SIPP, Hargreaves Lansdown and Funds

LongTermLurker

wary wrote: »

Here's my position. I'm 47 and have had a mixture of permanent jobs and freelance via my own limited company. I'm finally waking up to the fact that I've heavily under-invested in pensions although I don't know the full extent of by how much. For 2009/10, I'm at the stage where any money I take out other than via pension contributions will take me into the top tax bracket although I can leave it there. I've had the odd dabble in the stock market in recent months and have been very bad at it, largely because I can't just forget about my investments for the medium/long term but have to check them every 5 mins and get freaked by the slightest loss, often buying/selling at the wrong time. Nevertheless I do feel there is money to be made from buying shares at this stage and am considering further purchases for a 2-3 year hold, maybe longer.

I've started doing some research on this website and have come across SIPPs for the first time, although I'm still struggling to grasp the concept. My question is this. Can I effectively do my share-dealing in my one/two targetted companies via a SIPP, effectively getting the 40% relief but tying it up for a minimum 7-8 years as well as paying any fees (etc) and then basic rate tax?

Or would I better off paying this money from my company as additional (I'll be making some anyway) contributions into my existing personal pensions, hence leaving the investing to the so-called experts, and if I want to invest a modest amount in shares off my own bat then do that from my personal savings, losing interest (currently offsetting my mortgage) and possibly incurring CGT on anything over £9600 that is outside of an ISA, ensuring that I disable my access to all share price sites for at least a couple of years?!?

I don't mean to come across rude or anything, but if you can't leave your investments alone a SIPP could prove costly (though probably no more costly than buying/selling any investments at the wrong time).

As with any investment, targetting one or two companies isn't diverse enough - if one of those companies is the next Woolworths, you could lose half your pension pot. Diversify. Buy into many companies, across a number of sectors. Eggs and baskets...

You'd not be tying it up for 7-8 years unless you're about to retire. A SIPP is a pension like any other - you put in your money and when you reach a ripe old age you have an option to take 25% of the value tax free, the remainder either being used to buy an annuity or continue investing until you die, through drawdown.

You will only get 40% relief if you've paid that much tax at 40% - so if your income took you up to the 40% bracket and you invested some money in a pension, that investment would reduce your taxable income, meaning you didn't pay 40% income tax and thus couldn't get more than 20% relief on your investments. If you were earning £5000 into the high rate tax band you could invest £5000 gross and get the full tax relief on that.

jem16

LongTermLurker wrote: »

You will only get 40% relief if you've paid that much tax at 40% - so if your income took you up to the 40% bracket and you invested some money in a pension, that investment would reduce your taxable income, meaning you didn't pay 40% income tax and thus couldn't get more than 20% relief on your investments.

That's not entirely accurate.

If you had income of £45,875 you would be £2000 into the higher rate tax bracket. Pay £2000 into a pension and your taxable income has reduced by £2000 meaning you don't actually pay any tax at 40%.

However you are still entitled to 40% tax relief on that £2000 pension contribution.

LongTermLurker

jem16 wrote: »

That's not entirely accurate.

If you had income of £45,875 you would be £2000 into the higher rate tax bracket. Pay £2000 into a pension and your taxable income has reduced by £2000 meaning you don't actually pay any tax at 40%.

However you are still entitled to 40% tax relief on that £2000 pension contribution.

Maybe I wasn't clear in what I meant to say, but I think we've agreed! I didn't check the limits, but let's say in the paragraph you quoted he was earning £43,875 (at the limit) - by paying anything into his pension, he would not have entered the 40% band so couldn't claim 40% back. If he paid in £2k his new income would be £41,875 and he would get 20% relief.

I also said "If you were earning £5000 into the high rate tax band you could invest £5000 gross and get the full tax relief on that.", which I think is the same as you said - exchanging the £5k example for £2k.

jamesd

wary wrote: »

I've started doing some research on this website and have come across SIPPs for the first time, although I'm still struggling to grasp the concept. My question is this. Can I effectively do my share-dealing in my one/two targetted companies via a SIPP, effectively getting the 40% relief but tying it up for a minimum 7-8 years as well as paying any fees (etc) and then basic rate tax?

You can buy the shares within a SIPP, provided the SIPP offers that facility, as Hargreaves Lansdown and many others do. You can buy and sell at any time but can't withdraw money from the SIPP until you're 55.

wary wrote: »

Or would I better off paying this money from my company as additional (I'll be making some anyway) contributions into my existing personal pensions

Your company can also pay a contribution directly into a SIPP on your behalf, it's not restricted just to other types of personal pension. This will save you and the company the employee and employer NI on the contribution and is the most efficient way to pay money into a pension.

Since you write that you're inclined to over-trade and make the wrong calls, you're probably right to think that letting a fund manager handle the individual share parts is best in your case.

jem16

LongTermLurker wrote: »

Maybe I wasn't clear in what I meant to say, but I think we've agreed!

We do seem to be in agreement!

I was just clarifying that it's possible not to physically pay 40% tax yet still be due tax relief at 40%.

LongTermLurker

jem16 wrote: »

We do seem to be in agreement!

I was just clarifying that it's possible not to physically pay 40% tax yet still be due tax relief at 40%.

Yes, you can cancel out your higher-rate tax liabilty but you can only cancel out what you have/would have paid - what you can't do is pay HR tax on £1000 and expect to receive full 40% relief on a £2000 investment, and I suspect there'll be a lot of people who think they can.

jem16

LongTermLurker wrote: »

Yes, you can cancel out your higher-rate tax liabilty but you can only cancel out what you have/would have paid - what you can't do is pay HR tax on £1000 and expect to receive full 40% relief on a £2000 investment, and I suspect there'll be a lot of people who think they can.

Yes i've seen people on here asking about paying in a lump sum and expecting 40% tax relief on all of it.

Si1

LongTermLurker wrote: »

There are several FTSE trackers from

I don't think there would be any hidden charges, but trackers don't look great value to me. I'd rather pay a bit more for a human.

thankyou

only something like 1 in 14 active funds have beaten the DOW index (by way of some stats I picked up) by 1% compunded per year, in other words to justify the additional fee, over 35 years, and I expect similar for the UK market, but I appreciate active funds are a perfectly valid choice for those that can pick the winners

also thanks for your view on H-L charges

cheers

LongTermLurker

wary wrote: »

Or would I better off paying this money from my company as additional (I'll be making some anyway) contributions into my existing personal pensions, hence leaving the investing to the so-called experts, and if I want to invest a modest amount in shares off my own bat then do that from my personal savings, losing interest (currently offsetting my mortgage) and possibly incurring CGT on anything over £9600 that is outside of an ISA, ensuring that I disable my access to all share price sites for at least a couple of years?!?

Just re-read this - there's nothing to stop you paying regular amounts into your company pension and investing the above "modest amount" in a SIPP, foregoing CGT etc. Unlike ISAs, you can pay into multiple pensions up to your total annual income, so you could make regular payments into one or both and ad-hoc payments into your SIPP as well.

jem16

Si1 wrote: »

thankyouonly something like 1 in 14 active funds have beaten the DOW index (by way of some stats I picked up) by 1%, in other words to justify the additional fee, over 35 years, and I expect similar for the UK market,

You expect wrongly - the UK market is very different from the US market in relation to trackers v managed.