Tax efficient savings in retirement

[mesb48]

Would appreciate any thoughts on below. Sorry if it's been covered before but I couldn't quickly find the ideas I was looking for.

My dad is 80 and asked for the first time for help with his tax return - previously he'd paid an accountant. Financial affairs are relatively simple - company DB pension + state pension + house + cash savings. Unfortunately his marginal income is just over the 40% tax band limit so all his interest (coming to the fore with lower savings allowance/higher interest rates) on savings now gets taxed at 40%.

Unfortunately he hasn't built up many ISA savings accounts so I'm trying to propose some ideas for him. Wish is to keep savings in cash or close to cash in terms of risk tolerance. My ideas so far:

- start opening ISA accounts, to gradually over time build up this pot
- £50K premium bonds
- buy a selection of UK govt gilts (different expiry dates) trading below par, to get as much income in form of exempt capital gains rather than interest income
- sufficient cash in normal savings accounts to use £500 savings allowance
- approx £20k invested in blue chip UK shares (realise this is not cash, but it's a small amount of total) trying to use £1,000 dividend allowance assuming ~5% yield

Any suggestions on other things to look at would be well received.

[SebsCat]

Seems like a good approach and I'm sure some more knowledgeable Fools will be able to offer advice re gilts. Just to point out though that the dividend allowance will be reduced to just £500 from next April.

[mesb48]

Seems like a good approach and I'm sure some more knowledgeable Fools will be able to offer advice re gilts. Just to point out though that the dividend allowance will be reduced to just £500 from next April.

Thanks, so just £10k in blue chip shares then - might not be worth bothering but was trying to illustrate my thought process i suppose on the options

[BullDog]

Seems like a good approach and I'm sure some more knowledgeable Fools will be able to offer advice re gilts. Just to point out though that the dividend allowance will be reduced to just £500 from next April.

Thanks, so just £10k in blue chip shares then - might not be worth bothering but was trying to illustrate my thought process i suppose on the options

Current tax policy with respect to even quite modest savings is appalling, but it is what it is. I have a similar issue in the family. To avoid having to pay even more tax on quite modest savings I have drawn some money from savings accounts and bought low coupon short duration gilts. The low coupon means we won't be paying tax by exceeding the miserable £500 savings allowance and the redemption at par of the gilts is tax free.

[richfool]

Looking ahead at the tax on savings interest allowances, against the background of higher interest rates (on savings), has caused us to divert more savings into cash ISA's along with that which already goes into equity ISA's (one of each, each), subject to the overall £20K limit pa..

[DrFfybes]

Looks like you have most things coonsidered - be aware that Postal/Branch ISAs under PoA can be a complete PITA to amend (DAMHIK) so it might be handy to do online ones and then "help" him when he logs in.

One other consideration is to make sure you have all his Charity contributions from last year on the return - did he Gift Aid anything to shops, is he a member of Charitable organisations that take Gift Aid (English Heritage, national Trust, etc etc). Mum had loads of bits going out to the heart wrenching ads you see on daytime telly when I took over, it paid for a good chunk of her care when I stopped them!

Lastly, he's 80 years old and you say

approx £20k invested in blue chip UK shares (realise this is not cash, but it's a small amount of total)

which implies plenty of assets for his remaining years. Is it feasible to gift some so (grand)children within or above the ammual IHT allowances which would slightly reduce Income and might reduce IHT depending on circumstances.

Paul

[Kantwebefriends]

"Unfortunately he hasn't built up many ISA savings accounts". If he happens to have an S&S ISA he could transfer it to a Cash ISA: it's a simple matter of completing the form(s) for the bank/BS to which the transfer is going. Then he could replace his shares with something else that might protect him from inflation e.g. low-coupon index-linked gilts, which will make particularly light demands on his Savings Allowance (initial income yield in the neighbourhood of 0.125%p.a.), or even some gold sovereigns which will use up none of his Savings Allowance nor Capital Gains allowance. He could always hold them in a secure deposit somewhere - the Royal Mint isn't the cheapest but he might have confidence in it.

I know what else I'd consider as a tax-dodge: Venture Capital Trusts. I also know I'd reject them on grounds of my being too old, too ignorant, too cautious, and too poor.

Otherwise I do have sympathy for your idea of using his dividend allowance. How about one or two of those investment trusts that aim at capital preservation rather than growth e.g. Ruffer, Personal Assets, Capital Gearing?

[BullDog]

"Unfortunately he hasn't built up many ISA savings accounts". If he happens to have an S&S ISA he could transfer it to a Cash ISA: it's a simple matter of completing the form(s) for the bank/BS to which the transfer is going. Then he could replace his shares with something else that might protect him from inflation e.g. low-coupon index-linked gilts, which will make particularly light demands on his Savings Allowance (initial income yield in the neighbourhood of 0.125%p.a.), or even some gold sovereigns which will use up none of his Savings Allowance nor Capital Gains allowance. He could always hold them in a secure deposit somewhere - the Royal Mint isn't the cheapest but he might have confidence in it.

I know what else I'd consider as a tax-dodge: Venture Capital Trusts. I also know I'd reject them on grounds of my being too old, too ignorant, too cautious, and too poor.

Otherwise I do have sympathy for your idea of using his dividend allowance. How about one or two of those investment trusts that aim at capital preservation rather than growth e.g. Ruffer, Personal Assets, Capital Gearing?

Just to point out that near term performance of the so called wealth preservation investment trusts has been pretty dismal across the board. Whether that's going to continue or not I have no idea. Personally, I don't trust them to preserve wealth.

[Kantwebefriends]

Just to point out that near term performance of the so called wealth preservation investment trusts has been pretty dismal across the board. Whether that's going to continue or not I have no idea. Personally, I don't trust them to preserve wealth.

Fair enough but presumably anything heavily invested in fixed interest before interest rates shot up was going to perform poorly. Their holdings of gilts at the moment might do pretty well in future.

Anyway however cautious they are they are still equities. Past performance .. etc etc.

[mesb48]

Thanks all for your comments, a few things for me to look at further. Will write a better reply when I’ve done that.

[mesb48]

Longer reply……. Reflecting on each of your comments has helped a lot.

It’s also reaffirmed we’re looking for a reasonable income return so this rules out sovereign coins (didn’t know about them, so I’ve learned something though!)

The capital preservation trusts I’m aware of and personally hold in small amounts. Not sure they’re current delivering anything very consistent, so it’s hard for me to sell them as an idea to my dad even if I think there is short term some better performance probably ahead.

I also personally hold some conventional gilts. But have not really touched index linked ones. Need to look at them a bit more to see the possible advantages over convention ones but the main downside I see being the extra layer of complexity to explain.

I thought of VCT’s (which I also personally hold) and actually was tempted to bundle a few in (if I could decide on the better ones, and explain simply what they are). But the 5 year holding period is probably the main catch in case the money was needed. Also I’ve had my fingers slightly burned on some of the weaker ones so they don’t really fit the risk profile very well - don’t want the tax incentive tail to wag the dog. At the moment the (partly tax free) returns on gilts might be good enough to not really need to go down that route.

Didn’t realise things like National Trust membership counted as a donation, so thanks for that tip.

I suspect my dad is not the only one who has missed out on chances to put money into ISA’s in recent years despite having the funds/capacity to do so at the time. Shows the value of some basic but savvy financial choices. I feel guilty now for not suggesting or prompting it, but have always been shy to talk about money without being asked. Anyhow, I think I have enough ideas to hopefully mean it’s not a big deal, just quite a bit more effort to structure something appropriate and efficient.

Thanks again for the comments.

[UncleEbenezer]

Sounds like a man with considerably more money than he'll ever have a use for.

So perhaps it's time to consider making good use of it. In an investment context, consider an Angel network. Support his own choice of startup businesses alongside more experienced Angel investors, and claim generous tax breaks with EIS. Or in a general context, consider sponsoring something he favours: that too can often be done tax-efficiently.