Index linked gilts and index linked annuities: are you moving money into them, yea or nay?

RogerPensionGuy

I purchased a few gilts last year trying to understand how they work, call it a small gilt ladder of over just 5 years and plan to just keep them to maturity.

My feeling about these gilts is they work okay or very well for 40 & 45% income tax payers, but less so for 20% tax payers.

 

MK62

RogerPensionGuy said:

My feeling about these gilts is they work okay or very well for 40 & 45% income tax payers, but less so for 20% tax payers.

 

.....but in a pension, that's irrelevant.

MarkCarnage

RogerPensionGuy said:

I purchased a few gilts last year trying to understand how they work, call it a small gilt ladder of over just 5 years and plan to just keep them to maturity.

My feeling about these gilts is they work okay or very well for 40 & 45% income tax payers, but less so for 20% tax payers.

 

A 40% or higher tax payer will often benefit more from holding them outside a pension wrapper if they buy low coupon gilts and make most of the return via capital gain which is tax free for gilts. Buying these inside the pension wrapper will of course also have no tax, but withdrawals will be taxed at the marginal rate, whereas in a simple investment account there will be no tax to pay at all if the proceeds are taken out (small amount of tax payable on the small income from the gilt but it's pretty negligible). 

michaels

So do we know the best platform for these?  Adding another platform would be an extra cost especially as I assume for example for iWeb they do not come under their ETF only reduce price package?

Also has anyone actually compared the cost of building a linkers ladder to bridge the gap to state/DB pension with the cost of an equivalent (fixed term, RPI, joint life) annuity?  That again would likely require a quote from a broker as there do not seem to be web site quotes for such products.

zagfles

MarkCarnage said:

RogerPensionGuy said:

I purchased a few gilts last year trying to understand how they work, call it a small gilt ladder of over just 5 years and plan to just keep them to maturity.

My feeling about these gilts is they work okay or very well for 40 & 45% income tax payers, but less so for 20% tax payers.

 

A 40% or higher tax payer will often benefit more from holding them outside a pension wrapper if they buy low coupon gilts and make most of the return via capital gain which is tax free for gilts. Buying these inside the pension wrapper will of course also have no tax, but withdrawals will be taxed at the marginal rate, whereas in a simple investment account there will be no tax to pay at all if the proceeds are taken out (small amount of tax payable on the small income from the gilt but it's pretty negligible). 

But a 40% taxpayer will get relief at 40% on pension contributions on the way in, so unless they've hit the AA (or the earnings limit if a lot of unearned income), a pension would almost always be better. Holding unwrapped is tax efficient once pension & ISA limits hit, but if spare pension/ISA allowance then generally using them first is best. Subject to age/access issues etc. 

MarkCarnage

zagfles said:

MarkCarnage said:

RogerPensionGuy said:

I purchased a few gilts last year trying to understand how they work, call it a small gilt ladder of over just 5 years and plan to just keep them to maturity.

My feeling about these gilts is they work okay or very well for 40 & 45% income tax payers, but less so for 20% tax payers.

 

A 40% or higher tax payer will often benefit more from holding them outside a pension wrapper if they buy low coupon gilts and make most of the return via capital gain which is tax free for gilts. Buying these inside the pension wrapper will of course also have no tax, but withdrawals will be taxed at the marginal rate, whereas in a simple investment account there will be no tax to pay at all if the proceeds are taken out (small amount of tax payable on the small income from the gilt but it's pretty negligible). 

But a 40% taxpayer will get relief at 40% on pension contributions on the way in, so unless they've hit the AA (or the earnings limit if a lot of unearned income), a pension would almost always be better. Holding unwrapped is tax efficient once pension & ISA limits hit, but if spare pension/ISA allowance then generally using them first is best. Subject to age/access issues etc. 

In many cases they would be I agree (though it's marginal difference). However, if there is significant gain in value of the gilt, the tax on the withdrawal of it may mean that more tax is paid overall in the pension. 
Also, in Scotland we have the scenario where tax relief at 40% was given on the way in, but it's now entirely possible to be paying quite a bit more than that on the income coming out....I speak from experience, where I am taxed at 42% and would be 45% if my income was slightly higher compared to 40% in England. And higher rate starts £7k lower.......hence I went for using low coupon gilts in my GIA instead of adding more to my SIPP. 
Let's not get into the debate of whether that constitutes 'avoidance' or 'tax efficiency'......it's certainly not evasion! 

zagfles

MarkCarnage said:

zagfles said:

MarkCarnage said:

RogerPensionGuy said:

I purchased a few gilts last year trying to understand how they work, call it a small gilt ladder of over just 5 years and plan to just keep them to maturity.

My feeling about these gilts is they work okay or very well for 40 & 45% income tax payers, but less so for 20% tax payers.

 

A 40% or higher tax payer will often benefit more from holding them outside a pension wrapper if they buy low coupon gilts and make most of the return via capital gain which is tax free for gilts. Buying these inside the pension wrapper will of course also have no tax, but withdrawals will be taxed at the marginal rate, whereas in a simple investment account there will be no tax to pay at all if the proceeds are taken out (small amount of tax payable on the small income from the gilt but it's pretty negligible). 

But a 40% taxpayer will get relief at 40% on pension contributions on the way in, so unless they've hit the AA (or the earnings limit if a lot of unearned income), a pension would almost always be better. Holding unwrapped is tax efficient once pension & ISA limits hit, but if spare pension/ISA allowance then generally using them first is best. Subject to age/access issues etc. 

In many cases they would be I agree (though it's marginal difference). However, if there is significant gain in value of the gilt, the tax on the withdrawal of it may mean that more tax is paid overall in the pension. 
Also, in Scotland we have the scenario where tax relief at 40% was given on the way in, but it's now entirely possible to be paying quite a bit more than that on the income coming out....I speak from experience, where I am taxed at 42% and would be 45% if my income was slightly higher compared to 40% in England. And higher rate starts £7k lower.......hence I went for using low coupon gilts in my GIA instead of adding more to my SIPP. 
Let's not get into the debate of whether that constitutes 'avoidance' or 'tax efficiency'......it's certainly not evasion! 

More tax overall doesn't necessarily mean you're worse off. The extra tax is on grossed up money! Multiplication is commutative. Assuming same tax rates on the way in and out and ignoring the PCLS, it's neutral even though you pay more tax in the pension. The scenarios in which you'd be worse off using a pension are pretty niche. Even if tax relief is 40% on the way in and 45% on the way out, unless you've maxed out the LSA (~£268k tax free cash) then you'd get 25% tax free so the effective rate on the way out is under 34%

Example £1000 invested unwrapped, grows to £2000 inc coupons over several years, a small amount of tax is paid on the coupons, so you have a bit less than £2000. 

In the pension, £1667 is paid in costing the same £1000 net assuming 40% tax payer. The £1667 grows to £3333. 40% tax is paid on the way out. giving the same £2000 net, and no tax on the coupons. You've paid more tax in £ than the relief you got, but are better off, because the extra tax is on growth of grossed up money. 

But it's usually better than that because you get the PCLS. So effective tax rate out is only 30% (ie 40% of 75%) So you get £2333 net out. Or even if the tax rate out was 45%, you get £2208 out. 

There are circumstances where the pension would be worse, but they're pretty rare unless limits like the AA, LSA etc are breached. Usually the pension would be much better, particularly if you pay higher rate tax and will withdraw when you're a basic rate taxpayer. 

MarkCarnage

But it's usually better than that because you get the PCLS. So effective tax rate out is only 30% (ie 40% of 75%) So you get £2333 net out. Or even if the tax rate out was 45%, you get £2208 out. 

Agree if you get that, but I know of a few people, including myself, where that's already been taken. 

Usually the pension would be much better, particularly if you pay higher rate tax and will withdraw when you're a basic rate taxpayer. 

If your tax bands go in that direction then yes, less tax (but lower income too). However, the example I quoted above may become increasingly common due to fiscal drag and increased higher rates....already seen in Scotland....which could well mean 40% relief on way in and 45% tax on way out. 

zagfles

MarkCarnage said:

But it's usually better than that because you get the PCLS. So effective tax rate out is only 30% (ie 40% of 75%) So you get £2333 net out. Or even if the tax rate out was 45%, you get £2208 out. 

Agree if you get that, but I know of a few people, including myself, where that's already been taken. 

Usually the pension would be much better, particularly if you pay higher rate tax and will withdraw when you're a basic rate taxpayer. 

If your tax bands go in that direction then yes, less tax (but lower income too). However, the example I quoted above may become increasingly common due to fiscal drag and increased higher rates....already seen in Scotland....which could well mean 40% relief on way in and 45% tax on way out. 

Again - very niche. Live in Scotland, will have £75k+ income in retirement, but not while working, and used up the full £268k LSA (ie a pension over a million). The implication of your PP was that this was common, I doubt it is, even with fiscal drag. 

michaels

Bit of a tangent but I am thinking that at least some of my income received basic rate tax relief at a rates as high as 25% in 1988 but will only be taxed at 20% on the way out.