Best way to optimise yield in ISA 4 March at 6:01AM in Savings & investments 14 replies 860 views

pgalland

Hi,

I am looking for a sounding board on ways to optimise my interest income and minimise my tax liability by leveraging my ISAs & SIPPs as I am about to rebalance my portfolio and introducing some bonds/gilts in it. 

Currently 100% of my invested assets are invested in stocks (combination of FTSE100, Global and Europe index ETFs) - with nothing invested in bonds. This is primarily because the yields were terrible up to now and my risk profile was high as I still have 10+ years until retirement. 

Also frankly, the dividend payments I have been receiving across my investments have been averaging 3.25% which was much better than what interest & bond yields would earn. So I didn’t see the need to invest in bonds - which has turned out to be a good decision up to now.

Following the recent surge in interest rates, I am currently earning between 3 to 4% on my savings accounts but this is all subject to income tax. I am looking for a way to rebalance my SIPPs and ISAs investment to take advantage of those higher yields without being taxed as much if I can avoid it, which would then allow me to invest the cash currently in those savings account into accumulating ETFs and hence minimising tax payment on dividends. 

Given that all the gilts and corporate bonds ETFs I can find are averaging a yield between 1.8-2.5% which is way below my dividend yield, I am contemplating investing in a few individual FTSE100 corp bonds (eg Tesco, Vodafone, Lloyds bank etc…). The yield to maturity on those at the moment seems to be around 5-6%. 

Are there any other way to take advantage of those higher interests / bond yields within ISA/SIPP?

i would be looking at rebalancing roughly £400k and holding those investments to maturity not to be subject to yield curve oscillations. 

As a result of those higher interest paying investment being paid into tax free accounts (SIPPs/ ISAs), I would be investing my remaining cash balance into accumulating ETFs and therefore minimising my tax liability on interest/dividend payments. 

Thank you for your advice. 

JohnWinder

You sound like you’ve got your gear together, so I can’t offer much, but here it is.

‘investing in a few individual FTSE100 corp bonds’

That is taking idiosyncratic risk (default risk in this case) which you can reduce by buying lots of different bonds, thus exposing you to market risk only. Buying ‘a few’ exposes you to market risk and the risks of those particular bonds. The theory says you don’t get paid to take idiosyncratic risk because you can diversify it away, and why would anyone pay you to take a risk they’re not asking you to take? That’s why we use mutual funds and individual government bonds.

pgalland

The problem is so for some reason I cannot explain, I can’t find any mutual funds or government bonds that pay anywhere near what I get on a Zopa checking (3.2%) or 1 year fix term savings (4%) account that also guarantees no reduction in principal capital (up to £75k)…
Dont get how that can be :-(

JohnWinder

I certainly can't explain any of that. But at 4%/year you'd be losing 5% to inflation if it remains at 9%; although the market is estimating about 3.5%/year according to the Bank of England bond yield curves. And the BoE suggests short term linkers will yield ~neg 0.2%/year whatever the inflation turns out to be. Take your pick on a nominal 4% or a real minus 0.2%.

masonic

pgalland said:

The problem is so for some reason I cannot explain, I can’t find any mutual funds or government bonds that pay anywhere near what I get on a Zopa checking (3.2%) or 1 year fix term savings (4%) account that also guarantees no reduction in principal capital (up to £75k)…
Dont get how that can be :-(

How about one of these? All have YTM just north of 4% based on Friday's closing price, a significant portion of this return coming from a tax-exempt capital gain at maturity.

Those returns can be beaten by the best fixed rate savings accounts, and if you want a "risk-free" product, then it may well be that savings are the best option. This isn't unusual. However, as pointed out above, the real return is not guaranteed, so if you want to keep up with inflation, then most index linked Gilts currently have a small positive real return (RPI+0.1% to +0.8%) and no consumer savings product currently on sale rivals that.

In reference to mutual funds and other risk assets, if you have a way to determine what forward returns from any of those will be, then please publish your findings and collect your Nobel prize for economics.

GeoffTF

pgalland said:

Given that all the gilts and corporate bonds ETFs I can find are averaging a yield between 1.8-2.5% which is way below my dividend yield, I am contemplating investing in a few individual FTSE100 corp bonds (eg Tesco, Vodafone, Lloyds bank etc…).

Eh? Here is VAGP, which is a global aggregate bond fund hedged into GBP:

https://www.vanguard.co.uk/professional/product/etf/bond/9442/global-aggregate-bond-ucits-etf-gbp-hedged-distributing

The effective yield to maturity is 3.8%. You will get more from a corporate bond ETF, without the added risk of individual corporate bonds. Ignore the yield. That is the historical yield and is not relevant to future payouts.

masonic

GeoffTF said:

pgalland said:

Given that all the gilts and corporate bonds ETFs I can find are averaging a yield between 1.8-2.5% which is way below my dividend yield, I am contemplating investing in a few individual FTSE100 corp bonds (eg Tesco, Vodafone, Lloyds bank etc…).

Eh? Here is VAGP, which is a global aggregate bond fund hedged into GBP:

https://www.vanguard.co.uk/professional/product/etf/bond/9442/global-aggregate-bond-ucits-etf-gbp-hedged-distributing

The effective yield to maturity is 3.8%. You will get more from a corporate bond ETF, without the added risk of individual corporate bonds. Ignore the yield. That is the historical yield and is not relevant to future payouts.

Some more detail on this important point was raised in the OP's thread from yesterday: https://forums.moneysavingexpert.com/discussion/6429655/why-are-gilt-etf-yield-so-low/

pgalland

Sorry John - I am not sure I follow your argument what is a “linker -0.2”?
Also that argument of not matching inflation at 9% for any investment earning less than 9% effectively makes the bond market irrelevant in higher inflation eras. 

Which I don’t buy either on a portfolio management basis

JohnWinder

'Linkers' are UK treasury inflation linked bonds. '-0.2%' is the approximate yield from the BoE yield curve of 2 days ago for short term bonds. Invest your money and lose 0.2%/year regardless of inflation.

GeoffTF

pgalland said:

Sorry John - I am not sure I follow your argument what is a “linker -0.2”?
Also that argument of not matching inflation at 9% for any investment earning less than 9% effectively makes the bond market irrelevant in higher inflation eras. 

Which I don’t buy either on a portfolio management basis

You can buy bonds (index linked gilts) which have their payout at maturity adjusted for inflation. Currently, you will get a tiny bit more or a tiny bit less that the inflation adjusted amount, depending on the maturity date (amongst other things).

Prism

I don't understand your comments on tax? You don't pay tax on anything in an ISA or SIPP but you do pay tax on on ETFs outside of the ISA/SIPP.  Accumulation funds do not help avoid this.