Investment Trust Dividends

Month: May 2024 (Page 21 of 22)

SIPP withdrawal

Shares magazine
Can I avoid emergency tax on a pension withdrawal?
There’s a danger of facing an extra levy from HMRC when taking cash out of a retirement pot
Thursday 02 May 2024 Ask Rachel

I have a SIPP I haven’t yet touched. I would like to take money from that pension pot – both my tax-free cash and another lump sum.

However, I have been told that if I take this other lump sum, I will have to pay emergency tax on this amount. Why is this, and can I avoid it?

Fran

Rachel Vahey, AJ Bell Head of Public Policy, says:

Pension savers have a great deal of flexibility to decide how to take money out of their pension plans. As well as being able to take 25% of it as a tax-free lump sum (usually up to a total of £268,275 across all their pension plans), people can take the remainder out as a regular taxed income stream, which can be turned on or off, or increased or reduced whenever they want. They can also take it out as an ad-hoc lump sum, as and when it suits them, for example to pay for a child’s tuition fees, pay for house repairs, or splash out on a luxury Caribbean cruise.

If taking an ad-hoc lump sum, pension savers need to watch out for a pitfall which could see them hit with an unexpected tax bill possibly running into thousands of pounds. If they do nothing, then they will have to wait until the start of the next tax year to get their money back. And even then, they’re relying on the efficiency of HMRC in sorting out their tax position.

The problem can affect anyone who takes a taxable pension freedoms payment from age 55 – either through drawdown or through an ‘Uncrystallised Funds Pension Lump Sum’ (UFPLS) withdrawal.

Where the pension saver cannot provide a current year tax code, HMRC requires their pension provider to use either an emergency tax code on a ‘Month 1’ basis, or if they have a current year P45 this is applied on the same basis. This means the Revenue only gives them 1/12th of the usual tax allowances available on the withdrawal. This results in many savers being severely overtaxed. (A current year tax code is usually only supplied by HMRC after the first payment is made.)

For example, a pension saver with no current year P45 who has no other income and takes £50,000 from their pension pot – £12,500 as a tax-free lump sum and £37,500 as taxed income – would have to pay around £15,250 in emergency tax. Whereas the tax due is only around £5,000.

HOW TO GET MONEY BACK QUICKLY

Pension savers can, however, take action to get their money back quickly, hopefully within 30 days.

They do this by filling out one of three reclaim forms. Which one depends on the nature of the withdrawals made from the pension and their personal circumstances.

The guidance says:

If the payment entirely used up the pension pot and the pension saver has no other income in the tax year, fill in form P50Z;
If the payment entirely used up the pension pot and they have other taxable income, fill in form P53Z;
If the payment didn’t use up their pension pot and they’re not taking regular payments, fill in form P55. Pension savers can only use this form if their pension provider can’t refund them.
Another option is to take a small taxable withdrawal from the pension before taking the larger one. This will ‘set’ the right tax code for the later payment. Although people may not want this extra administration.

All of this adds up to extra hassle for a pension saver wanting to take their first ad-hoc taxed lump sum from their pension. And although HMRC are reasonably prompt in repaying overpaid tax, this time lag should be built into plans.

£££££££££

Remember even after u have taken your tax free amount, dividends go into the un-accessed pot and can provide a life long, under current tax laws, of a 25% tax free withdrawal.

Navel gazing

Not naval gazing that’s an entirely different topic.

If u have a Trust earning ten percent per year, u have the following options.

U could spend the dividend to pay for a luxury or to put towards paying your bills.

If u could re-invest the dividends back into the trust whilst it continues to pay an above market yield, or if the yield falls u could re-invest in another high yielding Trust.

U could re-invest the dividends in a low risk option, a deposit account or Government Gilts. After ten years* u will have achieved the holy grail of investing of having a position in your portfolio providing an income at zero, zilch, nothing cost. Even if u re-invested into a savings account u should be receiving income of around 14% pa. I haven’t mentioned, today anyway, that a comparable income from an annuity is around 7% and u have to gift your capital to a pension provider. The worst thing that could go wrong, u will still achieve the income but it may be in a longer time-frame depending on the market.

* Less if u re-invest the dividends.

SMIF

11 April 2024

TwentyFour Select Monthly Income Fund Limited

Re: Dividend Announcement

The Directors of TwentyFour Select Monthly Income Fund Limited have declared that a dividend of 0.5 pence per share will be payable, in line with the Prospectus, representing the regular monthly targeted dividend for the financial period ended 31 March 2024 and an additional dividend of 0.25 pence will be paid as follows:

Ex-Dividend Date 18 April 2024

Record Date  19 April 2024

Payment Date  3 May 2024

Dividend per Share  0.75 pence (Sterling)

Given the ongoing interest rate environment the Directors have given careful consideration to the Company’s projected income for the year balanced against their assessment of risks inherent in achieving its target dividend payment of 6 pence per share per annum.  Based on this analysis the Directors believe that dividends payable in respect of the year ending 30 September 2024 are likely to be in excess of 6.5 pence per share, and consequently believe it is appropriate to pay an additional 0.25 pence per share, in addition to its regular monthly targeted dividend of 0.5 pence per share, for the period ended 31 March 2024.

The Directors will continue to monitor the position during the remainder of the year ending 30 September 2024 and, where possible to do so, will provide appropriate updates on dividend expectations.

There is a sister fund

11 April 2024

TwentyFour Income Fund Limited

Re:    Dividend Announcement

The Directors of TwentyFour Income Fund Limited have declared that a dividend will be payable in respect of quarter end 31 March 2024 as follows:

Ex Dividend Date 18 April 2024

Record Date  19 April 2024

Payment Date  3 May 2024

Dividend per Share 3.96 pence ** (Sterling)

Current yield 9% trading at a discount to NAV of 2%

** The final dividend is often an enhanced dividend the current dividend paid quarterly is 2p.

Chart of the day

When/if the share price doubles u could take out your stake and re-invest in another high yielder around 8% and your yield on your initial investment would equate to 17% per year and your Snowball would grow faster than u ever thought possible.

Portfolio change

I’ve bought for the portfolio 12100 shares in SMIF TwentyFour Select Monthly Income fund.

The current yield is 9% but because a dividend is paid monthly, if these are re-invested the yield is nearer 10%.

Because of the high yield the Trust trades at a small premium to NAV of 2%.

The Snowball

I’ve sold the portfolio shares in GCP for a profit of £248.00 including the earned dividend but not yet received. An acceptable addition to the Snowball for a couple of days investing.

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    Dividends

    Dividend stocks are possibly the only investment where you have the opportunity for capital growth as well as income. It’s truly empowering once you see the impact that dividend stocks can make on any account size. The key ingredient is DIVIDENDS

    Distributions, distributions, distributions

    Investment trusts: deprioritise the discount

    While many investors focus on an investment trust’s discount, for those trusts with an income remit the distribution rate at time of purchase may have a larger effect on total return over the long term.

    Author

    Fran Radano

    INVESTMENT MANAGER, THE NORTH AMERICAN INCOME TRUST

    While closed-end fund investors may find the discount to net asset value (NAV) exciting, as Fran Radano explains, there is a bit more to it than that.

    The past few years have been challenging for investors. An elevated stock market and interest rate volatility caused by both inflation and hawkish central banks sent many investors rushing to the sidelines. This dynamic led to indiscriminate selling and, at times, pushed investment trust prices lower, driving discounts to historically wide levels.

    In fact, after the Bank of England started raising interest rates at the tail-end of 2021, a great deal of investment trusts have gone on to trade at their widest discounts since 2008’s Global Financial Crisis. In fact, the average investment trust discount fell to 16.9% at the end of October 2023 before recovering to 9% by the end of the year

    What are discounts?

    An investment trust can trade at a share price that is higher or lower than its net asset value (NAV). When a trust’s share price is higher than its NAV, it is trading at a premium. When the share price is lower than its NAV, it is trading at a discount. A discount or a premium is simply a number representing the relationship between a trust’s share price and its NAV.

    Investment trusts often trade at discounts, but over the course of a market cycle it has historically been the case that the discounts narrow and widen, like how the stock market rises and falls.

    During volatile markets, discounts can widen significantly, offering investors the opportunity to purchase shares well below their NAV. Some investors prefer purchasing investment trusts at a wide discount because doing so increases a trust’s distribution rate and may present a higher potential for capital appreciation if the discount narrows due to the share price rising to NAV. Because, as many investors fail to realise, discounts can also narrow as NAV falls to the price. Again, a discount or premium is simply a relationship between two numbers – nothing more.

    Other investors are less focused on discounts and prefer to invest in a trust due to the trust’s investment objective and its ability to provide regular distribution payments.

    “Oh, it’s a 10% discount, that looks good.” Well, unbeknownst to investors, the trust may usually be trading at a 15% discount, and this 10% discount isn’t much of a bargain. Furthermore, an investment trust discount could be driven by many different factors: poor historical performance, low distribution levels relative to peers, or market expectations of poor performance to come.

    We believe it’s important to gain an understanding of what is behind the discount. If no reason can be found, or if the only reason is that the trust’s underlying asset class seems to be out of favour, those may be signs the trust’s discount is truly attractive.

    Distributions, distributions, distributions

    Every investment trust has a formal investment objective which details how they invest. The objective will also indicate if the trust aims to deliver capital growth, income or a mix of both. For those trusts with an income remit, investors have long valued the dividend payments and diversification benefits on offer. Step up the Association of Investment Companies (AIC) which publishes an annual ‘dividend heroes’ list of those trusts that have consistently increased their annual dividends for at least 20 years in a row.

    For those trusts with an income focus, it is distributions – not discounts – that have historically been the primary contributor to total returns over longer periods of time. The benefit from a narrowing discount diminishes over time as a contributor to overall total return while distributions remain the dominant contributor.

    Consider a trust that distributes 7% of NAV per year and has a 10% discount. If the trust is held for three years, assuming its NAV does not change, and its price rises to the NAV at the end of the three-year period the distribution would account for roughly two-thirds of the price return every year (Table 1).
    Table 1. Most of return should come through distribution

     Year 1 Year 2Year 3
    Starting NAV $10.00$10.00$10.00
     Starting price$9.00$9.33$9.66
     Yield 7% NAV  
     Ending Price$9.33$9.66$10.00
     Ending NAV$10.00$10.00$10.00
     Price return$0.70$0.70$0.70
    Total price return$1.03$1.03$1.04
    Total price return %11.4%11.0%10.8%
     % from distribution68.0%68.0%67.0%
     % from discount 32.0%32.0%33.0%

    Source: abrdn, February 2024. For illustrative purposes only.

    Therefore, investors may be better served by focusing on a trust’s distribution than its discount. Final thoughts While it’s exciting to follow an investment trust’s discount, it’s ultimately not value-additive. Once invested, the most important thing to assess is the trust’s total return performance and whether it is meeting investment objectives. Historically, the key, long-term driver of a trust’s performance has not been its discount, but its distribution rate.

    ££££££££££££

    If an Investment Trusts discount to NAV is high, it follows the price will be

    lower and the yield higher.

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