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Lars Kroijer answers questions on tax efficient withdrawals and on the climate emergency

Grab yourself a cup of tea and a biscuit – because Lars Kroijer is here again with more answers to your burning questions.

As regular readers will know, this is a collaboration between Monevator and Lars’ popular YouTube channel.

Every month Lars picks a few of your questions and then answers them individually, in video and transcript form, as below.

We’ve already got enough questions to last us a year or two, so sit back and enjoy!

Note: embedded videos are not always displayed by email browsers. If you’re a subscriber over email and you can’t see the videos, head to the Monevator website to view this Q&A with Lars Kroijer.

How should one make tax efficient withdrawals?

Our first question this week comes from Barn Owl who asked: “Given UK tax laws on pensions, ISAs, capital gains tax and so on, how should you manage your portfolio withdrawal in a tax efficient way?”

Lars replies:

Now, I want to try to answer this question without really giving a good answer! Tax advice is typically incredibly jurisdictional in specifics and also highly personal.

I personally find it very frustrating that financial advice from people like myself often comes completely separate from tax considerations, which obviously can skew the results of any good financial allocation decision. On the other hand I sometimes find that tax lawyers can make relatively simple things appear far more complex than they have to be because, you know, they are not exactly paid to keep things short and simple when they are paid by the hour!

With that all said, you probably do need advice for your specific situation and it does not have to be expensive. You can prepare the questions in advance, go online, look for specific answers and then contact tax lawyers with very specific questions that they will probably have good answers for – or at least answers that are up-to-date with the current legislation.

Generally, I would say try to avoid paying tax sooner than you have to.

If you can, defer tax payments. Imagine you have a £100 where £40 is due in tax. Well if you defer payment even just for one year that means you are earning interest or capital returns on £100 instead of the resulting £60 after tax for that one year. So that is a benefit. Of course in the world of negative interest rate there are complications to this rule but generally I think that still holds true.

I’d also say pay attention to the rumblings of change. There are elections coming right now in the UK and there could be a change in government. It could be quite important to understand how a new government would impact the tax set-up and if there is anything that makes sense to do before an election.

In terms of withdrawals, think about your portfolio allocation when you do withdraw. Let us say you have decided on an allocation of 50% bonds, 50% equities but your current portfolio is 55:45. In this case you can use the withdrawal to realign your portfolio so it is more in line with what you want to do. Here you should sell and withdraw from the bonds, which will get you closer to your 50:50 desired allocation without having to incur trading charges that you otherwise would.

Another thing I would mention is there is in some people’s portfolio certain liquidity windows . If you have investments that may only be liquid every so often, it is certainly worth keeping in mind – even if it is sub-optimal from perhaps even a tax or other financial perspective. If you have a liquidity window perspective and there is an opportunity to get some cash out then I find that is often a very good thing to do.

Normally I’d say I hope that answers the question, but I know this time it sort of didn’t! I wanted to give you a flavor for the kind of thinking that goes around tax and why I think it is important to get good specific tax advice.

Further reading on Monevator:

Should you adjust your portfolio to reflect the climate emergency?

Our second question comes from the blogger DIY Investor. Keen Monevator readers may have noticed we’ve linked to several of his posts over the past year describing his shift to what he considers a more appropriate way of investing in the face of the climate emergency.

Perhaps not surprisingly, this question reflects such concerns:

Lars replies:

The question in this video comes from DIY Investor who asked for my views on the climate emergency and how that will impact the global economy in the next decade and whether we should adjust our investment portfolio as a result of that.

Now, in my view climate change will impact a tremendous number of things and, absolutely it will in all sorts of predictable ways. In fact, personally, I am devastated by how some politicians does not seem to embrace the obvious science behind climate change. I think the regulatory framework can therefore be a little slow to change to reflect the reality of climate change.

But moral and climate change issues aside, in general, I would say you should not be investing differently as a result of it.

Let’s say you are trying to profit maximize or risk return to maximize your portfolio by excluding oil and gas and related sectors from your portfolio. You are really saying I am doing this to make more money or have a higher return on my portfolio, but you are also saying I think I know something that the multi trillion-dollar global financial market does not know. Namely that the oil and gas sectors are going to under-perform the wider market going forward.

Now that is a pretty bold statement and for most people that is not a statement that they are able to make. Most people are not able to outperform the wider financial markets and have great insights that thousands and thousands of equally or better-informed investors have not seen.

I know that is a bit of a boring answer. It seems obvious perhaps to some people that something as dramatic and big as the climate catastrophe should lead to amazing trading opportunities and I am not saying that’s not the case. I am just encouraging you to think about what is it exactly that you know that the rest of the world has not seen, has not understood – what is your edge? If you go ahead and make those investments, continue to ask yourself that question. And if you do make money, make sure that it was not because you got lucky but it was actually because of the things you thought would happen did in fact happen.

For most people I say do not do it unless you have issues other than profit maximizing in mindset – i.e. moral or other issues. I would say stay away from it.

What if you do go ahead and deselect these sectors? I don’t think it’s the end of the world, as long as you still have a portfolio that is diversified across all sorts of other sectors and geographically diversified. You are probably going to be fine.

One minor note: let’s say that oil and gas sectors represent 10% of the overall market and you are deselecting those from the portfolio. Make sure you are not paying much higher fees for owning what is close to the same thing – 90 percent overlap. You’re could be paying a lot of money for that deselection. Just keep that in mind when you when you’re looking into this.

More from Monevator:

Until next time

Just those two questions this month – and the answers were a bit less definitive than those we’ve seen previously, so as ever feel free to add to Lars’ answers in the comments below.

Watch more videos in this series. You can also check out Lars’ previous Monevator pieces and his book, Investing Demystified.

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{ 18 comments… add one }
  • 1 Neverland December 12, 2019, 2:27 pm
  • 2 Rob B December 12, 2019, 2:40 pm

    @Neverland.

    Can we stop the muppetry and keep it relevant please…..

  • 3 sendaiben December 12, 2019, 2:54 pm

    It’s amazing how much has changed since I wrote about this last year. Kind of encouraging, in a way.

    https://www.retirejapan.com/blog/personal-finance-and-environmental-collapse/

  • 4 gadgetmind December 12, 2019, 6:49 pm

    Labour would reduce the capital gains allowance to £1k and they also have a manifesto pledge to destroy my business. No, I’m not making that up, they have said they would nationalise me and McDonnell (nasty man) hinted at asset confiscation ate well below market value in the infrastructure sector. As prudent investors, we need to be very wary of such things.

  • 5 Naeclue December 12, 2019, 8:51 pm

    “Generally, I would say try to avoid paying tax sooner than you have to.”

    That could be dangerous advice! For something like not crystallising a capital gain to avoid capital gains tax it makes perfect sense, but for something like drawing from a pension, where the tax is a percentage of the amount drawn (and so increases with the investment), the advice could work against you. For example, I could avoid £2,000 in income tax this year by not drawing £10,000 from my drawdown SIPP. If I don’t do that, the £10,000 might be worth say £20,000 when I am 75 and I would very likely lose 25% of it in the LTA charge, so down to £15k. I then draw it and pay 20% income tax, now down to £12k. Alternatively, I draw the £10k (£8k after tax) now and invest tax free in an ISA. When I am 75, that would be worth £16k, assuming invested the same way as in the SIPP, so I gain £4k by drawing from the SIPP now and investing in the ISA. Even in the case when no LTA charge is due, there is little benefit in not paying the income tax now (10k undrawn, becomes £20k, which becomes £16k after 20% tax).

    There is a scenario where drawing £10k from the SIPP now would not work out well – dropping dead the day after the withdrawal. In this scenario, the £10k would be hit for £2k income tax and then as the £8k is in my estate, it would be hit for 40% inheritance tax, reducing the £8k to £4,800. Leaving the £10k in the SIPP would result in it passing totally free of tax to my beneficiaries. So in this scenario there is a bad outcome, but I would not really call that the General case.

  • 6 The Investor December 12, 2019, 9:52 pm

    @Naeclue — Useful comment, cheers. 🙂 To be fair though @Lars said seek advice specific to your circumstances. It’s pretty much impossible to write anything about tax without some sentences / comments being inappropriate for some/many people — as we discover every time we write about tax!

    The alternative is not to talk about it, or to turn the site into Taxevator. (And the latter definitely ain’t happening on my watch. 😉 )

  • 7 Mr Optimistic December 13, 2019, 9:17 am

    Thanks for the article. Sensible, balanced, level headed advice.

  • 8 Gentleman's Family Finances December 13, 2019, 9:53 am

    I thoroughly enjoyed this article and it’s an advance on a realisation that I made recently which was that for all aspiring early retirees, you should not ignore the tax burden when myopically focusing on SWRs and 4% rules. I wrote about how we should not ignore it but since everyone’s finances & tax situation will be different it’s hard to give hard and fast rules on what to do / not to do.
    One of the advantages of having some savings and not living paycheck to paycheck is that you can use your money to your advantage and the same goes doubly for tax.
    The UK is a potentially a haven for low-tax burden retirement – with the tax free allowance on all income, capital gains tax, savings allowance, dividend allowance. 7.5% income tax on basic rate dividends, CGT exempt primary residence, ISAs, LISAs, VCTs/EIS, NS&I index linked bonds (if you are lucky), SIPPs, Salary Sacrifice, as well as the benefits system which you can game…
    If used correctly you can shield yourself from almost all income tax/NI whilst in work and it’s even easier when not in work.
    I even read a blog about a couple who were asset millionaires who with a few years to retirement were pumping their pensions so full of money that they were eligible for tax credits – lived modestly, semi-retired already and using the rules of the system to their advantage.
    So, how you manage your money is very important – so thanks Lars/Monevator for this.

  • 9 Gentleman's Family Finances December 13, 2019, 10:23 am

    On climate emergency – I am a firm believer that we need more than just a campaign against using plastic bags and a happy concert in the park with some songs to make everyone feel better.
    The energy industry talks about an energy transition and we’re already made massive moves towards that with billions being poured into renewables. Investors have their choice of different ways to invest and for people looking at FI/RE it makes great sense.
    Buying utilities which have sunk costs, reliable revenues and steady payouts mean that you can invest your money now and enjoy a dull ride of quarterly index linked dividends for the next 20-25 years.
    There are other ways to get in on the act but I think it’s a problem that can be solved (in part) by investors – and certainly investing in renewables is better than giving it to British American Tobacco or BP.

  • 10 The Rhino December 13, 2019, 11:10 am

    @GFF – I agree that UK is currently a bit of a tax haven

    I even read a blog about a couple who were asset millionaires who with a few years to retirement were pumping their pensions so full of money that they were eligible for tax credits – lived modestly, semi-retired already and using the rules of the system to their advantage.

    You don’t have a link do you?

    Appreciate this isn’t taxevator but I was under the impression you couldn’t SIPP salary sacrifice below min wage – it seems unbelievable that you could sock 40k or more into a SIPP then claim tax credits – but then again, tax and common sense are distant lands..

    I’m going to get rid of the NS&I linkers at the next opportunity, not because I don’t think they’re good, but because you can’t get enough of them to hit a sensible % allocation.

  • 11 Gentleman's Family Finances December 13, 2019, 11:28 am

    I don’t remember the blog but maybe someone else knows it?
    Sensible couple in their 50’s learned how to play the system and join the benefits gravy train.

  • 12 Previn December 13, 2019, 1:55 pm

    Re Tax Credits…
    We did this for around 3 years before becoming FI three years ago.
    Salary sacrifice down to min wage & save on nearly all NI too. Then pay remainder into SIPP. Effectively 3 years untaxed salary with bonus of receiving tax credits & also a full nurses’ bursary for daughter at uni.
    Wasn’t possible under Universal Credit though so missed out on final year before leaving work.

  • 13 Mr Optimistic December 13, 2019, 1:58 pm

    Yes, I would be interested in that link too. I know our salary sacrifice scheme had HMRC imposed limits to stop that happening.

  • 14 DavidC December 13, 2019, 3:38 pm

    In the recent discussions on tax wrappers of various kinds, nobody has mentioned “offshore bonds” (not what they sound like – some kind of life-insurance-linked investment wrapper). I’d never heard of them until I discovered my ageing parents had one, but it’s possible that they’re only available through IFAs and/or wealth managers, whereas I only frequent sites aimed at the “un-advised”. Maybe an idea for a future article to cover the pros & cons? Unless there are only “cons”!

  • 15 The Weasel December 14, 2019, 12:42 am

    Well I wasn’t eating, but phallic fish is news to me!.

    As to climate-conscious investing. I don’t know. Long H2O?

    Why do we have to put everything through our dogmatic economic lense? Will that still matter if we keep s*itting where we eat?

  • 16 Brady December 14, 2019, 6:10 pm

    Thanks Lars / Monevator for the you tube questions.
    I’ll leave comment on tax question well alone!
    Regarding Climate, I’d be interested in an expanded answer regarding ESG factor investing, which can now be done for only a tiny increase in fees vs basic tracker. I’m asking from the point of view of diverting some of my all world tracker pension, I’m not necessarily looking to beat the standard index but I figure highly scoring ESG companies will have a longer term focus / better resilience to cope with climate emergency and better governance structures, so this may give me some diversification and may, in a small way, help other companies change their behaviour to boost their ESG scores.

  • 17 two shillings and sixpence December 15, 2019, 10:01 am

    Would also be interested in @Brady question ?

    I think Monevator included one SRI fund in the “10-year retrospective” series
    Will be interesting going forward how they preform.

  • 18 Mr Optimistic December 15, 2019, 5:51 pm

    @The Weasel. Politics. Reading Robert Harris book about Cicero, one quote is that everyone is a stoic while things are going well. My view is one of the biggest dangers from global warming, should the trajectory continue, is war. People aren’t good at being stoical and politicians will divert the fury. Too many people consuming too much stuff.

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