Put shares ininvestment bond?

Question
I am very new to investments though I have been given company stocks every year and they have all appreciated in the US while I am based here in Germany. My financial advisor suggested that I "wrap" the stocks that I have already paid taxes on when they vested into the Skandia Bond to avoid paying further tax when those vested stocks appreciate further. I have no experience and have had 2 poor experiences with financial advisors who bailed out without informing me and not looking after my portfoliio resulting in my making losses. This time round, I am really apprehensive and would appreciate your kind advice.

Answer
Hard to give a complete answer without knowing your tax situation and future plans. I'm assuming you're tax resident in Germany with the intention of returning to the UK at some point?

It sounds as though you've already paid tax somewhere on the shares when they vested from your employer's scheme and now you own the shares directly you're keen to reduce any further future tax liabilities.

If the shares pay little/no dividend income then the key is avoiding tax on future gains. Gains are only taxable when you sell the shares and your liability at that time will depend on the country where you're tax resident. If the UK, you can offset gains against your annual capital gains tax allowance (£10,600 for 2012/13 tax year). In an ideal world you'd strip out gains to maximise use of your allowance each year to reduce the likelihood of a large taxable gain building up over time. I'm afraid I don't know about the tax treatment of gains in Germany.

Your adviser is likely recommending an offshore investment bond. This means there is no tax on gains and income within the bond. However, it's not tax-free. When you eventually sell the bond any overall profit will be taxable. In the UK, this is calculated via a process called 'top-slicing' (see our life investments page for more details), but in simple terms if you're a higher rate taxpayer when you sell the bond you'll pay higher rate tax on all profits made (i.e. gains and income).

If you don't plan on returning to the UK then the tax treatment of the bond will depend on the country where you're tax resident at the time of selling (the tax authorities there may or may not take an interest in the bond - and let's be honest, I suspect some people just don't bother to declare it if outside the UK, although they could be in trouble if found out).

I'm in two minds about your adviser's motivations.

On the one hand, if you're not likely to return to the UK then an offshore bond might provide a convenient tax vehicle for your shares, albeit profits could eventually be taxable (you'll know it's offshore if the company concerned is 'Royal' Skandia).

On the other, investment bonds do tend to pay high sales commissions (which can cause mis-selling) and probably won't be as tax efficient as regular use of your capital gains tax allowance if you plan to return to the UK sooner than later.

If the adviser is recommending an onshore bond I would be very concerned, as both gains and income will be taxed at basic rate within the bond and this would be especially disadvantageous if you're non UK tax resident.

Hope my answer gives you some pointers, feel free to post further information below and I'll try to follow up with more guidance.

Read this Q and A at http://www.candidmoney.com/questions/question741.aspx

Pension contributions with redundancy money?

Question
I have reached 60 years of age and during 2011/12 I retired, received substantial voluntary redundancy plus 3 months PILON. I could pay £80k into a SIPP (£100k gross).

My question is: which of those three (salary, redundancy, PILON) qualify as 'earnings' in 2011/12 qualifying for tax relief on investing into the SIPP?

They all appear to be taxed under PAYE, apart from the first £30k of redundancy. If any of these three does not qualify I would have to scale back my SIPP investment. I have sufficient allowance remaining from the last 4 years x £50k.Answer
Sorry for the slow reply, appreciate the 2011/12 tax year has already passed. However, for reference:

HMRC does not count the first £30,000 of redundancy payments (which are generally tax-free) as earnings. So you'll need to ignore this when calculating your annual earnings.

Pay in lieu of notice (PILON) is treated as earnings (and taxable) provided it's actually a payment in respect of the notice period you would otherwise have worked (i.e. you're being paid for 'gardening leave').

So the pension contribution can be up to your salary plus PILON and any redundancy payment over £30,000.

Just as a note for other readers: HMRC allows you to carry forward unused annual £50,000 pension contribution allowances from the previous three tax years, provided you've fully used your current £50,000 allowance. However, you will only enjoy tax relief up to your earnings in the current tax year if less than the carried forward and current allowance combined.

Read this Q and A at http://www.candidmoney.com/questions/question653.aspx

FundsNetwork SIPP via Cavendish Online ok?

Question
I have a Scottish Widows stakeholder pension (value £170k). To make sure that going forward I benefit from the trail commision I have decided to move the pot of money and all future contributions. The options I am considering are:

1) re-pension i.e. transfer the SW pension to a low cost broker or

2) transfer the entire value to a SIPP. I am planning to do this via Cavendish.

My question is whether I am better off doing 1) or 2)?

I'm financially savvy and already use Hargreaves Lansdown for ISAs and share dealing. I'm not thinking of holding shares or any other assets - just 5 or 6 well established funds in a SIPP. I've already completed the SIPP form (FundsNetwork) and sent ro Cavendish a couple of days ago but am getting cold feet! I would appreciate your opinion.Answer
I think a SIPP is quite sensible on a £170,000 pension fund. Even if you only want to hold half a dozen funds the wider investment choice should more than outweigh any additional fees on a competitive low cost SIPP.

The FundsNetwork SIPP offered by Cavendish Online offers a good choice of funds. The annual £291 FundsNetwork SIPP charge is a bit steep versus competitors, but given the size of your pension fund it's hardly something to lose sleep over.

Possibly of more concern longer term is the level of annual fund commission/platform fee rebates. Cavendish Online rebates all trail commission, typically 0.5% a year, which is very good. However, because they use the FundsNetwork SIPP platform Cavendish has no scope to rebate any of the annual platform fees that Fiidelity receives from fund managers (typically 0.25%). SIPP providers like Alliance Trust Savings and Interactive Investor who run their own platforms do this, which means typical overall rebates tend to be a bit higher than Cavendish (but not always), although they charge dealing fees for funds.

Bottom line, I certainly don't think you've made a mistake. If the pension will be in situ longer term (perhaps 10 years or more) then Alliance Trust Savings or Interactive Investor will likely prove cheaper (depending on your choice of funds), but as this would mean yet another pension transfer I'd be inclined to stay put or now and see how the SIPP market evolves over the next few years (I daresay FundsNetwork will reduce their fees in time) to be more competitive.

Read this Q and A at http://www.candidmoney.com/questions/question668.aspx

Tax position on ETF seeking reporting status?

Question
I hold SPRD ETF USDV and EMDV and I can see from their website that they are seeking "reporting " status.

How do I treat the dividends paid until they become reporting funds? Are they taxable? And what about gains?Answer
Whether or not an offshore fund (including ETFs) has reporting status doesn't affect how dividends are taxed. They're subject to income tax in exactly the same way as UK based funds and shares, i.e. they're deemed to have paid net of basic rate tax meaning higher and top rate taxpayers have an additional liability (unless held within an ISA or pension).

However, reporting status (or lack of) affects how gains are taxed. Gains from funds with reporting status are taxed under the capital gains tax regime, just like UK investments. Gains from funds without reporting status are taxed as income, generally far less attractive.

When a fund is seeking reporting status it's treated as non-reporting. According to the HMRC offshore funds manual the position for investors in your shoes seems to be covered by ‘Regulation 48’.

When a non-reporting fund becomes a reporting fund UK investors may make a ‘deemed disposal’ at the time of conversion. This means you can treat your tax position as if you sold and repurchased the fund on the conversion date. You’ll be liable to income tax on any gains up to the point of conversion, but gains thereafter will be subject to capital gains tax.

You’ll need to detail this via your tax return covering the tax year in which the conversion takes place. There’s no special section on the return for deemed disposals, so you should report the offshore income gain as you would normally and show your calculations in the relevant notes section.

By the same token, if you sell the fund before reporting status is granted then any gains will be subject to income tax.

Read this Q and A at http://www.candidmoney.com/questions/question671.aspx

How safe is Bestinvest SIPP?

Question
BestInvest used to act as discount brokers for the Fidelity SIPP which used the Funds Network Platform and Standard Life acted as the SIPP Administrators. Both are well known and well regarded in the UK.

Best’s new Select SIPP apparently uses the SEI Global Wealth Platform and uses EBS plc, part of Charles Stanley as administrators. SEI appears a very opaque organisation and whereas I can find plenty of information on Fidelity and Funds Network I can find nothing apart from a website which purports to be solely for “investment professionals” for SEI. Neither of these organisations can be described as household names.

Do you have any information on these organisations and how they compare with Fidelity and Standard Life?

Best are offering what appear to be reasonably attractive terms to transfer to their SIPP and, although there are slightly better deals around, Best seem to be offering a reasonable deal if you are actively managing a SIPP based on OIECS, especially as their fund information and manager assessments seem to be accurate and up to date. However, the fact that Best are partnering with unknown names seems to be a reason to be cautious?Answer
Neither SEI nor EBS are as big as Fidelity or Standard Life, but they're well established organisations (44 years and 35 years respectively) - they're just not public facing businesses. I don't think you need be unduly concerned about business risk with either company. You can read details about their history here SEI EBS..

If you feel the Bestinvest SIPP suits your needs I wouldn't hesitate to use it. Yes, it's not the cheapest, but the research is usually decent so you may find this worth the extra cost (versus those SIPP providers who give bigger annual fund rebates).

You might find it helpful reading my answer to this http://www.candidmoney.com/questions/question555.aspx previous questions about the risks associated with using a SIPP ignoring investment performance). Bottom line, you're covered up to £50,000 per provider (via the FSCS) if you lose money through them illegally dipping their fingers into your pension. The other main risk is an underlying bank going bust if you're holding cash within the pension, you're normally covered by the FSCS for up to £85,000 per banking institution.

Read this Q and A at http://www.candidmoney.com/questions/question691.aspx

Take final salary tax-free cash from another pension?

Question
My father is a few years from retirement, he currently has a final salary scheme and a smaller stakeholder pension, when he elects to take benefits is he able to effectively combine the 2 pots , my thinking is if possible it would be better to take his tax free lump sum using all the stakeholder pot and making the balance up from the final salary pot as this would give him the best return and not tie his money up in an annuity.

Is this possible?

Also would there be any complications caused if he moved the stakeholder pension into a SIPP for the 5 years or so he has until retirement?Answer
It's not normally possible to notionally combine pension pots in this way to take most or all of the overall tax-free cash from one of the pensions. The only exception I can think of is if you have an additional voluntary contribution (AVC) pension scheme linked to the main final salary scheme, in which case you may be able to take the tax-free cash from the AVC provided the final salary pension administrator is happy to allow it.

In you father's case it sounds as though his stakeholder pension is separate from his occupational pension scheme (although worth double checking), so this won't be allowed.

Of course, he doesn't have to take tax-free cash from his final salary pension. If he doesn't need the money then foregoing the cash will increase his pension income. Read my answer to this previous question covering the topic.

Provided the stakeholder pension is separate from his occupational pension then transferring into a SIPP shouldn't affect anything. Whether it's worthwhile depends on the extent your father will benefit from the increased investment choice offered by a SIPP relative to any extra cost incurred. Bear in mind if he plans to retire in around 5 year's time he probably won't want to take much risk, if any, with the underlying investments. So keeping the stakeholder pension and investing in cash/fixed interest funds might be most prudent.

Read this Q and A at http://www.candidmoney.com/questions/question652.aspx

Why make a loan from a SIPP?

Question
i understand that a SIPP can make a loan to an individual or business so long as they are not connected.

How does this work in practice? Where is the benefit for the SIPP investor?Answer
Some SIPP schemes (usually the more expensive ones) allow the pension fund to make a commercial loan to third parties. There are HMRC restrictions, primarily that the person or company you loan the money to must be unconnected, e.g. they can't be a family member, business partner or associated business. And the loan must be made on commercial terms, i.e. charge an appropriate rate of interest and wherever possible secured against assets.

The key test is whether a commercial lender such as bank would make the loan and, if so, the rate of interest they'd charge. Also, loans to individuals cannot be used to acquire any type of taxable property, which obviously restricts use.

The only benefit I can think of is the possibility of securing a reasonable investment return from lending the money. But the costs of the SIPP scheme itself and associated legal fees for the loan paperwork will eat into the margin. Plus there's the risk that the borrower will default.

Read this Q and A at http://www.candidmoney.com/questions/question650.aspx