Asset Allocation + Strategy

[TimR]

Like HighRiskPaul I have no pension apart from a state pension in a few years and have lived off an 80-90% equity portfolio for 10 years on a total return basis quite happily. Masterly inactivity works very well !

The stock market has not suffered significant downturn since 2008/9. With an 80-90% equity ETF portfolio which produces both dividends and capital growth there may be times in the future when stock markets suffer capital loss for a few years. If the stock markets are down for a long time then it would be a bad time to sell any capital to supplement dividends and other living expenses. This ratio is like the Warren Buffet 90/10 % where the Bond component consists of 'cash like' High Quality short dated US bonds.
I suppose Cash iSA's and short dated bond etfs could provide the 'Safe Bond' function to draw on or 'sell down' if stock markets are down for a long time ?

TimR

[UncleEbenezer]

I am 63 years old and have just retired with DB pension paying 20K pa (Pension is index linked which also pays same amount as a widows pension) ..

That's quite an annuity! Doesn't its value push you to the lifetime limit for pension savings?

If, for the sake of argument, you were to be widowed many years from now, you could remarry and offer a lifetime on the gravy-train to someone not yet born! Your annuity provider has to price that sort of thing in to what they promise you.

[TimR]

I am 63 years old and have just retired with DB pension paying 20K pa (Pension is index linked which also pays same amount as a widows pension) ..

That's quite an annuity! Doesn't its value push you to the lifetime limit for pension savings?

If, for the sake of argument, you were to be widowed many years from now, you could remarry and offer a lifetime on the gravy-train to someone not yet born! Your annuity provider has to price that sort of thing in to what they promise you.

I think the widows pension only for the wife I married before I was made redundant and started the DB pension but I'll check.

I don't think it pushes me to the lifetime limit for pension savings

The reason why the widows pension is similar to mine (should have been 3/4) is because when I was made redundant I took a 25% lump sum. They reduced my pension accordingly (pension should have been around 26.5K pa) to take account of the tax free lump sum but did not reduce the widows pension. However the wife is 6 years younger than me and her family are quite long lived but my parents died in their 70's)

TimR

[Hariseldon58]

With regard to an alternative to living off potentially taxable income, one could live off capital, cash or bonds in a low return world produce little taxable income , at least for the length of a parliament and then invest the remainder in an equity portfolio that produces little or no income , if you don't sell you don't have a capital gain.

If the need arose then I am sure the products would arrive to fill the need !

[Mapfumo]

I don't think it pushes me to the lifetime limit for pension savings

Guess it counts as £20k x 20 = £400k towards your lifetime allowance and presumably a good part of your portfolio is in ISAs and/or your wife's name rather than in your pension.

I like your asset allocation, both in terms of the equity/non-equity split and the geographic allocation. With a good DB pension and state pension to come soon, I don't see any reason to have much in bonds/gilts.

[TimR]

Looks all good to me Tim. I hold far less equities than you, but don't have a DB pension. My global equity split is similar to yours, but a bit less in the UK and 3% in Canada. I target US 40%, Europe 20%, UK 10%, EM 10%, Japan 10%, Asia/Pacific 7%, Canada 3%.

If you want to replace your US small cap fund, you could do that in your SIPP and hold a US listed ETF instead. That would boost your dividend as there would be no withholding tax to pay (assuming your SIPP provider supports this) and you would pay lower admin fees. For example, Vanguard S&P Small-Cap 600 ETF VIOO has an expense ratio of only 0.15% compared with 0.4% for the LSE listed iShares ETF you hold. I hold the Vanguard Small-Cap Value ETF VBR, with an expense ratio of just 0.07%, but this is not so concentrated in small caps as the S&P fund. It does pay more income though if you would prefer that, with an historical yield of 1.92% compared with 1.26% for VIOO.

Instead of VUSA, I would suggest either the US listed VOO or the whole of market VTI in your SIPP, again assuming your SIPP provider can receive US dividends without the 15% withholding tax.

As you are underweighting USA, you are sort of overweighting smaller caps anyway, so could probably do without DFE, which is expensive (0.58% TER + rebalancing costs as this is not cap weighted). In my SIPP, to complement VBR, I hold Vanguard FTSE All-World ex-US Small-Cap ETF (VSS). Expense ratio is only 0.13%, which is very low for a small cap fund. Historic dividend yield is 2.31%, helped by the low running costs. DFE is very expensive and 25% is in UK stocks as well, probably overlapping VMID. Personally I would get rid of it.

Sorry to come back to this after a year but I have been quite busy. I have made small changes to the portfolio and spend some of the cash on new cars for me and the wife and as well as holidays, etc. The cash has been reduced to about £90K but the equity side grown to about £750 K with growth and new investment bringing my equity/fixed income ratio to about 83%

The 83 % equity allocation on my SIPP + ISA platform is now:-

USA ------- 39 % ----- VUSA -- + ---(about 1/10 of it is in ISP6)
UK -------- 13% ----- VUK ---+ ---- (about 1/5 of it is in VMID)
Euro ------ 20% --- -VERX
Japan ----- 10% --- - VJPN
Asia Pac --- 7% --- - VAPX
EM ------- --11% --- -VFEM
Note: The above allocations include about 10% of the portfolio in VVAL to give a Value bias.

My main question is about using US listed ETFs to avoid withholding tax. I have struggled to find a platform which holds VOO, VTI, VBR and VSS. (HL appears to have US listed company shares but not these ETFs ?). I am still using Vanguard VUSA and iShares ISP6 for my US allocation. Can you point me in the right direction ?

[hiriskpaul]

New regulations came in at the beginning of the year which has made it very difficult to buy US listed ETFS. So although you can still get US dividends free of withholding taxes for ETFS held in SIPPs, SIPP providers no longer allow them to be purchased.

The regulations have come from Europe, so there is a chance they may be altered post Brexit, but I think this is only a slim chance as the main driver for European financial regulation is the UK.

[TimR]

New regulations came in at the beginning of the year which has made it very difficult to buy US listed ETFS. So although you can still get US dividends free of withholding taxes for ETFS held in SIPPs, SIPP providers no longer allow them to be purchased.

The regulations have come from Europe, so there is a chance they may be altered post Brexit, but I think this is only a slim chance as the main driver for European financial regulation is the UK.

Do these regulations also affect US listed shares as there seems to be a much smaller selection of US shares on the HL website now ?

TimR

[GeoffF100]

Do these regulations also affect US listed shares as there seems to be a much smaller selection of US shares on the HL website now ?

No, they apply only to funds. You are free to buy any US listed shares.

[TimR]

Do these regulations also affect US listed shares as there seems to be a much smaller selection of US shares on the HL website now ?

No, they apply only to funds. You are free to buy any US listed shares.

I may be mistaken but I can't find any US dividend paying shares on the HL website only non dividend payers like Berkshire Hathaway.

TimR

[hiriskpaul]

Apple are listed at HL - they certainly pay dividends. The new restriction is on collective investments. Underlying securities are fine.

[TimR]

Apple are listed at HL - they certainly pay dividends. The new restriction is on collective investments. Underlying securities are fine.

So as I understand it - if you buy dividend paying US shares such as Apple and Microsoft in a HL SIPP or AJ Bell SIPP they should be able to reclaim the withholding tax on the dividends paid out. Other SIPP providers may not do this ?

TimR

[Cookie]

How much do you actually save on US ETFs? I presume you buy in US dollars so there is a currency charge?

[hiriskpaul]

Apple are listed at HL - they certainly pay dividends. The new restriction is on collective investments. Underlying securities are fine.

So as I understand it - if you buy dividend paying US shares such as Apple and Microsoft in a HL SIPP or AJ Bell SIPP they should be able to reclaim the withholding tax on the dividends paid out. Other SIPP providers may not do this ?

TimR

As I understand it HL and AJ Bell Youinvest don't actually reclaim withholding tax. Instead the dividends arrive without withholding tax deducted in the first place. Other SIPP providers may be able to offer this service, but I doubt all do.

[hiriskpaul]

How much do you actually save on US ETFs? I presume you buy in US dollars so there is a currency charge?

There is both a currency charge and a higher dealing charge for investing in US listed ETFs/shares, so it can be quite some time before any benefit is received from the 0% withholding tax. An extra benefit is that management charges on US listed ETFs are lower than equivalent London listed ETFs. For example I hold iShares Edge MSCI Min Vol USA ETF (USMV), for which the expense ratio is 0.15%. The closest equivalent London listed ETF is iShares Edge S&P 500 Minimum Volatility UCITS ETF (SPMV), which charges 0.2%. The historical distribution yield is currently 2.11%, so I would lose 15% of that if it was listed in London instead (0.32%). So overall the saving is 0.37% per year. Most of my positions were purchased in 2012 so the initial hit from the FX charges and dealing fees were covered some time ago. I have no intention of selling any of the ETFs either, especially so now it is not possible to buy any more within my SIPP.

My biggest saving is on the US REITs ETF, VNQ. Historic dividend yield is 4.14%, so the saving is 0.621%, or £621 on a £100k investment. The charges are low for a REITs ETF as well at only 0.12%. The equivalent iShares ETF listed in London charges 0.4%, which pushes the total saving to 1%.

IG are still offering US listed ETFs, but that may just be because I am registered as a professional investor with them. HL do not distinguish between any of their clients, they are all retail, so it is not possible to avoid the ban by opting out (I have already tried this!). None of the other retail brokers I use are offering US listed ETFs any more.

I hold some US listed ETFs outside my SIPP. The advantage of US listed ETFs outside a SIPP is that the withholding tax can be used as a tax credit to reduce the UK dividend tax. Not such a big saving compared with the 0% withholding tax inside a SIPP, but still worthwhile for me. Withholding tax on US listed shares can of course still be used to reduce UK dividend tax, or eliminate entirely for those who pay 7.5%.

[Cookie]

How much do you actually save on US ETFs? I presume you buy in US dollars so there is a currency charge?

There is both a currency charge and a higher dealing charge for investing in US listed ETFs/shares, so it can be quite some time before any benefit is received from the 0% withholding tax. An extra benefit is that management charges on US listed ETFs are lower than equivalent London listed ETFs. For example I hold iShares Edge MSCI Min Vol USA ETF (USMV), for which the expense ratio is 0.15%. The closest equivalent London listed ETF is iShares Edge S&P 500 Minimum Volatility UCITS ETF (SPMV), which charges 0.2%. The historical distribution yield is currently 2.11%, so I would lose 15% of that if it was listed in London instead (0.32%). So overall the saving is 0.37% per year. Most of my positions were purchased in 2012 so the initial hit from the FX charges and dealing fees were covered some time ago. I have no intention of selling any of the ETFs either, especially so now it is not possible to buy any more within my SIPP.

My biggest saving is on the US REITs ETF, VNQ. Historic dividend yield is 4.14%, so the saving is 0.621%, or £621 on a £100k investment. The charges are low for a REITs ETF as well at only 0.12%. The equivalent iShares ETF listed in London charges 0.4%, which pushes the total saving to 1%.

IG are still offering US listed ETFs, but that may just be because I am registered as a professional investor with them. HL do not distinguish between any of their clients, they are all retail, so it is not possible to avoid the ban by opting out (I have already tried this!). None of the other retail brokers I use are offering US listed ETFs any more.

I hold some US listed ETFs outside my SIPP. The advantage of US listed ETFs outside a SIPP is that the withholding tax can be used as a tax credit to reduce the UK dividend tax. Not such a big saving compared with the 0% withholding tax inside a SIPP, but still worthwhile for me. Withholding tax on US listed shares can of course still be used to reduce UK dividend tax, or eliminate entirely for those who pay 7.5%.

I have heard from a Swiss investing site the Interactive Brokers allow them to buy US Domiciled ETFs, but not sure if it is because they are Swiss - although IB for Europe is based in the UK

[torata]

<SNIP>
The historical distribution yield is currently 2.11%, so I would lose 15% of that if it was listed in London instead (0.32%).
<SNIP>
I hold some US listed ETFs outside my SIPP. The advantage of US listed ETFs outside a SIPP is that the withholding tax can be used as a tax credit to reduce the UK dividend tax. Not such a big saving compared with the 0% withholding tax inside a SIPP, but still worthwhile for me. Withholding tax on US listed shares can of course still be used to reduce UK dividend tax, or eliminate entirely for those who pay 7.5%.

As a matter of interest, how much is the withholding tax on US ETFs? If I understand your first sentence above, it's 15%.
I am not in the UK, and am both able to and seriously thinking about buying some US based Vanguard ETFs.

torata

[hiriskpaul]

<SNIP>
The historical distribution yield is currently 2.11%, so I would lose 15% of that if it was listed in London instead (0.32%).
<SNIP>
I hold some US listed ETFs outside my SIPP. The advantage of US listed ETFs outside a SIPP is that the withholding tax can be used as a tax credit to reduce the UK dividend tax. Not such a big saving compared with the 0% withholding tax inside a SIPP, but still worthwhile for me. Withholding tax on US listed shares can of course still be used to reduce UK dividend tax, or eliminate entirely for those who pay 7.5%.

As a matter of interest, how much is the withholding tax on US ETFs? If I understand your first sentence above, it's 15%.
I am not in the UK, and am both able to and seriously thinking about buying some US based Vanguard ETFs.

torata

It is 30%, but for UK residents it is reduced to 15% (or 0% if held in a pension) if a valid W8-BEN form is filled in, due to the UK/US tax treaty. A W8-BEN reduces withholding tax on US dividends in other jurisdictions as well.