Investment income projection

deemy2004

brodev wrote:

I know that motley fool has an example of these but do you know of any other?

Hi

There are loads of sites out there, and as above most of them repeat the same shares usually from within the ftse 100.

The only site I tend to visit when updating my portfolio is the motley one, to see if theres anythign Ive missed on any particular stock I'm looking at.

Infact they do have a seperate board just for the high yeild portfolio which is good for both begginners and experienced alike.

MJSW

dunstonh wrote:

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.

??? That makes no sense at all. You are mixing up income with capital. The £200,000 I used was the capital, the £25,000 you are using is income! If you did have dividend income of £25,000, then with a 5% yield the capital would be £500,000, and so the tax due to lost Age Allowance would only amount to 0.0966% of the capital. If you actually meant £25,000 capital, then the dividend income on that would only be £1250, and so the maximum lost Age Allowance would only be £137.50, not the full £482. The £482 is the absolute worst case scenario (as long as remain with basic rate band). That would be equivilent to just 0.55% of the initial capital NOT 1.93% as you are claiming. You are now overstating the tax impact by 3.5 times, which is even higher than the 3 times (33% v 11%) you started at!

Indeed, with a 5% dividend yield the absolute maximum additional tax due to loss of Age Allowance as a percentage of the intial investment is 0.55% of the capital, no matter how big or small the dividend income (as long as they remain within the basic rate band). That is still lower the the 0.6% on the bond. And the bond merely defers the tax - additional tax could become due on it later if excessive withdrawals are made.

They cant be ignored but they will still appear on a high yield portfolio.

No they won't! This whole discussion is about a directly owned share portfolio. Ed's first post which sparked all this off (which you immediately rubbished) said "If you are a basic rate taxpayer you might like to consider holding a portfolio of high yield shares directly ..."

There would be no ongoing charges on such a porfolio unless the shares are actively traded rather than just bought and kept. Of course there would be some initial dealing charges in buying the shares in the first place, but you could quite easily buy a portfolio of 50 or so shares for around £350 in dealing costs, which is 0.175% of the £200,000 portfolio here.

noticed after typing above, that you emphasised dividend income and not income. Income is clearly what we were talking about.

LOL. So you didn't realise we were talking about dividends? The whole discussion has been about the tax effects of the income generated by buying a portfolio of high yielding shares! Therefore clearly it is the consequences of receiving the additional dividend income which is relevant, not the consequences of receiving other types of income.

MJSW

oceanblue wrote:

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%.

Again, entirely wrong. It makes no difference what other income he has, whether it be pension, earnings, interest, dividends or combination of them all. The "effective tax charge" due to the Age Allowance Trap on receiving extra dividends for a basic rate taxpayer will never be more than 11%.

There is no additional tax on the dividend itself. The only effect therefore is that for each £2 of income falling 'in the trap', £1 of allowances are lost. For a basic rate taxpayer (and that's the only scenario that's relevant here as the Age Allowance doesn't apply to higher rate taxpayers), the worst that can ever happen by receiving £2 extra dividends (gross) is that an additional £1 will become chargeable at 22%.

Depending what type of income there is just above the personal/age allowance, it could well be less than 11%. If it were interest, the effective rate would be 10%, and if all the taxable income was dividends there would be no additional liability whatsoever.

EdInvestor

cheerfulcat wrote:

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!!!

Probably a bit extreme these days.Adair Turner estimated in the first report of the Pensions Commission that at a stakeholder management fee of 1%, charges would eat up between 20 and 30% of a pension fund.You could perhaps add another c.5% onto that for the annuity. Since then the fee has gone up to 1.5%, so we're probably talking about a loss of one third of the fund in charges.

It's still bad enough.

deemy2004

Yeh MSJW, I think DH is forgetting that dividends for basic rate tax payers is always taxed at 10% (already deducted).

Hence I was puzzled as to where's the 33% extra tax with regards age allowance

MJSW

Well technically dividends are at 10%, but it is effectively a 0% for basic rate taxpayers as they also come with a deemed tax credit of 10%. To be fair to dunstonh, 33% is generally the correct rate to use for many types of additional income such as pension where the Age Allowance is being reduced (for interest it would be 31%). It's just not the rate to use for dividends.

I should also point out for the sake of clarity that in my post above there would of course be Stamp Duty at 0.5% on acquiring as share portfolio in addition to the stockbrokers dealing costs.

oceanblue_3

MSJW says..."This whole discussion is about a directly owned share portfolio."

No it isn't - look at the original post. Brodev asked about how much income could be generated by an investment of £200,000.00.

The solution of an "equity income" portfolio was then suggested. The tax ramifications of this were then discussed. You then picked up on a potential ambiguity in dunstonh's post - and you have wilfully misunderstood this ever since.

You mentioned in an earlier post the possibility of posting calculations; I think this is an excellent idea.

Let's assume that brodev retired, aged 65, in the second week of April 2005. Let us also assume that his total income for 2005/2006 is £23,890.00. However, this income is produced in one of two ways:

1) £19,500.00 is from State Pension and Occupational Pension; the remaining £4,390.00 is generated by dividend income. How much income tax would be due?

2) £19,500.00 is from State Pension and Occupational Pension; the remaining £4,390.00 is generated by withdrawals from an investment bond. How much income tax would be due?

Is there a difference between the two amounts due?

What has caused this difference?

deemy2004

You forgot to ask what would the deffered tax be on the bond ... :rolleyes: ... Oh, unless the bond makes a loss ! :eek:

Or how much tax is saved from utilising CGT allowance on gains on the stock portfolio, since your effectively talking about capital withdrawl from the bond.

or....

See, its easy to be nit picking... but when you consider all aspects.. a high yeild stock portfolio would be the better option than the bond.... ofcourse theres no commission for an IFA in one of those

oceanblue_3

deemy, we're not talking about commission - we're talking about income tax. I suggest you read the whole thread again - maybe you have missed some of its subtler points.

deemy2004

oceanblue wrote:

deemy, we're not talking about commission - we're talking about income tax. I suggest you read the whole thread again - maybe you have missed some of its subtler points.

No the discussion was about the norwich union bond against a high yield stock portfolio...

An issue was made on nit picking one aspect i.e. tax on dividend income against drawing capital from the bond of 5%, as that is what i am presuming i.e. to draw cash from the bond your selling some units ? Unless I am mistaken and you want to better explain that aspect of the product ?

I mean if your selling units, then its best to compare against taking profits on stock capital gains, which is set against CGT.

And as others have mentioned the commission is an important factor as its effects can reduce the gains anywhere from 33% to 50% !