.4     2.7     3.1     3.8

More realistically, using an international portfolio would have added about 0.3 percentage points to these values.

For a 67 year old couple with £190k each in their pensions already (average of those with pension pots in 2022) gives them an additional £380k and (probably) two full state pensions. For a m/f couple, there is a predicted 8% chance of one or other or both of them reaching the age of 100. So, planning a 35 year retirement might be prudent. From the above table, drawdown would be about 2.8% (assuming a willingness to hold 75% stocks), add another 0.2% for holding international investments, to take it to 3.0%. Will also assume they are householders with the mortgage paid off and any children are financially independent.

Planned income would then be
State pension   £21k
Drawdown        £41k
Total                 £62k

Alternatively, using the taxable part of the pensions to purchase an annuity (at 67 currently about 3.6% payout for inflation linked, joint with 100% survivor benefits)

State pension     £21k
Annuity income  £10k
Drawdown         £33k
Total                  £64k


A 57 year old couple would have a 10% chance of one of them reaching 100yo, so 102 is probably still good enough (and so a planning duration of 45 years is reasonably conservative), with a drawdown of 2.4% (assuming 75% stocks), plus 0.3% for international, so 2.7%. Average pension pot size was about £190k for 57 year olds in 2022. Will also assume they are householders with the mortgage paid off and any children are financially independent.

Assuming they each need another 5 years each of NI contributions in order to receive the full state pension, they will need to use about £10k (roughly £1k per missing year) - exact amount depends on inflation, but this is small compared to everything else.

They will need to fund 10 years of missing state pension - assuming cash rates can keep up with inflation (hmm....) or inflation linked bonds with yields of 0% are used instead then this requires about £210k to be set aside. The win pot is now 1000-210-10=780k.

Income will then be
State pension (or from set aside funds in first 10 years) £21k
Drawdown  £31k
Total £52k

Off to defrost the freezer now!