Investment income projection

EdInvestor

Hi brodev,

I recommend the approach followed at the Fool as a satisfied investor.We aren't allowed to recommend individual shares on this board.

The people on the Fool's High Yield Portfolio board are very used to helping newbies construct their portfolios, and the FAQ there should tell you all you need to know about the criteria for picking shares and how to reduce risks through diversification and other means.

There are 10 or 20 shares that crop up all the time in people's portfolios so it's quite easy to get the hang of it.REad back a few threads and you'll see.

cheerfulcat

Hi, brodev,

I would second Edinvestor's comment about the HYP board on the Motley Fool. The site is much more geared to investing than this one. I too am a happy investor with the help of the Fool.

The MF Value Investor newsletter picks one HY share every month; depending on how much you intend to invest you might find the £99 annual subscription a price worth paying ( there's a free trial available ). Having said that, the same information is available for free on the boards; you just have to look a bit closer, or ask...

The typical high yield portfolio holds a collection of shares in different sectors ( for the sake of diversification ), though some people are overweight in the real high-yielders ( banks, utilities ), being willing to take the extra risk for that extra bit of income. A look at the major holdings of a typical equity income fund will give you an idea of the shares involved :-)

Just one thing to keep in mind - some shares you see mentioned on the HYP board will no longer be suitable candidates for the portfolio, either through an increase in share price or a cut in the dividend ( in worst case scenarios, the dividend is done away with altogether - this is one of the risks of high yielding shares, and another reason for diversifying your portfolio ).

HTH

Cheerfulcat

dunstonh

I repeat that investing in a high yield portfolio could increase taxation making brodev an equivalent 33% tax payer.

This would not happen with the correct tax wrapper and a portfolio of high yielding shares is not the correct wrapper if age allowance reduction is likely.

I'm sorry to keep repeating it but it seems to be ignored.

MJSW

You can repeat it all you like, but you are entirely incorrect. The effective marginal rate of tax on additional dividend income reducing the Age Allowance is NOT 33%, it is 11%. If you can provide a worked example where additional dividend income increases the tax liability by 33%, then I would be fascinated to see it.

The maximum tax increase for a basic rate taxpayer between 65 and 74 is only £482.90 even if the Age Allowance is lost entirely. That's only 0.24% of the £200,000 investment proposed here. Why do you believe it to be advantageous to pay 0.6% in management fees each year in order to to defer a tax liability of just 0.24%? There may be other reasons for choosing an investment bond (if you think the performance of the underlying investments would be better etc), but just looking at the tax/fees implications a DIY high yield share portfolio is much cheaper for a basic rate taxpayer with the size of investment contemplated here, even with the additional tax.

oceanblue_3

Brodev

I hope you're following this!

dunstonh is right, despite the earlier post from MJSW. When you reach age 65, your personal allowance increases from £4,895.00 to £7,090.00. However, if your total gross income exceeds £19,500.00, then you lose £1.00 of your age allowance for each £2.00 of income in excess of £19,500.00. Income generated by earnings, pensions, savings interest, and share dividends, etc. all count towards this £19,500.00.

Effectively, therefore, some of your income could be taxed at an equivalent rate of 33% if you fall into this "Age Allowance Trap".

Annual withdrawals of up to 5% of the value of the original investment from Investment Bonds are not counted as income and, consequently, do not affect your age allowance.

In addition, Investment Bonds allow you to invest in a far wider spread of investments than just High Yield UK Equities:

international equities
commercial property
UK and overseas sovereign debt (gilts)
UK and overseas corporate bonds

As cheerfulcat has intimated, a significant reliance solely upon shares can bring its own problems (which you would have to identify and manage):

fluctuating income
no guaranteed purchaser if you choose to sell
an increased burden for trustees should you choose to put shares into a Nil Rate Band Discretionary Trust on first death

Similarly, wholesale fund switches within an Investment Bond are generally free, and certainly do not create any liability to Capital Gains Tax.

Brodev, I'm not saying that direct equity investment is wrong - just that its hinterland is not often explored by some of the posters on this site.

MJSW

oceanblue wrote:

When you reach age 65, your personal allowance increases from £4,895.00 to £7,090.00. However, if your total gross income exceeds £19,500.00, then you lose £1.00 of your age allowance for each £2.00 of income in excess of £19,500.00. Income generated by earnings, pensions, savings interest, and share dividends, etc. all count towards this £19,500.00.

I agree with all of that, but the effective rate on dividends is still 11%. Lets say you are right on the limit where the Age Allowance starts to reduce (£19500), and lets assume the £19500 is all pension income. You then receive an additional £100 in gross dividends. The extra tax on the dividends is zero, as it is covered by the tax credit. The Age Allowance is also then reduced by £50, which results in total additional tax of £50 x 22% = £11.

I am a Chartered Accountant, and a Chartered Tax Advisor, and I must say I'm astonished that two IFAs appear to have no idea how tax calculations work.

If the investor was receiving additional income of another sort, such as pension, then it would indeed be 33%, because the basic rate of tax on pensions is 22% and there is a further 11% loss due to Age Allowance. The rate of tax on dividends for basic rate taxpayers is effectively nil because of the tax credit, and so the 22% doesn't apply just the 11%.

dunstonh

You can repeat it all you like, but you are entirely incorrect. The effective marginal rate of tax on additional dividend income reducing the Age Allowance is NOT 33%, it is 11%. If you can provide a worked example where additional dividend income increases the tax liability by 33%, then I would be fascinated to see it.

The reduction of the allowance causes an equivalent rate of 33%. Equivalent having been quoted a number of times in the previous posts. every £2 of income can cost 66p in tax (i.e. 44p on the £2 itself plus 22p on the £1 of allowances withdrawn). This is an effective tax rate of 33%. Therefore you are entirely incorrect and i hope you are enjoying your period of fascination.

The loss of £482 a year because the wrong tax wrapper has been chosen is high enough to take into consideration when other tax wrappers could be used to achieve the same goal. It may only be .24% of a £200k lump sum but on an income of £25k a year, that is 1.93% of income lost.

Why do you believe it to be advantageous to pay 0.6% in management fees each year in order to to defer a tax liability of just 0.24%?

Charges appear on all sorts of investments. They cant be ignored but they will still appear on a high yield portfolio. Aso, high yielding investments can include higher risk investments than brodev is willing to accept (hes quoted 20% loss in his first post). We dont really know what the risk profile of brodev is. The 20% loss is one indication but its not enough to give recommendations. We dont know what the investment experience is. As i said earlier, the bond was just one example of a number of solutions. The charges may not be higher with the bond. A 10 year bond, for example, had a 0.6% charge p.a. but over 5 years, you can get a negative reduction in yield making it effectively charges free. Switching the bond every 5 years would resolve the problem.

I am not ruling out a high yield portfolio as an option. A bond is an option. There are also many other options which could be considered as well. Brodev has given us nowhere near enough information for any product to be recommended. Is there a partner/wife that could have allowances to be used? Could pensions be used? is capital rentention required? is inheritance tax a concern? Income and capital

However, as per usual, the casual unqualified amateurs come up with "solutions" which may be suitable but could equally be totally unsuitable with no consideration for all the other options.

edit added: noticed after typing above, that you emphasised dividend income and not income. Income is clearly what we were talking about. Which is why the previous posts made have said potentially. We do not know what brodevs income is or will be and what savings/investments are in place. However dividend income still reduces his age allowance potentially. So the reduction of age allowance argument still exists.

oceanblue_3

MJSW says..."I am a Chartered Accountant, and a Chartered Tax Advisor, and I must say I'm astonished that two IFAs appear to have no idea how tax calculations work."

I am grateful that you have contributed to this thread, and I take no exception to what you have posted. I have passed the CII's G10 examination, but I accept that I am not a qualified accountant. Nevertheless, I work with several chartered accountants, one of whom has confirmed the accuracy of what dunstonh and I have posted. I think there has been a misunderstanding concerning the tax impact upon dividends should the Age Allowance be breached.

Dunstonh and I are not referring to the effective marginal rate at which dividends are taxed if the Age Allowance is exceeded. Rather, we are both pointing out that dividend income is capable of being aggregated with pension income, etc. and is, thereby, capable of causing the Age Allowance to be breached. This will lead to some income being caught in the "Age Allowance Trap", with an effective tax charge of 33%.

This is in distinct contrast to withdrawals from an Investment Bond, for example.

cheerfulcat

dunstonh wrote:

However, as per usual, the casual unqualified amateurs come up with "solutions" which may be suitable but could equally be totally unsuitable with no consideration for all the other options.

I'm afraid that most IFAs have far too inflated an opinion of themselves as "professionals" They are salesmen, pure and simple. In my experience IFAs know what they are told, and what they are told about is what they sell. If there is no commission forthcoming, most IFAs won't want to know about it ( don't take my word for it, read Money Management, the IFA's own magazine ).*

FWIW, I think that EdInvestor is quite right to highlight the question of charges - it is widely known amongst investors, and even now is beginning to be accepted by some IFAs, that charges eat away at managed investments and investment products to a (mostly) unacceptable degree. A recent article ( MM again, I think, but will search to post a link if poss ) showed that the charges on an average pension mean that over 30 years, the investor only gets 48% of the investment's performance - 52% goes to the provider and the advisor!!!

Cheerfulcat

* None of this meant as a dig at present company!

dunstonh

Charges are very important which is why i highlighted 0.6% reduction in yield as being very favourable. Pick the NU property fund with a fund supermarket and go commission free and you pay more in charges than buying the NU property fund through a bond with full commission (let alone reduced) taken. A couple of major providers have their own products priced higher on their website than an IFA can do it with commission taken. So its always about cost.

Of course money is important. Would you go to work if you didnt get paid? I know IFAs that will not see an a person unless the minimum amount to invest is £50k. Its not in their financial interests to do so. This doesnt make them bad. It means that their time is better spent with others.

The salesman tag is an old one and it could easily apply to many industries. Many financial services products need to sold as they are not bought. That doesnt make the person selling them bad. If the wrong product is "sold" then yes it does.

Charges are there on everything. Buy your food at the supermarket and you are paying charges. That tin of beans at 30p really only cost 20p, so you are paying a 10p charge. Its not the charge that matters as much. Its getting value for money.

Also, we need to be careful when looking at legacy products from the old days. They are from a different time when growth rates were much higher and attitudes and legislation were different. Charges were much higher and were hidden in the same way that tin of beans is.

Things are much improved today and with clear pricing of products, such as the 1% annual management charge, means that it would be hard for the investor to only get back 48% of the investment performance.

Its very very easy to pick holes in financial services but tell me an occupation where it isnt. I would also challenge anyone to sit through G10 and G60 and think that their IFAs know nothing apart from what they are told. If we were talking tied agents, then I think i would agree with you.

There are enough people out there to suit all distribution channels. Advice, do it yourself, postal, telephone, website etc. Lets not muddy the waters with saying one is better than the other. Also remember, that those of us here that are qualified advisors are not being paid for advice. We are not earning from these posts. So there is no incentive at all to post anything. Most of the time, the IFA contributers to this board are making balancing threads as a few of the posters are a bit eager in promoting solutions that have worked for them and assume that they are right for everyone.

There are pros and cons with every solution and without knowing the facts, no one solution can be presented. This thread was pushing the high yield portfolio without highlighting the negatives and not knowing anything about the OP. Therefore some balance was required. By nature, thats going to mean my posts look negative to that solution but they should be taken in context with the positive things mentioned. Not in isolation.