Which platform for separate crystallised and uncrystallised pots?

Cobbler_tone

TheTelltaleChart said:

You merge 2 pots, one with gross assets P1 and tax application ratio t1, the other with P2 and t2.

The tax application ratio for the merged pot can be calculated as:

t3 = ( (t1 * P1) + (t2 * P2) ) / (P1 + P2)

Now consider an asset class held in either or both pots, with gross values of g1 and g2 in the 2 pots respectively.

Before the merger, the net value in this asset class is:

(g1 * t1) + (g2 * t2)

Assuming that's the net value you want, you now need a gross value of:

( (g1 * t1) + (g2 * t2) ) / t3

So you need to buy another:

( (g1 * t1) + (g2 * t2) ) / t3 - (g1 + g2)

of it inside the merged pot (and if that's a negative figure, it indicates a sale).

In the specialised case when this asset class only features in the first pot, not in the second one (i.e. when g2 = 0), the above can be simplified, as follows …

After the merger, you need a gross value in this asset class of:

g1 * t1 / t3

So you need to buy another:

g1 * t1 / t3 - g1

or

g1 * ( t1/t3 - 1)

of it.

OK Stephen Hawkins.
How did we end up from "HL have two accounts, one for each" to this? 

I think it is a good example of why most people wouldn't bother. 

Triumph13

I entirely agree that virtually no-one would actually make the £1,515 adjustments, for precisely the reasons you give. Cobbler_tone.  I only did it in the example to show how the maths works, but it would be a case of 'measure with a micrometer, cut with an axe, or whatever the opposite of that is.  A bit like when a news story takes someone's estimate of a round number of yards and converts it to metres to two decimal places.

LHW99

IvanOpinion said:

Have we figured out how much a box of cornflakes is yet?

No but it's probably related to the size of the black hole in the middle of the Milky Way by some means

Triumph13

TheTelltaleChart said:

Though we all tend to imagine that other people have vaguely comparable finances grasp of algebra to ourselves, when in fact most, are either a lot poorer or a lot richer  definitely do not.

 

Fixed that for you 

Pat38493

TheTelltaleChart said:

Pat38493 said:

My new lazy theory is - unless I believe that my risk tolerance allocation choices are accurate to within 4% or less, there is no point making such adjustments.

Yes, it's probably not worth making portfolio adjustments just for this. But the next time you're rebalancing, or making other significant changes, you could take into account the changes as a result of merging pots. By which, I don't mean look backwards at the effect of the merger, but use the net values of all holdings when reckoning their current contribution to the portfolio.

E.g. I have an uncrystallised pot, on the taxable 75% of which I might end up paying a mixture 0% or 20%. So the net value is somewhere betwen 0.85 and 1 of the gross value. I've been using 0.925 as a middle-of-the-road figure. So when I'm checking/rebalancing my whole portfolio (including ISA and pension), I'm treat each £1k inside the pension as being worth £925.

One time, I forgot to multiply by 0.925, and so I bought the "wrong" amount of a holding! So I just left it as it was 🤷

The point is more around what you are rebalancing to - how did you decide or do you decide your asset allocations targets.  Mostly this revolves around discussions about risk tolerance with then setting allocation in +/- 10% increments.  

As far as I can tell, even if you ignore the difference between ISA, Drawdown, UC, and just set allocation target at the gross level, you won’t get an error greater than 4-5%.  As such, the difference is within the margin of error on how you determine your original targets.

I attend Q&A sessions with an IFA who provides a kind of DIY financial planning course and then it includes a Q&A every month.  I found a few questions in some of his Q&A around this topic of rebalancing and tax rates on different assets (the Q&A sessions are really well documented so you can find relevant questions and then watch the relevant section).  Based on this I am pretty sure they would say that we are making it way too complicated and we should just pick a number and stick with it, regardless whether it’s gross, net or whatever - the important thing is not whether you have 80% or 76.2323r234% equities - the important thing is more that you stick to the plan of rebalancing based on the current situation on regular intervals.

michaels

TheTelltaleChart said:

Pat38493 said:

My new lazy theory is - unless I believe that my risk tolerance allocation choices are accurate to within 4% or less, there is no point making such adjustments.

Yes, it's probably not worth making portfolio adjustments just for this. But the next time you're rebalancing, or making other significant changes, you could take into account the changes as a result of merging pots. By which, I don't mean look backwards at the effect of the merger, but use the net values of all holdings when reckoning their current contribution to the portfolio.

E.g. I have an uncrystallised pot, on the taxable 75% of which I might end up paying a mixture 0% or 20%. So the net value is somewhere betwen 0.85 and 1 of the gross value. I've been using 0.925 as a middle-of-the-road figure. So when I'm checking/rebalancing my whole portfolio (including ISA and pension), I'm treat each £1k inside the pension as being worth £925.

One time, I forgot to multiply by 0.925, and so I bought the "wrong" amount of a holding! So I just left it as it was 🤷

Hmm. Should we also be adjusting pot valuations for (potential) inheritance tax?!

Pat38493

michaels said:

TheTelltaleChart said:

Pat38493 said:

My new lazy theory is - unless I believe that my risk tolerance allocation choices are accurate to within 4% or less, there is no point making such adjustments.

Yes, it's probably not worth making portfolio adjustments just for this. But the next time you're rebalancing, or making other significant changes, you could take into account the changes as a result of merging pots. By which, I don't mean look backwards at the effect of the merger, but use the net values of all holdings when reckoning their current contribution to the portfolio.

E.g. I have an uncrystallised pot, on the taxable 75% of which I might end up paying a mixture 0% or 20%. So the net value is somewhere betwen 0.85 and 1 of the gross value. I've been using 0.925 as a middle-of-the-road figure. So when I'm checking/rebalancing my whole portfolio (including ISA and pension), I'm treat each £1k inside the pension as being worth £925.

One time, I forgot to multiply by 0.925, and so I bought the "wrong" amount of a holding! So I just left it as it was 🤷

Hmm. Should we also be adjusting pot valuations for (potential) inheritance tax?!

This opens another can of worms I guess.  If you expect to have a large amount left over at the end of life, and you prefer to leave it to others rather than increase current spending or give it away in your lifetime, traditionally you would have left it in the pension, but this will all change next year I guess - hence why a lot of people now are re-hashing their plans to pass wealth to others before they die.  

Possibly this is a deliberate or hoped result of upcoming changes, although this would imply a lot of joined up thinking and research.

Even now, if you die before 75 the pensions will get favourable tax treatment.

Personally I am planning to draw a lot out of my pension within the 20% tax bracket for 10-12 years, partly to avoid the risk of having more money than I expected, but having it locked up and having to pay 40% tax to get it out - a good problem to have I guess but not ideal.   Also - this enables me to give away more money earlier - I am already planning to gift money for LISA contributions to our kids in the coming years.  

In other words, based on the upcoming pension IHT changes, rather than adjusting pot valuations, it’s more like you should possibly consider trying to give excess money away before you hit Davey Jones locker.