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"SIPP always losses out long term"

PART 2 of 3 - decumulation...

After 15 years you stop all savings/contributions. You want £50k of post-tax income.

Let's ignore all subsequent growth in the ISA/pensions.

This means that ISAbestone takes £50k a year from their ISA.

The others have two choices for taking their pensions in drawdown, they can either take:

A) Their "25% tax free lump sum" - technically their Pension Commencement Lump Sum (PCLS), which for most people is now capped at £268,275

B) Uncrystalised pension lump sums where the first 25% of withdrawal is untaxed and the rest is taxed at marginal rate

It's worth noting that:

- you can do something half way between A and B as you can "crystallise" just part of your pension

- B isn't the free lunch that it immediately appears as the 25% untaxed bit is still constrained by the PCLS cap of £267,275

Under the above two options:

A) requires the withdrawal of £59,357 a year

B) requires the withdrawal of £55,866 a year (as per Zac) for the first 19 years - after which the PCLS runs out and they they have to take £59,357 a year

[All this assumes a standard 1257L tax code and no other income]

So - HOW LONG DOES THE MONEY LAST?

- ISAbestone - 21.9 years

- SIPPbasicrate - (A) £268,275 up front plus 22.6 years OR (B) 18.5 years

- EMPbasicrate - (A) £268,275 up front plus 27.1 years OR (B) 22.2 years

- SIPPhigherrate - (A) £268,275 up front plus 31.8 years OR (B) 26.2 years

- EMPhigherrate - (A) £268,275 up front plus 39.2 years OR (B) 33.6 years

Note, that at 4%, the PCLS will generate a handy £10,731 of interest.

The downside of taking the PCLS up front is that you can't shelter it from tax.

IMV, the most tax effective thing to do is to take out £67,026.67 out of the pension in the first year. This generates your £50k income plus £9,486.67 to you stick into an ISA without pushing you into higher rate tax.

Onwards to part 3 - Who is right?

"SIPP always losses out long term"

PART 1 of 3 - accumulation...

Because I'm probably as sad a spreadsheet jockey as Zac...

Let's take 5 people:

- ISAbestone - saves £20k a year into an ISA

- SIPPbasicrate - earns £50k a year and saves £20k a year into their pension. They get no employer contribution

- EMPbasicrate - earns £50k a year and saves £20k a year into their pension.with their employer adding 8% of salary

- SIPPhigherrate - earns £100k a year and saves £20k a year into their pension. They get no employer contribution

- EMPhigherrate - earns £100k a year and saves £20k a year into their pension.with their employer adding 8% of salary

All of them want £50k a year in retirement.

Let's use an annual growth rate of 15% (which is frankly unrealistic and if retirment is consistently making that over a sustained period then they're in the wrong job and one has to wonder why they'd hang around with us losers, anyhows...)

At the end of year 15, ISAbestone has £1,094,349.45 saved - so scores on the doors after those 15 years:

- ISAbestone - £1,094,349.45

- SIPPbasicrate - £1,367,936.812

- EMPbasicrate - £1,586,806.702

- SIPPhigherrate - £1,823,915.75

- EMPhigherrate - £2,261,655.53

The differences are because the tax relief on the pension contributions mean that basic rate tax payers are contributing £25k a year and the higher rate tax payers £33.3k a year.

It is important to note that the in addition to income tax, ISAbestone will have paid national insurance on the money required to give them £20k of post tax income. Taking the £20k out of the marginal income, they will have paid:

- £2,777.78 of NICs if they are a basic rate tax payer

- £641.03 of NICs for higher rate tax payers

Employees DON'T pay NICs on pension contributions if the contribution is made as a salary sacrifice (one reason you should always go for this option).

Onwards to part 2 - decumulation...

…and finally…

What the Labour government is likely to do IMV…

I very much doubt they will touch the principle of ISAs. It’s too much of an attack on the middle class.

They are likely to do a blanket conversion of LISAs to ISAs as this appeals to a key demographic and the cost is pretty minimal. They are also likely to convert JISAs to be full ISAs on the basis that they often provide poorer value.

On the pensions front, my view is that they’ll move to a flat contribution relief rate for everyone. 33% has been muted as it’s the break even point between basic rate savers and higher (and above) tax rate payers after the expected increase in basic rate contributions. My view is that they’ll raise some tax by making it 30% or even 25%.

The £60k contribution limit is also likely under threat and might well be aligned with the higher rate tax band.

And removing IHT relief from pensions is a racing certainty. The argument against IHT on general assets is that you’re paying tax on money that has already been taxed. This isn’t the case on money in a pension.

The final thing they might do is make the state pension needs based. They can do this on the basis that pensions are legally a benefit and not a right. If they do this then they’ll do it early in the Parliament so that the people impacted will be less annoyed in 4-5 years time. They are also likely to do this gently by making the level high (£80k+) and tapered to establish the principle that can then be tightened later. They are also likely to put in place transitional arrangements to avoid legal challenges along the lines of WASPI. If they’re clever then they’ll announce the measure now and make it effective in 5-6 years time - providing enough time for the electorate to forget about it by the next election.

Doing this allows the retention of a form of the triple lock, without it bankrupting the country.

Making the state pension at least partially needs based requires the imposition of IHT on pensions - otherwise better off pensioners will simply pay themselves less so that they get the state pension and keep their pension pot sheltered from IHT.

…and there’s more…

A key thing about money in an ISA vs money in a pension is tax rate certainty.

Money in an ISA has tax certainty - you paid tax on the money going in, but know for certain that you’ll pay nothing on the way out.

Money in a pension goes in free of tax, but how much tax you pay when taking it out is subject to the whims of government.

If you happen to be a higher rate tax payer in retirement (and inheritance isn’t a concern) then - my view - is that you’re better off paying the 40% tax on the money needed to fill your annual ISA allowance than keeping it in the SIPP and paying tax when you need the money.

There are two reasons for this. The first is that you can lock in the tax rate. The second is that if you do this for long enough then you might be able to generate enough from the ISA to reduce the tax you pay from the pension.

Which is better depends on your income level and whether you get any form of employer contribution match (SIPP is just one form of pension).

It also depends on your estate planning considerations.

If you’re a basic rate tax payer the. The ISA wins. Unless you get an employer contribution match (or better).

If you’re a higher rate tax payer in employment and expect to be a basic rate tax payer in retirement then the pension wins through tax rate arbitrage - you get tax relief at 40%, but only pay tax at 20%.

If you’re a higher rate tax payer and expect to be a higher rate tax payer in retirement then then pension wins up to (IIRC) a salary of £85k.

If you’re in the Goldilocks income zone of £100k to £125k then your marginal tax rate is 60% and the pension (SIPP) wins hands down.

And if you add in an employer contribution match (or better) then the pension seldom loses.

If you have a limited company and don’t need the income then the company can make a pension contribution larger than your salary - up to your £60k total limit.

Pensions also have significant advantages from a IHT perspective and also in estate planning if you’re not married to your partner (a pension can be written in trust and left to ANYONE outside of IHT considerations).

None of this to be taken as advice.

I’m unsure what you’re trying to achieve chambersiain2.

A capital gain is a capital gain. If you sell Av. for a £2k capital gain; wait 31 days; re-buy and make another £2k then you’re still over the annual limit if you sell in year.

Sure, you could seek to realise your CGT limit in year, but you’d be surely doing that anyway if you hold a GIA?

The general principle is that tax changes aren’t retrospective and changing the CGT rate mid-year would cause such a nightmare to HMRC that it’s hard to see the government implementing it.

@stevebt - that’s just an unsubstantiated rumour at the moment. They are rumoured to be one of the bidders, along with a couple of private equity firms.

In truth, the PE companies are likely to be able to pay a higher price; be patient and wait for the economic cycle to be in their favour to sell in 3-5 years time. Both the Barratt and Bellway offers are paper ones, which isn’t going to cut it for LGEN, who will want cold, hard cash. Personally, I think it unlikely that PSN will be able to stump up sufficient cash to compete.

The recent disposals are a good demonstration that the NAV is robust and, if anything, a bit of an underestimate.

“EPS is meaningless.”

No it’s not.

Would you prefer quarter of £100 or half of it?

The £100 hasn’t changed.

If a company buys back 20% of its shares then the EPS goes up 25%. All things being equal then shareholders receive that return in perpetuity - usually through enhanced dividends.

What if I could now offer you the chance to forward buy £100 of income for £75?

The insurance sector is trading at historically low multiples of earnings and way below other sectors where income and cash flow are far less certain.

Buybacks made against shares that are genuinely undervalued have a double leveraging effect because they are buying those future earnings at a discount.

There is a widely held view that increasing EPS flatters director bonuses. Any decent company’s remuneration committee will adjust the EPS to reflect the impact of share buybacks on director remuneration.

"Not a great show of support is it?"

You shouldn't read too much into a director selling. There are lots of reasons to sell - they could be simply paying off a mortgage or using money to support children/parents. You need to remember that the senior directors have previously had no liquidity for their shares - so it's not unreasonable that they sell some.

A friend with stock options once considered selling part of their £5m of options. They hesitated because the value could go up more. The shares tanked and they walked away with £300k for their whole holding when the company was bought out.

Stuff happens and it's not unreasonable for the directors to diversify.

Much more significant is that one of the non-execs, Daniel Labbard, has bought nearly £100k of shares with their own money (i.e. outside of any share save scheme or stock option award).

“You will recal brokers noted they lacked cash flow to cover the dividend despite stating they were undertaking a progressive growth strategy on it.”

That’s only if you believe the brokers actually understand the free cash flow numbers better than PHNX do. The Board wouldn’t have committed to a dividend strategy that - from the outset - wasn’t supported by the forecast free cash flow.

"Havnt labour just said they will increase stamp duty?"

From the manifesto - "Revenue from increasing stamp duty on purchases of residential property by non-UK residents by 1%"

No party in their right mind would raise stamp duty on house purchases.

@Laughton - that article is a really useful spot - thanks. It helps add some colour on why dividends are holding more or less steady when profits (and staff profit share) is up.

An interesting statement on page 36 of https://group.legalandgeneral.com/media/czoc4jha/2024-capital-markets-event-presentation-slides.pdf

“The Board intends to return more to shareholders over 2024-2027 than the equivalent of maintaining 5% per annum growth in dividends per share (DPS).”

"debacle" ? .. if you think the debacle is down to the CEO then you arent watching things closely enough, and looking in the wrong direction...in my opinion

I largely agree with this. It’s far from a debacle. He certainly, though, lost the first game of the season; at home.

He did or signalled most of what the market was expecting. But an expected £500m buyback turned into an initial £200m one; the Cala disposal was largely confirmed, but is clearly nowhere near as advanced as expected; and there wasn’t any big “ta daaaa!” reveal.

The market was expecting near £1.5bn of capital return and it got £200m. With a poorly articulated revised capital returns policy.

The LGIM/LGC integration was widely expected.

I do, though, feel that the communication of the changes felt more L&G are far less effective with their communications than Aviva.

“The cash disappears from the balance sheet, therefore the business value is decreased but because the same value of shares are bought and cancelled the share price remains static.”

True.

And/but EPS and ROE increase. That, in principle, drives share price growth.

In principle.

Well, the share price has taken a light beating (and continues to do so as I scribble) as a result of the announcement.

I suspect four factors:

- no news on Cala disposal - where expectations had been running for a £750m-£1bn disposal - which, if they get, will be a nice uplift on the purchase price of (IIRC) £384m

- the £200m share buyback is significantly less than the £500m market expectation

- dropping the dividend increase target from 5% per annum to 2% per annum

- the lack of a surprise "...and finally..." (in the words of Steve Jobs)

I find the move of Cala into a "Corporate Investments Unit" interesting. If only that it suggests that disposal isn't imminent. Why bother with the hassle of moving something if your on the verge of announcing its disposal.

I also find interesting the phrase "...as first step of plan to increase returns to shareholders" in the RNS announcement.

At first blush, buying back 1.5% of the shares and aiming to increase dividends per share (DPS) by 2% doesn't look like an increase.

But/and we have "...with 5% DPS growth to FY24...", which looks like a commitment to meet Nigel Wilson's promise of "mid single digit" DPS growth for five years ending in the FY2024.

So that's 5% DPS growth plus 1.5% buyback, for this year. And - I'm guessing - signals a shift next year to the lower 2% DPS growth together with a higher level of buybacks.

"...not sure when we will know the allocations!"

The IPO was massively over-subscribed and all retail investors have been scaled back to 365 shares.

Zac - I don’t doubt the numbers.

If you crunch the numbers back to a pre-IFRS 17 basis then LGEN is currently trading on a P/E that’s equivalent to what it was trading at in May 2020. Reversion to the lower end of L&G’s historic P/E ratio range takes it to my £3.50. Trading at the middle of that range takes it to £5+.

My view is that value will out.

"All this analysis is fine but what's the conclusion?

There is a saying something along the lines of history having a habit of repeating itself. Over the last 10 years the average annualised total return from LGEN has been 5.9% pa. That's all I expect going forward. Maybe others know differently?"

I don't disagree with the numbers. I disagree with their predictive usefulness.

The problem with relying on 10 year historical performance numbers for your argument is that they are just that. Historical.

I've said it before and I'll say it again. It doesn't matter what the 2, 3, 5 or 10 year performance numbers are. What matters is matters when I'VE bought and I'VE sold. What matters is MY returns. Not yours. And not the 10 year performance.

On a 10 year basis MKS is doing appallingly. But NOT if you happened to buy in Oct 2022 at 98 and are now sat on a share worth 309.

My first investment in LGEN was 8/9/22 and since then I've returned 32% on invested monies, which annualises to 15%. I don't trade, but I've done some gentle selling and buying in that period.

If I'm going to rely on anything predictive about the past then it's reversion to mean. In my view, LGEN is a value play and has been since 2022 because the market is pricing it on a PE ratio that isn't reflective of the historical mean PE ratio. That's why I bought in.

My view is that fair value is around 350, but you only get there through analysis. Boring, but otherwise you're just throwing darts at a dart board with a blindfold on.