HL SIPP fees.

chucknorris

jamesd wrote: »

Paying from cash in the SIPP is the most efficient way because you have received tax relief on it.

But you receive the tax relief anyway, I always max out on both my SIPP and ISA contributions, but if you also have a fund and share account and instruct HL to take the SIPP fees from that (which I have done so, and also my ISA fees too) you get to keep what would have been paid in fees still tax wrapped in your SIPP.

The above is not correct, see below

[Deleted User]

foreversummer wrote: »

Thank you. That's pretty much what I thought and it is not a problem to do that. I was just concerned that I had added under £100 by debit card and therefore done something wrong. I will add more in due course and in future top up by greater amounts only. I also have a monthly payment set up.

You can pay in a quid via debit card if you so wish.


Will just sit there as cash in your account...


Cheers

jamesd

chucknorris wrote: »

But you receive the tax relief anyway, I always max out on both my SIPP and ISA contributions, but if you also have a fund and share account and instruct HL to take the SIPP fees from that (which I have done so, and also my ISA fees too) you get to keep what would have been paid in fees still tax wrapped in your SIPP.

Try plugging in some real number calculations and you'll find that isn't so. You keep the money in the SIPP but receive no tax relief on the non-SIPP money used to pay the fees.

bowlhead99

Hi Chuck. Here's some numbers.

To keep it simple on the tax rates I'll assume that you are getting 20% tax relief on contributions and paying 20% tax on withdrawals but obviously having 25% of the withdrawals entirely tax free which is your main driver for using a pension. So your effective relief on is 20% on the way in (contribution becomes 100/80 times contribution) but 15% on the way out. You could substitute other numbers, but principle is you are using a pension to get more by way of payin grossup than the tax you pay on the way out.

Say you are going to invest money into a good deal that will double over next decade and you are going to invest 100 in the same deal both inside and outside the pension as you have enough cash and pension capacity to do both.

First unwrapped.
100 outside the pension. Double it you have 200 which is 100 profit. Pay 20% tax on the profit which is 20, you are left with £180 in your hand.

Now inside pension.
100 outside becomes 125 inside. Double it you have 250. To get your hands on it, draw the 250 and pay effective 15% tax on the 250 on the way out which is 37.5, left with 212.5 in your hand.

So clearly pensions are good because 100 turned into more money in your hand when you used the pension so we all like pensions and want to use them where we can.

However lets see what happens if you owe £10 fee to your provider and you have a choice to pay it inside or outside pension. Where best to pay it from.

If you pay outside the pension you can no longer invest the whole 100 in the investment deal. You can only do 90. The 90 doubles to 180. The profit is 90 and you pay 20% tax on the profit which is 18. So you'll end up with 90+90-18 which is 162. And 162 is 18 lower than you had if you had not paid the 10 fee.

When you analyse why you have 18 lower cash, you find:
You don't have the 10 you spent on fees
You don't have the 10 profit you would have got if you had invested that 10.
But you saved 2 tax on the 10 profit that you didn't make.
So 10+10-2 = 18. Overall you are short 18.

Now lets see what happens if you pay the fee inside the pension.

The 100 pension contribution turns into 125 inside the pension as before, then:
You can't invest 125 in the deal because you have 10 fees to pay. You only have 115 to invest. The 115 doubles to 230. To get your hands on the 230 you draw it out paying 15% effective tax on the 230 which is 34.5. So what you get back in your hand is 230-34.5=195.5
If you didn't pay that fee inside the pension you would have had 212.5 as before. So by paying the fee you lose 17.

When you analyse why you have 17 lower cash, you find:
You don't have the 10 you blew on fees
You don't have the 10 profit you would have got if you had invested that 10.
But you saved 1.5 tax when you didn't withdraw the 10 cash that was blown on fees
And you saved 1.5 tax when you didn't withdraw the 10 profit you didn't get to make.
So 10+10-1.5-1.5 = 17. Overall you are short 17.

Overall then:
- if you settle the 10 fees outside the pension it costs you 18 in the end after the 10 cost, the missed profits, offset by tax saved on those profits.
- if you settle the 10 fees inside the pension it costs you 17 in the end after the 10 cost, the missed profits, offset by tax saved when you don't have capital to withdraw and further offset by tax saved when you don't have profits to withdraw.


As you suggest, if you had spare pension contribution allowance and could pop more into the pension to settle the fee, then clearly it would make sense to pay the fees out of the grossed up contributions. But what is not so clear is that even if you are maxed out on the pension contributions it can still make sense to spend gross pension money on clearing the periodic platform fees, because ultimately that money (and the profits made on that money) would get taxed if you were to take it out to spend further down the line anyway.

There will be some scenarios where it doesn't work ... e.g if you had capacity to take all your capital and profits out of the pension wrapper entirely tax free... but that doesn't happen to a lot of people with relatively large amounts of assets because they are already using their personal allowances.

chucknorris

bowlhead99 wrote: »

Hi Chuck. Here's some numbers.

jamesd wrote: »

Try plugging in some real number calculations and you'll find that isn't so. You keep the money in the SIPP but receive no tax relief on the non-SIPP money used to pay the fees.

Thanks I get it (now), I ran some numbers through on a spreadsheet.

It's because I would pay more tax on the pension (i.e. in my case a 40% marginal rate of income tax on 75% of the total pension draw down), whereas I would only pay 20% CGT on the profit in the unwrapped fund, and some of that would have also been mitigated by years of B&B'ing and also using the CGT allowance each year as you draw down.

EDIT: The thing is though that my pension pot does actually grow more because there is no tax on the dividend income, I'm way over the £5k tax free allowance on dividend income, and also in the 40% tax band, so I pay 32.5% tax on dividends. So I can't really assume that the pension and non wrapped funds both grow at the same rate, (i.e. the tax free dividend income means that the pension fund grows more). To be honest I couldn't really be bothered to set up a more intricate spreadsheet which took that into account, but obviously I get the point that you are making.

Justanitgeek

So because HL charge 0.45% of funds under management, one way to pay the charge is to have an amount in a high yield income fund (inc rather than acc) that pays out regularly, monthly or quarterly. If you have sufficient in that fund the dividend payment may be enough to cover charges from HL without having to pay in extra cash, or keep back a percentage of money you paid in every month in cash to cover charges.

jamesd

For most people it's far simpler. A £50 fee can be paid either by using £50 outside the SIPP or by paying in £40 and getting £10 of tax relief added so they see an easy to understand fast saving of £10 of their money by paying from inside the SIPP.

More complicated for you because you're already paying in the maximum but even so for you the way to go is still to pay SIPP fees from inside the SIPP and ISA from outside the ISA.

brewerdave

I actually put the max. allowed £2880 into my HL SIPP each year.What I found in year 1 was that I had to put money into a Fund and Share account and set up the SIPP fees to come from there when the cash in the SIPP ran out to prevent units being sold,as the system wouldn't let me add any more cash to the SIPP.
In subsequent years I've left ~ £200 of tax relief to fund charges

foreversummer

jamesd wrote: »

Click on the trade icon towards the right in your list of funds. Top ups of less than a hundred Pounds are normally accepted.

Thanks Jamesd

I've found the trade button. It only lets me top up more than £100, but that's fine. Maybe it depends on the fund. At least I can see how to do it now. Many thanis.

foreversummer

jeepjunkie wrote: »

You can pay in a quid via debit card if you so wish.


Will just sit there as cash in your account...


Cheers

Thank you, that's useful to know. Many thanks.