Index funds

[FredClogs]

mdianuk said:

FredClogs said:

I think the LISA is doomed to be a failure. Pension regs are bound to change in the next 20 or 30 years,just treat it like an ISA that you get 25% tax relief on the money going in and that's locked away until you're 60 ish.

But (and this might be the issue I have with SIPP's and pensions in general) I have to pay tax on 75% of the fund, where as any money contributed or invested in a LISA or S&S ISA is tax exempt (poor choice of wording no doubt).

Am I understanding it wrong because of that 75%, it is actually not taxed at salary, and therefore it cancels itself out? What about a large sum contribution, that has of course already been taxed!

(The majority of my 'pay' is in dividends FYI, and I keep below the higher tax band as I don't need more and don't wish to pay 40% tax on anything above)

Edited by mdianuk on Wednesday 19th April 18:30

It doesn't matter if you pay no income tax, as long as you're not already a pensioner for every £1 you put in the pension you get 25p from the tax man (your pension provider will claim it for you). Just like your LISA but it's paid monthly not as a yearly bonus.

Your LISA is tax exempt when you come to take the money out. A pension is not, money taken out of a pension is seen as "earnings" and taxed as income (subject to whatever the law is at the time, at the moment you get a generous lump sum tax free).

But you can contribute vastly more into your pension, your LISA is a max of £4k per annum and also your employer can contribute to your SIPP. If you're a company director that means your Ltd company can contribute to your SIPP, that is an expense to the company and as such is deductible from corp tax.

[2Btoo]

mdianuk said:

nyt said:

Fundsmith is so stable that its often referred to as a "Bond Proxy Fund". These are currently out of favour with the press, and it does look like the economic environment where they shone is ending.

Are you suggesting that whilst being a solid fund that has consistently done well, that it is out of favour because the market is potentially in a period of downturn and therefore it might not do as well, or do you mean something else?

Coming late to this thread but I'm interested in the answer to the above question. Is the suggestion (by NYT) that Fundsmith's excellent performance over the last 5 years or so won't be continuing for the coming 5/10/15 years?

[mdianuk]

FredClogs said:

But you can contribute vastly more into your pension, your LISA is a max of £4k per annum and also your employer can contribute to your SIPP. If you're a company director that means your Ltd company can contribute to your SIPP, that is an expense to the company and as such is deductible from corp tax.

This is the hurdle I have to jump though, as in an ISA, I don't pay tax, but in a SIPP, I pay tax (again!). I know I'm not understanding it correctly, and will start to research, but that might be a reason why so many don't have a pension.

The deduction of corp tax for my ltd company is certainly appealing, but I'm sure there is limits on what they can pay, and I'm sure I'll pay it in the long run! So any contribution I make, lets say to a SIPP with HL, will receive a 25% interest payment monthly?

[FredClogs]

mdianuk said:

This is the hurdle I have to jump though, as in an ISA, I don't pay tax, but in a SIPP, I pay tax (again!). I know I'm not understanding it correctly, and will start to research, but that might be a reason why so many don't have a pension.

The deduction of corp tax for my ltd company is certainly appealing, but I'm sure there is limits on what they can pay, and I'm sure I'll pay it in the long run! So any contribution I make, lets say to a SIPP with HL, will receive a 25% interest payment monthly?

Yes but its not interest and you pay no tax, cgt or dividend tax on the money being made in your pension whilst its maturing. You can contribute £40k a year into a private pension, but those amounts do roll over so you can pit in more to average put over a number of years to £40k (check exact rules) You only pay tax (under the rules of the day) on money you take out of your pension when you retire as its income, that goes for any pension of any kind, sipp, ppp or an employer scheme. That's why the money going in is tax free. It's the opposite of an Isa, tax free going in taxed coming out, an Isa is taxed going in tax free coming out, a LISA is both but the rules and investment amounts are restrictive.

[CarlosFandango11]

mdianuk said:

This is the hurdle I have to jump though, as in an ISA, I don't pay tax, but in a SIPP, I pay tax (again!). I know I'm not understanding it correctly, and will start to research, but that might be a reason why so many don't have a pension.

You pay tax on your income that is used to contribute into an ISA. You don't pay tax on your income that is used to contribute to a pension (SIPP).

You don't pay tax on any income from an ISA. You may pay tax on income from a pension.

[WindyCommon]

mdianuk said:

This is the hurdle I have to jump though, as in an ISA, I don't pay tax, but in a SIPP, I pay tax (again!). I know I'm not understanding it correctly, and will start to research, but that might be a reason why so many don't have a pension.

The deduction of corp tax for my ltd company is certainly appealing, but I'm sure there is limits on what they can pay, and I'm sure I'll pay it in the long run! So any contribution I make, lets say to a SIPP with HL, will receive a 25% interest payment monthly?

It's not the reason why so many don't have a pension. That is another story entirely!

As has been explained earlier in this thread, the government don't pay you "interest". If you make a contribution to a SIPP out of taxed income, your SIPP provider will reclaim the basic rate income tax you've paid and add that to your contribution. Simplistically, if you pay in £100 your SIPP account will (soon after) be credited with an additional £25. If you're a higher rate tax payer, you can reclaim more via your tax return.

When you start to withdraw money from the SIPP the first 25% will be tax free. Withdrawals beyond this will be treated as income and taxed at your normal marginal rate. Many people plan to make contributions when they are earning a lot and subject to higher-rate tax, and then to withdraw those contributions (plus investment returns) when they have "retired" and are perhaps no longer higher-rate taxpayers. This can make them enormously effective!

Shall I mention professional advice again? With your level of income and assets it might be enormously helpful and well worth paying for.

[WindyCommon]

FredClogs said:

Which is where we came in...

So maybe currency hedged funds are a good idea - thanks for the advice I'm going to transfer all my money into a currency hedged fund right now ;o)

Holders of a GBP-hedged globally invested portfolio might have felt that they "missed out" on post-Brexit vote currency gains. On the other hand, they are now "protected" from adverse impacts should GBP strengthen.

Currency hedging for private investors is a tricky question. The traditional answer would simply be to say that if your liabilities are in GBP, then hedging back to GBP makes sense.

However, this is easier said than done - even by professional fund managers. Most so-called currency hedged funds are hedged solely on the basis of the listing currency for their holdings. So a UK-listed holding in a Global Fund wouldn't be subject to any hedging transactions. This is fine, but what if the company concerned has significant non-GBP revenues/profitability? This quickly becomes way too complex for fund managers, even those with implementation specialists, to cope with. Two things are certain:1. There are costs associated with hedging, 2. FX is ultimately (unlike equity investment) a zero-sum game.

To some extent, unhedged and fully-hedged are the extremes of a spectrum. I prefer to stay away from positioning extremes of all varieties. With this in mind, since I have been running my own money I have made a conscious / pragmatic decision to hold a balance of hedged and unhedged funds.

Edited by WindyCommon on Wednesday 19th April 20:32

[FredClogs]

WindyCommon said:

FredClogs said:

Which is where we came in...

So maybe currency hedged funds are a good idea - thanks for the advice I'm going to transfer all my money into a currency hedged fund right now ;o)

Holders of a GBP-hedged globally invested portfolio might have felt that they "missed out" on post-Brexit vote currency gains. On the other hand, they are now "protected" from adverse impacts should GBP strengthen.

Currency hedging for private investors is a tricky question. The traditional answer would simply be to say that if your liabilities are in GBP, then hedging back to GBP makes sense.

However, this is easier said than done - even by professional fund managers. Most so-called currency hedged funds are hedged solely on the basis of the listing currency for their holdings. So a UK-listed holding in a Global Fund wouldn't be subject to any hedging transactions. This is fine, but what if the company concerned has significant non-GBP revenues/profitability? This quickly becomes way too complex for fund managers, even those with implementation specialists, to cope with. Two things are certain:1. There are costs associated with hedging, 2. FX is ultimately (unlike equity investment) a zero-sum game.

To some extent, unhedged and fully-hedged are the extremes of a spectrum. I prefer to stay away from positioning extremes of all varieties. With this in mind, since I have been running my own money I have made a conscious / pragmatic decision to hold a balance of hedged and unhedged funds.

Edited by WindyCommon on Wednesday 19th April 20:32

Thanks, I might revisit the idea if the pound strengthens again in the near future, I suspect the politics at play throughout the Brexit process will be engineered to not let the pound get too much stronger but who knows?

[mdianuk]

You may be right that I need professional advice from a financial advisor, but humour me for a moment, as I feel it is important to understand as much as I can first.

So what is being said is that pension contributions are taxed on output, not input (so to speak), so the net benefit to my LTD company is that they don't pay 20% corp tax on them, plus of course I save on the 7.5% dividend tax in draw down from the LTD company. In addition to this, any fresh contributions I make personally, regardless of where they come from, will then have 25% applied automatically by the government, arranged by the SIPP company?

I appreciate the current limits of £40k per annum, but what are the restrictions on balance between personal contributions and LTD company contributions? Must they be paid from the salary I get paid; or can in theory I pay in £100 per month and my LTD company pay in £1,000 per month?

The way I see it, and again, I'm possibly very wrong, putting the first 25% aside, the rest is taxable at most likely 20% (in today's money) depending on drawdown, so the best strategy is to either drawdown the minimum per year (whatever that may be at the time), otherwise saving in an ISA proves similar in cost to me? If you did draw down at 20% across the board, then with the first 25% taken care of, it is effectively the same as being charged 15% tax on everything!

[FredClogs]

mdianuk said:

You may be right that I need professional advice from a financial advisor, but humour me for a moment, as I feel it is important to understand as much as I can first.

So what is being said is that pension contributions are taxed on output, not input (so to speak), so the net benefit to my LTD company is that they don't pay 20% corp tax on them, plus of course I save on the 7.5% dividend tax in draw down from the LTD company. In addition to this, any fresh contributions I make personally, regardless of where they come from, will then have 25% applied automatically by the government, arranged by the SIPP company?

You've got it.

mdianuk said:

I appreciate the current limits of £40k per annum, but what are the restrictions on balance between personal contributions and LTD company contributions? Must they be paid from the salary I get paid; or can in theory I pay in £100 per month and my LTD company pay in £1,000 per month?

That's perfectly allowed, my company pays in twice what I do which is similar to any occupational pension scheme, the employer pays in more than the employee.

mdianuk said:

The way I see it, and again, I'm possibly very wrong, putting the first 25% aside, the rest is taxable at most likely 20% (in today's money) depending on drawdown, so the best strategy is to either drawdown the minimum per year (whatever that may be at the time), otherwise saving in an ISA proves similar in cost to me? If you did draw down at 20% across the board, then with the first 25% taken care of, it is effectively the same as being charged 15% tax on everything!

I'm not sure what you're getting at here. When your pension pot goes into drawdown (i.e you retire or semi retire) you can claim a large tax free lump sum (currently 25%) that could be hundreds of thousands depending on how big your pot is... The rest is taxed as income on top of what ever other benefits or pensions you might receive, your personal allowance etc... is still there to be used up.

The other benefit of a SIPP over an ISA is that the range of investment options is larger, you can hold commercial property and some other fancy investments in a SIPP that you can't in an ISA. That really is the sum amount of my knowledge someone else might be able to fill in more details.

[WindyCommon]

mdianuk said:

You may be right that I need professional advice from a financial advisor, but humour me for a moment, as I feel it is important to understand as much as I can first.

Understanding is good, but as I have explained this is a complex topic - particularly where you have a limited company. You're simply not going to learn enough from Google and internet forums. My friend who is a GP tells an extraordinary story about a treatment demanding patient who had internet-convinced himself he'd had a heart attack, when in fact he had pulled a muscle in his chest.

mdianuk said:

So what is being said is that pension contributions are taxed on output, not input (so to speak), so the net benefit to my LTD company is that they don't pay 20% corp tax on them, plus of course I save on the 7.5% dividend tax in draw down from the LTD company.

It's not really possible to answer this without a greater understanding of your tax situation (incl your LTD co) and your financial objectives. How (and when) you choose to "pay" yourself will matter here. There are additional possible savings in employer NICs that may or may not be relevant for example. Also considerations like whether you need to be able to prove income - perhaps for future mortgage borrowings.

mdianuk said:

In addition to this, any fresh contributions I make personally, regardless of where they come from, will then have 25% applied automatically by the government, arranged by the SIPP company?

Yes, although not quite "regardless of where they come from" as there are requirements around earned income vs investment income. There are also contribution limits including the possibility of utilising previous years allowances - again subject to specific requirements. It's complicated!

mdianuk said:

I appreciate the current limits of £40k per annum, but what are the restrictions on balance between personal contributions and LTD company contributions? Must they be paid from the salary I get paid; or can in theory I pay in £100 per month and my LTD company pay in £1,000 per month?

There aren't any simple restrictions of the nature you suggest. Again this gets really complicated v quickly. There are other limits, notably relating to your earned income. Contributions from your LTD co *might* not be subject to these. It's complicated!

mdianuk said:

The way I see it, and again, I'm possibly very wrong, putting the first 25% aside, the rest is taxable at most likely 20% (in today's money) depending on drawdown, so the best strategy is to either drawdown the minimum per year (whatever that may be at the time), otherwise saving in an ISA proves similar in cost to me? If you did draw down at 20% across the board, then with the first 25% taken care of, it is effectively the same as being charged 15% tax on everything!

That's not really right. Simplistically the SIPP allows you to claim relief at the outset and then to grow the enlarged sum free of various taxes (notably CGT). It then gives you flexibility in drawdown to optimise your earnings from a tax perspective. All other things being equal - which they are not! - the tax benefits associated with SIPPs (particularly for higher earners) can significantly exceed those associated with ISAs.

I can't offer you further help with this I'm afraid.

[mdianuk]

FredClogs, WindyCommon, you have both been an incredible help, thank you. I will revert to a financial advisor to fill in the gaps, and also my accountant, who has a good handle on this, as well as my personal and business finances.

[mdianuk]

Head screwed on again now, SIPP registered, small sum in to get it rolling, large contributions by my LTD company each month to build a long term pot. Makes sense in this position to forgo the corporation tax and draw down tax I would have paid over the coming years, so that is the advantage most obvious to me. I'm going to opt for a reasonably balanced fund for slow and careful increases (hopefully).

Not sure now whether to keep the LISA; I had intended it as a high risk fund, for obviously long term tie down, but with a SIPP now, I don't think I want to contribute to both, sealing two pots from access until retirement, so I'm thinking that a S&S ISA would fit better, ignoring the loss of the GOV bonus that may or may not be available in 1, 2, 5, 10 or 20 years time!

Hope I've done the right thing, but having something in place is better than nothing. (this comes following a long conversation with my accountant, and brief conversation with a financial advisor - I will follow up on this though).