When ISA levels have been exceeded and SIPPS flexibility

dazman_3

Hi,

For someone saving into an ISA (earmarked for retirement savings) wrapped around a UK stock index tracker fund: Once they have reached their yearly savings limit on the ISA and they want to continue to save into a tracker, is it a good idea to take out something like the Cavendish bought pension, recommended on this site?

It seems for something like the Friends Provident plan for the UK Index tracker (charges 0.7% for regular contributions and 0.6% for transfers into the scheme) this is a great way of continuing to save tax free when ISA levels have been reached.

In fact, because the cash goes into these before income tax paid, is it not better to use this sort of thing up first to dodge the taxman, now you will have the flexibility to properly control the cash in the future with SIPPs and drawdown or have I missed something?

EdInvestor

Hi Dazman

Personal pensions with no employer's contribution are not a bargain for standard rate taxpayers - the tax benefit is on only 25% of the fund, and in return for that there are numerous restrictions, imcluding loss of contrtol of the capital forever, restrictions on how much income can be taken,no access until after 55, requirement to buy an eventual annuity etc.

Remember that direct investment in shares is only taxed if your capital gains exceed your annual allowance of 8,500 - so the taxman shouldn't bother you for quite a while Dividend income is tax free to basic rate taxpayers.


See if you like this idea

dazman_3

Hi EdInvestor

I like the HYP strategy... After reading about it in your SIPPs thread I also saw positive feedback recently in the FT:

http://news.ft.com/cms/s/939d05f0-3473-11da-adae-00000e2511c8.html

However, trackers have beaten managed funds over the long term (most normal pensions), so if someone is already 25% up on the tax relief by saving directly into something like this, it can't be that bad?

EdInvestor wrote:

Remember that direct investment in shares is only taxed if your capital gains exceed your annual allowance of 8,500 - so the taxman shouldn't bother you for quite a while Dividend income is tax free to basic rate taxpayers.

dunstonh

However, trackers have beaten managed funds over the long term (most normal pensions), so if someone is already 25% up on the tax relief by saving directly into something like this, it can't be that bad?

You fell for it by using a UK tracker. One fund which has been in the worst performing sector (with the exception of the US) for the last 5 years.

There are times that trackers will outperform managed funds (in the same sector) and vice versa. Managed funds tend to have downside protection which holds them back a bit when periods of growth occur but also reduces the decline when the markets drop.

By investing in a UK tracker alone, you have missed out on UK equity income funds, smaller companies, european, far east, property, latin america... all of which have outperformed the UK in recent years.

In these days of volatile markets, UK FTSE trackers do not look as good value and income and diversification has become king.

EdInvestor

I'm not a great fan of trackers either. They tend to do well in rising markets, poorly in sideways markets and badly in falling markets. Hence they are still lagging behind the HYP (and equity income funds) over five years.

But the vast majority of managed equity funds are abolute dross, even worse.

It's pretty easy to find out which are the top five performing funds ( Fidelity Special Situations, Invesco Perpetual High Income,etc etc) ask any IFA, check the personal finance press.

You probably won't go too far wrong if you invest in the top few performing funds via a discount IFA like Cavendish which will rebate the charges.

Almost certainly you will do a lot better than with a tracker.

IMHO there's a good chance the HYP strategy will beat the lot of them because you pay no charges

dazman_3

dunstonh wrote:

You fell for it by using a UK tracker. One fund which has been in the worst performing sector (with the exception of the US) for the last 5 years.

Trackers have been good to me. I bought into the FTAS and since April 1st I've made 10.61% so I have absolutely no problem there. On the other hand the S&P 500 has been pretty much flat from April this year so that one is not so good. I'm glad I now know about the high yield strategy as it provides many options for equity investments

Compared to trackers, I also have to admit to jumping onto the hedge fund bandwagon 3 years ago. I went for one of the glossy ones and the only people that made anything on that were the IFA that sold it and the hedge fund company. The lesson there to me, is low cost, commission free rules!

“UK equity income funds, smaller companies, european, far east, property, latin america... all of which have outperformed the UK in recent years.”…Changing the subject slightly, if someone already has cash in a [high cost] Personal pension (which they cannot buy discrete shares with) moving to Cavendish with a cheap pension company providing access to quality funds, rather than the index tracker option, is the way to go?

The only problem I have with this is long, long term history shows only a handful of managers have ever beaten the index

dunstonh

The only problem I have with this is long, long term history shows only a handful of managers have ever beaten the index

Long term history contains a lot of events which are not current with situation today. A portfolio of funds invested across the sectors would have out performed a UK FTSE Tracker.

The problem with the managed vs tracker debate is that both sides can quote periods when one beats the other. A better solution is to go with both and spread it wide.

whiteflag_3

The lesson there to me, is low cost, commission free rules!

Dazman - Ive got clients in a pension fund with an amc of 0.75% (no other charges) The fund has passive (tracker) and 5 external managers (who are consistently montitored by the pension company).

They ( my clients) got a 30 page report before they signed up for the deal, thay get valuations and professional advice whenever they want. All the administration was done for them and they have someone to sue in the future if something goes wrong. And they dont have to spend half of their life on websites like this.

And my company got paid 4% commision!

The lesson to me is look for value for money and at what other benefits come from having a professional adviser!

hobbesandco

dunstonh wrote:

Long term history contains a lot of events which are not current with situation today. A portfolio of funds invested across the sectors would have out performed a UK FTSE Tracker.

Can you explain which events are not current with the situation today? Is it a case of 'but this time it's different?'

dunstonh

Boom/bust economy gone and replaced with a less volatile economy, high inflation replaced with low inflation, lower number of mergers at the top end. Manufacturing in decline to almost nothing. Service industry replacing it.

Doesnt mean none of those things can change but if you want to look at past performance, you need to look at why these things grew as they did, in that period. There hasnt been a period since the FTSE100 started that matches the current economic situation. If you look at the current situation, a FTSE tracker does not look as desirable compared to an equity income fund. With all the volatility that is currently taking place, income does appear to be king.