II sipp admin of merged cyrstallised & uncrystallised funds

jcmlinvestor

Hello,
I moved to Interactive Investor from Hargreaves Lansdown where my uncrystallised and crystallised (in drawdown) pots were in separate accounts. This made it easy to manage them separately and to decide when to "tip" more money into the crystallised drawdown account to get the 25% tax free cash. Interactive Investor runs the two accounts as one merged account which means that I have no ability to separately manage the accounts and forecast the tax free cash. The II sipp administrator (Hartley Sas) must get a feed from the merged account run on the II platform. Hartley SAS/II will provide me with a crystallised/uncrystallised valuation and split on request, however II will not provide me with the "algorithm" that they use to allocate the investment transactions and growth to one or other of the pots. (I have complained formally and they say the are not obliged to explain it but it is "industry standard"). I believe that what they do is allocate any contributions fully to the uncrystallised pot and withdrawals (tax free cash or drawn down pension) to the crystallised pot. Any investment transactions and investment growth/loss between times is allocated "pro rata" to the value of the two pots between contribution and withdrawal events. As an example I had only cash in the uncrystallised pot on arrival from Hargreaves Landsdown. Since markets went down and the merged account value went down, then gave me an updated split showing that the uncrystallised pot had gone down in value. This pot contains only cash. If I was to tip the uncrystallised pot into drawdown, then my tax free cash would be less than 25% of the cash value transferred from Hargreaves Lansdown which seems unreasonable.

Questions as follows:
1) can anyone confirm that the above is their method?
2) I have written to HMRC and their initial response is that the treatment should be "as if the money was managed separately" This is clearly not the case. HMRC do also point out that HMRC rules are "not prescriptive" in this area. Any view on whether the approach of II complies with tax legislation?
3) Is the approach of II operated by other providers? (They seem to say Hartley Sas is running an "industry standard" SIPP admin platform).
4) because II will not tell me their algorithm, I have no way to check their notional values to the pots and hence whether I am getting more or less tax free cash than if the pots were separately administered. Does this seem reasonable?
Sorry for the long post, and thanks in advance for replies.
jlmlinvestor.

dunstonh

nteractive Investor runs the two accounts as one merged account which means that I have no ability to separately manage the accounts and forecast the tax free cash.

Are you sure its not two segments within one account? One account is normal. However, there will still be some separation. Say for example, you had one fund for your holdings (purely for example), you would hold the fund twice. One for cystallised, one for uncrystallised.


I dont know the method of II but having one account is normal.

2) I have written to HMRC and their initial response is that the treatment should be "as if the money was managed separately" This is clearly not the case. HMRC do also point out that HMRC rules are "not prescriptive" in this area. Any view on whether the approach of II complies with tax legislation?

It is normal to see them separated, albeit in the same account.

jcmlinvestor

Many thanks for the post.
I am certain that there is no proper separation in the background.
Here is an extract from the final complaint response of Interactive Investor:
"These figures (crystallised and uncrystallised)may rise or fall, based upon the overall value of the investments within your SIPP. The methodology used to determine these amounts(crystallised and uncrystallised) is based upon a complex algorithm used by our pension administrators that they have declined to provide as they are under no obligation to disclose this information to the public.
This method, whilst certainly different from the implementation of Hargreaves Lansdown, is compliant with HMRC tax law and is a standard method within the industry of calculating the relevant values of crystallised or uncrystallised assets within your SIPP.
I can confirm that there is no current capability for the crystallised and uncrystallised elements of your SIPP to be held separate from each other. We also have no plans to introduce this in future. Whilst I am sorry that you are not happy with the methodology that we are using, we do not have an alternative to offer you".

I also have a letter from HMRC stating: "The crystallised and uncrystallised funds should remain separate and the scheme administrator should be able to determine which funds are which".

As an example, when I make a purchase I am not asked to specify whether I am funding the purchase using uncrystallised or crystallised cash, so there cannot be any "proper" tracking in the background.

Compared to separate tracking, the 25% tax free cash on drawdown will always be different compared to separate tracking, being more or less than it would be with separate tracking.

Seems I need to go to ombudsman and back to HMRC or to the newspapers with this?

Thanks,
jcmlinvestor.

dunstonh

The ombudsman wont be able to change the systems. As long as the scheme administrator can differentiate, then that is all that is required as a minimum. This is a system feature request you are after not a complaint resolution.

Best bet is to transfer out to one that meets what you want.

jcmlinvestor

Many thanks,
The administrator can differentiate but not accurately - in the same way as if the accounts were run separately. If funds rise and the uncrystallised has only cash, then the "approximate splitting" will give more tax free cash than would be provided with separate tracking. The question is whether their "approximate" splitting complies with HMRC rules?

jamesd

Well, this is one good reason not to choose III. Thanks.

I'd normally expect more income-producing investments and cash in a drawdown pot. This means that what III is doing is reducing your available tax free lump sum by allocating the non-income investments to the crystallised pot rather than the uncrystallised one that you really want them in. This effect will be greater the longer you have your money with III so I suggest that you transfer out as rapidly as you can if you use this sort of differing investment mix.

System

I thought the rule was that income (not contributions) had to be allocated to the sector generating that income? So if the crystallised pot produces more income, it must not be disproportionately allocated to the uncrystallised pot.
To do that would surely be a back-door way of surreptitiously feeding crystallised funds back into uncrystallised, and having another bite at the tax-free cherry?

jcmlinvestor

Thanks clifford pope and jamesd. I have talked to the HMRC respondent and the story is that while the iii approach is "not what they would have envisaged" the HMRC rules etc are silent in this area and the approach does not contravene any legislation/rules. Clifford pope is correct that iii is "value shifting" between the crystallised and uncrystallised pots which could work against or in favour of the account holder.

II ought to set out this approach in the terms and conditions so that people are aware of it, in my view.