Investment Strategy Statement – Part 4 – Accounts, Funds, Taxes & Rebalancing

Wrapping up my ISS with the mechanical stuff.
Taxes

Exploit tax-free allowances where possible

MrsShrink and I are both UK resident fully compliant UK taxpayers. 2018/19 I have been on the cusp of higher rate tax, and will need to review once I get my year end P60 for the three (actually sort of four) jobs I’ve been on PAYE (1). From 2019/20 onward it looks like I’ll be in the higher rate 40% bracket.

I plan to exploit four tax-sheltering methods:

1. Interest from cash savings and emergency funds will stay within my Personal Savings Allowance

This latest weapon in the public’s tax armory allows for £1,000 tax-free savings for basic rate tax payers and £500 for higher rate (2, 3). Interest from our high interest current accounts holding our cash emergency fund will aim to be held within this limit.

2. Filling up ISA allowances

Once our emergency fund is topped off we will contribute to ISAs (4, 5). In the short term all my stock market purchases will fit within the £20k/year wrapper (6). MrsShrink is likely to use Cash ISAs (7). We will utilise the Marriage Allowance if such circumstances arise (8).

We are considering using LISAs as well, but their benefit appears limited to the government bonus (9). We’re not first time buyers, so such an account would be for the long-haul and intended to supplement our income post-60. They’re a complex product and I’m not sure I’m happy with the lack of flexibility, so this will be another area to think about in the future (10).

3. Pensions Contributions

I will maximise my tax relief on my pension contributions. I’m in the enviable position of having pensions held in two of the most generous funds left in the country; the NHS Pension Scheme and the Universities Superannuation Scheme. Both are sort of defined benefit schemes. The NHS Pension Scheme functions as a career average revalued earnings (CARE) scheme (11). The USS is a hybrid defined benefit and contribution scheme, where DB is paid on salaries up to £57,216.50 and DC over that figure (12, 13). I will detail both schemes in separate future posts. I shouldn’t really have both (this has happened due to some HR oddness) and so I need to sit down and unpick. The complexities of my professional life mean that I am likely to be bouncing between services for the foreseeable future, so this will remain a headache.

The secondary headache in this is that both pensions may be hard up against the lifetime allowance cap (14, 15). As a defined benefit scheme my NHS pension is multiplied by 20 and added to any lump sum to give a capital value (16). Many of my senior colleagues have been hit with substantial (five-figure) unexpected tax bills since the reduction in the lifetime allowance. It’s therefore not clear to me yet if making further contributions will be tax effective, or which pension scheme will be the most advantageous for a potential early retirement (17, 18, 19, 20). A matter for future reading.

4. Other investment structures

Longer term areas of interest:

• Venture Capital Trusts
• Enterprise Investment Schemes
• Seed Enterprise Investment Schemes (21, 22)
• Premium Bonds (I dared to speak thy name!) (23, 24)
• Property (25, 26, 27, 28)

Accounts and Funds

Split holdings across multiple providers and platforms to reduce risk

We will use the bank account savings website (or similar if superseded) to maximise returns on liquid cash holdings (29). This will be split across multiple accounts to remain within the FCSC £85,000 limit (30). Tax-free accounts will be the preferred method for holding passive equities, bonds and stock.

Assets will be allocated across investment accounts to reduce costs, provide further security and reduce platform risk (31, 32). Initially I will aim to keep investments within the £50,000 FCSC protection limit (33). As stated in my ISS part 3, I intend to allocate ETFs across fund holders to meet allocation targets. No provider will hold more than 25% of my holdings after year five (to give me time to actually build the damn thing up!).
Rebalancing

Rebalance quarterly using Swedroe’s 5/25 through purchases

A basic tenant of my investment plan is to sell rarely, if ever. My stock purchases are for the long haul. Therefore I aim to check and buy back to allocation each quarter through purchases (34, 35). Boundaries for this are set using Larry Swedroe’s 5/25 rule; 5% absolute or 25% relative percentage variance (36). If this implicates selling I will wait until year end to optimise Capital Gains Tax. Allocations will be balanced annually against global markets plus my own weighting. On the active naughty step portfolio investments are free to do their own thing but will be re-evaluated against the overall portfolio yearly at the 10% stocks, 10% active target.

I’ll revisit this and update periodically, but for now that about wraps it up.

Take care,

The Shrink

References:

1. https://www.gov.uk/income-tax-rates
2. https://www.gov.uk/apply-tax-free-interest-on-savings
3. https://www.moneysavingexpert.com/savings/personal-savings-allowance/
4. https://www.gov.uk/individual-savings-accounts
5. https://www.moneyadviceservice.org.uk/en/articles/isas-and-other-tax-efficient-ways-to-save-or-invest
6. https://www.fool.co.uk/investing-basics/isas-and-investment-funds/stocks-and-shares-isas/
7. https://www.fool.co.uk/investing-basics/isas-and-investment-funds/isa-basics/
8. https://www.gov.uk/marriage-allowance
9. https://www.fool.co.uk/investing-basics/isas-and-investment-funds/lifetime-isas/
10. https://youngfiguy.com/why-the-lifetime-isa-is-not-a-simple-to-understand-product/
11. https://www.moneywise.co.uk/managing-your-pension/pensions/the-lowdown-nhs-pensions
12. https://www.imperial.ac.uk/human-resources/working-at-imperial/pension-schemes/uss—universities-superannuation-scheme/changes/pension-schemes-explained/
13. https://www.uss.co.uk/members/members-home/the-uss-scheme
14. https://www.gov.uk/tax-on-your-private-pension/lifetime-allowance
15. https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/the-lifetime-allowance
16. https://www.bma.org.uk/advice/employment/pensions/lifetime-allowance
17. http://www.legalandmedical.co.uk/3-reasons-to-have-a-pension-pot-that-is-over-the-allowed-limit/
18. https://chasedeveremedical.co.uk/2018/02/22/beware-the-lifetime-allowance-charge/
19. https://www.telegraph.co.uk/money/special-reports/should-i-retire-at-55-because-of-my-125m-nhs-pension/
20. https://www.uss.co.uk/members/members-home/retirement-articles/2018/the-easy-way-to-keep-track-of-your-annual-and-lifetime-allowances
21. https://www.moneyobserver.com/how-to-invest/how-to-invest-tax-efficiently-beginners-guide
22. https://www.fool.co.uk/investing-basics/how-shares-are-taxed-2/tax-efficient-investing/
23. https://www.moneysavingexpert.com/savings/premium-bonds/
24. https://www.nsandi.com/premium-bonds
25. https://www.moneyadviceservice.org.uk/en/articles/tax-and-property-investment
26. https://www.out-law.com/topics/tax/property-tax-/tax-treatment-of-reits/
27. https://www.investorschronicle.co.uk/tax/2017/08/31/how-farmland-is-taxed/
28. https://www.whatinvestment.co.uk/how-to-invest-in-forestry-2134293/
29. https://www.bankaccountsavings.co.uk/calculator
30. https://www.fscs.org.uk/what-we-cover/
31. https://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts
32. https://www.thisismoney.co.uk/money/experts/article-2553851/How-I-know-DIY-investing-platform-safe.html
33. https://www.fscs.org.uk/what-we-cover/investments/
34. https://www.investopedia.com/articles/stocks/11/rebalancing-strategies.asp
35. https://www.bogleheads.org/wiki/Rebalancing
36. https://awealthofcommonsense.com/2014/03/larry-swedroe-525-rebalancing-rule/