Investment income projection

oceanblue_3

deemy

Although your deployment of smileys is excellent, and I must commend you for your use of them, you appear to have missed the point of dunstonh's post - he's talking about paying too much tax in retirement. If someone follows your track they will, almost inevitably, pay tax unnecessarily.

brodev

I have looked at all of these replies and I am grateful to all of you. I shall plod my way through these till my brain hurts. thanks

deemy2004

oceanblue wrote:

deemy

Although your deployment of smileys is excellent, and I must commend you for your use of them, you appear to have missed the point of dunstonh's post - he's talking about paying too much tax in retirement. If someone follows your track they will, almost inevitably, pay tax unnecessarily.

Thank you for the compliment.......... I think......

Inevitably more tax ?

Your forgetting that the bond in addition to a hefty annual charge will ALSO be paying TAX on the income they are reinvesting into the bond !- So exactly what tax is being saved ?

Infact the bond literature contains the following points which seems contradict DH.

Income Tax

* You may lose some or all of your entitlement to age allowance or income related benefits

So as far as i can see is what the bond fund is offering, with an annual management charge and already taxed income within the bond, is MORE than the tax libaility on the dividend income of a stock porfolio...

dunstonh

Your forgetting that the bond in addition to a hefty annual charge will ALSO be paying TAX on the income they are reinvesting into the bond !- So exactly what tax is being saved ?

Its paying the equivalent of 22% within the funds. However, the saving is in the reduction in age allowance.

I arranged a bond last night with an reduction in yield of 0.6% over 10 years. Since when has that been classed as hefty? The same funds within a unit trust through fidelity would have shown a reduction in yield of 1.8%.

Infact the bond literature contains the following points which seems contradict DH.

Income Tax

* You may lose some or all of your entitlement to age allowance or income related benefits

You can lose/reduce the age allowance under certain circumstances. Avoid those, which most will, and you have no problem.

So as far as i can see is what the bond fund is offering, with an annual management charge and already taxed income within the bond, is MORE than the tax libaility on the dividend income of a stock porfolio...

This is why you arent a financial advisor. Wrong on annual management charges and wrong on tax.

oceanblue_3

deemy

As far as the original poster is concerned then, I would say, "inevitably" more tax, yes.

Investment bonds do not, necessarily, have "hefty" annual charges; if the criterion were to be net return over the last 2 years, for example, then the annual charge would be negligible.

Their real benefits are to be found in these areas:

1) withdrawals of up to 5% per year attract no immediate tax charge

2) switches between funds within the bond are not looked upon as disposals for CGT purposes

3) they can go in to Discretionary Trusts and not generate an explicit income

4) if IFA's are not too greedy, they can produce very favourable "reduction in yield" figures.

5) if withdrawals are kept below 5% per year, then the Age Allowance warnings will not be relevant (my clients tend to make irregular withdrawals anyway).

Clearly, investment bonds are not as income-tax-efficient as ISA's nor, probably, as CGT-tax-efficient; when it comes to Inheritance Tax, however, they are immensely efficient. For large investments of, say, £100,000.00+, their charging structure, access to all investment classes, and fund switching capabilities are unsurpassed.

brodev

oceanblue wrote:

deemy1) withdrawals of up to 5% per year attract no immediate tax charge

Is this 5% of the original value or of the current value?

brodev

I dont know how the last quote got in there. I thought I had put in withdrawals of 5%

oceanblue_3

Hello brodev

It's 5% of the original investment.

MJSW

dunstonh wrote:

This is why you arent a financial advisor. Wrong on annual management charges and wrong on tax.

Sorry, but it is you who is wrong on tax! Previously, you stated that the marginal rate of tax on dividends to an investor who was about to lose Age Allowance was 33% ("Using high yield shares in that case, would reduce the age allowance causing an equivalent tax rate of around 33%."). This is completely inaccurate. The actual rate is only 11%. It's a bit laughable for you to accuse Deemy of being wrong on tax, when you appear to be basing your figures assuming a tax liability 3 times greater than it actually is.

33% is the rate applying to most types of income, such as pensions. On each additional pound, you pay 22% on the additional income and then an extra 11% through reduction in the Age Allowance. However, if the additional, income is dividends, then there is no additional tax on the dividends themselves and there is still an effective 11% on loss of the Age Allowance. The total additional tax is therefore 11% of the gross dividend.

And that rate only applies on a relatively small amount of income falling within the Age Allwanance reduction band, not the total dividend income. For an investor less than 75, the maximum additional tax is £4390 @ 11% = £483 (assuming they don't become higher rate taxpayers). It could be less than this depending on the level of the investors other income. On £200,000 worth of investment, that equates to 0.24% of the total investment, which is vastly cheaper than even a 0.6% management charge.

Additionally, the investment bond often only defers the tax, not remove it. If the investor wants to withdraw the money, then there could be further tax liability if the top sliced gain pushes him into higher rates of tax.

brodev

I asked earlier if anyone could point me to a typical high income portfolio.
I should have said earlier that I am married and that my wife has only a little income therefore I could place this investment in her name or half and half