The Motley Fool

Retirees are paying frightening amounts of tax. Don’t join them

Story by Malcolm Wheatley

The other day, my annual tax code notice arrived.

And my personal allowance — which, as with most people, is £12,570 — is now very largely swallowed up by the state pension. (Yes — I’m that old…)

So in the coming tax year, if my total earnings and unsheltered investment income exceed a sum just over £2,000 — and they will — then I’ll be paying income tax on them.

Frozen figures create a bigger tax take

It’s no mystery what’s happening here.

The personal allowance hasn’t changed since the 2021-2022 tax year, and neither has the higher rate threshold — the point at which individuals pay tax at 40%, instead of 20%.

Nor will either of them change until 2028, successive chancellors have said.

So consequently, many more people are being caught in the tax net with each passing year, until allowances and income thresholds — hopefully — rise again.

People who didn’t pay tax at all are now paying tax. People who paid basic rate tax are now paying higher rate tax, because their pay rises have taken their earnings above the higher rate threshold of £50,270.

Economists call it ‘fiscal drag’.

Fiscal drag in action

The other day, the Office for National Statistics published some figures — well, quite a lot of figures, really — in a lengthy and detailed annual publication called Personal Incomes Statistics 2021-2022.

But the data already amply illustrates successive chancellors’ miserly approach raising them in the past.

There were 800,000 thousand more basic rate taxpayers than the year before. 400,000 higher-rate taxpayers. And around 70,000 more additional rate taxpayers.

And over the next few years, experts expect that those numbers are going to increase quite significantly.

Squeeze the old

Most troubling is what’s happening with older taxpayers — those individuals above state pension age.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, sums up the situation well:

“Pensioners continue to make a huge contribution to the nation’s tax bill. They now account for over 20% of all taxpayers and almost 15% of total income. One in ten taxpayers is over the age of 75 — this is up from 7% in 2011/12 in a reflection of our ageing society.”

There were 6.74 million taxpayers of state pension age. 409,000 were self-employed, and 1.2 million received employment income. Sure, some people might want to carry on working after the state pension age — me, for instance — but, like you, I know of plenty of people who have jobs on the side because they actually need the money.

And quite a lot — the majority, in fact — are in receipt of non-state pension income, from either past employment or private pensions.

Taxation in retirement

What are the implications of all this for your retirement investment planning?

For those investing through SIPPs, then your pension income is taxable, full stop. And if your state pension and your SIPP income together exceed the personal allowance, you’ll pay tax.

ISA income? Under present tax rules, ISA income is free of tax. This is very handy when you’re building your retirement ISA pot (as is the fact that ISAs are also free from capital gains tax), but is absolutely crucial in retirement.

Because otherwise, you’ll pay dividend tax — a tax that didn’t used to exist, and in my view represents a double tax-grab on corporate earnings. In fact, says Hargreaves Lansdown, this year dividend tax is expected to rake in £17.4 billion for the chancellor.

For basic rate taxpayers, dividend tax (after the £1,000 allowance) is currently 8.75%. For higher-rate taxpayers, it’s a whopping 33.75%. Ouch.

Run for shelter

The bottom line?

In my view, things are only going to get worse.

This coming tax year, the dividend allowance shrinks to just £500 — a mere one-tenth of the £5,000 it stood at when introduced in the 2016-2017 tax year. Any investment income above £500, then you’re liable for income tax.

Yet large numbers of us continue to hold investments in brokerage and investment accounts — with fund supermarkets, for instance — that aren’t tax-sheltered.

Granted, it’s difficult, as you can — under present ISA rules — only shelter £20,000 a year. Limits also apply to SIPP contributions, at least in terms of the allowed tax rebates.

We’re almost at the end of the current tax year. From April 6th, we’re in a new tax year. Over the next month or so, you could shelter £40,000, if you have it sitting in unsheltered accounts. As many of us do.

Do it today. Your retired self will thank you for it.

In March the blog portfolio will earn £1,045 of dividends, most probably earmarked for FSFL as they don’t go xd until next month.

There is an old Scottish saying.

‘Many a mickle makes a muckle’.

Stick to your plan

Until it sticks to you.

City of London

This is a non-independent marketing communication commissioned by City of London.

Kepler

Overview
CTY has benefitted from strong stock picking and the structural advantages of investment trusts…
Overview
Like its namesake, longevity permeates the City of London Investment Trust (CTY). CTY has the longest track record of any trust, having raised its dividend for 57 consecutive years . Much of this track record can be attributed to Job Curtis who has managed the trust for approaching 33 years. Job’s investment philosophy has clearly been critical to CTY’s success, but so too is the ability to tuck away surplus income into a reserve, and thereby smooth income pay outs to shareholders.

This is very much an actively managed portfolio, with an expected number of holdings between 80 and 90. Part of Job’s approach is to maintain a broad spread of investments. By not taking large stock or sector positions when compared to the benchmark, Job and his deputy manager David Smith believe that their stock selection will add value but at the same time does not expose investors to undue risks. In the Portfolio section, we illustrate how Job prefers companies that are not hostage to fortune, or ‘turn-around’ stories.

CTY’s board believes that gearing will enhance returns over the long term, and so took advantage of the previous low interest rate environment by arranging long-term, low-cost debt . At 7%, CTY’s gearing level remains significantly below the five-year average, and below the average of the peer group. In our view, this chimes with Job’s cautious and practical approach to investing for the long term.

CTY’s significant size puts it at an advantage. In the recent interim results, the board announced a management fee reduction from 0.325% to 0.3%, effective 1st January 2024. Low charges are one of the contributors to the virtuous circle that CTY finds itself in, enabling it to continue to issue shares and grow its asset base.

Analyst’s View
Weathering the occasional storm is part and parcel of long-term investing, and in our view, the inherent advantages that investment trusts have, combined with Job’s stock-picking skills have clearly helped. Having been a portfolio manager for nearly 33 years, Job’s experience is one of the unique aspects of CTY. The trust has consistently delivered on its objectives for many years, and in our view—given the repeatable investment process that emphasises spreading risks and investing based on fundamentals—it is in a strong position to continue to do so.

This is an active strategy, and so positive attribution from stock selection is the hallmark of success. Whilst Job has unequivocally added value over the years from his stock picking, the unique tools employed by investment trusts have also added to returns. As we show in the Performance section, Job’s stock selection has been strong over the past decade, but gearing has also contributed to returns more years than not. We also note that share issuance has contributed consistent and significant value to shareholders, in some years making a considerable dent in offsetting the trust’s already low ongoing charges (see Charges section).

Over the last five years, CTY’s average premium to NAV has been 1.2%, which compares to the current slight discount to NAV of 0.6%. In our view, CTY’s lower discount volatility is as much a result of the board’s share issuance and buyback activity, as it is the high-quality proposition that CTY represents as a long-term investment vehicle. If the past is anything to go by, the opportunity to buy CTY’s shares on a small discount may not prove to be around for long.

Bull
Very low OCF of 0.37%
Consistency and experience of manager who has delivered long-term outperformance of the FTSE All-Share Index in capital and income terms
57-year track record of progressive dividend increases

Bear
Cautious approach means that NAV performance can underperform in some market conditions
Income track record highly attractive, so manager might risk long-term capital growth in trying to maintain it
Structural gearing can exacerbate the downside

Not included in the Snowball as the yield is below the threshold for the plan.

Strong Outperformance in Volatile Market

Annual results for the year ended 31 December 2023

Performance Highlights

• The Company’s share price was 1,112.0 pence (£11.12) as at 31 December 2023, representing a Total Shareholder Return of 20.2%. This was 4.9% ahead of its benchmark, the MSCI All Country World Index (MSCI ACWI’), which returned 15.3%.
• The Company’s Net Asset Value Total Return of 21.6%, as at 31 December 2023, was 6.3% ahead of benchmark.
• The Company has delivered a Total Shareholder Return of 79.3% over the five-year period to 31 December 2023, equivalent to 12.4% per annum.
• A fourth interim dividend 6.34p has been declared, bringing the total dividend for the year ended 31 December 2023 to 25.2p per share. This is a 5% increase on the previous year, the 57th consecutive annual increase.

Dean Buckley, Chair of Alliance Trust PLC, commented:

“In a volatile market environment, Alliance Trust reported strong returns, outperforming the MSCI ACWI and most of its peers in the Association of Investment Companies (‘AIC’) Global Sector. These results extend the Company’s long-term track record of attractive outright gains and relative performance.

In a highly concentrated market, it was reassuring to note that the driver of the Company’s outperformance in 2023, was the broadly-based, skilled stock picking approach, rather than the result of any significant style, country, or sector biases.

I am pleased to say that this year also marks the 57th consecutive annual dividend increase a track record which is one of the longest in the investment trust industry, and one which the Board is confident can be extended well into the future.

About Alliance Trust PLC
Alliance Trust aims to deliver long-term capital growth and rising income from investing in global equities at a competitive cost. We blend the top stock selections of some of the world’s best active managers, as rated by Willis Towers Watson, into a single diversified portfolio designed to outperform the market while carefully managing risk and volatility.  Alliance Trust is an AIC Dividend Hero with 57 consecutive years of rising dividends.

U have done your research and were ready for the market crash.

You know that Merchant’s Trust is a Dividend Hero and wait to buy.

When the price touched 300p the dividend was 27.10p a yield of 9%.

U do not buy at the bottom but buy at 340p a yield of 8%

but for ease of this post let’s use 300p and u invest 10k.

When the share reaches 600p u take out your stake plus u have earned 82p in dividends, £2,733.00 which u have re-invested to earn more dividends, the Snowball.

Today your shares in MRCH would be worth £8,746.5

plus dividends earned since the sale of £471.00

The current dividend is 28.4p a yield of ??????? on a Trust

that sits in your account at Nil cost.

From one trade u now have £23,204 invested in the market

the value is unknown but of no importance as the dividend

yield at 5% is £1,160.00. Most probably higher if u re-invested

the 10k at a yield of 7%.

Currently hoping for another market crash.

KISS

We have three baskets for investing: yes, no, and too tough to understand.
Often investors are tempted to make unwise bets due to FOMO (= fear of missing out) but Munger preaches against the politics of envy:
Envy is a really stupid sin because it’s the only one you could never possibly have any fun at. There is a lot of pain and no fun. Why would you want to get on that trolley ?
What’s more, he doesn’t think we should be in too much of a hurry:
The desire to get rich fast is pretty dangerous.
Given his incredible success, Munger’s humility is instructive.
Someone will always be getting richer faster than you. This is not a tragedy

Investment companies have an income advantage which is particularly important during difficult times like these when dividends are under pressure.

Unlike open-ended funds, investment companies don’t have to pay out all the income they receive from their portfolios each year. They can save up to 15% and tuck it into a revenue reserve. This means they can hold back some of the income they receive in good years and use it to boost dividends when businesses may be cutting theirs.

This structural benefit has enabled many investment companies to pay consistently rising dividends through both good and bad years for decades, a record that’s unrivalled by open-ended funds.

It’s important to remember that dividends are never guaranteed and so your income from investment companies, like your capital, can fall as well as rise. It’s the responsibility of investment companies’ independent boards of directors to decide on a dividend strategy that is in the best interests of shareholders.

Dividend heroes

The AIC dividend heroes are the investment companies that have consistently increased their dividends for 20 or more years in a row.

£££££££££££££££

When the next market crash occurs, the dividends of the above shares will be enhanced and in the past has been an excellent time to add selected Trusts to your portfolio.

The rules for the plan, there are only two.

1. To own a portfolio of Investment Trusts that pay a dividend to buy more Investment Trusts that pay a dividend.
2. Any Trust that drastically changes its dividend policy must be sold even at a loss.

If u buy a Trust at one pound and it yields 8%, if nothing else changes

and the price of the Trust doubles, the buying yield remains at 8%

but the running yield falls to 4%.

If u then sell the Trust and reinvest in another Trust yielding 8%

your yield would be

Buy 1k of shares dividends £80

Sell shares after they double

2k dividends @ 8% £160

A yield of 16% on your initial investment, the Snowball effect.

Here’s how I’m planning for a £2,300 a month second income

The MotleyFool

Oliver Rodzianko gives us the lowdown on his plan for a healthy second income in retirement. He reckons investing is his path to financial freedom.

I absolutely love planning my finances. While others may find this boring, there’s something adventurous to me about slowly building a cache of money over time. My end game strategy is to have a second income in retirement that will pay all my bills, as long as my mortgage is fully paid off. Here’s how I plan to do it.

Rules of the game
The game goes like this. I have to work incredibly hard, as without that, there’s no way I can earn enough to pull off these two goals:

Get a mortgage on a house and pay it off by the time I retire
Build up a £500,000 investment portfolio, independent of the equity in my home
Now, that’s quite a daunting challenge, but I think it’s possible. I’d need to start with just £5,000 and invest an extra £200 a month over 25 years at a total yearly return of 12.5% including price gains and dividends. That would get me to roughly £500,000.

What’s great is that I plan to do all of my investing through a Stocks and Shares ISA. So, I won’t have to pay any tax when I come to sell my investments, or when I receive dividends.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Now, to hit my £2,300 a month dividend income target, I’d need a range of companies yielding 5.5% per year, as well as rising in price regularly. Of course, the risk is that this doesn’t happen.

Shares like these
I like businesses like Record (LSE:REC), which is a currency management firm in the UK. It offers a dividend yield of 6.8%. That’s more than I bargained for, but one thing I’ve learned is to have low expectations and overachieve on them.

I like that the business has a very stable balance sheet. It has less than 20% of its assets balanced by different forms of debt. Also, it’s growing very fast. Over the past three years, its earnings have grown at a 20.7% rate as an annual average.

Also, because the shares have grown in price consistently, if I’d bought them five years ago, I’d be getting 11% of my initial investment every year in dividends now. That’s because the dividend yield applies to the present price, not what I initially paid.

However, I also need to be aware of the risks if I invest in Record. One of the main ones is that its assets are growing faster than its revenues, which can be an indication that the business is becoming less efficient. Over time, this could reduce how fast the shares grow in price.

Covering my bills
If I can build up a portfolio of five to 10 quality and high-dividend businesses like Record, I’ll have great diversification that will help to protect me from anything going wrong in one company.

If all of these businesses average out to a 5.5% dividend yield, I’ll have £27,500 a year. That will also be tax-free because of my ISA.

With that, I might not be taking luxury holidays, but it will certainly give me the ability to do many of the things that I enjoy and live a nice, stress-free life without any active work. To me, that’s true financial freedom.

How I’d try and turn a £20k Stocks and Shares ISA into a recurring £16,634 income

The MotleyFool

Story by John Fieldsend

Here’s how drip-feeding £200 a month into a Stocks and Shares ISA might grow into a recurring £16,634 income – received year after year, come rain or shine – that wouldn’t even eat into the nest egg.

The ISA is crucial. The Financial Times called ISAs “arguably the best investment ‘wrapper’ in the Western world” and it’s hard to disagree.

I can deposit up to £20k a year – with no balance limit – and every pound gets a lifetime tax exemption on interest, capital gains or dividends. These taxes can take off 39%.