AJ Bell Youinvest - Pay custody charge from dealing account

hoc

The advice/logic to pay fees from the SIPP account only holds if the intention is to make contributions only to pay these fees with the tax relief as a bonus. Otherwise by paying out of SIPP you are immediately reducing the amount which can grow free of tax for years. The tax relief is the tax relief whatever you do with it but it is in your interest to maintain it in the tax free wrapper for it to grow thus compounding the tax relief bonus.

bowlhead99

jim1999 said:

bowlhead99 said:

You would of course be crazy to pay for SIPP custody with cash from an account outside the pension, given that if you first contribute it to a pension it would receive tax relief making the effective cost of the custody charge some 20-60% lower depending on your marginal tax rate.

Unless you were maxing out your SIPP contributions, I suppose.

Audaxer said:
It sounds like a good idea for my wife's SIPP. She has paid in the maximum she can this year and it's invested in a multi asset ACC fund. There is only a little cash left in her SIPP, so when the tax relief is added next month, she would have been investing most of it in the fund, but leaving a bit as cash to cover fees. With this new rule allowing the taking platform fees from a dealing account, surely it would be a better idea to invest all the tax relief in the fund, and open a dealing account putting in cash to cover the fees?

Jim and Audaxer are right that if you were already maxing your SIPP (or LISA) there is no opportunity to put extra money into it and receive a gross up, so if you choose to pay the fees from outside the product (e.g. from a general investment account) you are not forgoing any opportunity to fund the fees at a lower net cost by using grossed-up SIPP/LISA portfolio money to pay the bill.

Most people don't get close to maxing out their pension (assuming they have the standard annual allowance of 40k available to them, up to the level of earnings) and so they would be better off paying the fees outside the product. However, for those who aren't earning and have a lower pension limit (3600 gross) or are subject to the MPAA (4000 gross) or are using a LISA (5000 gross) there will be a load of people who will be planning to max out the product. And therefore any fees paid out of the product will restrict their future compounded returns available from the product, so they might as well pay it from a separate account outside the product.

hoc said:

The advice/logic to pay fees from the SIPP account only holds if the intention is to make contributions only to pay these fees with the tax relief as a bonus. Otherwise by paying out of SIPP you are immediately reducing the amount which can grow free of tax for years. The tax relief is the tax relief whatever you do with it but it is in your interest to maintain it in the tax free wrapper for it to grow thus compounding the tax relief bonus.

Well yes if you can make extra contributions to get extra gross up, you should, whereas if you can't, there is no compelling reason to use the money from a useful product that would have given tax-free growth, to do your admin fee payments.

But just to run some numbers: A lot of people will find their SIPP returns taxable as they will be planning to have annual income in retirement at least equal to the personal allowance. If they pay £100 of fees in the pension, and could have instead had £100 of assets growing at some arbitrary 7.2% a year for a couple of decades turning into £400, and ultimately the £400 is taxed at 15% (after a quarter tax free and the rest at basic rate), they are missing out on £340 of net proceeds that could have come back to their bank account.  Alternatively they might choose to pay just £100 outside the pension. Which makes it sound like paying outside the pension is a total no-brainer.

However, if they choose to pay that £100 outside the pension, from money that they put into the general investment account, that's also money that could have grown over time from investment returns. Outside a tax wrapper, some would be lost to annual income tax (though not if within annual personal allowance or dividend tax allowance and not at a very high rate once this is exceeded if still a basic rate taxpayer), while the CGT side of it is manageable for most people within annual exemptions. If half of the annual return was from income and they were paying ~10% dividend taxes on that half of the annual 7.2% return, they would still have a ~6.8% annualised rate of return from the ~7.2% gross in the example above, and could have turned their £100 in a general investment account into about £375. 

So you could say in that example that the person paying fees out of his pension account is giving up £340 while the person paying it out of his general investment account is giving up £375. It is a bit counter-intuitive but comes from the fact that annual investment taxes on basic rate taxpayers are not too high while pension money will eventually end up being taxable.  In reality, investing small amounts of money in a general investment account rather than large amounts of money in a pension can be inefficient because of economies of scale - especially with transaction-based fees - so the rate of return on these few £100s being invested independently of the pension money, may be lower. Also, if the pension was entirely tax free in retirement or if you ran if for longer (e.g. 30 years instead of 20) the effect of avoiding annual tax drag inside the pension would win out.

But generalising, I would say:

• if you can put more money into a SIPP to cover the fees, there's a good advantage in doing that because of the gross up: free money helping you pay the bill
•  if there isn't a gross up (because you have maxed your limit or the account is not one that gives a gross up anyway, e.g. a normal ISA) you will probably prefer to settle the fees independently from another source and maximise the money growing tax free inside the wrapper: as maximising the ongoing compounding gross tax-free growth for decades is more lucrative than maximising compounding taxed net growth elsewhere.

Mr.Saver

bowlhead99 said:

 if there isn't a gross up (because you have maxed your limit or the account is not one that gives a gross up anyway, e.g. a normal ISA) you will probably prefer to settle the fees independently from another source and maximise the money growing tax free inside the wrapper: as maximising the ongoing compounding gross tax-free growth for decades is more lucrative than maximising compounding taxed net growth elsewhere.

If, and only if, the growth outside tax wrapper accounts is actually going to be taxed at a rate higher than 0% before the investor eventually cash in the investment.

BobWelham

There is also IHT to consider if you intend to bequeath all or some of your (IHT exempt) SIPP.
£100 (the annual custody charge for an AJBell SIPP of value £40,000+) paid from within the SIPP leaves £100 outside the SIPP which in due course could be subject to IHT at 40%.

Alexland

toothdoctor said:is it also best to pay the platform fee for a LISA from the LISA itself or from a dealing account

Given you get the 25% bonus on the LISA contribution either way then it doesn't make much difference while you are still contributing. One way you avoid ISA allowance leakage and the other way you have less money tied up until age 60.

However from age 50 when you can no longer contribute, if nothing has changed (...), paying custody fees from a separate account means that you could keep your LISA fully invested in an accumulation ETF until age 60 on just the capped £30 platform fee with no trade fees to sell down units to pay fees. It's tempting to get this setup now on our LISAs incase they stop offering the customers the ability to switch to this method in future.