S&S ISA questions and sense check

HCIMbtw

Hi there,

I’m early 30s, have spent the past decade putting all my money into houses and getting married. I’m good at saving in that I’m frugal but terrible at getting my money to work for me. The next few years look much more stable and I am keen to properly get saving for later life.

I am borderline higher tax rate payer but contribute 15% to my pension which optimises the tax benefit on contributions, employer contributes 8%. The current pot is pretty terrible given I used to be earning a lot less and it was held in a DCB, think it only totals about £14k.

Mortgage term is around 25 years, currently at a rate of about 1.7% at about 80% LTV but have a chunk of unrealised equity after doing it up.

I have about 10k just sat in my current account and don’t want to dip into it too much in that this will be my cash reserve for anything unexpected.

I’m confident I could put 10k aside each year at present.. maybe more but would like to try this amount first.

The S&S ISA/LISA plan:

LISA – AJ Bell Youinvest, £4,000 lump sum at the start of each financial year, purchase HSCBC global strategy dynamic Acc fund. Total fees 0.45% (platform and fund) transfer fee £1.50.

S&S ISA – Vanguard Lifestrategy 60 or 80, (haven’t quite decided yet), £570pm. Total fees 0.37%.

Essentially thinking two contrasting funds diversify a little in terms of UK/US skewed allocation in equities at least.

Two things i’m just mindful of, I can totally see myself wanting to move house again in the future and kids which will come in a couple of years will hit my ability to save (expecting my partner to get garbage maternity cover). However, I will have paid of my student loan in about 4 years and this will offset by about £300pm.

I really don’t think market volatility would make me withdraw from the vanguard but the one risk might be the temptation to release funds to contribute to a bigger house purchase, but intend to be disciplined and adjust saving contributions in advance if this is on the cards.

Questions

As I understand it when setting up the AJ Bell Youinvest I open up a cash account I transfer into and will need to hold a level of cash in this account to cover the fees and the £1.50 purchase fee each? About £26 in the first year.

In contrast the Vanguard I could just set up a direct debit and the fees would just be deducted from the value of my account at the end of each month or year?

Is any of the money in these structure protected by £85,000 FSCS?

Is tweaking contributions to Vanguard S&S ISAs pretty simple?

Apologies for the essay, appreciate your feedback

MaxiRobriguez

If you're investing for retirement it would make more sense to salary sacrifice more (if possible) than it would be to put into a S+S ISA, because you get the benefit of avoiding tax at the point of investment, rather than at the point of withdrawal. The additional money in your pot to start with means more money that compounds, so you will have more than a 20% difference between salary sacrifice pot and S+S ISA pot at the time of retirement. This is especially true if you move (further) into the 40% band.

If you're wanting to move house again soon it's probably worth retaining the 80% equity in your current property to allow you to fund a deposit on what sounds like will be a more expensive home. If you change your mind and decide not to move, you could remortgage and reduce the equity, using the freed up cash to pop into a S+S ISA, if you think you can generate better than 1.7% returns. But be wary that we've had a lot of up years in a row and interest rates have been suppressed for a number of years too. Any changes to those facts and equity returns are likely to be crushed, so you'd need to be prepared to ride that out and hold onto your funds for a number of years, possibly over a decade.

HCIMbtw

Sorry my mortgage is a bout 80% of the purchase price, but house is worth 20% more than purchase based on work done nowadays.. probs total bout 35% equity if that makes sense

Bit confusing to explain

Ideally i want money built up to access and worry less about working in my late 50s into 60s, maybe drawing some out.. but would plan what i could do nearer the time

Dont think i would get the same flexibility sticking into SIPPs or such would i?

Im not to concerned about markets performance in that theres not much i can do about it, if i was investing a lump sum i might be inclined to think more about timing

george4064

HCIMbtw wrote: »

Questions

As I understand it when setting up the AJ Bell Youinvest I open up a cash account I transfer into and will need to hold a level of cash in this account to cover the fees and the £1.50 purchase fee each? About £26 in the first year.

In contrast the Vanguard I could just set up a direct debit and the fees would just be deducted from the value of my account at the end of each month or year?

Is any of the money in these structure protected by £85,000 FSCS?

Is tweaking contributions to Vanguard S&S ISAs pretty simple?

Apologies for the essay, appreciate your feedback

AJ Bell will recover their platform fee quarterly from the same account that the fee is accruing, so any platform fees in relation to your holding in a LISA with AJ Bell will be taken from your cash balance in your LISA, and same with any fees accrued in your S&S ISA will be taken from your S&S ISA cash balance.


Fees are taken quarterly from each respective account, usually taken around the end of the month after quarter end. For example my Q2 platform fee was taken on 22nd July.


Can't comment on Vanguard ISA because I don't use them, however have you thought about transferring your previous ISA with Vanguard to AJ Bell? This will make things easier for you as everything in one place!


You will be eligible for the £85,000 FSCS protection for each account you hold with Vanguard/AJ Bell. However they are both well established and functioning companies so I wouldn't worry too much about this!


With regard to your question around tweaking contributions, note that you can only contribute to one S&S ISA in each tax year. However since you are talking about a S&S ISA and a LISA, you are free to contribute to both in the same tax year but make sure you don't exceed the overall ISA allowance for the tax year!

HCIMbtw

Thanks for the response, I don't have an ISA at all at the moment so nothing to transfer.. just money in a current account

The only thing I find slightly confusing about the language is your 'fees will be taken from your cash balance'. if all the money in the account is invested in a fund, how is there any cash? e.g. if set up a direct debit with vanguard and it is all invested..

I feel like the person who was talking about pensions up above has thrown a right spanner in the works.. while I'd only get 20% on my contributions at present... I struggle to see why I wouldn't use a SIPP over an S&S LISA, fees seem comparable.. 25% would be more than enough to draw out... could access earlier if needed.. provides more flexibility if salary goes up..

MaxiRobriguez

HCIMbtw wrote: »

Thanks for the response, I don't have an ISA at all at the moment so nothing to transfer.. just money in a current account

The only thing I find slightly confusing about the language is your 'fees will be taken from your cash balance'. if all the money in the account is invested in a fund, how is there any cash? e.g. if set up a direct debit with vanguard and it is all invested..

Most platforms will automatically sell down a proportion of the fund to pay for the fees if not covered in cash balance.

HCIMbtw wrote: »

I feel like the person who was talking about pensions up above has thrown a right spanner in the works.. while I'd only get 20% on my contributions at present... I struggle to see why I wouldn't use a SIPP over an S&S LISA, fees seem comparable.. 25% would be more than enough to draw out... could access earlier if needed.. provides more flexibility if salary goes up..

Sorry.

SIPP you can put as much as you want in annually pretty much, S+S LISA is limited to £4k.
SIPP can currently be accessed at age 55 (will be going up shortly) whereas S+S LISA is 60 (may go up, unknown).
SIPP has advantage that you avoid tax upon fund purchase rather than sale, giving a greater compounding benefit than S+S LISA.
S+S LISA gets topped up 25%, SIPP doesn't.

Hope that helps!

bowlhead99

MaxiRobriguez wrote: »

S+S LISA gets topped up 25%, SIPP doesn't.

Why doesn't it ? Basic rate tax relief is a 25% boost (£80 becomes £100). Then in retirement a portion can be accessed as tax free lump sum and the remainder drawn out with tax due at marginal rates at the tax year its taken (may be 0% if within personal allowance).

So, it's possible to get the same 25% boost from SIPP albeit some management needed of the timing of withdrawals in later life.

Given salary is likely to go up over time, the SIPP can be extra useful in avoiding higher rate tax - a greater than 25% boost (£60 becomes £100) and the ability to keep suppressing one's adjusted income for the purposes of getting child benefit.

Due to the usefulness of getting 40% tax relief when a higher rate taxpayer, and avoiding loss of child benefit that results from a high salary, a SIPP (or workplace pension) can be more valuable than the LISA (which is flexible on timing of withdrawals in later life, but only 25% boost). And becoming a higher rate taxpayer is likely quite inevitable if on the cusp of it already with 3 decades of career development still to go.

So a valid solution instead of maxing out the LISA could be to only do a bit of LISA now (it's a decent but imperfect scheme), and use a regular S&S ISA now (which has no withdrawal penalty) with the intention of withdrawing some of the proceeds of that S&S ISA in a few years and having those proceeds help you to be able to afford to fund large pension contributions when you reach high rate tax status.

SIPP has advantage that you avoid tax upon fund purchase rather than sale, giving a greater compounding benefit than S+S LISA.

Wat.

ColdIron

MaxiRobriguez wrote: »

SIPP you can put as much as you want in annually pretty much

Well, you are limited to your relevant annual earnings or your £40K annual allowance, whichever is the lower figure. You may be able to use carry forward for the last 3 years if you have unused allowance but are still limited to your annual earnings which cannot be carried forward

HCIMbtw

Cheers bowlhead, my slight confusion with your post is u detail all the benefits of a sipp and propose a solution which doesnt use it

My thinking right now is to sack of the LISA and look at SIPP and S&S isa set up..

My fear with going all in with a SIPP is regulatory changes and suddenly i cant access at 57, but the new age to draw out becomes like 65.... So if i balance risk of access to with the SIPP, with the flexibility/ease of access of an ISA that probably works out alright

Makes me think i should look at my current pension AVCs as i would probably be better off investing them in a SIPP myself rather than sticking them in the company pension..

The one thing i didnt want to have to worry about, but i will probably have to is filing for tax returns? Or whatever the correct language is to the hmrc, to get the higher rate on SIPP contrbutions... Need to read into all that now

bowlhead99

HCIMbtw wrote: »

Cheers bowlhead, my slight confusion with your post is u detail all the benefits of a sipp and propose a solution which doesnt use it

I detailed some of the benefits of a SIPP because the previous poster had said that the LISA would get topped up 25% and the SIPP wouldn't, and had also made some spurious claims about 'greater compounding benefits than S&S LISA' which didn't make sense.

In your current position it seems that at some point in the future you would be able to get higher rate tax relief with a pension (workplace pension or SIPP) which would beat the bonus you could get with LISA. So you do not need to max out your LISA, because then it is locked in the LISA with a penalty to get it out, and you will not have the opportunity to put that same money into the pension for the greater relief, avoid clawback of child benefit etc.

But that 'SIPP becomes better than LISA' is at some point in the future. In the current, you have said you are only borderline high rate tax and have already made decent contributions to your workplace pension which you said have optimised that tax relief. So presumably there is no further high rate tax to save this year by doing further pension contributions. So there is no need to set up a SIPP at the moment.

My thinking right now is to sack of the LISA and look at SIPP and S&S isa set up..

As mentioned above, no real point doing SIPP (or extra workplace contribution) now for basic rate tax relief when you could instead do those pension contributions later and get higher rate tax relief then (assuming government policy is not going to change to remove that opportunity within the next few years).

Putting the money in to a pension now and getting only basic rate relief locks you into that relatively low amount of relief (because you only get it at the time you make the contribution). As the money is locked away until your late 50s or beyond, you can't take the cash back out of the pension in three years time and decide you will put it into a pension to get higher rate relief and reduced child benefit clawback. Because the ship has sailed and the money's already in the pension, having only achieved basic low rate relief.

So if LISA didn't exist as a product, it would be sensible to put all the money into the S&S ISA now with a plan to let it grow tax free in investment funds and then at some point in the future, take that money out and put it into the pension for tax relief (whether workplace pension or private SIPP arrangement).

However, LISA does exist as a product and it is a decent product:

- It gives you the equivalent of basic rate tax relief now without being taxable in retirement (so you don't need to manage the timing of your withdrawals like you would with a large pension pot). So in that respect it's better than using a SIPP now for only basic rate relief.

- It also has the advantage of being accessible, in that if you realise you have screwed up your retirement planning and have too much locked away in a pension - or pension access age goes up to 65 while LISA access age doesn't go up - so you are without enough money for your earlier-life objectives, you can simply give up the bonus and treat it as if it were a regular S&S ISA (for a small penalty).

As such, I would not ignore the LISA and its bonus completely. A bird in the hand, and all that.

What I was suggesting is that you don't need to max out the LISA to the full £4k every year, because ultimately pension can be a better financial option for retirement planning (once you are further into the high rate tax bracket, unless there is regulatory change withdrawing higher rate relief) and it would be a shame to have to pay a penalty to access the money and make it available for pension contributions or other medium term goals.

So:
- SIPP should be eliminated from contention this year (tax relief no better than LISA bonus and would prevent getting higher relief on the same money in future;

- that leaves S&S ISA and LISA as flexible options;

- LISA not a bad opportunity, but don't feel the need to max it out at the full £4k every year because both S&S ISA and pension have better potential (either in flexibility or in outright potential financial gain)

As you don't need a SIPP this year, the obvious choices for your £10k are either £10k S&S ISA £0k LISA, £6k S&S ISA £4k LISA, or something in between.

Personally I would use the LISA but reduce it from its max and maybe do 8:2 instead. Or do the full £4k this first year while you have the money available to 'kickstart' it (and any transaction costs will be a smaller proportion of a bigger number) but from next year you don't need to keep doing that. Because if it's not the best product long term (merely one of the best today) you don't need to max it out.

Makes me think i should look at my current pension AVCs as i would probably be better off investing them in a SIPP myself rather than sticking them in the company pension..

'Probably be better off' assumes the company 'AVCs' (you mean just your regular contributions to the company defined contribution pension scheme) are a poor option. Why is that the case? Do they not have a reasonable fund for you to invest in at a reasonable total cost?

The one thing i didnt want to have to worry about, but i will probably have to is filing for tax returns? Or whatever the correct language is to the hmrc, to get the higher rate on SIPP contrbutions... Need to read into all that now

Well, as there doesn't seem to be a need for you to make any SIPP contributions this year - as you have already used work pension contributions to use up your earnings in the higher rate tax band - that may be a moot point (unless your workplace contributions are made net of tax and you need to claim the higher rate relief on those instead).

Generally the options are either:

- do an online self assessment tax return - which involves putting your P60 income in one box, your P11D in another, your bank interest in another, your grossed up private pension contributions in another, and having your total tax charge for the year come out at the end ; which is compared to what tax you paid via PAYE, and HMRC will send you back the overpayment or adjust your next year's tax code for it; or

- write to HMRC telling them the pension contributions you made (gross of basic rate relief) and they will send you back the overpayment or adjust your tax code for it.

HCIMbtw

bowlhead99 wrote: »

So if LISA didn't exist as a product, it would be sensible to put all the money into the S&S ISA now with a plan to let it grow tax free in investment funds and then at some point in the future, take that money out and put it into the pension for tax relief (whether workplace pension or private SIPP arrangement).

This has absolutely blown my mind, so in an overly simplified model I could essentially be paid gross £1k, receive £800 after 20% tax in 2019.. then in 2020 if I am a higher rate tax payer invest the £800 into a pension, instantly get the 20% tax benefit back and then claim an additional 20% relief from the HMRC to total 40% relief

Essentially creating more money than I was ever paid (gross)

Are there any people who YoYo their salaries like that to benefit? Small company Directors?

I posted another thread on pensions sub section and did a lot of digging into my pay and benefits and about 4.5k of salary is eligible at higher rate tax. I have this more than offset through current pension contributions (about 7.2k).

I’m looking into the details of my current pension allocations, they look to be 100% equities, a lot of UK (30%) and I have a few options I can choose from to diversify it and I might do that. Annual charges look to be about 0.4% so pretty reasonable.

I think what I really have to do is look at what kind of access I will want to money. I am honestly a bit put off LISA, Investing more into my company pension seems a lot simpler and will lock money in for about the same amount of time.

Which means if I want to save money I can have access to in my 50s as I see fit S&S ISA is probably the simplest route.. sack of SIPP/LISA idea for now and don’t worry about self assessment