End of tax year

morstar

Opinions needed.
End of tax year approaches. Either need to hit the pension with a sizeable contribution or pay a large chunk of tax.
I have no other salary sacrifice mechanisms available to me to mitigate the tax.

Given the state of current affairs, is there a compelling reason to take the tax hit?

Pension would have to tank pretty badly for losses on the contribution to outweigh the tax bill but I’m open to any opinions in either direction.

TheBigBean

There is no compelling reason to earn between £100k and £125k unless you are in need of the cash now. (I'm guessing that's the question).

pblakeney

Shares have taken a pounding due to the Putin effect. I'd say it's a good time to pay into a pension (plus the tax benefit) but fear further drops. That said, there will hopefully be a rebound. 🤞🤞🤞

morstar

Not that bracket (unfortunately).
The money over the earlier threshold will be taxed at 40% + the Child benefit clawback makes an effective rate of over 50%

Would you put the full amount in a pension you know will almost certainly suffer some decreases or take <50% right now but keep cash in hand.

morstar

pblakeney said:

Shares have taken a pounding due to the Putin effect. I'd say it's a good time to pay into a pension (plus the tax benefit) but fear further drops. That said, there will hopefully be a rebound. 🤞🤞🤞

Yes, I am inclined to think some of the hit has already happened so yes, potentially a good time to put money in. If it is armageddon, it's a moot point but just wanted other opinions.

pangolin

morstar said:

pblakeney said:

Shares have taken a pounding due to the Putin effect. I'd say it's a good time to pay into a pension (plus the tax benefit) but fear further drops. That said, there will hopefully be a rebound. 🤞🤞🤞

Yes, I am inclined to think some of the hit has already happened so yes, potentially a good time to put money in. If it is armageddon, it's a moot point but just wanted other opinions.

Depends on time to retirement somewhat. Over 10 years ish, no point worrying about current events. Less than that and it starts to become a factor.

pblakeney

pangolin said:

morstar said:

pblakeney said:

Shares have taken a pounding due to the Putin effect. I'd say it's a good time to pay into a pension (plus the tax benefit) but fear further drops. That said, there will hopefully be a rebound. 🤞🤞🤞

Yes, I am inclined to think some of the hit has already happened so yes, potentially a good time to put money in. If it is armageddon, it's a moot point but just wanted other opinions.

Depends on time to retirement somewhat. Over 10 years ish, no point worrying about current events. Less than that and it starts to become a factor.

Some of us were hoping to retire within months. 🤬

Pross

pangolin said:

morstar said:

pblakeney said:

Shares have taken a pounding due to the Putin effect. I'd say it's a good time to pay into a pension (plus the tax benefit) but fear further drops. That said, there will hopefully be a rebound. 🤞🤞🤞

Yes, I am inclined to think some of the hit has already happened so yes, potentially a good time to put money in. If it is armageddon, it's a moot point but just wanted other opinions.

Depends on time to retirement somewhat. Over 10 years ish, no point worrying about current events. Less than that and it starts to become a factor.

Plus presumably if share prices have dropped you'll be getting more for your money at the moment?

morstar

Thanks all.
Confirming my thoughts.
I did wonder if anybody would consider keeping cash now but things have to tank pretty badly to wipe out the tax benefit.
The pension will need to run for a few years yet so, money in unless someone tells me it’s a stupid idea.

First.Aspect

Depends how close to the 125k you are. And whether you need the money for something else.

Dorset_Boy

Put the money in the pension. You don't have to expose the contribution to the markets if you don't want to. If you have a Sipp it can sit in the sipp bank account. If a personal pension then you could put it in a cash fund temporarily.

You also have to think of the term to retirement. If a number of years away then investing in the next week or so should do you ok over the medium to longer term.

I think the markets will fall a little further in the next couple of days until the energy situation (ie more oil production from the rest of the world) before stabilising. I do not however have a crystal ball so could be totally wrong.

The real key is time in the markets, not trying to time the market.

shirley_basso

You can invest into a tax efficient VCT or EIS fund. You'll get 30% back on day 1, effectively repaying the tax (well, not quite). You can sell and reinvest every 5y so after 15y youll basically have the principal for free.

VCTs and EIS invest in early stage UK HQ businesses.

Generally EIS is very early, VCT a little later. They aren't a 'boom or bust' model either. They really need to acheive zero capital loss for their investors who make returns through tax rebates. Normally make 12-15% annual returns, depending.

Examples are:

Octopus
Mercia
Foresight
Maven

I'm not an IFA so this advice is given with caveats but worth a conversation.

Downside is they are highly illiquid so can't cash out for 5y at a time, normally, but that's no worse than a pension.

Investment sizes start around £10k I think.

super_davo

morstar said:

Not that bracket (unfortunately).
The money over the earlier threshold will be taxed at 40% + the Child benefit clawback makes an effective rate of over 50%

Would you put the full amount in a pension you know will almost certainly suffer some decreases or take <50% right now but keep cash in hand.</p>

I've done exactly the same as you for a number of years now, and very glad I did.
Basically capped my salary at an effective £50k for several years with the rest going on pension, cycle to work, additional holiday (my company lets you have a salary offset for 5 days extra holiday). Definitely worth it if you're in mid 50s to 60k level after bonus.
Beyond that you have to look at the fact the maximum cost of the full CB going back is £1900 & ascertain what you'd do with the money in the shorter term & whether it can make more of a difference to you e.g. mortgage overpayments, ISAs etc.
It's not just about being tax efficient, it's about making your money work the best it can.

Dorset_Boy

shirley_basso said:

You can invest into a tax efficient VCT or EIS fund. You'll get 30% back on day 1, effectively repaying the tax (well, not quite). You can sell and reinvest every 5y so after 15y youll basically have the principal for free.

VCTs and EIS invest in early stage UK HQ businesses.

Generally EIS is very early, VCT a little later. They aren't a 'boom or bust' model either. They really need to acheive zero capital loss for their investors who make returns through tax rebates. Normally make 12-15% annual returns, depending.

Examples are:

Octopus
Mercia
Foresight
Maven

I'm not an IFA so this advice is given with caveats but worth a conversation.

Downside is they are highly illiquid so can't cash out for 5y at a time, normally, but that's no worse than a pension.

Investment sizes start around £10k I think.

In reality the 5 years is closer to 6.
There aren't many VCTs open by the end of the tax year, VCT 'season' is now really October and November. Cash out within the 5 years and you repay the 30% tax credit. You can get in for less than £5k.

They are a good way for small business owners to get capital out of their company, but are higher risk than mainstream investments. They won't help if you are trying to avoid things like the Child benefit trap.

EIS are another level of risk altogether and unsuitable for 99% of investors.

morstar

Again, thanks all.
Lots of useful info.
Will stick it in pension this year and maybe look into VCT for a chunk of money next.
I am naturally risk averse but have had a mind for a while to stick a manageable chunk in a higher risk area.

Work is a bit rubbish on tax efficiency as it’s only a small organisation but I’m working on them.

I have seen about salary sacrifice for electric vehicles but most schemes seem to be leasing rather than buying.

shirley_basso

You can't use VCT to cash out any more, rules have changed.

They are higher risk, but if you invest in a good manager they will have a diverse portfolio so you should be okay. Returns for most managers is actually quite good.

Stevo_666

If you're sure that you won't need the cash, I would say stick it in the pension fund. The markets have taken a bit of a hit recently but clearly there is some risk, although you probably have some influence in how the funds are invested - in which case you can play safer if you want.

A 40% tax deduction is not to be sniffed at. Used to be a very effective tax planning and investment tool for me.

TheBigBean

I'd stay well clear of VCTs and EISs unless you know what you are investing in.

Stevo_666

TheBigBean said:

I'd stay well clear of VCTs and EISs unless you know what you are investing in.

I would agree with that.

surrey_commuter

Dorset_Boy said:

Put the money in the pension. You don't have to expose the contribution to the markets if you don't want to. If you have a Sipp it can sit in the sipp bank account. If a personal pension then you could put it in a cash fund temporarily.

You also have to think of the term to retirement. If a number of years away then investing in the next week or so should do you ok over the medium to longer term.

I think the markets will fall a little further in the next couple of days until the energy situation (ie more oil production from the rest of the world) before stabilising. I do not however have a crystal ball so could be totally wrong.

The real key is time in the markets, not trying to time the market.

Concentrate on this advice.

To add detail you can pay in, leave it in cash and then buy shares on a monthly basis to spread the risk.

If you are looking for a SIPP provider than Vanguard make life very easy and cheap. You can also chose to have 100% shares or some in bonds which is considered less risky. Or you say when you are retiring and they will adjust your allocation to more bonds as you approach retirement

Dorset_Boy

surrey_commuter said:

Dorset_Boy said:

Put the money in the pension. You don't have to expose the contribution to the markets if you don't want to. If you have a Sipp it can sit in the sipp bank account. If a personal pension then you could put it in a cash fund temporarily.

You also have to think of the term to retirement. If a number of years away then investing in the next week or so should do you ok over the medium to longer term.

I think the markets will fall a little further in the next couple of days until the energy situation (ie more oil production from the rest of the world) before stabilising. I do not however have a crystal ball so could be totally wrong.

The real key is time in the markets, not trying to time the market.

Concentrate on this advice.

To add detail you can pay in, leave it in cash and then buy shares on a monthly basis to spread the risk.

If you are looking for a SIPP provider than Vanguard make life very easy and cheap. You can also chose to have 100% shares or some in bonds which is considered less risky. Or you say when you are retiring and they will adjust your allocation to more bonds as you approach retirement

Interest rates are rising. That is bad news for the capital value of fixed interest securities.
Vanguard offer passives. They are good at that, but you really don't solely want passives in your portfolio.
What people need is a professionally, pro-actively managed portfolio that reflects the level of risk they are willing and able to accept. (That is pro-actively managed at portfolio level, not necesaarily at fund level.)

shirley_basso

Any good recommendations? Quite hard to find that level of service at a retail pension fund level.

Dorset_Boy

shirley_basso said:

Any good recommendations? Quite hard to find that level of service at a retail pension fund level.

It really isn't if you use an adviser (and not a St James's Place salesman!!). However not many solutions will be direct to consumer, but you could search for Direct to consumer model portfolio services.

surrey_commuter

Dorset_Boy said:

surrey_commuter said:

Dorset_Boy said:

Put the money in the pension. You don't have to expose the contribution to the markets if you don't want to. If you have a Sipp it can sit in the sipp bank account. If a personal pension then you could put it in a cash fund temporarily.

You also have to think of the term to retirement. If a number of years away then investing in the next week or so should do you ok over the medium to longer term.

I think the markets will fall a little further in the next couple of days until the energy situation (ie more oil production from the rest of the world) before stabilising. I do not however have a crystal ball so could be totally wrong.

The real key is time in the markets, not trying to time the market.

Concentrate on this advice.

To add detail you can pay in, leave it in cash and then buy shares on a monthly basis to spread the risk.

If you are looking for a SIPP provider than Vanguard make life very easy and cheap. You can also chose to have 100% shares or some in bonds which is considered less risky. Or you say when you are retiring and they will adjust your allocation to more bonds as you approach retirement

Interest rates are rising. That is bad news for the capital value of fixed interest securities.
Vanguard offer passives. They are good at that, but you really don't solely want passives in your portfolio.
What people need is a professionally, pro-actively managed portfolio that reflects the level of risk they are willing and able to accept. (That is pro-actively managed at portfolio level, not necesaarily at fund level.)

We could have a very good debate about this but assuming the OP has limited funds then the likes of Vanguard give him easy access to a balanced portfolio at a low cost.
Assuming costs of approx 2% over Vanguard's then that needs a healthy outperformance.

For the avoidance of doubt I do see the value of IFA's depending upon the investors knowledge and situation.

What SJP do should be illegal.

Dorset_Boy

You are well out on the additional costs figure. If you ignore the cost of advice then you should be talking less than 1% pa differential for a properly managed portfolio.
(Look at the likes of Parmenion for a whole of market solution or Royal London for their own funds in a portfolio, though Joe Public can't access them directly).

That all said, doing something is better than doing nothing.

surrey_commuter

Dorset_Boy said:

You are well out on the additional costs figure. If you ignore the cost of advice then you should be talking less than 1% pa differential for a properly managed portfolio.
(Look at the likes of Parmenion for a whole of market solution or Royal London for their own funds in a portfolio, though Joe Public can't access them directly).

That all said, doing something is better than doing nothing.

my 2% was including adviser fees as not many individual investors have the knowledge or access to go direct.

FWIW in an insane binary piece of decision making I am split between Vanguard and Funsmith

pangolin

surrey_commuter said:

Dorset_Boy said:

You are well out on the additional costs figure. If you ignore the cost of advice then you should be talking less than 1% pa differential for a properly managed portfolio.
(Look at the likes of Parmenion for a whole of market solution or Royal London for their own funds in a portfolio, though Joe Public can't access them directly).

That all said, doing something is better than doing nothing.

my 2% was including adviser fees as not many individual investors have the knowledge or access to go direct.

FWIW in an insane binary piece of decision making I am split between Vanguard and Funsmith

Past performance is not a guide to future performance. The performance quoted may be before charges which will have the effect of reducing illustrated performance. No investment is suitable in all cases and if you have any doubts as to an investment's suitability then you should contact us. League of Legends playing cards are not a recommended investment vehicle.

rick_chasey

Shout out to Dorset for plugging active management.

A dying part of the City no less, though one that still does a lot of hiring

Out of interest Dorset, and this is an honest, non-judgemental question, what makes you think that active in this instance is better than passive when passive as a whole consistently smashes active when it comes to performance after management fees?

Dorset_Boy

rick_chasey said:

Shout out to Dorset for plugging active management.

A dying part of the City no less, though one that still does a lot of hiring

Out of interest Dorset, and this is an honest, non-judgemental question, what makes you think that active in this instance is better than passive when passive as a whole consistently smashes active when it comes to performance after management fees?

Passive doesn't always outperform and it doesn't 'smash active'. And the whole point isn't to compare the whole. Sure there are some consistently sh!te active managers, often with the dinosaur life offices, but the aim is to largely avoid those.

There are certain markets where passive makes sense - large cap US is an example where the market is so heavily researched that there are few opportunities to exploit.
Passive makes no sense if you want to invest in smaller companies or emerging and under developed markets.
The best route is a combination of the two, and being prepared to switch between them depending on market conditions.

Slight tangent. Joe Public also generally doesn't understand investment risk, or at least the risk they are taking. They see a fund that has had a good run and want to stick with it, or they've held a fund for sentimental reasons. The only way you can manage a portfolio is if you have discretionary powers.

TheBigBean

The efficient market paradox.

I think some active managers are naive when considering their own skills. I have said before that a friend's hedge fund's algorithms predicted Brexit. The salient detail is that they have the algorithms trying to assess this.