End of tax year
morstar
Posts: 5,904
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.
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.
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I am not sure. You have no chance.
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.
Cube Attain
I am not sure. You have no chance.
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.
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.
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.
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.
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.
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.
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.
A 40% tax deduction is not to be sniffed at. Used to be a very effective tax planning and investment tool for me.
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
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.)
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.
(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.
FWIW in an insane binary piece of decision making I am split between Vanguard and Funsmith
Cube Attain
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?
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.
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.