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

michaels

Lowtrawler said:

michaels said:

Exactly the question I was asking, how the cost of an annuity giving the same cash flows compared to that of building your own ILG ladder.  I assume by 'similar' that the annuity also only ran to 85 rather than (second) death?

I ran various scenarios including joint lifetime annuity. All of the annuities came in between 8% and 20% more expensive than a ladder unless one of you happened to live into your late 90's. In effect, if you split the ladder into 2 - up to 85 and post 85, you get 10% extra until 85 and can then switch to a lifetime annuity that beats the ladder if either of you live to over 97. If equities perform well in the period to 85, you may get double bubble with the 10% gain from using a ladder in the early years and a pot of money at 85 which buys an annuity that exceeds the ladder value you could buy today while also covering you for longevity risk.

As you age, you are also more likely to get an annuity on an impaired life basis making it even more attractive to delay consideration of an annuity until your later years. IMV, unless you have an impaired life or have reason to believe you or your partner will live long lives, a ladder makes more financial sense than an annuity in your early years of retirement.

What constitutes your early years of retirement is then open to interpretation. I know some people will have a 5 - 10 year rolling ladder which then supports equity investment for anything over a 5-10 year horizon. With a ladder, you are free to choose your own duration and can switch from the ladder to an annuity when you feel the time is right (or not, if you never feel the time is right). I believe the key obstacle to using a ladder and achieving a better financial outcome is most people lack the skills and inclination to operate the ladder approach and so prefer to pay the extra 10% for an off the shelf solution.

Thanks

You are doing something slightly different to me with you ILG ladder. Mine is to provide matching real income flows for the period between retirement and access to index linked pensions (DB and State pension) 

coyrls

Lowtrawler said:

Nebulous2 said:

I'm new to this - and may not know what I'm doing, but Charles Stanley gives me the dirty price. Different columns state; tax cost, market value, change in value, bid. 

The market value is equivalent to the number I have times the bid price. The tax cost shows what I paid.  

Thanks Nebulous, certainly an option for me but the 0.3% platform charges capped at £50 per month are pretty steep. Effectively £400 more per year than ii - you get what you pay for. 

It also sounds pretty hopeful that HL might treat them correctly at key points. If I run into a road block with ii, I'll need to do a bit more investigation.

It would be a pain, and getting ii to sort it out would be preferable, but you could transfer to a platform that did the correct calculation, crystallise, withdraw the TFLS cash and then transfer back to ii.

Lowtrawler

coyrls said:

It would be a pain, and getting ii to sort it out would be preferable, but you could transfer to a platform that did the correct calculation, crystallise, withdraw the TFLS cash and then transfer back to ii.

I'm hopeful ii will get this sorted. I don't think they have a leg to stand on. HMRC require them to base the PCLS on market prices and the clean price is not a market price. As has been pointed out earlier in the thread, they must value them correctly for death / probate or it will create opportunities for tax avoidance. Finally, the new FCA consumer duty requirements will work in my favour.

Other providers such as Charles Stanley are using the correct price and it appears HL are also doing so at key events. With a bit of effort, I could probably find the same for others.

To be honest, I have asked the question prior to suffering any loss and have sufficient time to take corrective action if ii do not bend. However, there will be customers that have taken lump sums not realising the loss they were taking. If ii find in my favour, they will have a responsibility to correct for those who have already been detrimentally treated and that could be a major exercise. This is why I have chosen to raise the complaint rather than just moving on.

coyrls

Lowtrawler said:

coyrls said:

It would be a pain, and getting ii to sort it out would be preferable, but you could transfer to a platform that did the correct calculation, crystallise, withdraw the TFLS cash and then transfer back to ii.

I'm hopeful ii will get this sorted. I don't think they have a leg to stand on. HMRC require them to base the PCLS on market prices and the clean price is not a market price. As has been pointed out earlier in the thread, they must value them correctly for death / probate or it will create opportunities for tax avoidance. Finally, the new FCA consumer duty requirements will work in my favour.

Other providers such as Charles Stanley are using the correct price and it appears HL are also doing so at key events. With a bit of effort, I could probably find the same for others.

To be honest, I have asked the question prior to suffering any loss and have sufficient time to take corrective action if ii do not bend. However, there will be customers that have taken lump sums not realising the loss they were taking. If ii find in my favour, they will have a responsibility to correct for those who have already been detrimentally treated and that could be a major exercise. This is why I have chosen to raise the complaint rather than just moving on.

I agree, it's a bad and indefensible mistake by ii.

Lowtrawler

Disappointingly, Interactive Investor have rejected my complaint. The key part of their response is shown below. I have now complained to the ombudsman.

"In summary, the 25 percent tax free lump sum from your SIPP is calculated using the clean price of your holdings including Index-Linked gilts as reflected in your account. We are unable to use the dirty price as our system uses the clean price provided by the London Stock Exchange.

This methodology is also outlined in section 8.2 of our terms:

“We will value the investments in your SIPP Account using a price feed that we reasonably determine from independent service providers or quotations from independent Market Makers or dealers in the investment concerned. However, if we determine that valuation data is not available from such sources or it is inappropriate to use such sources we may value investments at such value as we reasonably consider fairly reflects the current value of such investment.”

In line with this, the legislation allows the market value of designated assets to be used to determine the applicable amount for the Pension Commencement Lump Sum. As the clean price represents the market value listed on the London Stock Exchange, this is the valuation we are required to use when calculating the PCLS."

michaels

Lowtrawler said:

Disappointingly, Interactive Investor have rejected my complaint. The key part of their response is shown below. I have now complained to the ombudsman.

"In summary, the 25 percent tax free lump sum from your SIPP is calculated using the clean price of your holdings including Index-Linked gilts as reflected in your account. We are unable to use the dirty price as our system uses the clean price provided by the London Stock Exchange.

This methodology is also outlined in section 8.2 of our terms:

“We will value the investments in your SIPP Account using a price feed that we reasonably determine from independent service providers or quotations from independent Market Makers or dealers in the investment concerned. However, if we determine that valuation data is not available from such sources or it is inappropriate to use such sources we may value investments at such value as we reasonably consider fairly reflects the current value of such investment.”

In line with this, the legislation allows the market value of designated assets to be used to determine the applicable amount for the Pension Commencement Lump Sum. As the clean price represents the market value listed on the London Stock Exchange, this is the valuation we are required to use when calculating the PCLS."

Presumably they will let you purchase at the 'market value' as well then lol

leosayer

Disappointing indeed..computer says no. Do they have a policy that describes their valuation process?

Have you estimated the potential £ difference in tax free cash that will result from this and communicated this to II?

Writing in such terns may elicit a more understanding response. 

squirrelpie

Lowtrawler said:

“We will value the investments in your SIPP Account using a price feed that we reasonably determine from independent service providers or quotations from independent Market Makers or dealers in the investment concerned.

That sounds like they could check the accuracy of their prices against those of an independent market maker, which would hopefully show them they are wrong. Failing that it seems you need to argue that the LSE feed of clean prices should have failed their 'reasonable determination' test, since it isn't reasonable!

phlebas192

As others have mentioned, it is perhaps worth pursuing how they value portfolios for probate because if they were to use the clean price for ILGs then they would fall well short of their duties to the executors, including to the extent that executors who relied on such obviously incorrect "valuations" would be liable for additional IHT and even prosecution.

But on a practical level, if you can establish that another provider will give a correct valuation then it would seem best to transfer to them, enact the crystallisation, and you can always transfer to another provider (even back to ii!) once you have received the PCLS.

Hoenir

But on a practical level, if you can establish that another provider will give a correct valuation then it would seem best to transfer to them,

A full on stockbroking service would suffice rather than an immediatary platform which places trading orders via Retail Service Providers.