SIPP v DC pension and drawdown

[Dave]

Hi

I'm hoping for some advice from learned members who have been here already.

I've just taken voluntary redundancy from my job of 25 years, aged 64. I'm planning to retire now.

My leaving package will take me through the tax year 22/23. I'll be able to put some spare cash in my share ISA.

Then I plan to take the 25% tax free element of my pension tax year 23/24 and live off that, putting spare cash in mine and my wife's share ISAs (one each).

Then my state pension kicks in, which I'm guessing I can defer to start at beginning of tax year 2024. I've also got a company final salary pension from an earlier job that should add a few thousand pound a year to that which I can also start from tax year 2024/25 onward. That will then be supplemented by drawdown of the DC pension.

So to my question - Interactive investor offering £2,000 to swap the DC Pension into a SIPP. Does it make financial sense to do that?

My DC Pension adds up to nearly £400,000 in Legal and General stocks and shares funds worldwide and developing world (passive) and I'm paying I reckon around £750 a year for their management..

Does it make sense long term for me to transfer the L&G pension into a SIPP and manage it myself putting the money in the same types of funds that they are currently in. I'm wondering what the costs are of moving it into a drawdown pension and whether it's better to be able to take the money out of a SIPP whenever I like.

What are the hidden costs likely to be? What's the stuff I have not thought about due to inexperience?

Does my strategy make sense to those who have been through the same or similar process, who frequent this site?

Or am I a dunderhead for missing something obvious?

Looking forward to your comments,

Best wishes

Dave

[BullDog]

I have no idea what costs you will incur in moving the L&G holdings to II. II doesn't charge anything. Do L&G?

For sure the cost at II for a SIPP, trading account and ISA are capped at £20 per month irrespective of what the pot is worth. Fixed £240 per year with one free trade each month. Regular monthly investing is free.

Looks a good idea to me. If you want the same or similar funds as you have now, do your research at II to see what's available. If a certain fund is not available at II, the transfer will be in cash for that fund. There's absolutely tonnes of funds available, you will find something you're happy with.

I moved a SIPP and a couple of DC pensions to II. They are just fine. The website is a bit clunky but improving all the time.

The customer service is absolutely fine either by secure message in the account or by phone.

Finally, if you want to save the first year fees, myself or another member here can refer you. The referrer also gets a bonus too.

Happy to answer any other questions about II and moving a DC pension to them. HTH.

[Snakey]

I'm in the process of moving from Standard Life to ii and it seems straightforward so far. Looks like I'll save a fair heft. You can open the ii account immediately and then do the transfer at your leisure - well, sort of, you have to have started it off by the end of this month to get the incentive.

I filled in something online to start the transfer, after first checking with SL that they would not be charging me anything to leave - always nice to have the little things like that in writing, just in case.

Also check with your current provider whether you can transfer your funds "in specie". I am having to sell, transfer cash, and re-buy, which might prove to be a stroke of luck or a total disaster depending on whether the market crashes or soars during the weeks I'm not invested.

The cashback I think is "up to", so check where your balance sits within the various tiers before finalising your decision if that's primarily why you are doing it.

I didn't realise that you could get paid for referrals! My apologies to whoever was the first of the people who recommended ii to me who also holds an account with them, as I missed a chance to thank you with real money instead of the "like" button.

[swill453]

My leaving package will take me through the tax year 22/23. I'll be able to put some spare cash in my share ISA.

Then I plan to take the 25% tax free element of my pension tax year 23/24 and live off that, putting spare cash in mine and my wife's share ISAs (one each).

Don't forget you've got a personal allowance in those tax years. You can use it to get some "taxable" money out of your SIPP or DC pension tax-free.

(Though starting drawdown restricts future pension contributions, if that's an issue.)

Scott.

[DrFfybes]

So to my question - Interactive investor offering £2,000 to swap the DC Pension into a SIPP. Does it make financial sense to do that?

My DC Pension adds up to nearly £400,000 in Legal and General stocks and shares funds worldwide and developing world (passive) and I'm paying I reckon around £750 a year for their management..

Does it make sense long term for me to transfer the L&G pension into a SIPP and manage it myself putting the money in the same types of funds that they are currently in.

The answer is "possibly".

1)Will you be charged an exit fee, and if so will the "welcome fee" cover it?

2) Is the £750 charged from L&G the total fees, including the OCF/TER of the fund, or is it simply their platform fee? A fairly typical tracker fund TER of circa 0.2% would be £800/year. L&G "all world" is 0.23%, their Emerging Markets ones about 0.5%, so not too far off the mark. The PLATFORM fee for II for your SIPP will be £120 at current rates. However any funds you hold with them will also have their own fee.

Of course the added flexibility, or costs of drawdown with the L&G will also be a factor

Paul

[JohnB]

You can get S&P 500 trackers for 0.07% and emerging for 0.15, so the L&G charges are high. Expect to pay £200 on that for a good quality of service from a range of SIPP companies.

[xxd09]

Just some points to look out for
Make sure your cash flow is good for at least a year or two before initiating transfer in case transfer takes time or there are hiccups
Make sure you have the type or preferably the actual funds set up in your mind that you are going to use going forward and that they are available on your chosen platform.
Snakeys point about transferring investments and being out of the market for any length of time etc etc is well made
Transferring in the current volatile market is probably the worst time you could pick and could be potentially loss making(or gain if you are lucky!)
If there is no urgency possibly waiting till markets stabilise might be more sensible-this could be a year or two but might be worth it
Gambling with a pension is not wise-you are a long time retired and a year or two spent getting the transfer set up to your satisfaction might be worth it
xxd09

[Hariseldon58]

The iI approach will be cheaper in the long run.

You will need to make a few more decisions.

The biggest problem is being out of the market, you need to be able transfer in specie and make sure that the funds you move across are able to be held on ii. There are often subtle variations in otherwise identical funds to trip you up (different classes if units )

[hiriskpaul]

The DC pension run by L&G is likely to invest in "pension" units. Due to tax treaties these may be free of (or pay lower) foreign dividend withholding taxes, which could be a considerable saving compared to a SIPP. For example if you have £200k in US shares paying 1.6% in dividends that comes to £3,200. Hold those in funds/ETFs/ITs* in a SIPP and you will lose £480 in US dividend withholding tax. It may be tricky getting a sensible answer to the question "Do your funds receive dividends free of US withholding tax", but probably worth asking.

* Hold US shares directly in your SIPP and you will not be charged dividend withholding tax. The tax only applied to shares held in funds/ETFs/ITs.

[xxd09]

That one is news to me -v interesting
Never thought about holding individual US shares except through a Vanguard OIEC
Stopped holding individual UK shares never mind US shares years ago
DC pension not available to me-SIPP only
Would be good to know what the tax/financial loss was over the many years of global equity (and bond?) index fund in a SIPP/ISA wrapper
Pensions are 50/60 years long investment vehicles
xxd09

[xxd09]

Very pertinent article to my last post just posted at at Monevator.com
One work round is to use the Accumulation units in a ETF,Fund etc
xxd09

[TedSwippet]

One work round is to use the Accumulation units in a ETF,Fund etc

Unfortunately not; at least not for general retail funds. With these, the US applies its 15% tax on dividends at the point where the US stocks held by the fund pay dividends to the fund structure itself. Whether or not the fund pays out (dist) or reinvests (acc) the remaining dividend doesn't change the outcome for the holder. A 15% loss on dividends paid by US shares either way.

The real workround for SIPPs, alluded to upthread by hiriskpaul, is to hold US stocks directly in the SIPP, and have the SIPP provider confirm that they do all the US paperwork necessary to get the 0% US/UK treaty rate on dividends paid to UK pensions. It used to also be possible to workround this issue by holding US domiciled tracker funds rather than Ireland, Luxembourg, or other non-US domiciled ones. However, MIFiD and PRIIPs sealed off that option a few years ago, by effectively making it impossible(*) for UK and EU investors to hold US domiciled ETFs.(**)

For funds that can only be held in a pension -- that is, typically those issued by pension and insurance companies -- it may be that these can received dividends from the US stocks they hold without losing 15% to US tax. It might be tricky to get a straight yes or no on that from the pension provider, though.


(*) For completeness, not entirely impossible, just mostly effectively so. Qualifying as a professional trader, for example, is one way around the restriction. Another is to use expiring options on these ETFs. Neither is exactly straightforward.

(**) Observant readers will note that disallowing US domiciled ETFs for UK SIPP investors works to the advantage of the US treasury, and the disadvantage of the UK treasury. For investors who do not want to hold US shares directly (such as me), the US gets 15% tax on dividends that it would not get if the US/UK tax treaty were not pushed out of availability by PRIIPs. And as a consequence of this US tax leakage, the amount that is taxable to the UK when withdrawn from the pension is that much smaller than it would be otherwise.

[hiriskpaul]

Very pertinent article to my last post just posted at at Monevator.com
One work round is to use the Accumulation units in a ETF,Fund etc
xxd09

Just found that. The article is discussing FX fees and the workaround of using accumulating ETFs works for those, but as TedSwippet has said, accumulating funds will not help with dividend withholding tax.

[hiriskpaul]

I have been talking to a friend who briefly worked for Topshop and has £2k in the Arcadia pension fund. The pension is managed by L&G. I have been told the management fee is 0.25% plus the cost of the fund management. My friend pays 0.1% fund management fee for something called "Legal & General Mastertrust Global Developed Equity Index Fund", which is a FTSE Developed World tracker. I have been sent the factsheet, etc. and it is totally unclear whether the fund is subject to US dividend withholding tax. 0.10% is not too bad a charge though.

[Kantwebefriends]

Can anyone enlighten me about avoiding withholding tax from non-US company dividends e.g. Swiss, Australian, Japanese, ...

[TedSwippet]

Can anyone enlighten me about avoiding withholding tax from non-US company dividends e.g. Swiss, Australian, Japanese, ...

The ability to entirely avoid US dividend withholding tax for pensions (and only for pensions) is a particular feature of the US/UK tax treaty, specifically article 10 paragraph 3(b). And even then, only where your SIPP platform or pension provider jumps through the necessary regulatory and bureaucratic US hoops to arrange for this to happen.

For other countries, I guess you would need to investigate both the relevant tax treaties, and then, if they offer a similar get-out clause, your platform or broker's willingness to handle the necessary paperwork. I'm not aware offhand of any other countries that work the same as the US for UK pensions, but then I haven't looked closely; no need, given what I hold in my pensions.