Darka's Income Portfolio and AZN

[Darka]

Thanks everyone for an interesting thread, I'll catch up with it tomorrow and explain my plans - which are very similar to some of those above.

Can't tonight as busy planning for a running adventure I have planned for early in the morning; looking after your health should always be part of retirement planning in addition to the financial side of course.

[monabri]

I am approaching the stage where a switch to ITs might be advisable, and that could start with the lower yielding shares. I might formulate a plan of campaign before long. I don't think that I need more than about 10 ITs, and have a fair idea which I will choose.
TJH

Interested to see what you come up with ..keep us informed of ideas "s.v.p" !

[Darka]

Firstly, thank you for those who commented and have described your plans as it has helped me firm up some idea's I had for my own plan.

My wife is older than me and was very ill a couple of years ago (she's ok now thankfully) which really focused my mind on what I needed to achieve.

Life is short and without any working crystal ball you just don't know what will happen; so all you can really do is have a rough plan of action that you hope will see you through retirement, and then not worry about it too much - otherwise the stress will either kill you or make you panic and do something stupid.

I cannot find myself relying on 20ish shares for income without significant stress, hence as mentioned already the move to IT's for what I hope will be a less stressful retirement.

However, I will keep most of the HYP and treat the IT and HYP collection as a single portfolio, as I've said before I don't unitise - there is only so much record keeping I'm willing to do and as I get older I'd like it to be even less.

My main focus of course is a growing income with financial independence and retirement as soon as possible. I have given this a lot of thought over the years as retirement is now only a few years away (my wife in less than 3 years, me a little later).

As others have said I do believe that there is potentially large mental hurdle to overcome when switching from paid work to living off investment income; so my plan is designed to minimise that fear and to allow me to alter course slightly if needed before handing in my notice.

With things as they stand, our current plan is (surprisingly similar to Itsallaguess):

1. Until my wife's retirement, continue to build investment income as much as possible by investing mostly in IT's and occasionally individual shares and reinvesting all dividend income.

2. When she retires, and her small but very useful defined benefit pension kicks in, start taking that as income to reduce the loss from her now missing salary.

3. Continue to build income until it covers all expenses, with an additional 25% safety margin (SM) (this would exclude my SIPP as it would not be available until a couple of years past my planned retirement, it would then provide a nice boost to the safety margin taking it to around 50%).

4. Once this level of income + 25% SM is in place, build an income float (3 x months income) and switch to living off the dividend stream for 1 year whilst working. This allows us to get used to having 'no salary' and also checking that everything works as it should with regards to collection account, income float etc.

5. During this year, save all of my salary building a 2 year income reserve (excluding what I shall continue to salary sacrifice).

5. Once the reserve is built, decide if we have sufficient income. If not, then work 1 more year building up the safety margin from my salary - this step will probably be unecessary as my SIPP would kick in a couple of years after this providing a fairly good boost to income.

6. Only at this point would I retire from work, in the lead up to this I would prefer they had no idea of my plans. As Itsallaguess mentioned in his plans, this allows a change of direction if needed before taking the step of actually notifying my employer.

During retirement, the protection mechanisms I intend to have in place should something going wrong are simiar to Julians hard/soft/lifestyle safety margins as my planned expenses allow me to cut some of those if needed.

I will also reinvest from the SM income each year, probably 50% of that - allowing us to enjoy and spend the other 50%.

I am yet undecided on whether to take the 25% tax free lump sum from her SIPP, it could either be used to help build the income reserve, or be reinvested within an ISA. Taking it from the SIPP to an ISA would reduce both the future income from the SIPP (obviously) and also the income tax payable.

I also don't trust a future government to either remove the 25% tax free lump sum, or to set a limit on it.

Any state pensions we receive will just become holiday money as my plans do not rely on them for retirement.

regards,
Darka

[Julian]

...
I am yet undecided on whether to take the 25% tax free lump sum from her SIPP, it could either be used to help build the income reserve, or be reinvested within an ISA. Taking it from the SIPP to an ISA would reduce both the future income from the SIPP (obviously) and also the income tax payable.

I also don't trust a future government to either remove the 25% tax free lump sum, or to set a limit on it.
...

Thanks for the update Darka. It sounds like a well thought out and comprehensive plan with plenty of sensible correction points built in.

For what it's worth I did extract my full 25% from my fairly modest SIPP as soon as I could. If one is never going to draw from the SIPP and it will be the ultimate emergency reserve then fair enough, all those dividends getting re-invested tax free is nice, but as soon as you start drawing from it it becomes even worse (under current income tax rates) than having the shares generating those divis held in a regular un-tax-sheltered broker account let alone an ISA account because, regardless of the fact that the income being drawn might have come from dividends, HMRC still treats it as PAYE-like income hence 20%/40% tax on it currently vs 7.5%/32.5% for un-tax-sheltered dividends and 0% for ISAs of course (ignoring the higher tax bands - too tedious to list).

Unless someone really does expect to keep their divis untouched within a SIPP, or at least sufficient to offset the detrimental tax treatment on the divis being drawn, then I struggle to see why one wouldn't take out the 25%. I do fully accept that might be a gap in my understanding and/or imagination so I would be interested to hear the counter arguments (although they would be too late for me). I am not particularly concerned about inheritance tax so maybe that is a factor? Since it doesn't concern me I don't really look at the regulations around that aspect of various investments.

- Julian

[Darka]

For what it's worth I did extract my full 25% from my fairly modest SIPP as soon as I could.- Julian

Thanks Julian,

I've been thinking the same and the reasons you point out are convincing.
As you mention however, there might be something we're missing - although I'm not sure what with regards to not taking the 25%.

But so far, I'm fairly certain I shall take it (from both our SIPP's as they become available).

regards,
Darka

[Charlottesquare]

For what it's worth I did extract my full 25% from my fairly modest SIPP as soon as I could.- Julian

Thanks Julian,

I've been thinking the same and the reasons you point out are convincing.
As you mention however, there might be something we're missing - although I'm not sure what with regards to not taking the 25%.

But so far, I'm fairly certain I shall take it (from both our SIPP's as they become available).

regards,
Darka

Taking the 25% on the full pension value at day one means anything else ever taken will be taxed at your marginal rate and you have foregone taking out tax free any future fund growth. Whilst the 25% may be invested outwith at either no tax on income (ISA) or lower tax as dividends you are foregoing the tax free benefit of 25% of the future growth.

I more likely intend to use my SIPP to take a sum each year of which 25% suffers no tax and 75% is taxable, so if say £20,000 p.a., £5,000 p.a. tax free and £15,000 taxable, and hopefully this sum, and the tax free element, will keep increasing over multiple years.

Whether foregoing 25% tax free withdrawals re future growth will concern you will depend upon your plans and income profile in retirement

[Darka]

Whether foregoing 25% tax free withdrawals re future growth will concern you will depend upon your plans and income profile in retirement

Thanks Charlottesquare,

My concerns mainly lie in that I believe the 25% tax free will be withdrawn at some point, or curtailed in some way by a future government.

By taking the 25% tax free up front, I reduce the SIPPs size, therefore it's income and the tax payable from it in the future - reducing my wife's overall post retirement tax bill.

I may do something different for my SIPP which is larger than my wifes, but not sure yet.

regards,
Darka

[Itsallaguess]

Life is short and without any working crystal ball you just don't know what will happen

Absolutely - I was actually beginning to think that you'd not made it back from your race!

Cheers,

Itsallaguess

[Darka]

Absolutely - I was actually beginning to think that you'd not made it back from your race!

Cheers,
Itsallaguess

The race isn't until next weekend, this was just a long training run

Sadly was too tired/busy this week to sort out my reply earlier and needed some time to work on the plan.

[77ss]

....

For what it's worth I did extract my full 25% from my fairly modest SIPP as soon as I could. If one is never going to draw from the SIPP and it will be the ultimate emergency reserve then fair enough, all those dividends getting re-invested tax free is nice, but as soon as you start drawing from it it becomes even worse (under current income tax rates) than having the shares generating those divis held in a regular un-tax-sheltered broker account let alone an ISA account because, regardless of the fact that the income being drawn might have come from dividends, HMRC still treats it as PAYE-like income hence 20%/40% tax on it currently vs 7.5%/32.5% for un-tax-sheltered dividends and 0% for ISAs of course (ignoring the higher tax bands - too tedious to list).

Unless someone really does expect to keep their divis untouched within a SIPP, or at least sufficient to offset the detrimental tax treatment on the divis being drawn, then I struggle to see why one wouldn't take out the 25%. I do fully accept that might be a gap in my understanding and/or imagination so I would be interested to hear the counter arguments (although they would be too late for me). I am not particularly concerned about inheritance tax so maybe that is a factor? Since it doesn't concern me I don't really look at the regulations around that aspect of various investments.

- Julian

I am retired and have a modest SIPP. I am hanging on to it (and adding the annual £2,880 permitted) for the moment.

We are all in different positions, and I have about 40% of my share holdings outside tax shelters, so every year I like to move £20k into an ISA. So far, I have been able to combine this with using my annual CGT allowance (top-slicing successful shares), but I foresee the day when this will no longer be possible. That is when I shall take my 25% from my SIPP - to generate funds for an ISA. Not a ''counter argument', just my personal plans.

To be honest, havng benefited from a 40% tax relief going into the SIPP, I am not too concerned about paying 20% on drawing amounts over the 25%. No doubt I might feel differently were I in a higher tax bracket!

[Muddywaters]

The benefit of not taking the 25% tax free straight away is that in theory as your pension grows so does the actual value of the 25%.

Pension at 55 is 100k, so 25k tax free cash. Leave this until say 60 when it’s grown to 120k and the tax free cash available 30k. General rule of thumb (IMO) is if you don’t need it don’t take it

Also dependent on tax position may be worth phasing tax free cash with taxable. Again theory is that if you phase, the remaining tax free cash is allowed to grow

I do get the whole it may be taken away argument. But then so might ISAs or state pension. Unless we get Corbyn I doubt anything like that will happen. Even then it’s BTL owners who’ll be in the sights first

[Julian]

We are all in different positions, and I have about 40% of my share holdings outside tax shelters, so every year I like to move £20k into an ISA. So far, I have been able to combine this with using my annual CGT allowance (top-slicing successful shares), but I foresee the day when this will no longer be possible. That is when I shall take my 25% from my SIPP - to generate funds for an ISA. Not a ''counter argument', just my personal plans.
...

In this case you and I are not in such different positions. Like you I also have a significant portion of my investments unable (yet) to fit into my ISA. A few years ago my unsheltered portfolio had a sufficiently large safety margin that the surplus dividend income was sufficient to fully fund my ISA each year but a combination of deciding that life is short and increasing my income drawn plus a partial selloff to fund a holiday home does now leave me needing to sell holdings from 2020 onwards to keep building the ISA. Also, like you, from looking at the gains wrapped up in various shares which in some cases surprised me(*) I am likely to soon be walking a tightrope in terms of being able to keep the required sales each year within my CGT allowance.

In retrospect your "That is when I shall take my 25% from my SIPP - to generate funds for an ISA" plan would have worked well for me and, knowing what I know now, I might not have extracted that 25% back in 2009. Then again I didn't know what I know now nor did I have my current attitude towards capital sell-offs. At the time of my SIPP withdrawal any capital sale was an anathema to me (**) and I had planned for and fully expected to be able to continue funding my ISA indefinitely from surplus taxable income. Additionally, at the time when I did my 25% SIPP withdrawal the ISA limit was £7,200 which made it possible to believe that my plan to fund future year's ISAs from surplus income was practical; I never dreamed that the ISA limit would be increased so dramatically to the current £20,000.

- Julian

(*) Ironically one share that surprised me is the same AZN mentioned in this thread title. With the hand-wringing and negativity re AZN on the HPY practical board at the moment I was quite surprised when I looked at the price and my costs last week to see that AZN is well over a two-bagger for me, in fact currently sitting at about 2.5 times my average section 104 price. By blind luck I seemed to have done most of my AZN buys in the dips.

(**) Much of my SIPP was already in cash because I'd just consolidated my lifetime of smaller schemes into it via cash transfers so no selling of investments that I cared about was involved there.

[tjh290633]

(*) Ironically one share that surprised me is the same AZN mentioned in this thread title. With the hand-wringing and negativity re AZN on the HPY practical board at the moment I was quite surprised when I looked at the price and my costs last week to see that AZN is well over a two-bagger for me, in fact currently sitting at about 2.5 times my average section 104 price. By blind luck I seemed to have done most of my AZN buys in the dips.

As Zeneca demerged from ICI at 630p, and AZN has a current price of about £62, it's not hard for someone who has held from the outset to have a near ten-bagger.

TJH

[77ss]

....
In retrospect your "That is when I shall take my 25% from my SIPP - to generate funds for an ISA" plan would have worked well for me and, knowing what I know now, I might not have extracted that 25% back in 2009. Then again I didn't know what I know now nor did I have my current attitude towards capital sell-offs. At the time of my SIPP withdrawal any capital sale was an anathema to me (**) and I had planned for and fully expected to be able to continue funding my ISA indefinitely from surplus taxable income. Additionally, at the time when I did my 25% SIPP withdrawal the ISA limit was £7,200 which made it possible to believe that my plan to fund future year's ISAs from surplus income was practical; I never dreamed that the ISA limit would be increased so dramatically to the current £20,000.

- Julian

(*) Ironically one share that surprised me is the same AZN mentioned in this thread title. With the hand-wringing and negativity re AZN on the HPY practical board at the moment I was quite surprised when I looked at the price and my costs last week to see that AZN is well over a two-bagger for me, in fact currently sitting at about 2.5 times my average section 104 price. By blind luck I seemed to have done most of my AZN buys in the dips.

...

Interesting how circumstances and events change. All one can do is make what seems to be the right decision at the time, and move on.

My SIPP was forced upon me in mid 2015 - an unwelcome complication at the time and I have always planned to get rid of it at some stage. The ISA allowance at the time was £15,240 rather than the earlier £7,200 and I was unable to fund it from unspent dividends so have got used to thinking of my SIPP as a tax sheltered cash pot, ISA for the use of, when needed.

Amusingly, like you, I hold AZN and the share price has more than doubled for me since my initial purchase in Jan 2011. With aid of tinkering tailwinds my XIRR is 17.45% (notional untinkered 14.19%). Not too dusty. I too have been interested in the commentary but intend to continue holding.