Keeping drawdown below tax threshold?

[Dod101]

https://y.yarn.co/8c1cd55b-1251-4298-9c59-0772d3661afc_text.gif

:O)

Cheers,

Itsallaguess

As said, we are very far off topic. But some ideas of how society could function were set out in "The machinery of Freedom" by Milton Friedman's son.

https://www.amazon.co.uk/Machinery-Free ... 112&sr=1-1

If you are interested the author will be paid a small sum if you buy the book, but there is a pirate copy of the second edition available. He provides the pirate copy on his web site to thumb his nose at the pirate (pirating the pirate).

There are in fact many such speculations and some historical examples. This is not really the thread though for such debate. I'll leave it to you to do the research.

Ps, don't forget your ID card when you go and vote. Also off topic, but I will note that there was debate and consultation about ID cards back in the 90's. While researching, you could research that too.

Thanks for all of that. I am in Scotland so no elections for me.

Dod

[DrFfybes]

Seeing the recent dividend drawdown question from Gilgongo made me want to ask a question that's been on my mind as I consider what to do when I can access my SIPP in September 2024.

[...]

For instance, my SIPP's income will be above the personal allowance, I could reduce this by taking the 25% and reinvesting in ISA's but even after taking the 25% the income will be above the personal allowance, or I could take higher UFPLS payments and only a small upfront 25% for a new kitchen.

Going forwards, I could then reduce my drawdown to stick to the personal allowance, thus avoiding tax but I can't see the point as that money would be stuck in the SIPP instead of being available to spend/invest in ISA's as I choose.

So, is there any advantage that I am missing of deliberately avoiding tax or is maximising income (and paying some tax) more important (as I believe)?

Wow, this thread has drifted - and I thought Gengulphus wrote sime complicated stuff but I'm not at all sure what 1nvest was getting at

The things that are missing from Darka's post are...
1) you're retired, you pay no tax, so how are you living at the moment?
2) Can you carry on living like that, in which case why change things?
3) Do you have significant unsheltered assets?
4) What level of income do you want - do you need to draw from SIPPs or ISAs?
5) Do you have any inheritance plans (yeah, I know, early days you hope, but...).

I'd work out how much I wanted as an income then work out a tax efficient way of extracting it. Deliberately curtailing income and the experiences and things that could come with that money to avoid paying tax on it seems a hair shirt.

This! - don't let the tax tail wag the dog, generate what you need to live on in the most tax efficient manner. Just because you CAN access your SIPP, doesn't mean you need to.

Generally, the simple rule is to use up unsheltered assets first, selling to use CGT and using personal allowances on dividends, and moving to ISA/SIPP as appropriate (you can still add £2880 to your SIPP anyway).

BUT, if you have a spouse you might want to maximise your ISA holding so they can inherit, or you might wish to maximise your SIPP for the IHT rules if you have children, especially until you hit 75 (although personally I can see this changing in the next few years).

Without this info it is impossible to make good suggestions, as what works for me will probably not work for you.

Paul

[TUK020]

I have planned my retirement income so that I should be able to live comfortably and stay within the basic rate income tax band.
I could draw more from my SIPP, subject to paying a higher rate.
I view this as having a reserve if I need it. It also happens to be in an IHT efficient spot if I don't.
I live in probably a forlorn hope that one day somoene will increase the tax threshold to account for inflation. If that happens, I will give myself a pay rise

[1nvest]

Looking at long-term performance of 2UKL (ie about 10 years), it seems to be no better than the total return of a FTSE 100 ETF,

Leveraged ETF's scale the volatility, not the mid/longer term reward. Generally the mid/longer term reward does tend to compare 1:1 with the non-leveraged, but having endured twice the volatility along the way. Half in 2x, half in low/no volatility, scales that amplification back to being around the same.

[1nvest]

I've never understood this 'don't give money to the government' thing

Council taxes rise, and your service/benefits decline, bins collected fortnightly instead of weekly ...etc. type pay more for less public spending wastage.

All the rail, NHS doctors, nurses, teachers ...etc. all want more pay, whilst waiting and treatment times get worse/longer.

Private sector and for more money the expectation is for more productivity, is far better at capital allocation/deployment.

IMO public sector should get more pay, but in return for a cut in their pensions that otherwise are mostly vastly better than that of most of the private sector, or otherwise demonstrated productivity improvements.

Similar for taxes, individuals retaining more, paying less taxes, will be inclined to better invest/deploy that capital than the public sector/state.

[1nvest]

There's always the option of a UK version of this sort of US version



Tax exempt on the way in (SIPP), tax exempt on the way out (ISA)

Can backfire in some years, 2008 for example, SIPP expansion of +60%, but the next couple of years saw that reversed by -50% and -32% (1.0 -> 1.6 -> 0.8 -> 0.5) ... so potentially SIPP value halved in a bad case 3 years. In other cases SIPP value might be halved after just a single year.

Adjust the tilts as you see fit, the above is more for a broadly inflation pacing overall portfolio type choice. You might scale up stock exposure with the likes of 50/20/30 2x long/2x short/bonds ... or whatever you might deem to be appropriate.

2UKL and 2UKS (WisdomTree) for instance as possible ETF's (2UKL in ISA, 2UKS in SIPP).

Interesting, but how does it compare with ungeared 20/80 in the SIPP and 80/20 in the ISA?

Faster migration

[EthicsGradient]

Looking at long-term performance of 2UKL (ie about 10 years), it seems to be no better than the total return of a FTSE 100 ETF,

Leveraged ETF's scale the volatility, not the mid/longer term reward. Generally the mid/longer term reward does tend to compare 1:1 with the non-leveraged, but having endured twice the volatility along the way. Half in 2x, half in low/no volatility, scales that amplification back to being around the same.

And so it seems a pointless strategy for a longer term - more volatility with higher charges. You also don't specify how it would work - you start with the 20% 2xShort in the SIPP, and 30% 2xLong in the ISA, but the strategy involves rebalancing every year to keep that 20:30 split the same. So when, in most years, you have to buy more of the short ETF, to make up for its losses, do you buy it inside the SIPP? Or do you buy in in the ISA, where you've (probably) got some excess money? What about the bond fund - again, do you buy that where it is, when required to rebalance, or wherever the profit from the previous year has come? Where do you take the income from, and what's the strategy to actually save tax, which was what this was supposed to be about?

Overall, the short ETF looks like a good way to burn money - it usually loses it, and the strategy requires piling more money into it when it does, when it's likely to lose it in the future. Its only point is to mitigate the self-inflicted higher volatility of the long ETF, which is not a long-term investment.

I did some calculations, and I reckon you'd have got about the same return if you were 100% in the bond fund, over the period of those figures.

[James]

I've never understood this 'don't give money to the government' thing

Council taxes rise, and your service/benefits decline, bins collected fortnightly instead of weekly ...etc. type pay more for less public spending wastage.

All the rail, NHS doctors, nurses, teachers ...etc. all want more pay, whilst waiting and treatment times get worse/longer.

Private sector and for more money the expectation is for more productivity, is far better at capital allocation/deployment.

Private rail companies...
Private energy companies...
Private water companies...
Snap.

[1nvest]

Leveraged ETF's scale the volatility, not the mid/longer term reward. Generally the mid/longer term reward does tend to compare 1:1 with the non-leveraged, but having endured twice the volatility along the way. Half in 2x, half in low/no volatility, scales that amplification back to being around the same.

And so it seems a pointless strategy for a longer term - more volatility with higher charges. You also don't specify how it would work - you start with the 20% 2xShort in the SIPP, and 30% 2xLong in the ISA, but the strategy involves rebalancing every year to keep that 20:30 split the same. So when, in most years, you have to buy more of the short ETF, to make up for its losses, do you buy it inside the SIPP? Or do you buy in in the ISA, where you've (probably) got some excess money? What about the bond fund - again, do you buy that where it is, when required to rebalance, or wherever the profit from the previous year has come? Where do you take the income from, and what's the strategy to actually save tax, which was what this was supposed to be about?

Overall, the short ETF looks like a good way to burn money - it usually loses it, and the strategy requires piling more money into it when it does, when it's likely to lose it in the future. Its only point is to mitigate the self-inflicted higher volatility of the long ETF, which is not a long-term investment.

I did some calculations, and I reckon you'd have got about the same return if you were 100% in the bond fund, over the period of those figures.

So you don't "get-it" that it generally returns bond like total reward whilst potentially relatively quickly migrating large amounts of SIPP value (tax free on the way in) over to ISA (tax free on the way out). Or the benefit of doing such!

Consider a general account where a saver saves £100 inflation adjusted each month, out of income they'd paid 20% tax on (£125 gross), whose investment is bond like and sees that money offset/match inflation, but then pays 20% taxation when that is drawn (£100 reduced to £80). In net terms they lose -36%. In contrast a SIPP or ISA might do better, in only having one side taxed (on exit for SIPP, on entry for ISA). Whist the investor who saves via SIPP, withdraws via ISA does even better +25% in this example case. Difference 125/0.64 = near twice as much on capital at risk compared to the general account comparable amount at risk.

I've led horses to water, taught how to fish. Have no further intent to try and force horses to drink water nor feed fish to others, that's down to each horse/individual.

[1nvest]

Council taxes rise, and your service/benefits decline, bins collected fortnightly instead of weekly ...etc. type pay more for less public spending wastage.

All the rail, NHS doctors, nurses, teachers ...etc. all want more pay, whilst waiting and treatment times get worse/longer.

Private sector and for more money the expectation is for more productivity, is far better at capital allocation/deployment.

Private rail companies...
Private energy companies...
Private water companies...
Snap.

Exactly. British rail travellers subsidise German rail travellers, British water/energy users subsidise French water/energy users. They in turn can produce the same for less in having been subsidised. UK energy prices for instance are one of the highest in Europe, those higher costs in turn making UK businesses less competitive. Advantages such as the UK having its own gas resources are lost when UK gas users have to pay the same global price as others who have no gas of their own and have to buy from the global market.

A step might be to start levying dividend withholding taxes as most others do. In some cases IIRC France levy a 75% withholding tax rate against 'unfriendly' share beneficiaries, and the EU has certainly been most unfriendly towards the UK. FT100 £2Tn market cap, 3.5% dividend yield = £70Bn of dividends paid out, much of which flows overseas. In the opposite direction British investors who receive foreign dividends are typically (on average) levied a 20% taxation on those dividends (global average withholding rate).

[EthicsGradient]

And so it seems a pointless strategy for a longer term - more volatility with higher charges. You also don't specify how it would work - you start with the 20% 2xShort in the SIPP, and 30% 2xLong in the ISA, but the strategy involves rebalancing every year to keep that 20:30 split the same. So when, in most years, you have to buy more of the short ETF, to make up for its losses, do you buy it inside the SIPP? Or do you buy in in the ISA, where you've (probably) got some excess money? What about the bond fund - again, do you buy that where it is, when required to rebalance, or wherever the profit from the previous year has come? Where do you take the income from, and what's the strategy to actually save tax, which was what this was supposed to be about?

Overall, the short ETF looks like a good way to burn money - it usually loses it, and the strategy requires piling more money into it when it does, when it's likely to lose it in the future. Its only point is to mitigate the self-inflicted higher volatility of the long ETF, which is not a long-term investment.

I did some calculations, and I reckon you'd have got about the same return if you were 100% in the bond fund, over the period of those figures.

So you don't "get-it" that it generally returns bond like total reward whilst potentially relatively quickly migrating large amounts of SIPP value (tax free on the way in) over to ISA (tax free on the way out). Or the benefit of doing such!

Consider a general account where a saver saves £100 inflation adjusted each month, out of income they'd paid 20% tax on (£125 gross), whose investment is bond like and sees that money offset/match inflation, but then pays 20% taxation when that is drawn (£100 reduced to £80). In net terms they lose -36%. In contrast a SIPP or ISA might do better, in only having one side taxed (on exit for SIPP, on entry for ISA). Whist the investor who saves via SIPP, withdraws via ISA does even better +25% in this example case. Difference 125/0.64 = near twice as much on capital at risk compared to the general account comparable amount at risk.

I've led horses to water, taught how to fish. Have no further intent to try and force horses to drink water nor feed fish to others, that's down to each horse/individual.

I don't think you are explaining anything. You cannot "save via SIPP, withdraw via ISA". You have to save into an ISA before you can withdraw from it. And saving into a SIPP without withdrawing from it is pointless. You just aren't making much sense.

Your figures were applicable to someone who had already saved into a SIPP and into an ISA, in the ratio 2:3 (plus 5 in a bond fund somewhere). You suggested a strategy of buying a 2x short ETF in the SIPP, and a 2x long ETF in the ISA, and then rebalancing these, and the bond fund, each year. You did not, however, explain how to withdraw the desired income, nor whether the rebalancing purchases should be in the tax vehicle in which any excess money is available, or if you want the funds to remain solely in the tax vehicle in which they start (in which case, in most years, you'd be contributing to the SIPP). Sure, contributing more to the SIPP gets a tax bonus, and if your main intent is to build up the SIPP to leave it to someone else, that may work; but others have pointed that out far more clearly, and using this expensive short ETF is a waste of money, and a way to, over the years, decrease the amount of money in the SIPP.

Don't worry, I'm quite happy for you to stop attempting to explain, because I think your strategy really is off-topic for the thread.

[DrFfybes]

I have planned my retirement income so that I should be able to live comfortably and stay within the basic rate income tax band.
I could draw more from my SIPP, subject to paying a higher rate.
[...]
I live in probably a forlorn hope that one day somoene will increase the tax threshold to account for inflation. If that happens, I will give myself a pay rise

What was it we said about 'not letting the tax tail wag the dog'?

On a serious note, presumably if you needed to go into higher rate tax to maintain your lifestyle then you would?

Paul

[TUK020]

I have planned my retirement income so that I should be able to live comfortably and stay within the basic rate income tax band.
I could draw more from my SIPP, subject to paying a higher rate.
[...]
I live in probably a forlorn hope that one day somoene will increase the tax threshold to account for inflation. If that happens, I will give myself a pay rise

What was it we said about 'not letting the tax tail wag the dog'?

On a serious note, presumably if you needed to go into higher rate tax to maintain your lifestyle then you would?

Paul

Yes I would, that is my 'reserve'.