ISA to SIPP

[TimR]

I am 63 years old with an FS index linked DB pension of £18,500 pa in payment to me which provides the same amount as a widows pension . My wife is 56 years old and earns £18,000 pa and has about 7 small pension pots from several previous jobs which total around £60,000. We have a 15 year old daughter at home and 3 older children who have now left home and are working. We have no outstanding mortgage on our home. I have been running a limited Company Consultancy for the past ten years since I was made redundant and I have built up a SIPP with HL worth £230,000 (invested in Global Equity ETFs). I have a Stocks & Shares ISA valued at £430,000 also invested in Global equity ETFs. We have about £100K in Cash ISA's.
My Ltd Company Profit at the end of March is going to be £17K, however I still owe my company £10K as I have a directors loan.

My question is " Does it make sense to pay my company profits (£17K) into my SIPP so I wipe out the profit and pay no Corporation tax (at 20% rate). If I did this I would need draw at least £10K from either my Cash ISA or my Stocks & Shares ISA. (To Withdraw is tax free but is this worth doing to avoid Corporation Tax on my Company Profit) ?

Furthermore, I am thinking of retiring in a few months (The wife intends to carry on working) so should I start moving part of my my ISA and SIPP into some less risky investments (instead of 100% in Global Equity ETFs at present) or do we have enough of a Hedge in our Cash ISA's and my DB pension in payment ?

Many Thanks
Tim R

[TimR]

By the way I also took £8052 salary from the Company to date so the profit is net of this and out of pocket expenses.

TimR

[TimR]

Having thought more about my options the main benefit I can see of paying my Company profit into a SIPP is the 25% tax free lump sum I can take when I decide to draw on the SIPP. As for the remaining 75% left in the SIPP I will still be paying 20% income Tax on this because of my existing DB pension in payment. So in effect I will be deferring paying 20% Corporation Tax at the end of March to paying 20% income tax later on the remainder when I draw the pension.


Tim R

[Kantwebefriends]

I am 63 years old with an FS index linked DB pension of £18,500 pa in payment to me which provides the same amount as a widow's pension ... My wife is 56 years old

If you look upon that pension as being bond-like, but better than bonds because there's no risk of choosing an unsuitable term, and if you ask what an index-linked annuity would pay a 56-year old (let me guess; 2% p.a. or less?) then you'll see that the capital value of this "bond/annuity portfolio" is somewhere around a million pounds. You'll add to that when you start your State Retirement Pension, as will she when she starts hers. You might reckon that that is all a pretty good basis for the 'bondy' part of your portfolio, at least the UK bonds part.

Various blog posters have persuaded me that your house is equity-like: it pays a dividend, but one that happens exactly to defray a liability - namely your imputed rent. Like equities it's value can go up and down and is not guaranteed at any time in the future, but you hope that the trend is upwards. It's "super-equity" in that it is exempt from CGT, it gets special privileges for IHT, and its dividend is happily untaxed. You presumably have a decent idea of its current value. So there's the UK basis of the 'sharey' part of your portfolio.

So I'd say that your financial portfolio should be devoted largely to characteristics that your house/pensions don't have: foreignness, diversity, liquidity, and divisibility. So cash might include high interest accounts, FX and, oh, premium bonds or some other exotic; diversity might imply some gold and commodities, perhaps (I'm a fan of gold); equity levels of risk might include P2P lending and must include overseas equities. Since liquidity is a big deal I'd avoid any investment in commercial property via open-ended funds; closed-ended funds would be the thing. Anyway that's the direction my thinking might take.

[she] earns £18,000 pa and has about 7 small pension pots from several previous jobs which total around £60,000. We have a 15 year old daughter at home and 3 older children who have now left home and are working. We have no outstanding mortgage on our home. I have been running a limited Company Consultancy for the past ten years since I was made redundant and I have built up a SIPP with HL worth £230,000 (invested in Global Equity ETFs). I have a Stocks & Shares ISA valued at £430,000 also invested in Global equity ETFs. We have about £100K in Cash ISA's. My Ltd Company Profit at the end of March is going to be £17K, however I still owe my company £10K as I have a directors loan.

My question is "Does it make sense to pay my company profits (£17K) into my SIPP so I wipe out the profit and pay no Corporation tax (at 20% rate). If I did this I would need draw at least £10K from either my Cash ISA or my Stocks & Shares ISA. (To Withdraw is tax free but is this worth doing to avoid Corporation Tax on my Company Profit)?

I'd do the SIPP contribution to avoid the tax: moving the £10k is fine when both of you have a new £20k ISA allowance on 6/4/17. Further, I'd consider making pension contributions for your wife while she still has earnings to justify them. At some point you might even (depending I assume on the value of your house) both begin to consider SIPPs as IHT-avoidance devices. In light of that you might even want to make an £8k gross (£6k net) SIPP contribution yourself before the tax year ends.

[tjh290633]

I have been running a limited Company Consultancy for the past ten years since I was made redundant and I have built up a SIPP with HL worth £230,000 (invested in Global Equity ETFs). I have a Stocks & Shares ISA valued at £430,000 also invested in Global equity ETFs. We have about £100K in Cash ISA's.
My Ltd Company Profit at the end of March is going to be £17K, however I still owe my company £10K as I have a directors loan.

My question is " Does it make sense to pay my company profits (£17K) into my SIPP so I wipe out the profit and pay no Corporation tax (at 20% rate). If I did this I would need draw at least £10K from either my Cash ISA or my Stocks & Shares ISA. (To Withdraw is tax free but is this worth doing to avoid Corporation Tax on my Company Profit) ?

Furthermore, I am thinking of retiring in a few months (The wife intends to carry on working) so should I start moving part of my my ISA and SIPP into some less risky investments (instead of 100% in Global Equity ETFs at present) or do we have enough of a Hedge in our Cash ISA's and my DB pension in payment ?

Many Thanks
Tim R

Being 100% in one type of ETF worries me. My thoughts would be to diversify in one way or another. Would you like to list the ETFs which you hold?

TJH

[TimR]

I

Being 100% in one type of ETF worries me. My thoughts would be to diversify in one way or another. Would you like to list the ETFs which you hold?

TJH

Hi

My current SIPP (value £230,00) and Stocks ISA (£430,000) are invested as follows:-

44 % Vanguard VUSA,
15 % Vanguard VERX,
8 % Vanguard VUKE,
4 % Vanguard VMID,
8 % Vanguard VJPN,
7 % Vanguard VAPX,
7 % Vanguard VFEM
4 % Ishares IS153%
3 % SL Commercial Property Trust SLI

As described above we have £100K in cash ISAs , House (Value £450K with mortgage paid off) and an £18.5K pa DB index linked pension in payment.
I am also concerned about the concentration in Equity ETFs even though there is full Global Diversification.

TimR

[hiriskpaul]

I am 63 years old with an FS index linked DB pension of £18,500 pa in payment to me which provides the same amount as a widows pension . My wife is 56 years old and earns £18,000 pa and has about 7 small pension pots from several previous jobs which total around £60,000. We have a 15 year old daughter at home and 3 older children who have now left home and are working. We have no outstanding mortgage on our home. I have been running a limited Company Consultancy for the past ten years since I was made redundant and I have built up a SIPP with HL worth £230,000 (invested in Global Equity ETFs). I have a Stocks & Shares ISA valued at £430,000 also invested in Global equity ETFs. We have about £100K in Cash ISA's.
My Ltd Company Profit at the end of March is going to be £17K, however I still owe my company £10K as I have a directors loan.

My question is " Does it make sense to pay my company profits (£17K) into my SIPP so I wipe out the profit and pay no Corporation tax (at 20% rate). If I did this I would need draw at least £10K from either my Cash ISA or my Stocks & Shares ISA. (To Withdraw is tax free but is this worth doing to avoid Corporation Tax on my Company Profit) ?

Furthermore, I am thinking of retiring in a few months (The wife intends to carry on working) so should I start moving part of my my ISA and SIPP into some less risky investments (instead of 100% in Global Equity ETFs at present) or do we have enough of a Hedge in our Cash ISA's and my DB pension in payment ?

Many Thanks
Tim R

By round-tripping £17k through your SIPP you will make about 5% on it. That is because when you take it out of the pension you will pay no tax on the first 25% and tax at basic rate on the remainder. So not a huge benefit. You may make a bit more though if it costs you more than just the 20% CT to withdraw the money from your company. An likely advantage of the SIPP (over adding to your ISA) for you is that the investments sit outside your estate and can be passed to beneficiaries free of IHT. Also if you die before your 75th birthday, the whole SIPP can be withdrawn by your beneficiaries entirely free of income tax. It is like free life insurance.

However, One of the things to watch to watch out for with pensions is exceeding the lifetime allowance, this may be a concern for you as your DB pension will be taken into consideration in calculating this. I think DB pensions are valued at 20 times the annual amount paid at the point you start drawing, but don't take my word for that! From what you have said, this is unlikely to be a problem for you, but if it works out that it might, you may be better off not paying any more into your SIPP and taking Fixed Protection 2016. You can only apply for FP16 though if you have not added to any pensions already this tax year.

I see you hold VUSA in your SIPP. A quick tip that would gain you an extra £300 or so a year in dividends would be to sell this and buy the US listed equivalent Vanguard ETF VOO. The reason investing in VOO will generate you £300 more than VUSA is that HL have arranged for their SIPP accounts to receive dividends from US investments free of dividend withholding tax (this is part of the UK/US tax treaty rules on pension funds). With VUSA, Vanguard have to pay 15% dividend withholding tax on the underlying investments before paying it out and this cannot be claimed back, but the withholding tax will not be charge on VOO. The downside of doing this is that as VOO is listed in New York, you will have to pay an additional FX spread to trade it. For investments over £100k, the additional spread is 0.35%, so you will have to wait for just over a year before you start profiting from the WHT saving.

No reason, why you have to buy VOO of course. In fact S&P 500 trackers from rivals such as iShares currently have lower TERs (0.04% compared to Vanguard's 0.05%), or you could go for a more diverse total stock market ETF, such as Vanguard's VTI (TER 0.05%) or iShares ITOT (TER 0.03%).

For property investments, you could consider US REITs instead of Commercial Property Trust. You will make the same withholding tax saving and US listed REITs ETFs have much lower charges that London listed ones, for example 0.12% for Vanguard's REITS ETF (VNQ) and 0.08% for iShares USRT. I hold VNQ in my SIPP as it was much cheaper than others when I invested - I would probably go for USRT now.

I overweight US equities in my SIPP for the WHT saving and underweight in my ISA and dealing accounts. The saving in WHT easily covers HL's £200 SIPP fee and should for you as well.

As for bonds, this is very hard to say and really depends on what level of risks you are comfortable taking. Your index linked DB pension will be an immense asset if we end up in a decade or more bear market and/or high inflation, and you have cash ISAs to fall back on so can stay invested through shorter lived stock market slumps, so you probably could stay invested the way you are if you don't mind the level of risk you are taking. I hold a lot in fixed income, although much of it is high yield, but I don't have the benefit of the index linked pension that you have.

[Kantwebefriends]

I

Being 100% in one type of ETF worries me. My thoughts would be to diversify in one way or another. Would you like to list the ETFs which you hold?

TJH

Hi

My current SIPP (value £230,00) and Stocks ISA (£430,000) are invested as follows:-

44 % Vanguard VUSA,
15 % Vanguard VERX,
8 % Vanguard VUKE,
4 % Vanguard VMID,
8 % Vanguard VJPN,
7 % Vanguard VAPX,
7 % Vanguard VFEM
4 % Ishares IS153%
3 % SL Commercial Property Trust SLI

What is your plan if someone should nuke Vanguard?

[TimR]

What is your plan if someone should nuke Vanguard?

Thanks for the response. I don't have a plan if Vanguard is destroyed or my SIPP and ISA platforms are electronically wiped !. I understand the ETF market is dominated by three main companies so perhaps I should use some of others as well? However I suppose I could fall back on my DB pension and Cash ISAs.

Many thanks for your detailed previous responses. I intend to make the £17K SIPP contribution. As my SIPP and Stocks ISAs are over 90% invested in Global Equity ETFs I feel I should add some other asset classes to bring the risk level down a bit. As I have the £18.5K pa DB pension and a Cash ISA I don't think I need to reduce the Equity risk in each of my SIPP and stocks ISA too much, say to 75% Equity ? or do readers think this amount of equity risk is still too high for a 63 year old with a DB pension who wants to retire soon ?

TimR

[TimR]

@Hiriskpaul Thanks for your response . As described above I was thinking of reducing the equity risk of my SIPP and ISA a bit. What do you think of diversifiers such as US TIPS etf -shares (ITPS) , Gold etf Ishares (SGLN) or Corporate bond etfs such as Ishares (IS15) or Ishares (SLXX) ?

[hiriskpaul]

@Hiriskpaul Thanks for your response . As described above I was thinking of reducing the equity risk of my SIPP and ISA a bit. What do you think of diversifiers such as US TIPS etf -shares (ITPS) , Gold etf Ishares (SGLN) or Corporate bond etfs such as Ishares (IS15) or Ishares (SLXX) ?

High inflation has not concerned me and still does not, so I have never held TIPS or Gold. Most of my fixed income investments are direct, but I held a US Treasuries ETF for quite a long time in my SIPP. I recently sold it and bought (in an ISA) iShares ETFs CU01 (US Treasuries, accumulating ETF) and LQDS (US investment grade). I think it well worth having some US bond exposure for diversification. When the World is in turmoil, money frequently flows in to US Treasuries. SLXX is good for GBP denominated bonds, as is IS15, but I question whether you would need IS15 in addition to a significant amount in cash ISAs.