Interactive Investor - calculation of 25% tax free cash when holding Index Linked Gilts

Lowtrawler

In common with many platforms, Index Linked gilts are shown in my Interactive Investor portfolio value at the clean price. Obviously, the market price is much higher.

When I come to take out 25% of my portfolio as tax free cash, do the Index-Linked gilts get uplifted to the current market price in determining the value of the 25%? If they are not, I will end up with a lower tax free cash amount.

TheGreenFrog

The appropriate value will be the dirty price.  ii are particularly clueless when it comes to ILGs (although all platforms show clean price valuations) so be prepared for them to make a mess of it.

Hoenir

Platform's don't have dealing desks. They'll have order handlers who will determime the best place for the trade to be routed. Whether it be Retail Service Providers or directly with market makers. ILG's were designed for institutonal pension funds rather than retail investors. 

All bonds are quoted clean. Accrued interest etc is a totally different layer on top. 

leosayer

Will you still hold IL Gilts in the remaining 75% after taking your lump sum?

If so then I'd tell II your concerns and ask for their valuation methodology which should use the dirty price or the clean price with a separate line for accrued interest.

Lowtrawler

leosayer said:

Will you still hold IL Gilts in the remaining 75% after taking your lump sum?

If so then I'd tell II your concerns and ask for their valuation methodology which should use the dirty price or the clean price with a separate line for accrued interest.

I will. I have posed the question to interactive investor and will let others know once I have their response. I just thought some of the clever investors on MSE might give a quicker response.

Lowtrawler

I received a response from ii which I have copy and pasted below. It is not good news. They use the clean price and so the tax free lump sum will be less than it should be. It will mean I have to sell the IL gilts prior to taking a lump sum.

"When calculating the 25% tax-free lump sum from your SIPP, the valuation of your holdings, including index-linked gilts, will be based on their clean price, as displayed in your account. Unfortunately, we are unable to use the dirty price for valuation purposes, as our system reflects the clean price provided by the London Stock Exchange. 

This means that the lump sum calculation will be based on the clean price valuation of your SIPP holdings."

FIREDreamer

Lowtrawler said:

I received a response from ii which I have copy and pasted below. It is not good news. They use the clean price and so the tax free lump sum will be less than it should be. It will mean I have to sell the IL gilts prior to taking a lump sum.

"When calculating the 25% tax-free lump sum from your SIPP, the valuation of your holdings, including index-linked gilts, will be based on their clean price, as displayed in your account. Unfortunately, we are unable to use the dirty price for valuation purposes, as our system reflects the clean price provided by the London Stock Exchange. 

This means that the lump sum calculation will be based on the clean price valuation of your SIPP holdings."

If these are your bag, you could always switch into GILI which is an ILG ETF. Then switch back into real ILG after taking your PCLS.

Lowtrawler

FIREDreamer said:

Lowtrawler said:

I received a response from ii which I have copy and pasted below. It is not good news. They use the clean price and so the tax free lump sum will be less than it should be. It will mean I have to sell the IL gilts prior to taking a lump sum.

"When calculating the 25% tax-free lump sum from your SIPP, the valuation of your holdings, including index-linked gilts, will be based on their clean price, as displayed in your account. Unfortunately, we are unable to use the dirty price for valuation purposes, as our system reflects the clean price provided by the London Stock Exchange. 

This means that the lump sum calculation will be based on the clean price valuation of your SIPP holdings."

If these are your bag, you could always switch into GILI which is an ILG ETF. Then switch back into real ILG after taking your PCLS.

I'm using INXG to do the same thing. I have a gilt ladder setup in my SIPP to give payments at precise dates during retirement and was wanting to finalise that ladder now and so avoid any errors in matching from using a general ILG ETF. I will just need to live with the matching risk and the cost of selling / rebuying the gilts I already have. If I had known about the pricing issue before creating my ladder, I would just have put everything into INXG.

SnowMan

If you are not happy with their response (I wouldn't be happy but it's what you think that is important) then I would raise a complaint. It sounds like they are saying it's their systems not the legislation that is stopping you take the full 25% which I think weakens their position. I'd ask them to link to the legislation that requires them to undervalue the index linked gilts for the purposes of calculating the 25% tax free cash. And there is likely to be be material detriment to you involved, either through having to swap tax free cash for taxed income or in having to incur the costs of selling and rebuying together with the risk of market movements going against you between selling and rebuying. And if you do have to sell and rebuy I would state in any complaint that you hold them responsible for any loss.

If you were taking a UFPLS (uncrystallised pension lump sum) then there wouldn't obviously be an issue, as you'd be taking 25% from cash from investments that you had sold, but I'm assuming there are reasons you aren't going that route.

Lowtrawler

SnowMan said:

If you are not happy with their response (I wouldn't be happy but it's what you think that is important) then I would raise a complaint. It sounds like they are saying it's their systems not the legislation that is stopping you take the full 25% which I think weakens their position. I'd ask them to link to the legislation that requires them to undervalue the index linked gilts for the purposes of calculating the 25% tax free cash. And there is likely to be be material detriment to you involved, either through having to swap tax free cash for taxed income or in having to incur the costs of selling and rebuying together with the risk of market movements going against you between selling and rebuying. And if you do have to sell and rebuy I would state in any complaint that you hold them responsible for any loss.

If you were taking a UFPLS (uncrystallised pension lump sum) then there wouldn't obviously be an issue, as you'd be taking 25% from cash from investments that you had sold, but I'm assuming there are reasons you aren't going that route.

SnowMan, I am not happy but not to the point of making a formal complaint. I am kicking myself for not asking the question prior to building my ladder. My preference is to do an in-specie transfer to another provider who values the index-linkers differently. However, I don't know of another major provider who values at the dirty price and so I may end up with the same issue. If anyone can advise different, let me know.

As I will now intend to sell and rebuy, the main detriment to me is in the costs, spreads and price movements from selling, getting the lump sum and rebuying. As I will park the proceeds in INXG prior to repurchase, hopefully the price movements will have a low impact and the dealing costs / spreads are likely to amount to a few £hundred. Were I to take the lump sum with the index-linked ladder still in place, it would reduce my lump sum by around £10k and cost me £4k in tax.

The additional detriment is I cannot build a full ladder now and so any mismatch between INXG price movements and my preferred ladder could give me a gain or loss. Essentially, my intended risk free path has been blocked.

SnowMan

You would have to ask other platforms how they would value the index linked gilts. Although other platforms (for example Hargreaves Lansdown, Halifax Sharedealing (and iweb) typically show the gilts in your account undervalued at the clean price, they may still be prepared to value them in terms of the pension value to which the 25% is applied allowing for indexation also.

Do interactive investor allow you to opt for partial drawdown and if so do they let you choose which investments to move into drawdown (or is it done pro-rata?). If they do let you choose then you could put everything into drawdown apart from the index-linked gilts, albeit that still leaves you with some issues.