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LLOYDS is going to FLY

lse:lloy

#2358

Hi @Eadwig and @J_Westlock, Below are a set of my collected personal observations and conclusions on SIPPs, ISAs, foreign currency accounts and exposure to the USD. If I’ve got anything wrong I am sure you will point it out !.

I was always in occupational pensions when I was working, so I never thought about opening a SIPP.
Would that I had because the IHT implications are significant.
But now that I am retired the maximum that I could contribute if I started a SIPP Is £2,880 a year.
So I can NEVER accumulate a worthwhile sum in a SIPP now.

I have considered opening a SIPP, putting my £2,880 a year in, collecting the £720 from the tax man and doing that every year. Obviously I could invest that money too. But if I ever want to withdraw it you then have to pay tax at your marginal rate – so effectively they take back all that money that they gave you. So that ONLY makes sense to me if you can just leave the money in the SIPP for your dependants. Sadly I don’t see myself being able to build up a big enough pot that way to be useful for IHT purposes.

So I see SIPPs as a closed book to me now – I can never have one. I no longer think about it.

All of my invested money is in ISAs instead providing my tax shelter.
The benefits of ISAs are significant to me, no CGT or income tax to pay and no tax returns to do.
I would not want to return to having to operate a normal trading account.
I am no longer in a position to regularly contribute more than the £20,000 a year limit on ISA contributions – which I know causes some to need to continue to use trading accounts, but that situation doesn’t apply to me.

Only a SIPP lets you reclaim withholding tax, you can’t do that with an ISA.
Only a SIPP permits you to have multi-currency accounts (or a regular trading account obviously but then you are taxed on your gains).
So if I invest in a US listed anything that pays dividends I CANNOT avoid withholding tax or currency charges (and all transactions in a foreign currency including dividend receipt will incur a currency charge).
Of course as J_Westlock points out I could still invest in ETFs not listed in the US but which track US indices as a way of avoiding withholding tax. I may do that in the future.

Even if I had a USD account, as a UK resident operating my day to day life in GBP, would it make sense to put a load of money into that ?.
If I did I would incur significant charges AND have to pay further charges every time I wanted some money out in GBP. Makes no immediate sense to me unless I was investing the USD money.
But if I had a USD account and used it to trade stocks then that would have to be in a regular trading account, making me liable for tax. I see no benefit in taking that approach.
I realise that a rising USD will impact on me through inflation, but whatever I do I cannot avoid that cost of living impact (except by trying to invest in things that provide income that rises with inflation).
If I invest in USD assets then I am taking on currency risk. Doing so may be beneficial when the USD is rising (as it has been for many years) but it is not guaranteed and currently a Brexit deal of some form might well cause the GBP to appreciate significantly. That would be a significant risk were I to put a lot of money in USD.
Those who invest only in the FTSE take almost no currency risk (unless they invest in foreign earners). This can be seen as advantageous at times – but I am not advocating that approach. I have about 30% of my portfolio invested overseas and I am comfortable with that proportion. But I am not inclined to increase that right now.

So there you have it. Others situations are likely totally different. Obviously you play the game as best as you can……

ATB

Pref


#2359

That’s the maximum for tax benefit. Can’t you add more if you wish to though? Even if you can i understand that it probably wouldn’t be appealing to your circumstances.

On the other hand, if you’re thinking of IHT planning your ISAs etc wont help there and having just paid a huge chunk of IHT any little bit that is protected I can assure you your beneficiaries will appreciate.

I hesitate to say this, i don’t know if rules recently changed or it has been a mistake, but I used to pay the full WHT until i filled out the forms, then I paid none … at all … in all my accounts. This is why I’ve always seemed confused about that issue. I know this was the case because I had a 15% yielder, on and off, for many years in both my SIPP and Trading accounts.

As you know, I don’t tend to hold many stocks for yield, but when I have in my ISA, i haven’t noticed the WHT there either. It might be that I just haven’t noticed because the divis were not my objective and i don’t / haven’t had any US divi payers in that account recently so can’t go back and check.

That’s true, but I’m assuming you expect to have enough years left to be able to pick and choose over the years to time any exchange at reasonable rates. That’s the way i’m looking at it.

If Brexit goes No Deal I’ll be very glad of the USD cushion I now have. If it goes Remain (strongest outcome for GBP) then I’ll be a lot happier because all my assets outside my portfolio are in GBP and far greater than the value of USD in my investment portfolio.

If there is a Brexit deal, I don’t think there is very much upside from where we are now with exchange rates, unfortunately. I think you 4%-8% was a fair guess.

Whatever the outcome, impossible to predict where rates will be in 10 years. I am mindful that historically we’ve been slipping against the USD all my lifetime (55 years) from about 1 GBP to $4. At the moment its very hard to see how we could ever get to 1 GBP to $2 again although we did move from near current levels to a brief time of 1:2 over a 25 year period.

All the years my business was dealing weekly with US customers (1992-2012) the rate was pretty stable and always seemed to come back to about 1:1.63. Almost all those 20 years that was the rate i used for accounting purposes. During the whole 20 years from memory extremes were 1:1.38 and 1:2.06.

That rather puts into perspective where we are now. Even if it was announced tomorrow that Brexit is off i don’t think we’re going to be returning to anything like a 1:1.62 mid point. Maybe a 1:1.42at best. Brexit ‘with a deal’ is likely to be some way below that for any foreseeable future.

Found this chart which shows my memory to be pretty good on those numbers, but also shows that when the Brexit hit did come along we were already on the low side of my presumed ‘mid-point’ from the previous 25 years. The overall trend is also easy to see by eye.


#2360

What you say there is correct.
Also, you need to be under 75 to receive tax relief at all and beneath the LTA (across all your pensions).
Above noted… You can get your 20% tax relief on the way in and pay in the £2,880 pa as you say.
That’s not bad is it?
As you say, on the way out, when/if you come to take money out then you will be taxed but it should (if you manage it) be less than the relief that you got on the way in. Remember that the first 25% of your withdrawals are free of tax so if you plan to withdraw the money carefully over a period of years (taking into account your other income of course) then you can be quids in… clearly, if you take a lot out each year and are subject to higher levels of the marginal rates then it might not be for you

Further, if you have a partner… and dependent on their tax arrangements/income… then you could also potentially contribute to a SIPP for them so that they also got the tax relief.

It depends on your personal situation a lot of this but these are free giveaway tax breaks… one day I suspect they will all be closed down and despite benefiting from them myself I rather hope they do as they encourage paying less tax for those wealthy enough to afford it rather than encouraging investing.


#2361

OK, ISAs and SIPPs are different in this regard.

Firstly, the ISA… having foreign listed investments in an ISA is exactly the same as having them outside of an ISA… it has no significance to foreign governments including the US. So just as with any account, if you get charged WHT then you will need to reclaim it (if they’ve charged you more than they should of course).
Simples.

SIPPs are different and do have a special arrangement with SOME foreign Governments… certainly the US. For those with that arrangement then you pay zero WHT. However, then it gets messy.
Some foreign governments won’t take the WHT upfront if they know it’s a SIPP… some will. For those that do, you then are entitled to claim the full WHT back (all of it) but if you don’t claim you don’t get it.
Now… your Broker… not all brokers are able to pay SIPP dividends with zero WHT because of how they have their nominee account/s setup… and you will only find out by asking them if your SIPP is setup to receive zero WHT (for those foreign Governments that allow it… like US). The larger brokers will handle it… the cheaper, online outfits won’t.

So this is why you will get different remarks/advice from different people… but the above is correct as I delved into this in the past when I was upset with a broker and their lack of transparency over how they handled WHT.

I’m sure you’d have already done this but ensure that you have completed a W-8BEN form for every account holding US listed stocks else there is zero chance of any of the above working anyway.


#2362

Hi Again @Eadwig,

Point 1 - Making contributions to your SIPP that dont attract tax relief. Everything Ive read previously implies that this is not the case. But I googled it this morning and read one guide that contained a statement that implied that maybe you could. But I suspect that there are limits, and everything changes at Age 75. I am going to send a question to Hargreaves in a minute to get definitive clarification.

Point 2 - Reclaiming WHT. I think that this worked for you as you have a SIPP. EVERYTHING that I have read is explicit that you cant do this in an ISA.

Point 3 - USD Appreciation Re the GBP. Well yes I am aware of the long term trend. If I put a 6 digit sum into USD I wouldnt be terribly happy with the rate going back to 1.42 !. And as I said where would I put that money and what could I do with it that didnt get taxed ?. All the while I am holding GBP and spending GBP I really only have to worry about inflation. As soon as I start holding a big sum in USD then I might win a lot or lose a lot. I dont really want to be taking that risk - and I certainly dont want to pay tax on it.

ATB

Pref


#2363

Depends how you define currency risk.
You have just been through a period (since mid 2016…) where GBP has become massively devalued against several currencies around the world.
Holding USD or being invested in USD assets would therefore have protected your wad better than being in GBP assets or holding GBP.

Sticking in GBP and/or the FTSE100 isn’t avoiding currency risk… it is just putting your head in the sand about foreign currencies and foreign assets.

Clearly, we may or may not be at a GBPUSD low… you can gamble on that as you wish. But ignoring it and sticking in one currency or another is making a gamble in itself.


#2364

That is my point about diversification. You may choose to do nothing about it depending on circumstances, but I’m just saying that everyone should be aware that there is still significant risk with all assets in GBP even when purposely diversifying geographically via ETFs or other funds that are still priced in GBP.


#2365

Yes agreed… and whether it works in your favour or not depends on the GBUSD rate when you bought, when you get divis converted to GBP (if you get divis) and when you sell.
Just another factor to consider… but it shouldn’t stop anyone investing in foreign assets from a SIPP or ISA.
Getting 5% pa from the FTSE100 vs 10%+ from S&P500 every year over the last 5… easily makes that decision for you.


#2366

Yes, well that is the risk at the moment in the situation we’re in. There could be a significant percentage change either way in the near future.

I’m in a position where I have to guard against the worst. I can see your point of view where the current risk is less and changing now, especially a very large sum, would be increasing risk unnecessarily.

Like I said previously, I’m very glad I had significant dollar assets bought prior to 2016 and I haven’t exchanged any back into GBP since then. Initially I just held what i had, since the changes in ii I’ve always settled in USD in those accounts where I had the choice.

I was lucky actually, I didn’t know you couldn’t hold other currencies in ISAs, so it was good fortune that the bulk of my USD stocks were held in my trading account or SIPP.

One of the few pieces of luck I’ve had in this area in recent years!


#2367

Hi @J_Westlock, Yes I have a W8BEN in place. My understanding is that SIPPs have special rules in place with other governments that allow WHT to be reclaimed. ISAs dont have that and the best you can do is 15% on US investments (instead of the normal 30%).

Yes but Im never going to build up a decent size pot to pass on for IHT purposes that way am I ?. £3,600 a year going in, say 5% interest compounded - be lucky to get £50,000 over 10 years. If I live that long. Cant get excited by that really. Yes I could do the same for the wife - though it might be a hard sell. She is not keen on investing at the best of times !.

What I REALLY need to be able to do is to put in a 6 digit sum (dont care if there is no tax relief addition). Do you know if that is possible ?. I didnt think so but I read something this morning that implied that maybe you could ?.

ATB

Pref


#2368

Did you read my post on this… I explained how it works in more detail.


#2369

In fact good fortune that ii made the changes they did whereby there are 9 (I think it is) currencies you can hold in now. The only downside is that the fx rate they charge if you are doing an exchange has gone up from 0.5% to 1%.

I’m currently hoping that in future i may be able to transfer out of my trading account without having to change currency. I think ‘Revolut’ accounts may be possible to attach in future the way things are going and that would save a lot of money in fx charges. No plans to withdraw any foreign currencies at the moment, so I have time there to sit and await developments.


#2370

I really have little to do with pensions, but isn’t there a rule where you are allowed up to a percentage of your income - and can’t you back date it several years if you haven’t used your allowance?

It might be worth you making a trip to a financial advisor (I know you have to pay these days) and getting some professional advice on the subject.

Another risk we’re all facing at the moment is the potential change coming to IHT with a new government. Always something of a political football.

Are you very close to 75, Pref, if you don’t mind me asking. You keep talking about things changing at that age? Please don’t answer if you feel it isn’t something you want to share.


#2371

OK. but you can only benefit from the tax rules that are in place however meager the benefits.
I’m not sure why you want to put a large amount into a SIPP in your situation but other than the above… you can only contribute as much as you earn each year to your pensions, up to the annual allowance of £40k (unused rollover years can increase this).


#2372

I’ve read it, yes. Like I say, not sure about my ISA, but when i had a large position in my trading account and SIPP - this back in the days when divs were paid in GBP whatever currency they were declared in - I got the same amount per share in both accounts.

Maybe it was an admin error. Which is why I’m not going to pursue it any further in public, that and the fact all transactions going back to that point are now archived off and I don’t have access to my copies at the moment.


#2373

Yes, if your motivation is to avoid 40% IHT, the tax relief when putting it in, whether you get it or not, is not so important. You’re still going to make a significant saving.

The better way of avoiding IHT is to give your money away now and then make sure you live 7 years, by the way! If you’re comfortable enough to do that. In practice those who are tend to be very wealthy and have all sorts of trusts and things set up to smooth it all out.

I get the feeling none of us are in that happy position, but are also looking down the barrel of some of our estate being hit with 40%.

I could double my allowances by getting married, of course. But there are limits to tax planning!


#2374

@J_Westlock is it not the case that SIPPs are immune from IHT?

I’m assuming that is @PrefInvestor1 's interest here.


#2375

Right. I’ll have to drop out when it comes to IHT… I know little about it.
I’m not planning on leaving much behind and continuing to spend it on an Animal Shelter tbh.


#2376

I’ve pretty much shunned my SIPP over the years, only ever paid 2 lump sums into it … then I started a family aged 49 and being single (£325k allowance, I believe) I’ve suddenly started having to think about it. Especially after handing over an eye-watering amount in IHT when my dad died last year.

It was only in the last year or so I found out SIPP’s were ‘immune’…

Your pension is normally free of IHT, unlike many other investments. It is not part of your taxable estate. Keeping your pension wealth within your pension fund and passing it down to future generations can be very tax-efficient estate planning.

One of the great tax advantages of a Self-invested personal pension or SIPP is that they allow you to pass on your pension to your beneficiaries on your death. Your beneficiaries can normally choose to take the pension fund as a lump sum or leave it invested in a SIPP.

I should really start by writing a will! Just one of those Brexit limbos I’ve been left in with my partner and daughter living in the EU and me being a British subject and resident for tax. Too many complications and unknowns at the moment. Also, Ms. Eadwig, being Polish, has no comprehension of IHT so I need something in place to help her out here with legalities. (Needless to say she is significantly younger than me so the assumption is she will survive me by a long way).

First I’ve heard about your animal shelter today, @J_Westlock. I love animals, but I couldn’t leave anything but a donation to them myself, even before I had a daughter’s future to think about.


#2377

Hi @Eadwig, Indeed, I’m up to speed with the rules. Money in a SIPP is exempt from IHT if you die before you are 75 (I am 68). After that it gets taxed at 40%…

Lots of factors to weigh in considering the way to go, including legal options with Trusts etc.

ATB

Pref