ISAs, SIPPs and falling tax free allowances

[Nicola Mclaughlin]

Hi Stephen

This year I used up my ISA allowance for HYP and so put the rest of my HYP investments in a regular share dealing account. I’m 41 and don’t currently have a pension because I have my money invested in property etc and I’ve never been employed in the traditional sense so have no workplace pension. In your view, would it have been more beneficial for me to have placed my remaining HYP investments into a SIPP pension? To be completely honest I had forgotten to take income tax into account when I did this (I know …I know…!!) and now that tax free allowances for dividend income are due to fall to only £2000 in the UK I’m worried about what I have done.

As the new tax year is about to start I’ve been wondering if I should sell the shares I invested in the general share dealing account and move the money into this years ISA allowance. But then I remember that it’s best not to sell AT ALL with the HYP strategy.

I fully realise and understand you are not allowed to give personal financial advice, but are you able to highlight things I should be thinking about?

Many thanks for your great newsletters. I really really enjoy getting them.
Best wishes
Nicola

[Stephen Bland]

As you say Nicola, I am not permitted to give personal financial advice so that does restrict substantially my response to your points.

As a generality, I always suggest that HYPers use ISAs as far as possible for their portfolios. And as another generality, I much prefer them to SIPPs because the latter are overloaded with restrictions of which the rules change often and I see little or no attraction in the purported tax advantages compared with ISAs. But having said that, individual circumstances vary so much that each investor has to make their own decision.

On your other point, assuming ISAs are of benefit to you personally upon which I won’t comment, I think it preferable to move HYP shares held in a direct account into the ISA. I have done this myself, repeatedly. That does constitute a sale and repurchase in the ISA because you can’t make a direct transfer, but it’s the only way to do it so I don’t consider that such a transaction breaches my “never sell” rule. This will involve some costs but in my view the attractions of ISAs are such that it is worth it provided that suits your personal circumstances.

For HYPers constructing a portfolio, it’s simpler to place the cash in the ISA first then buy the shares. But for those like yourself who already hold shares outside the ISA, then I do find it worthwhile to to make the sale and repurchase in order to relocate the holdings into the ISA. If doing so, watch the timing of xd dates to avoid missing a dividend between the sale and repurchase.

Thanks for your comments on TDL, much appreciated.

[Nicola Mclaughlin]

Thank you, that has helped clear my thinking quite a lot. As soon as the new tax year starts I will move my shares into my ISA.

By the way, I’m reading a lot right now about how the markets are undergoing a huge fundamental shift as we move from a low / zero interest rate environment back to one of rising interest rates and possibly high inflation. The bond market seems to be firmly established in a bear market right now due to rising Interest Rates and that as bond yields continue to rise I’m reading opinion pieces that suggest that it is possibly going to negatively effect the stock market (in a stronger bearish move than we’ve already seen recently…possibly leading to the stock market moving into a steady and long decline after years and years of bullish rises).

If all of that proves to be the case, there doesn’t seem to be much that the average retail investor can do to protect themselves…though the income stream from HYP will be a bonus that other investors not buying high dividend shares may miss out on.

Do you anticipate HYP investors finding the next few years tough going? My thoughts are that we are quite well placed because the companies we are investing in usually have lower levels of debt and so are less vulnerable to the rising interest rate environment…but I’m interested to know your views. Particularly about protecting ourselves from inflation???

Even though HYP investors hold their shares indeterminably and so the overall value of the portfolio should matter less to the HYPer than the dividend yield and the income stream, I imagine it’s going to be pretty tough for some investors to watch their portfolio value “shrink” even if it doesn’t reduce in income stream??

Thank you for your thoughts…
Best wishes
Nicola

[Stephen Bland]

Predictions, especially about the future, are not something in which I indulge Nicola. Strategic ignorance rules.

Investors including HYPers should not be in equities at all if they can’t countenance big falls in share values which can happen in really bad bears. Many companies may cut their dividends as well in such conditions, where cash may be tight. But I’ve seen it all before, several times, and HYPs in particular are likely to survive and go on to do well though there can never be any guarantees. Shares and their dividends are risk investments and HYPers have to accept that fact if they wish to invest this way.

[Martin Silman]

Stephen, Am guessing this thread provided the seed for today’s DL Update where you outline the benefits of ISA’s. I agree with your logic throughout but just wanted to comment on the concept of nominee holdings.

I have an account denominated in US $ with one of the US trading platforms and use that to buy stocks in various US companies – the default there is that every shareholder is ‘a shareholder’ and gets full voting rights and is encouraged to use them whether they have paper shares or trade through an online broker or platform. They all seem to use proxyvote.com – you get emailed a ‘control number’, you go to proxyvote.com and enter it, then you have full access to all of the documents and materials associated with the AGM, EGM or whatever and can vote on every motion.

It would be incredibly easy for any of the UK platforms to offer this but they all see it as an overhead and unfortunately, very few people seem interested in taking an active role in the companies we own, yet we all complain about the poor governance, exorbitant executive salaries and stupid share buybacks which result from this lack of involvement.

Is it just me or do others have a similar view? I buy shares for the long term and as a result, care about the companies I own

[Stephen Bland]

Interesting comments Martin. I would much prefer to be on the share register but it just is not available for ISAs. For my direct holdings I use CREST, as mentioned in today’s article, which is ideal in offering electronic trading combined with being on the register, but due to the cost as I said there CREST is really only suitable for large portfolios. Smaller investors who almost all use cheap online brokers are stuck with the anonymity of nominees unfortunately.

As for the small guy exercising influence if there was a system here similar to the US you mention, institutions control the overwhelming majority of the shares in big caps so that the small investor is all but irrelevant these days.

[Martin Silman]

Stephen, Cannot argue about the institutional control and lack of governance on the part of fund managers, that is another insurmountable problem on our collective ‘To Do’ list. However, I would say the ‘activist investor’ and ‘small investor’ seems to be much more influential under the US system. I voted shares for PepsiCo and Lockheed Martin this week and those, just like all the others I have seen recently, had motions from small shareholders asking for more control or transparency or objecting to remuneration or whatever. They may usually not get sufficient votes to be enacted, but they always cause the relevant boards to discuss them and to draft reasons why they are against it, etc which must influence their thinking going forward a tiny bit and if it does, that is better than the UK situation.

[Stephen Bland]

Yes I agree. Private investors are much more prevalent in the US which is probably why things work better there for them, as you say.

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