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Would love some thoughts on my desire to move away from Vanguard investing

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
xeny
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Re: Would love some thoughts on my desire to move away from Vanguard investing

#409992

Postby xeny » May 7th, 2021, 8:19 am

turnaround wrote:tbh now im actually wondering whether i should instead be focusing on maximising my pension instead of ISA if i dont have serious plans to use it before retirement.

atm i contribute 15% + 5% company match...even if i contributed the whole 20k ISA allowance id still be getting the 40% tax benefit....


You're in your early 30s. Return wise Pension trumps ISA because of the tax breaks, but there is the LTA which is currently frozen, and to be frank looking as if it's an easy lever for a government to pull to increase tax take long term without too much screaming.

I'd suggest doing some very rough and ready projecting of how large your pension might get for various levels of contribution/growth and make some guesses about how much the LTA is likely to be increased over time, and then look at contribution split ISA vs pension vs LISA.

Remember if you've got spare annual contribution allowance and are earning enough, you can contribute all the annual allowance to your pension and meet any living cost needs from an ISA, so it's possible to shuffle ISA->pension, you can't go the other way.

hiriskpaul
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Re: Would love some thoughts on my desire to move away from Vanguard investing

#410012

Postby hiriskpaul » May 7th, 2021, 9:49 am

xeny wrote:
turnaround wrote:tbh now im actually wondering whether i should instead be focusing on maximising my pension instead of ISA if i dont have serious plans to use it before retirement.

atm i contribute 15% + 5% company match...even if i contributed the whole 20k ISA allowance id still be getting the 40% tax benefit....


You're in your early 30s. Return wise Pension trumps ISA because of the tax breaks, but there is the LTA which is currently frozen, and to be frank looking as if it's an easy lever for a government to pull to increase tax take long term without too much screaming.

I'd suggest doing some very rough and ready projecting of how large your pension might get for various levels of contribution/growth and make some guesses about how much the LTA is likely to be increased over time, and then look at contribution split ISA vs pension vs LISA.

Remember if you've got spare annual contribution allowance and are earning enough, you can contribute all the annual allowance to your pension and meet any living cost needs from an ISA, so it's possible to shuffle ISA->pension, you can't go the other way.

Under current rules, A 40% taxpayer that ends up paying an LTA charge is no worse off than paying 40% upfront tax and paying into an ISA, provided the pension is subsequently drawn at 20%. Each £1 over the LTA is subject to 25p LTA charge, leaving 75p. Drawing the 75p attracts 15p at 20% tax, leaving 60p. For someone who can get an additional company contribution to the pension and perhaps NI saving through salary sacrifice, that tips the balance in favour of the pension.

There are other considerations than just the numbers though. Future government tinkering over tax, pension and ISA rules may retrospectively alter the balance one way or the other. An issue with pensions is that they cannot be accessed before age 55 at present, except for cases of severe illness. Again a number subject to future government tinkering and current government planning is that it will move to state pension age minus 10 years.

A lot depends on personal circumstances and preferences, but for a 40% taxpayer in their early 30s I would suggest backing both horses - increased pension contributions and ISA contributions.

LISA contributions well worth considering as well. At least the end date is more rigorously fixed at age 60.

xeny
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Re: Would love some thoughts on my desire to move away from Vanguard investing

#410014

Postby xeny » May 7th, 2021, 10:00 am

hiriskpaul wrote:Under current rules, A 40% taxpayer that ends up paying an LTA charge is no worse off than paying 40% upfront tax and paying into an ISA, provided the pension is subsequently drawn at 20%. Each £1 over the LTA is subject to 25p LTA charge, leaving 75p. Drawing the 75p attracts 15p at 20% tax, leaving 60p. For someone who can get an additional company contribution to the pension and perhaps NI saving through salary sacrifice, that tips the balance in favour of the pension.


Thanks, that's a much more extensive analysis than I offered. My reasoning with the pension LTA has been that with that large a pot, the odds are pretty good that you'll be paying 40% tax when drawing down the pension. Am I missing something (apart from an employer that will make additional level pension contributions at this kind of level) ?

hiriskpaul
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Re: Would love some thoughts on my desire to move away from Vanguard investing

#410058

Postby hiriskpaul » May 7th, 2021, 12:23 pm

xeny wrote:
hiriskpaul wrote:Under current rules, A 40% taxpayer that ends up paying an LTA charge is no worse off than paying 40% upfront tax and paying into an ISA, provided the pension is subsequently drawn at 20%. Each £1 over the LTA is subject to 25p LTA charge, leaving 75p. Drawing the 75p attracts 15p at 20% tax, leaving 60p. For someone who can get an additional company contribution to the pension and perhaps NI saving through salary sacrifice, that tips the balance in favour of the pension.


Thanks, that's a much more extensive analysis than I offered. My reasoning with the pension LTA has been that with that large a pot, the odds are pretty good that you'll be paying 40% tax when drawing down the pension. Am I missing something (apart from an employer that will make additional level pension contributions at this kind of level) ?

The LTA is about £1m. 25% of the LTA can be taken as a tax free lump sum, leaving about £750k for flexi-access drawdown. 4% (IMHO a fairly risky withdrawal rate) of that is £30k, so well within basic rate tax even with the new state pension.

Turnaround is getting a 33% boost to his* pension from his employer, so for every £1 contributed he gets about 67p in higher rate tax saving plus 33p from his employer, total £2. If he ends up paying the LTA charge and 40% tax, the effective charge is 55%, so he gets back 90p. So overall he loses out by about 10% compared to an ISA if he ends up paying 40% tax in retirement. But that is only on the amount taxable at 40% of course. He is gaining 20% on the amount over the LTA that is taxable at 20% due to the employer's contribution.

On the part within the LTA, he is ahead by 70% compared to an ISA (£2 gross becomes £1.50 after the 50p PCLS, which becomes £1.20 after 20% tax).

Given the above, I think I would want to be maxxing out on the higher rate tax saving. Something that is regularly considered likely to vanish at each budget.

Drawing pension income at 40% is of course optional. Personally I would not want to do that. I would leave the excess to beneficiaries. What tax rate they draw down at would be up to them.


*apologies if a her!

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Re: Would love some thoughts on my desire to move away from Vanguard investing

#410066

Postby turnaround » May 7th, 2021, 12:50 pm

to provide a bit more context my pension is very bad. currently around £50k (ie lower than my current ISA pot) because in my youth i was silly and didnt contribute much at all. Fidelity predicts it will grow to ~500k at current contribution rates etc etc

my salary is 68k and i contribute 15%+5% match. the big benefit from my job is my bonus can be 50-150% in a good year and i can contribute into my pension (with company NIC bonus added in additionally). So my plan generally has been to continue 15%+5% & try max ISA contribution and then put majority of bonus into my pension.

maybe i should switch to 25% + 5% and then any spare cash i do have contribute into ISA. I can always move across my current 30k sitting into current accounts into cash ISAs at the end of the year so i dont lose the allowances....

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Re: Would love some thoughts on my desire to move away from Vanguard investing

#410097

Postby TUK020 » May 7th, 2021, 4:17 pm

turnaround wrote:to provide a bit more context my pension is very bad. currently around £50k (ie lower than my current ISA pot) because in my youth i was silly and didnt contribute much at all. Fidelity predicts it will grow to ~500k at current contribution rates etc etc

my salary is 68k and i contribute 15%+5% match. the big benefit from my job is my bonus can be 50-150% in a good year and i can contribute into my pension (with company NIC bonus added in additionally). So my plan generally has been to continue 15%+5% & try max ISA contribution and then put majority of bonus into my pension.

maybe i should switch to 25% + 5% and then any spare cash i do have contribute into ISA. I can always move across my current 30k sitting into current accounts into cash ISAs at the end of the year so i dont lose the allowances....


One way of thinking about pensions is an opportunity to arbitrage tax rates between now when you are earning, and later when you are drawing a pension.

If I were in the earnings + pension situation you describe, I would be thinking about the following priorities

a) having sufficient money in an ISA to provide for an emergency needs buffer (i.e. instantly accessible)
b) putting max into pension to ensure employer matching contribution, and also, if I could afford it, any earnings over 50K (i.e higher rate tax band)
c) if you can then afford it and qualify (age limited), putting 4k into a LISA - getting matching 1k from HMRC - to create a 'pension' accessible from age 60
d) anything spare left over into ISA

In essence, you have the opportunity to reclaim tax at higher rate (up to 40k/yr) into your pension, and then pay nil/basic rate (together with 25% tax free) when you draw the pension.

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Re: Would love some thoughts on my desire to move away from Vanguard investing

#410112

Postby turnaround » May 7th, 2021, 5:05 pm

TUK020 wrote:
turnaround wrote:to provide a bit more context my pension is very bad. currently around £50k (ie lower than my current ISA pot) because in my youth i was silly and didnt contribute much at all. Fidelity predicts it will grow to ~500k at current contribution rates etc etc

my salary is 68k and i contribute 15%+5% match. the big benefit from my job is my bonus can be 50-150% in a good year and i can contribute into my pension (with company NIC bonus added in additionally). So my plan generally has been to continue 15%+5% & try max ISA contribution and then put majority of bonus into my pension.

maybe i should switch to 25% + 5% and then any spare cash i do have contribute into ISA. I can always move across my current 30k sitting into current accounts into cash ISAs at the end of the year so i dont lose the allowances....


One way of thinking about pensions is an opportunity to arbitrage tax rates between now when you are earning, and later when you are drawing a pension.

If I were in the earnings + pension situation you describe, I would be thinking about the following priorities

a) having sufficient money in an ISA to provide for an emergency needs buffer (i.e. instantly accessible)
b) putting max into pension to ensure employer matching contribution, and also, if I could afford it, any earnings over 50K (i.e higher rate tax band)
c) if you can then afford it and qualify (age limited), putting 4k into a LISA - getting matching 1k from HMRC - to create a 'pension' accessible from age 60
d) anything spare left over into ISA

In essence, you have the opportunity to reclaim tax at higher rate (up to 40k/yr) into your pension, and then pay nil/basic rate (together with 25% tax free) when you draw the pension.


ok so i should contribute 68k-50k = 18k of salary into pension pot = ~26.4% (ie higher than current 15%). By my estimates thats only an extra ~£300 post tax that id be losing out from my salary...and thats coincidently roughly what im now saving having paid off my student loans so not much of a net difference to me.

ill transfer my existing cash ISA (from PY) into my existing Vanguard fund and just keep everything there (appreciate id prob get a ~20-30£ saving potentially going somewhere else but im fine with that).

ill put £4k into LISA...i should still have enough cash flow to contribute £10k to ISA and the balance of this will be me taking money out from my existing current account savings of ~30k and topping up into new cash ISAs each year to keep allowance (& then potentially transfer into S&S in future when i have rebuilt current account savings).

if i get good bonus i can top up pension to the extent that i fill 3 years allowances (40kx3) and remaining can go to ISA/ savings

thanks everyone for helping me think this through. i think this is a good plan!

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Re: Would love some thoughts on my desire to move away from Vanguard investing

#410117

Postby hiriskpaul » May 7th, 2021, 5:43 pm

By the sound of it you are already maxing out your employer's contribution, so another option to consider is opening a SIPP for flexibility. You can then contribute to this towards the end of each tax year to utilise any extra 40% tax relief you want to receive. That might be simpler than continually changing your company pension contribution, although it does mean you will have to reclaim the additional tax relief from HMRC. Take a look at any extra benefits your company pension scheme might offer first though, as well as the running costs of the SIPP compared to the employer scheme.

If your employer lobs the employer NI saving on to your bonus when paying the bonus into the company pension scheme then that seems like a no-brainer to me. Take full advantage of that before increasing your regular contributions unless your regular contributions are made up with employer NI as well.

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Re: Would love some thoughts on my desire to move away from Vanguard investing

#410264

Postby turnaround » May 8th, 2021, 1:35 pm

hiriskpaul wrote:By the sound of it you are already maxing out your employer's contribution, so another option to consider is opening a SIPP for flexibility. You can then contribute to this towards the end of each tax year to utilise any extra 40% tax relief you want to receive. That might be simpler than continually changing your company pension contribution, although it does mean you will have to reclaim the additional tax relief from HMRC. Take a look at any extra benefits your company pension scheme might offer first though, as well as the running costs of the SIPP compared to the employer scheme.

If your employer lobs the employer NI saving on to your bonus when paying the bonus into the company pension scheme then that seems like a no-brainer to me. Take full advantage of that before increasing your regular contributions unless your regular contributions are made up with employer NI as well.


hmm swear i posted a reply but its gone. anyway, company contributes 50% of NIC savings to pension contributions too so i think its better idea than SIPP. plus id hate the hassle and HMRC admin.

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Re: Would love some thoughts on my desire to move away from Vanguard investing

#410267

Postby hiriskpaul » May 8th, 2021, 1:43 pm

turnaround wrote:
hiriskpaul wrote:By the sound of it you are already maxing out your employer's contribution, so another option to consider is opening a SIPP for flexibility. You can then contribute to this towards the end of each tax year to utilise any extra 40% tax relief you want to receive. That might be simpler than continually changing your company pension contribution, although it does mean you will have to reclaim the additional tax relief from HMRC. Take a look at any extra benefits your company pension scheme might offer first though, as well as the running costs of the SIPP compared to the employer scheme.

If your employer lobs the employer NI saving on to your bonus when paying the bonus into the company pension scheme then that seems like a no-brainer to me. Take full advantage of that before increasing your regular contributions unless your regular contributions are made up with employer NI as well.


hmm swear i posted a reply but its gone. anyway, company contributes 50% of NIC savings to pension contributions too so i think its better idea than SIPP. plus id hate the hassle and HMRC admin.

Agreed, forget the SIPP!

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Re: Would love some thoughts on my desire to move away from Vanguard investing

#410393

Postby turnaround » May 8th, 2021, 9:55 pm

am i correct in thinking that if i dont top out the £120k over 3 years higher rate pension allowance then a LISA only makes sense if i think that my total pension pot might be bigger than life time allowance of £1m?

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Re: Would love some thoughts on my desire to move away from Vanguard investing

#410629

Postby hiriskpaul » May 9th, 2021, 9:16 pm

turnaround wrote:am i correct in thinking that if i dont top out the £120k over 3 years higher rate pension allowance then a LISA only makes sense if i think that my total pension pot might be bigger than life time allowance of £1m?

I don't think I fully understand the question, but if you are comparing a LISA to your employer's pension you need to consider what you get back under various scenarios.

A payment into a LISA is made with after tax money, but boosted by 25%, so you get £1.25 back for each after tax £1.

If I understand your pension correctly, for an additional contribution to your pension you get a top-up of 6.9% (half of employer's NI). So you end up with 106.9p in the pension for each 60p net of tax contribution, or for each after tax £1, that is about £1.782 in the pension. What you are left with after drawing that £1.782 depends on 1) your marginal income tax rate at the time of withdrawal; 2) whether the £1.782 has been subject to an LTA charge. Here are some scenarios:

1) No LTA charge, marginal income tax rate 20%, you get back 25% as a PCLS and 75% taxed at 25%, total £1.514
2) LTA charge, marginal rate 20%, no PCLS is allowed, a 25% LTA charge is applied, followed by 20% tax, total £1.069
3) LTA charge, marginal rate 40%, no PCLS is allowed, a 25% LTA charge is applied, followed by 40% tax, total £0.802

Scenario 3 is the one to avoid - you would be better off paying money into a conventional ISA. Since you are in control of how much you draw, this scenario should be avoidable*
Scenario 2 is better than a conventional ISA, but not as good as a LISA.
Scenario 1 is great, much better than a LISA.

Unfortuneately you are not going to know whether additional pension contributions end up under scenario 1 or 2 until long after the option of paying into a LISA has passed. Personally I think I would go for the LISA as an additional diversification option, but there is no clearcut answer as to which is best, except one based on hindsight.


* There is one extra niggly complication here. There are LTA tests done at age 75 which look at 1) Nominal growth in the portfolio and 2) A test on any funds that have not been crystallised. So if you end up with a very large pension and get good growth, you could be subject to a later LTA charge even if you draw down the maximum you can paying 20% tax.

ps, if you save personal NI as well (I am not 100% sure how PAYE works with employer's pensions), adjust the above accordingly. It is not going to make a huge difference to the choice between a LISA or additional pension contribution though.

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Re: Would love some thoughts on my desire to move away from Vanguard investing

#410673

Postby TUK020 » May 10th, 2021, 7:58 am

hiriskpaul wrote:* There is one extra niggly complication here. There are LTA tests done at age 75 which look at 1) Nominal growth in the portfolio and 2) A test on any funds that have not been crystallised. So if you end up with a very large pension and get good growth, you could be subject to a later LTA charge even if you draw down the maximum you can paying 20% tax.


True, but I would put this in the "quality problem to have" bucket.

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Re: Would love some thoughts on my desire to move away from Vanguard investing

#410686

Postby Arborbridge » May 10th, 2021, 8:57 am

TUK020 wrote:
hiriskpaul wrote:* There is one extra niggly complication here. There are LTA tests done at age 75 which look at 1) Nominal growth in the portfolio and 2) A test on any funds that have not been crystallised. So if you end up with a very large pension and get good growth, you could be subject to a later LTA charge even if you draw down the maximum you can paying 20% tax.


True, but I would put this in the "quality problem to have" bucket.


Deal me in! I'd love to have that problem.


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