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How to invest excess cash?

Gilgongo
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How to invest excess cash?

#441611

Postby Gilgongo » September 12th, 2021, 12:52 pm

My wife is 60, not in drawdown, earns about £3-5K a year and has tons of cash (over 3 x our annual expenditure) getting about 0.5% interest. She's obvioulsy very risk averse, but may be amenable to putting some of that (perhaps £50K) into a bonds or possibly a property ETF.

She could buy the holding(s) in a dealing account, then bed and ISA £10K (and contribute SIPP up to £3600) annually from then. But what about a SIPP? Am I right in thinking that's not a good idea given the likely annual allowance charge on that compared to the (possibly zero) tax on any income from the holdings in the dealing account?

I've no idea how I'd estimate the amount of any annual allowance charge though.

monabri
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Re: How to invest excess cash?

#441651

Postby monabri » September 12th, 2021, 2:46 pm

How are her National Insurance contributions? Is there scope for voluntary class 3 NI contributions to boost her state pension?

If years of contributions are missing, making appropriate class 3 contributions could be very advantageous.


As for buying bond/property ETFs, one could buy directly into a share dealing ISA account ( eg with Iweb) or with Interactive Investors (ii).....and other platforms.

Why buy into a non isa account? One could transfer ISA cash accounts to the broker and buy funds that way.
Last edited by monabri on September 12th, 2021, 2:53 pm, edited 2 times in total.

XFool
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Re: How to invest excess cash?

#441652

Postby XFool » September 12th, 2021, 2:48 pm

...Good thinking.

Urbandreamer
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Re: How to invest excess cash?

#441662

Postby Urbandreamer » September 12th, 2021, 3:10 pm

Let me assume that she earns £4100pa. In which case, as long as she does not draw her pension she can invest the entire amount into a SIPP each year.
Well actually it would be £4100 *0.8 with the state topping it up to her full salary.
Were she to have ever entered drawdown the limit would drop to £4k.

Your figure of £3600 *0.8 assumes that she doesn't earn at all.

I would argue that a SIPP could be a great idea. The issue would be that they tend to cost more than ISA's. Not a problem if you intend to build them to a significant sum, but possibly an issue starting at 60.

I'd recommend looking at Vanguard. They are very cheap (0.2%) and offer a good selection of funds for both the risk averse and for those who don't make investing a hobby.

Try this (US) link for their investment recommendations.
https://investor.vanguard.com/investing ... allocation
Here is a link to their UK charges and website.
https://www.vanguardinvestor.co.uk/what ... -explained

I don't have an account with them myself, I enjoy investing too much but pay £120pa in charges. I am going to recommend Vanguards SIPP to my daughter.

Gilgongo
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Re: How to invest excess cash?

#441667

Postby Gilgongo » September 12th, 2021, 4:10 pm

monabri wrote:How are her National Insurance contributions? Is there scope for voluntary class 3 NI contributions to boost her state pension?

If years of contributions are missing, making appropriate class 3 contributions could be very advantageous.


Ah, not sure. Good point - will have a look.

monabri wrote:As for buying bond/property ETFs, one could buy directly into a share dealing ISA account


Oops, sorry, forgot to mention that she has maxed out her ISA from having received some other money a couple of years ago.

ursaminortaur
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Re: How to invest excess cash?

#441681

Postby ursaminortaur » September 12th, 2021, 5:21 pm

Gilgongo wrote:My wife is 60, not in drawdown, earns about £3-5K a year and has tons of cash (over 3 x our annual expenditure) getting about 0.5% interest. She's obvioulsy very risk averse, but may be amenable to putting some of that (perhaps £50K) into a bonds or possibly a property ETF.

She could buy the holding(s) in a dealing account, then bed and ISA £10K (and contribute SIPP up to £3600) annually from then. But what about a SIPP? Am I right in thinking that's not a good idea given the likely annual allowance charge on that compared to the (possibly zero) tax on any income from the holdings in the dealing account?

I've no idea how I'd estimate the amount of any annual allowance charge though.


Not sure what you mean by annual allowance charge. The pensions annual allowance is the maximum amount per year that someone earning can contribute to a pension and get tax relief ie the maximum gross contribution would be the minimum of their earnings and that annual allowance. Someone who has no earnings would be able to contribute £3600 gross (ie an actual contribution of £2880 which would then receive £720 of tax relief).

Charges for many providers are pretty similar for their trading accounts, ISAs and SIPPs. Though there may be an additional management charge for the SIPP eg with ii there is an extra £10 per month charge.
When taking money out of the SIPP 25% will be tax free with the rest taxed at your marginal rate (some providers will also charge a fee for drawdowns but others such as ii and youinvest don't).

AsleepInYorkshire
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Re: How to invest excess cash?

#441683

Postby AsleepInYorkshire » September 12th, 2021, 5:24 pm

Gilgongo wrote:My wife is 60, not in drawdown, earns about £3-5K a year and has tons of cash (over 3 x our annual expenditure) getting about 0.5% interest. She's obvioulsy very risk averse, but may be amenable to putting some of that (perhaps £50K) into a bonds or possibly a property ETF.

She could buy the holding(s) in a dealing account, then bed and ISA £10K (and contribute SIPP up to £3600) annually from then. But what about a SIPP? Am I right in thinking that's not a good idea given the likely annual allowance charge on that compared to the (possibly zero) tax on any income from the holdings in the dealing account?

I've no idea how I'd estimate the amount of any annual allowance charge though.

If I recall correctly she can go back over three years for pension contributions, if that's of any help.

Failing which I've pm'd my personal details and she can send me the cash :lol: I know - my bad :oops:

AiY

ursaminortaur
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Re: How to invest excess cash?

#441686

Postby ursaminortaur » September 12th, 2021, 5:39 pm

AsleepInYorkshire wrote:
Gilgongo wrote:My wife is 60, not in drawdown, earns about £3-5K a year and has tons of cash (over 3 x our annual expenditure) getting about 0.5% interest. She's obvioulsy very risk averse, but may be amenable to putting some of that (perhaps £50K) into a bonds or possibly a property ETF.

She could buy the holding(s) in a dealing account, then bed and ISA £10K (and contribute SIPP up to £3600) annually from then. But what about a SIPP? Am I right in thinking that's not a good idea given the likely annual allowance charge on that compared to the (possibly zero) tax on any income from the holdings in the dealing account?

I've no idea how I'd estimate the amount of any annual allowance charge though.

If I recall correctly she can go back over three years for pension contributions, if that's of any help.

Failing which I've pm'd my personal details and she can send me the cash :lol: I know - my bad :oops:

AiY


Carry-forward of unused annual allowance from the previous three years is only available if your relevent earnings* are greater than £40,000 as you have to fully use up this year's annual allowance before you can take advantage of unused allowances from those previous years. You must also have been in a pension scheme during those years even if you didn't contribute. You also need not to have taken anything more than the tax free lump sum out of any money purchase/DC pension otherwise you trigger a new limit called the MPAA. Triggering the MPAA restricts future contributions to a maximum of £4000 per year even if you are earning far more than that and also explicitly bans the use of carry-forward.

* relevent earnings are pretty much earnings from employment though a few other things such as income from patents etc can also count. Income from pensions or investments are not counted as relevent earnings.

Gilgongo
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Re: How to invest excess cash?

#441697

Postby Gilgongo » September 12th, 2021, 6:31 pm

ursaminortaur wrote:Not sure what you mean by annual allowance charge.


I mean that if she paid, say £50K into her SIPP this year then she's have to pay a charge (or is it a tax?) on that as it's above her annual allowance for paying into a pension and getting a rebate on that. If I understand kowecktelleh.

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Re: How to invest excess cash?

#441715

Postby mc2fool » September 12th, 2021, 8:11 pm

Gilgongo wrote:I've no idea how I'd estimate the amount of any annual allowance charge though.

Well that's easy; it's the tax relief you get on making a pension contribution more than your annual allowance.

"If you make a contribution above your available allowance you will suffer a tax charge known as the annual allowance charge (AAC), this will effectively cancel out the tax relief you receive above your allowance." https://www.youinvest.co.uk/pensions-and-retirement/pensions-explained/contributing-to-your-pension

"To calculate the amount of the AAC, the total gross amount that has been contributed to all your pensions in the tax year in excess of your personal annual allowance is added to your income for the year, and then income tax is applied. If you have only made personal contributions in the tax year then effectively the charge will cancel out the tax relief you receive." https://www.youinvest.co.uk/sites/default/files/AJBYI_Guide_to_scheme_pays.pdf

I have heard (on these boards IIRC) that some SIPPs just don't let you contribute more than your annual allowance (assumes you don't lie in what you put in the "Annual Earnings" field of their additional contribution form of course...)

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Re: How to invest excess cash?

#441716

Postby Urbandreamer » September 12th, 2021, 8:20 pm

My wife has just pointed out that auto-enrolment exists.
It's possible that the OP's wife has to take into account such contributions when thinking SIPP.

ursaminortaur
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Re: How to invest excess cash?

#441719

Postby ursaminortaur » September 12th, 2021, 8:41 pm

Gilgongo wrote:
ursaminortaur wrote:Not sure what you mean by annual allowance charge.


I mean that if she paid, say £50K into her SIPP this year then she's have to pay a charge (or is it a tax?) on that as it's above her annual allowance for paying into a pension and getting a rebate on that. If I understand kowecktelleh.


OK - I'm with you now. I was thrown by your saying she only earned about £3-5K a year since with so little relevent earnings she couldn't exceed the annual allowance as she can only get tax relief upto the level of her earnings or £3600 gross.
The pension provider should ask when you are making a contribution what your annual earnings are and shouldn't allow tax relief to be paid on any gross contribution which exceeds that.

For information on the annual allowance charge see

https://www.which.co.uk/money/pensions-and-retirement/personal-pensions/contributing-to-a-private-pension-explained/how-the-pensions-annual-allowance-works-ac8d33u9v9ch

Which includes an example.

Youinvest also provide details of how to use scheme pays to pay the charge

https://www.youinvest.co.uk/sites/default/files/AJBYI_Guide_to_scheme_pays.pdf

And just for info here is the HMRC page on what qualifies as relevent earnings.

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100

Relevant UK earnings means any one or more of the following types of income:

employment income, such as: pay, wages, bonus, overtime, or commission - but only if taxable under Section 7(2) Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) - so including:
the part of a redundancy payment above the £30,000 tax exempt threshold in section 403(1) ITEPA 2003. The first £30,000 of the redundancy payment is not classed as employment income so does not count here. But any amount on top of the £30,000 threshold is classed as employment income and so it is also relevant UK earnings. In making this analysis, care is required not to confuse usual wages or pay, pay in lieu of notice or holiday pay, with the redundancy payment when such elements are bundled into a final payment.
benefits in kind which are taxable (applies to employees earning over £8,500, and to directors)
profit related pay (including the part which is not taxable)
Statutory Sick Pay (SSP) and Statutory Maternity Pay (SMP) if paid by the employer and taxable under Section 7(2) ITEPA 2003
Permanent Health Insurance (PHI) payments paid by the employer whilst you are still in employment
pay paid by way of Government Securities
pay in the form of units in an authorised unit trust if taxed on the person receiving it
amounts taken off pay to buy partnership shares in a share incentive plan in line with paragraph 83 of Schedule 8 of Finance Act 2000
income from a trade, profession or vocation that is chargeable under Part 2 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005)(applies if the activity is conducted individually or as a partner acting personally in a partnership)
income from a UK and/or EEA furnished holiday lettings business, which is chargeable under Part 3 ITTOIA 2005 (applies if the business is conducted individually, or as a partner acting personally in a partnership)
a UK furnished holiday lettings business means a UK property business so far as it consists of the commercial letting of furnished holiday accommodation (Chapter 6 Part 3 ITTOIA 2005).
an EEA furnished holiday lettings business means an overseas property business so far as it consists of the commercial letting of furnished holiday accommodation (Chapter 6 Part 3 ITTOIA 2005) in one or more EEA states.
in either case if there is a letting of accommodation only part of which is holiday accommodation, a just and reasonable apportionment is to be made to determine the amount of the income from that business that is to be counted.
patent income, where the individual alone or jointly devised the invention for which the patent in question is granted, in the following categories:
royalties or other sums paid regarding patent use and charged to tax under section 579 ITTOIA 2005 (intellectual property)
amounts on which tax is payable under section 587 ITTOIA 2005 (sales of patent rights) or section 593 ITTOIA 2005 (death of seller of patent rights), or
amounts on which tax is payable under section 472(5) of the Capital Allowances Act 2001 (balancing charge) or paragraph 100 of schedule 3 to that Act (balancing charges)
Relevant UK earnings are to be treated as not being chargeable to income tax if by virtue of section 2(1) Taxation (International and Other Provisions) Act 2010 (double taxation arrangements), they are not taxable in the United Kingdom. To the extent that they are not chargeable in this way, they will also not count towards the annual limit for relief explained in Annual limits above.

For the avoidance of doubt a pension is not classed as earnings and cannot be included in the definition of relevant UK earnings.



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