Making the Most of Tax Allowances

5th Jul '23 by The Brass Monkey

18 comments 604 reads

This is my first post so please be gentle :-)

My Situation:

My wife and I are both maxing out our ISA allowance every year (low cost index investing)
We both have a good pension with our employer (1 x NHS and 1 x Defined benefit)
I am a higher tax rate payer my wife is a basic tax rate payer

My Goal:

I've just subscribed to Stockopedia and plan to use this data to create a portfolio of around 20-25 stocks investing £1K into each stock. I've only just started doing my research but am thinking of taking a NAP approach and buying the top two shares in each sector based on QVM and trying to be as diversified as possible in terms of style and risk. I'd like to keep trading fees to a minimum so would look to sell any holdings falling below a range of QVM rank of 70. My aim is simple I want to grow my £20-25K as much as possible and try to out pace inflation (don't we all !)

Options:

As I have already used up my ISA allowance, I would appreciate peoples thoughts on the best options available to me (I'm just looking to benefit from peoples experience and the views of the community and understand it is not financial advice ) Where does it make the most sense to hold this portfolio, should I re structure how I am holding things

Should I hold the portfolio in a General Investment Account (GIA)?
Should I open a SIPP to hold the Stockopedia portfolio?
Should I open a SIPP and continue to invest in low cost index funds there to free up my ISA allowance to hold the stockopedia portfolio?
Other?

Many thanks in advance

TBM (The Brass Monkey)

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BenHazz

5th Jul '23

Hi TBM,

I think your third option sounds the most sensible. The 20-25 stocks are more likely to see a larger percentage swing (hopefully a gain!) than index funds, this is because they are going to be impacted by events such as buyouts, general cyclicality and company specific news. Having them in the ISA offers you more protection on the gains you could make, keeping it safe from the tax man.

In any case, with you having 25k to invest you only need to cover yourself for 8 months before you can move the money into an ISA again. You would be doing well to make enough gains on those shares that you would go above either your dividend or capital gains threshold limits for the financial year, so for ease you could just use a GIA.

Cheers,

Ben

Rusty2

Ed Croft, found VM/QM outperformed QVM stocks, the last 30 months have been on that basis. He has just done a new NAPs, in case you have not seen it, here: https://www.stockopedia.com/co...

Opening a SIPP would be a good idea.

The other issue with QVM stocks is finding enough in certain sectors, such as Telecoms, Health, even Technology I can only see one suitable stock.
Diversification I would be a bit careful, there are several similar companies near the top, such as, Vesuvius (LON:VSVS) Severfield (LON:SFR) and Castings (LON:CGS) , I probably would not want all 3 out of 20/25 folio.

The Brass Monkey

Hi Rusty - Thanks for the reply, I've just read the article you kindly linked for me and yes VM and QM sounds like it has outperformed QVM.

With only 25K invested rebalanced annually, I'm probably unlikely to breech the 6K capital gains or 2K dividend (I think this is going to reduce to 3K next year though). I think you can off set losses and trading fees too. Once I've let compounding work its magic for a few years I could just withdraw 3K a year to stay within the allowance.

SIPP is a good idea though as I'd get a 20% top up from the Gov and could claim the 20% additional tax relief through self tax return giving me a 40% return straight off the bat.

What would I be best putting in the SIPP, the low cost index funds that I want to keep investing in or the 20/25 portfolio stocks? Any thoughts on SIPP providers?

Thanks again

TBM

Thats a great shout, I'd not spotted all three but notices two were both connected to the steel industry and decided I'd only pick one.

Cheers Ben, and suggestions on SIPP providers?

DavidMcCabe

The big question you have to ask first, is what is the extra money being saved for? If it is for retirement, and you earning enough over the higher rate of tax, you could without any investment returns at all, get a huge uplift just by getting tax relief.

For higher rate tax payers, if you earn an extra £100, you get taxed at 40%, you will have £60 after tax. So you put this in SIPP, and claim tax back, you get an uplift of 40/60, which is 66%.

You also get 25% of you pension pot tax free when you retire, which is a big bonus.

Obviously I don't know your circumstances, or priorities, and this is very simplified view, so you will need to explore further.

My personal approach is to max out the amount of money I put into a SIPP, because of the tax advantages.

If you are saving for other purposes this would not be relevant.

In terms of sipp providers, the cost effectiveness of each depends on how much you expect to hold in the sipp. Broadly speaking, those with fixed fees per month, are better for those larger sums, 100k+, and those who charge as a percentage of funds are better for those with a smaller pot.

Hi David thank you for the reply. I am aiming to retire at 50 (I'm 43 now) which is why I am maxing the ISAs out to enable early access to this money to bridge me until I can get my final salary pension at 67. I'm hoping to build a pot of around £500K.

I think you're right though building this portfolio of 20+ stock picks in a SIPP is probably the way to go to reap the tax advantages. I'll probably add to this as and when I can over the next 7 years. I'll be able to take 25% of it tax free at 57 and then up to 12.5K a year without tax as that will be my only source of taxable income until my company pension kicks in 10 years later.

ISA only 50 to 57

ISA and SIPP 57 to 67

Pension and state pension 67 to the end

Other than my wife I've not discussed this life plan with anyone, but you sound pretty switched on, broadly speaking am I thinking along the right lines or do you think I'm overlooking anything, I'd really appreciate your thoughts.

Thanks in advance

Benson212

6th Jul '23

Hi TBM,

In terms of SIPP providers, you broadly have two categories; execution-only or full service. Full service brokers offer additional services to their clients, including research, articles, better customer service etc, but they usually come with higher fees. Many of these brokers still charge extortionate commissions and high FX conversion fees which eat into your returns. Examples of such brokers are
- Hargreaves Lansdown (LON:HL.)
- AJ Bell (LON:AJB)
- Interactive Investor (subsidiary of Abrdn (LON:ABDN) ).

However, one could argue that if you're using Stockopedia for your research and you're managing your own portfolio, why do you need all this additional research and opinion, which can cloud your decision making? Especially, if you choose to do a mechanical StockRank system.

If this is the case, it might be worth considering an execution-only broker. IG group (LON:IGG) is competitive with lower commissions and an FX rate of 0.5%. But better still, there are lots of fintech companies, based in London, who are disrupting this space. At this stage most fintech brokers tend to offer GIA and S&S ISAs, but I have recently moved my SIPP to Freetrade (link below).

https://freetrade.io/pension/p...

You pay £11.99 a month as a custody fee (nearly all brokers charge this anyway!). There is zero commission on all transactions and they offer a highly competitive 0.39% FX conversion fee. (The only FX fee I've seen which is lower than Freetrade, is Trading212 at 0.15%, but they only offer ISAs, for now.). They're also regulated by the FCA and part of the FSCS.

It's definitely worth a look. Personally, it pains me to see people choose the big stalwarts. The fees are so high and many that I've spoken with and observed conversations on the forums, limit their trading simply because of the fees. This means they don't rebalance as often as they should and then end up with poorer results.

I moved my SIPP there last month away from ii and I'll save hundreds in fees each year (about 2% of my portfolio) and it allows me to rebalance more frequently, ensuring I keep momentum in my portfolio. Hope this helps!

Ben

Silver Moon

Earlier this week there was a useful article in Money Mail which described moving sufficient of the higher-rate taxpayer's earnings into the pension of the basic rate tax-paying spouse. To my mind this an excellent plan but far too late for myself to benefit from.

GloucesterBob

Have you created a spreadsheet that will show you how much you will have to spend each month from the date you expect to retire, till you are aged 80. I have assumed for me at that age, the cost of a half a bottle of brown ale and a pair of TENA pants will be covered by my old age pension. Don't forget to include you wife's pension and saving on the spreadsheet as well.

You should then be able to work how much you have to spend each month once you do retire. I haven't allowed for inflation on mine, as I assume, as I get older, I will spend less anyway, so hopefully the two will cancel each other out. I also do not take into allowance my personal allowance (and assume 20% tax on everything), and count that as a Brucie bonus to also counter the effect of inflation

If you fill it in with todays amount, and expected contributions going forward, you should easily be able to see how far off you are from your target goal and that may drive how much risk you are willing to take, and whether you are able to move the money from your ISA into your SIPP to take advantage of the 40% uplift that brings, and therefore if you play safe with your investments or enjoy the thrill of the chase....(its not too thrilling today for some of my star picks) Polar Capital Holdings (LON:POLR) .

Best wishes with whatever you decide to do, but have you thought what you are going to do when you retire? I was going at 60 but still working a couple of years later. For every month you delay your retirement, its surprising how much the spreadsheet jumps in your favour.

Polar Capital Holdings (LON:POLR) went ex-dividend yesterday, pays a sizeable dividend so no wonder at the fall in share price today Bob.

Hi TBM, that sounds credible to me, I would be wary of assuming the age at which you can take a private pension remains at 57 though. If the state pension age goes up, then the age you can take benefits from the sipp will go up too.

This may or may not happen in the next 14 years but is worth considering.

It probably does not make a huge difference to the overall approach though.

David

Yes gone ex dividend but dividend is 32p but shares fell around 53p, I have noticed this a bit recently, ex dividend falls far exceeding the dividend, maybe stop losses being triggered? Legal & General (LON:LGEN) was another.

Thanks for the feedback David, really appreciate it :-)

Your right if the government could get away with it, they would work us till we're dead, it wouldn't surprise me if it does get get pushed out another year or 2 by the time I get there.

That's really good advise, I'll be honest I've not done a spreadsheet yet, just played around with a few compound calculators and wrote it out on a fag packet.

Ps. Nearly spat my brew out laughing at the Tena and brown ale comment LOL

doug2500

7th Jul '23

If you invest in trackers anyway, and you end up with something in an investment account this would be a good home for them because of this neat trick - one FTSE 100 tracker is much the same as the next but you can swap them at the end of the tax year to trigger capital gains up to the allowance while effectively continuing to be invested in the same thing. Just keep good records.

Making the Most of Tax Allowances

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The Brass Monkey

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