Reply to: Contractor SIPP (advice for 2013)

[DonkeyRhubarb]

Efficient Market Hypothesis / Random Walk

For anyone who's interested.

http://emlab.berkeley.edu/~craine/Ec...ent%20Mkts.pdf

[Fred Bloggs]

So for contributions from my own limited company it's just a very tax efficient way of taking money out of the company - basically I don't pay any tax when taking that money out (as opposed to divi tax etc. if I was doing contributions from a personal source)?

Yes, SIPP contributions are an allowable expense for your co ltd. As a bonus, it "IR35 proofs" that portion of your turnover too.

[faxfan]

So for contributions from my own limited company it's just a very tax efficient way of taking money out of the company - basically I don't pay any tax when taking that money out (as opposed to divi tax etc. if I was doing contributions from a personal source)?

[Fred Bloggs]

Agreed - for getting money out of the company it is a good option if that is first priority but if it's personal contributions it's not as clear.
Personally I am doing both because I can see 55 from here but if I was 32, I might want a bit more control.

The closer you are to 55 (I'm 56) the more attractive it becomes as you can take the 25% tax free lump sum from age 55 onwards. I'm maxing out my SIPP contributions.

[lukemg]

Agreed - for getting money out of the company it is a good option if that is first priority but if it's personal contributions it's not as clear.
Personally I am doing both because I can see 55 from here but if I was 32, I might want a bit more control.

[Fred Bloggs]

If you make company funded SIPP contributions you tell HL (or whoever) of that fact and they then do not make a tax claim. It's very tax efficient way to get the money out of the company.

[Ruprect]

Finally - make sure you max out your ISA first, much more flexible access options.

Trouble with this though is you need to pay the tax to get it out the Ltd - which unless you can get by on less than the 40% threshold will cost... which is a reason to look at investing from the company no?

[Edit: will cost regardless of which tax band you're in]

[lukemg]

As far as contributions are concerned - from you goes in net and additional amount turns up few weeks later - direct to SIPP.
For employer contris - you have to do a form for HL specifying its employer which does not then get topped up - since its already a gross contribution as opposed to you adding after you have paid tax.
HTH

[lukemg]

WTAS - some good advice here, dont touch an IFA, there is no evidence to suggest this will do anything other than reduce your returns, ask him to do it for 200/year instead of a percentage (or for free and 10% of any out-performance of the FTSE all-share...)
No didnt think he would take that.
and you can be sure there will be fund costs even if you dont see them.
HL is a good shout - there is a change in charging across all suppliers to make it more transparent so there will be changes for all coming - dont worry yet and HL likely to be amongst the most reasonable.
Info wise - books mentioned are good, you can have a couple of mine if you can get to the NW !
fool.co.uk, monevator, asset allocation, PCA, HYP, basket of investment trusts, ETF protfolio.
Brain off wise - consider vantage lifestyle 80% OR 100% if you are young. These cover most of the global share markets and 20% bonds (not favoured currently due to QE but generally a good idea for stability.)
I enjoy the whole process and have the bulk in trackers but also some individual shares and funds but if you dont, dont try to guess the right markets etc. stick it in a range.
Only thing to remember - HOLD YOUR NERVE, I have been through various crashes etc over the years and it tends to bounce back so dont sell the lot when it drops.
It's not dificult to set this up with a very simple approach and will probably be the best financial decision you make.
Finally - make sure you max out your ISA first, much more flexible access options.
P.S. Saw this mix mentioned, which looked good, its all ETF's too = low cost and no stamp duty I think (just changed recently or will be soon ???)
60% FTSE 100 (ISF)
30% FTSE Developed World ex-UK (IWXU)
5% iBoxx £ Corporate Bond ex-Financials (ISXF)
5% FTSE UK All Stocks Gilt (IGLT)

GLA

[faxfan]

I'm about to the same with HL / Vangaurd, could some explain how the tax relief works?

I'm assuming the the pension will be in my own name with contributions from my own limited company. Looking at various calculators the taxman will will contribute 40% - how does this happen in practice? I do have an accountant who I assume I just all the details and they'll make it happen but like to understand how it does work before going forward.

Thanks

[ASB]

I had mentioned etfs earlier. If you are considering a tracking route then etfs might be a little more attractive from a cost point of view with the upcoming stamp duty changes.

Have not researchex it personally since it is not a route open to me. But could be of benefit to some.

[jlo1983]

Sure, here you go:

http://www.ft.com/cms/s/0/4a2beb66-5...#axzz2n0DrFbSb

[SimonMac]

Bit of a dilemma guys - I'm finally in a position to set-up a SIPP this month (before end of my Ltd. companies tax year) to invest a lump sum (circa 20k) initially, then each year. I was all set to go with HL as I like their platform but I see they're due to announce new fees in Feb 2014.

I wondered if anyone here opened up a SIPP in last month?

Trying to determine if it worth biting the bullet and taking plunge with HL, or going with AJ Bell YouInvest (formerly Sippdeal)/ AllianceTrustSavings instead? I see YouInvest have already announced new fees with increases in some areas.
I've read the various comparison articles etc but they all seem to be out of date w.r.t latest fees being announced.

I am with HL, do you have the details?

I generally find the fee's with HL very competitive, the dealing fees can be a little higher than others as I just have shares in my portfolio rather than funds, but the management fees are very good (capped at £200 a year)

[jlo1983]

Bit of a dilemma guys - I'm finally in a position to set-up a SIPP this month (before end of my Ltd. companies tax year) to invest a lump sum (circa 20k) initially, then each year. I was all set to go with HL as I like their platform but I see they're due to announce new fees in Feb 2014.

I wondered if anyone here opened up a SIPP in last month?

Trying to determine if it worth biting the bullet and taking plunge with HL, or going with AJ Bell YouInvest (formerly Sippdeal)/ AllianceTrustSavings instead? I see YouInvest have already announced new fees with increases in some areas.
I've read the various comparison articles etc but they all seem to be out of date w.r.t latest fees being announced.

[ASB]

My personal rules are

1. 0% initial charge is the maximum I will pay
2. 0.5% annual is the upper limit on what I will pay for a fund invested in equities, in practise it should be possible to stay below 0.3% for non-UK equities and UK shares can be owned for as little as 0.1%.

(An exception to rule 1 is that I will pay 0.5% initial to invest in Vanguards UK tracker, as all that payment is doing is explicitly refunding them for stamp duty they have to pay. Other UK funds have the same expense, but it is implicit and hidden, and spread across all investors, so that long-term investors are subsidising those who dip in and out.)

I think you are mad to contemplate the level of charges you are talking about, to understand why I think that, follow my earlier reading recommendation, or in fact read almost any advice on investing that wasn't written by a financial advisor or fund manager.

Hint: advisors and fund managers are not on your side, they are the enemy. Every penny paid to middle-men is a penny less that active investors get in returns.

Here's a simple illustration of the problem. Divide investors into two categories, those who invest in cap-weighted index trackers and those who don't. The latter will pay higher fees, say 1% versus 0.2%. (The exact figures not relevant here, these figures are just for illustration.)

(1) The set of all investors will collectively get, before charges, the same underlying returns as the index. This is by definition: the index measures the return on all shares.

(2) The subset (2) of index tracker investors will get the return of the index, less 0.2%, because that's what index trackers return, by construction.

(3) If you take the set of people who are in (1) and remove the subset who are in (2) you get the subset consisting of active investors (3). Since both those first two sets got the same return as the index, it follows that the members of this set (3) must also collectively have underlying returns (before charges) equal to the index. The only way a member of (3) can have above-average/index returns is if someone else in (3) has made below-average/index returns. So active investing is in a sense (relative to the index) a zero-sum game, where one person's out-performance can only come at the expense of someone else's under-performance. That's all before charges, after the higher charges the average active investor must of course do less well than the average tracker investor.

(Strictly speaking it's not the average investor in (3) that must do worse than the market average, it's the average pound invested, but I'm trying to keep my language simple.)

So if you choose to be in set 3, you choose to be in a group that is collectively going to do worse than average, and the only way (other than luck) you can overcome that handicap is by you out-thinking the average member of your set in investment selection, to the extent that you manage to take money off them.

So what makes you think you are an above-average chooser of investments?

Note that if you subcontract the choosing to advisors or fund managers you are merely increasing overheads without solving the problem.
(a) If you are not a better than average selector of investments, maybe you need a fund manager to select them.
(b) What makes you think you are a better than average selector of fund managers? Maybe you need to pay an advisor to choose your fund managers.
(c) What makes you think your advisor is above average, may you need an advisor advisor to choose your advisor.
(d) and so on, to an infinite number of levels, or at least until all your money is the pockets of middle-men.

Note there is something called "efficient markets theory" which says the shares are always correctly priced and the only reason one investor ever does better than another is luck. While maybe not 100% true, you really should regard it as 99.99% true. It is very unlikely that you fall in the fraction of 1% who make a profit setting prices because they really do know better than all other market participants what the price should be.

If follows from regarding efficient markets theory as practically true that every penny unnecessarily paid to a fund manager is a penny wasted, because all differences in returns between them are a result of luck rather than skill. (Again, oversimplifying a little, as there is some evidence that professional fund managers do collectively take money off individual investors, by out-trading them, but that profit is more than eaten up by their extra charges.)

A couple of other pointers to consider.

In terms of trackers consider tracking error over time. It is therefore important to compare your chosen vehicle. Tracking error can occur for a number of reasons related to when redemptions are made, exactly when the fund is rebalanced etc.

A number of pension providers have specialised pension only type trackers with lower TERS than their mainstream counterparts.

There are a number of ETF's which have lower charges than some of the cheaper funds. If you were to consider leveraged ETFS (e.g. LUK2) be sure to understand how they are rebalanced and the impact this has. (It really would not be wise to hold any leveraged ETF for any length of time).

Size matters. Any individuals contribution levels and pattern will have an impact on what is the best choice for them.

If using ETFs consider its replication mechanism and whether it is synthetic or not; in the latter case counter party risk should also be considered.

If taking a tracking route consider which indexes you might want to track. FTSE, all share, 250, 350, european, world. There are funds which will track almost anything.; albeit at significantly different costs.