Re: Maximum personal pension contribution

Maybe I'm wrong but I assumed that John Smith *was* talking about someone who takes dividends rather than salary from their own company. There aren't many people rich enough to live just on income from investments, and they probably have private bankers setting up offshore trusts or something :)

Even so, if you have, say, a couple of million pounds invested without any kind of wrapper (pension, ISA, whatever) you will either need to be happy being a very passive investor or you'll pay a lot of CGT, given that even 5% a year capital growth would be 100k on 2 million, so the annual allowance isn't going to help much.

Well indeed - which will get you all of 1000 a year from an annuity, and that's without any inflation-proofing ...

Because he already has adequate capital to support him. If he goes in for a pension, he will end up buying an annuity which will replace the income he already enjoys, and he has lost his capital for good. A fair bit will be siphoned off in the process.

Yes, of course, an annuity isn't good value as spending your own capital, because of the annuity provider's profit margin.

But one should still do something to safeguard the case where you live for a very long time. An annuity is just an insurance policy against living too long.

You only pay CGT if you realise investments. Say that you have a fund of £2 million. Invested in indexed-linked gilts, that would bring in over £40k a year, index-linked. Invested in higher-yielding equities (or simple gilts), it could be £100k. The income from the equities is likely to rise, and could do so faster than inflation. Reinvesting some of the income would ensure that.

If you are retired, £20k will give you a comfortable lifestyle, with ample scope for holidays and following other pursuits. You are not bothered with mortgages or pension contributions, or even NICs.

Don't forget that there is no CGT on death, only IHT after a considerable exemption band, and various means of circumventing that.

Indeed, hence my point about being a very passive investor. But really that means *very* passive; I don't deal much and I have a lot less than 2 million, but CGT was still a major issue for me in 1999/2000, and probably will be again. And if you want to spend some of the capital - which is after all the advantage over an annuity - you won't be able to spend much without paying CGT.

Gilts are free of CGT anyway so that's not a very good example, but they also give a pretty low return.

5% from equities is pushing it, and you will still pay 25% higher rate tax on most of it (40% with gilts). 3% is more likely, which would be 60k less about 6k in tax. A reasonable level of income, but not that great for a multi-millionaire, and you could well have another 100-200k in gains which you're unable to realise without giving nearly half of it to the taxman.

So what's the point in building up such a huge fund if you're never going to spend most of it?

He's not spending any of his capital.

He is living off the income from it.

He doesn't need an annuity, because he is not eating into his capital.

He doesn't need to insure against living too long.

Over the last 18 years I have gradually transferred almost all my investments into PEPs and then an ISA. Consequently CGT is not an issue. Neither is HRT. Admittedly it is not £2 million:-)

It's still an adequate income.

5% is quite practicable. Have a look at a recent thread on Motley Fool's HYP board, where rnewfie gave details of a method of picking shares from the FTSE350 with reasonably high yields.

You might have inherited it. You might wish to pass it on. It might just happen.

I doubt very much that you have enough in PEPs and ISAs to come anywhere near being able to live off dividend income from them, unless you've been extremely successful with your investments. In any case that isn't much use for someone starting now. The ISA limit will soon be 5k a year (and maybe nothing after 2009), compared with 6k + 3k for PEPs and 1800 for TESSAs a decade ago, and that's really peanuts on the scale we're talking about (at

5k a year it would take a century to put in even half a million!).

There are shares which yield 5%+, but I'm doubtful that you can expect them to grow faster than inflation, certainly recent history with e.g. Boots, WH Smith, Scottish & Newcastle etc is not that encouraging. Also current market conditions are probably not typical, usually you would expect to have lower yields, so I don't think anyone should be basing a general investment strategy on current yields.

If I inherited it I would still want to spend it, and I have no particular wish to pass it on. Analysis on R4 last week was about inheritance - probably still on "listen again". It was somewhat interesting but failed to look at many of the issues, notably the fact that with people dying in their 80s and 90s their children are going to be way past the age when they need the money, and even grandchildren will often be grown up.

The income which I have is about half that which I get from pensions. It could be higher. I don't think that the PEP/ISA concept will die, despite Gordon Brown's antiparthy to encouraging saving.

One of the filters applied was shares which had increased their dividend every year for the past (10?) and he took the highest yielding 10 of those. The average yield was over 5% IIRC.

In my case I shall be nudging 90 when my grandchildren start going to university. I hope that I shall be able to give them a good start in their higher education and in getting on the property ladder. Their parents don't need help, anyway, having had it from their grandmother.