Introducing Timelineapp UK Income Tax Module
In another trailblazing effort, Timelineapp has introduced a new Income Tax feature that calculates the client’s tax across multiple accounts and income sources including the State pension, annuity, DB pension, drawdown as well as ISA and GIA. Cool, right?
The new tax settings now have the option for users to specify their withdrawals in either Net or Gross terms. Using the Net tax option, once you enter the income, the client would receive, net of taxes, the software will gross up the amount across each account, allowing you to withdraw the full amount of income required from the portfolio.
For the Gross tax option, you will need to enter the total required income, which includes an allowance made for tax. The software then calculates and deducts what the client’s marginal rate of tax is.
Apart from calculating taxes on income from multiple sources, Timelineapp also enables advisers to demonstrate the potential value-add as a result of careful tax planning. There are two aspects to this:
- Tax Efficient Withdrawal; coordinating withdrawals from multiple accounts to keep taxes to the minimum
- Asset Location (not allocation) - that is, locating the asset classes in specific accounts across the portfolio.
Let us go through the first instance above, by illustrating an example of a tax efficient withdrawal.
Tax Efficient Withdrawal
This is a very important value added service that financial advisers provide to clients, by ensuring withdrawals are made from the right account in a way that utilises all of the client’s allowances and avoids moving the client into higher a tax band if it is not practical to do so.
To illustrate the benefit of a Tax Efficient withdrawal as a result of a carefully planned Account Withdrawal Order, let’s introduce Tina Taxman.
Tina has the following accounts and income sources
- Pensions: £800k
- ISAs: £400k
- GIA: £300k
- State Pensions: £8k p.a. gross
All the above portfolios are invested in a 50⁄50 Global Portfolio, with a total fee of 1.5% p.a.
Tina wants net income of £40k, after taxes, including her State pension.
- An inefficient withdrawal order
Like most people, Tina is very likely to see her State and private pensions as her primary sources of income in retirement. So, what does she do? She withdraws all the income from those sources while leaving the ISA and GIA reinvested while generating returns.
The image below shows the results based on around 1,000 scenarios using extensive empirical asset class data.
The result is 84% success rate, cumulative spend of £1.25m (10th percentile) and a median legacy of £534.6k (50th percentile).
- Tax- Efficient Withdrawal Order
A good adviser understands the need to plan for withdrawals across multiple accounts to keep tax to the absolute minimum. But how do we demonstrate this to the client? The result below shows the impact of using changing the account withdrawal order to minimise taxes.
The Success Rate is 94%, which is a significant improvement in the results, compared to the first option.
In terms of cumulative income, we end up with £250k more in net income, or over four more years of income, plus some legacy! And that’s in the 10th percentile, leaving us with nine more scenarios better than this one!
In the median scenario, because of careful tax planning, we are left with a whooping £305k of extra money over the 35-year period.
Remember, both versions of the plan have the same asset allocation, the same fees, and income. The only difference here is how we plan for the withdrawals across the accounts to improve for the impact of taxes.
So, the value of tax-efficient withdrawal coordination to Ms Taxman? £250k! That has little to do with investment return. Just careful planning. Many advisers may already do this for clients. Now, Timelineapp enables them to quantify the value-add in pounds and communicate this to clients in a visually impactful way.
Is Ms Taxman still questioning our value? I don’t think so!