What caught my eye this week.

I am recovering from an excellent wedding that ended late last night (not my own!) so straight into the links this morning.

Except to observe that people of all ages do seem very happy to mix again.

And that commentators who asked last summer “Will we ever be comfortable at a party again, post-Covid?” might have been bemused to see half a dozen pensioners crowding together into one of those comedy prop-strewn instant photo booths.

Of course that’s not to say that was necessarily wise behaviour for their age bracket in the midst of the ongoing Delta spread – nor to deny that there are limits to the double-jabbed vaccination protection that made this wedding possible.

More that the human spirit has strong reversion-to-the-mean tendencies.

Investing accordingly, I think.

Have a great weekend!

[continue reading…]

Okay, confession time. This SIPP money saving hack won’t change your life. But it could be worth the price of a nice meal out every year.

If I was a better intro writer I’d also highlight it might save you up to 82% on your SIPP fees – which will certainly be true for a few readers.

Either way, it’s surely better to have every pound working for you rather than for the Military-Financial complex, eh?

SIPP money saving in a minute

This tip should only take a couple of emails to sort. It will help two groups of people.

• Firstly, anyone who is not maxing out their pension annual allowance and is not using their platform’s SIPP account to pay their fees could benefit.

You could be paying anything from 25% to 82% extra in foregone tax relief if your platform takes your SIPP fees from a linked dealing account.

• Secondly, anyone who is maxing out their annual allowance and is using their platform’s SIPP account to pay their fees.

In this latter case you can grow the tax-free space in your SIPP faster by paying your fees from a linked dealing account instead.

This was me for a few years because I didn’t know I could pay my SIPP fees from a non-SIPP account.

Annual allowance headroom step-by-step

If you’re not maxing out your pension annual allowance then pay your fees from your SIPP account.

• Set up your monthly direct debit on your SIPP account.
• Instruct your platform to take fees from your SIPP account first.
• If your platform won’t facilitate this request then don’t fund any account other than your SIPP. Leave enough cash in there to cover your fee. They’ll soon take it.

How much can you save?

A basic-rate UK taxpayer makes a 25% saving by using pension contribution tax relief to help pay their fees.

They’d save £60 on annual fees of £300, for example.

That’s because they only need contribute £240 to their SIPP to gain £300 after 20% tax relief.

A higher-rate UK taxpayer makes a 67% saving.

So, for a higher-rate payer a £180 SIPP contribution magically pays a fee of £300, after 40% tax-relief.

Some additional tax rate payers could save 82%. Some Scottish taxpayers will save at different rates. Anybody who can salary sacrifice into their SIPP to use this SIPP money saving tip will fill their boots even more.

No annual allowance headroom: step-by-step

If you are maxing out your pension annual allowance then pay your fees from your linked dealing account.

• Instruct your platform to set up a dealing account for you and to take fees from that account first.
• Set up a monthly direct debit on your dealing account to cover the fees.

This way every last pound of your annual allowance can be put to work expanding your tax-advantaged wealth.

Every little bit helps when the Government is shrinking your annual allowance by the inflation rate every year.

Granted, this is like squeezing the last blob of toothpaste from the tube. But who doesn’t do that?

Optimising costs

Relatively minor savings like this will rebound off the incredulity shields of big picture people.

But optimisations stack. The modern world is built on them.

Shave off enough costs like this and they’ll add up like extensions to a money moustache that grows bushier every year.

And of course, optimisation is a psychological comfort and motivator for detail hounds like me.

The originator of this SIPP money saving hack

I can’t sign-off without mentioning that Monevator reader Steve alerted me to the fact that his platform actively made it difficult for him to pay his fees from his SIPP.

I’ve never had this trouble from my platforms. But I did lose out by forgetting to switch my direct debits back to my SIPPs once I stopped maxing out my annual allowance.

Please let us know in the comments if your platform makes it difficult for you to save on SIPP fees – or any other costs.

I’d like to update our broker table with these extra nuggets that passive investors need to watch out for. Reader feedback helps.

Two hidden costs that platforms don’t advertise come instantly to mind:

1. Some platforms aren’t transparent about the currency exchange fees you’ll pay on dividends from funds invested overseas.

2. Many platforms advertise a low dealing fee for regular investing. For example, they say you’ll only pay £1.50 to buy an ETF on a monthly schedule versus £10 to trade whenever. That’s great, but watch out for costly catches.

For instance, some platforms restrict the choice of products available in their regular investing scheme. And some make it hard to undo the commitment.

In contrast one of my platforms lets me chop and change my regular investments every month, or to take a break anytime. So obviously that’s the one to go for if you expect to lean heavily on this feature.

Please add your experiences in the comments so we can create a checklist of questions to fire at new platforms before you transfer to them.

Take it steady,

The Accumulator

This thought piece explains why it’s so compelling to fill your ISA each year. The approaches discussed won’t be suitable for all readers! Please think about your own situation and get professional advice if needed.

Even on a good middle-class income, it’s not easy to fill your ISA. The annual ISA allowance – £20,000 per year per adult – is pretty chunky.

And that’s a shame, because the ISA is a near-peerless tax shelter.

Gains made and income received in an ISA are tax-free. They don’t use up other tax allowances. You don’t even declare them on your tax return.

The snag is the ISA is a use-it-or-lose-it allowance. If you don’t fund your ISA one year, then that year’s allowance is gone.

That is to say, there’s no ‘carry-back’ type option, in contrast to pensions. 

Use it or lose it

Even with no investment gains at all, you can squirrel away £500,000 into ISAs over 25 years. Just by putting in the maximum of £20,000 annually. 

Okay, so ‘just’ is doing quite a lot of heavy lifting in that sentence. You would be excused for not quite being able to rustle up twenty grand of post-tax spare cash, year in, year out.

Especially in the early years of your career when your earnings are low, or when you’re trying to save for a house deposit. Or when you’re servicing a mortgage or wanting to go on holiday, or paying the school fees. Or for the kids’ university.

Oh, and what about saving into your pension?

Suddenly that difficult year is looking like your whole career. 

But then Great Auntie Mabel goes and dies and leaves you £500,000. (She bought a house in 1976.) It’s a shame you can’t just put that all into your ISA in one go, isn’t it? 

Especially since a friend, whose Aunt Bessie gave them £20,000 a year conditional on it being kept in a cash ISA during her lifetime, got exactly the same inheritance. Only they get a tax-free income from it, in perpetuity!

Tax and spend

Let’s say you both invest your inheritance into corporate bonds paying 2.5% per annum.

Let’s also presume you’re both higher-rate taxpayers in your retirement.

Because your windfall remains outside of an ISA, you will have £5,000 less to spend from your inheritance every year than your friend:

• £500,000 * 2.5% * 40% tax = £5,000 tax

And since the ISA allowance is now effectively inherited between a couple when one of them dies, the ISA tax shield benefit could go on for 30 or more years. Which means the ‘cost’ of not being able to use that ISA allowance might be £150,000 (each).

And that’s all assuming no growth.

Yes yes, I know, you could be putting the inheritance into your ISA over this time, and at year 20 you’d have it all in there. My numbers are to illustrate a point.

Besides, perhaps you’ll get a second inheritance or a bonus or sell a buy-to-let, or some other windfall?

Gimme shelter

It all seems a bit unfair. It’s like the full ISA tax break is only really available to those who start out rich in the first place!

If only there was a way to carry forward all those unused years of allowance to later on in your life…

As I just alluded to, a later life windfall might not even be an inheritance.

Many people earn much higher wages in their 40s and 50s. Or they might cash-out equity in a business they are involved in. Or sell their Bitcoin.

Whatever the case, it would be nice to be able to shelter any late-life lump sum in the ISA that you couldn’t afford to fill in your 20s, wouldn’t it?

Well if you haven’t ‘banked’ all those decades of allowances, you can’t.

Should you borrow money to fill your ISA?

Borrowing to fill your is ISA is the classic business school solution to this conundrum.

Every year you borrow £20,000 and put it into your (cash) ISA.

When Auntie Mabel dies you’ll have £500,000 in your ISA and £500,000 of debt. Her money pays down your debt leaving you in exactly the same position as your friend.

Voila!

Common objections include:

• Who’s going to lend me that sort of money?
• The cost of the debt will exceed income on the cash ISA. That makes this an expensive exercise for some uncertain future benefit.
• Shouldn’t I buy equities in the ISA for higher long-run returns? 

All reasonable counters. Let’s get the last one out of the way first. You’re asking should you borrow to invest in risk assets? That’s a different question to the one we’re answering here. We’re just going to say ‘no’ (for now). 

To answer the first two objections, we turn to our secret sauce – a devilish brew of Flexible ISAs and offset mortgages. 

Your new flexible friend

Flexible ISAs enable you to withdraw money from your ISA, without it affecting your allowances, as long as you return it in the same tax year. In this case it is treated as not having been withdrawn at all.

The legislative intent behind this is to enable you to use your ISA cash to meet unexpected large expenses and then ‘return’ the money to the ISA.

But we don’t care about the intent here. We only care about how we can turn this to our advantage.

Fill your ISA every year

You can withdraw money on the morning of the 6th April 2021 – the first day of the new tax year.

As long as it’s back in the ISA by the evening of the 5th of April 2022, very nearly one year later, you’re in the clear, because you’ve returned it in the same tax year, haven’t you?

Of course, the next day you can take it back out, for nearly a whole year again:

And you can do this every year – ‘re-paying’ into the ISA all the previous years’ used allowances, plus this year’s, and then immediately withdrawing it all the next day. 

We only need to borrow the money for one night every year – overnight between the 5th and the 6th of April.

Now we’re going to need to borrow an additional £20,000 more each year for that evening, which may present challenges.

And realistically we should get it there a few days early, as opposed for just one day. There are operational risks – think “computer says ‘no'” hiccups – when moving large amounts of money around. 

Off and on again

But how will you borrow the money?

That offset mortgage, of course.

If you have an offset mortgage or a flexible mortgage (one that enables you to overpay and redraw funds at will) then you’re all set.

You’re simply going to draw the money down on the 5th, warehouse it in your ISA overnight, and then pay-back (or offset) the mortgage with it for the other 364 days of the year. It’s only going to cost you a few days’ interest.

True, you might need to start off by taking out a larger mortgage than you would otherwise require, in order to give yourself the borrowing capacity to fill your ISA. But since it’s an offset / flexible mortgage, you can do that and pay no more interest, since the extra cash will spend most of the time parked against your outstanding balance. 

This is a completely reversible transaction. It’s not like contributing to your pension, say, where the money is locked away. You can stop at any time if you need to, and let your ISA allowance lapse.

And it’s a very low-cost option. 

Variations on the theme

This is just an idea. Do with it what you will. And yes, there are many real world frictions.

But it doesn’t have to be all or nothing – and you don’t have to do it for 25 years.

Maybe you only do this with a portion of your ISA, because you can afford to save some money from your income, too? You borrow to top-up the rest.

Or it could be as simple as avoiding the difficult decision of whether to use your bonus to pay down your mortgage or use up your ISA allowance. Do both!

Perhaps you could do a 0% transfer on your credit card balance, free up a bit of cash for a few months, and use it to fill the ISA allowance this year.

Business owners may be able to borrow from their business without tax implications if it’s within the company’s fiscal year (a reason for not having a April 5th end-of-year).

Crypto bros can DeFi borrow against their Bitcoin for a few days without triggering capital gains tax on their BTC. 

You get the idea.

What about pensions?

The pension annual allowance is another, somewhat, use-it-or-lose-it allowance. (Only ‘somewhat’ because there exist carry back / forward arrangements).

But you can’t get access pension money very easily, so borrowing to fill it is a very different proposition.

However, there may be edge cases where it’s worth considering, such as if you’re a 60% tax payer (earning £100,000 to £125,000) on the eve of retirement, and a long way from the Lifetime Allowance.

The point is to be – cautiously and legally – creative.

Nobody else is better at looking out for your money than you are!

If you enjoyed this, you can follow Finumus on Twitter or read his other articles for Monevator.