I’ve been presented with a slight conundrum about fees on my share accounts. From which account am I best paying fees?
KISS – Keep It Simple, Safely
For a bit of background; the Gentleman’s Family Finances are a little complex – convoluted you could say – with many accounts, pensions, SIPPS, LISAs, ISAs, shares, VCTs, schemes, scams, side hustles and whatnot. I’ve tried to KISS – keep it simple, safely – but it’s not always possible. With complexity comes risk that you mess things up, so I’ve kept a tight control on our finances for over 20 years now including month-end totting up of assets, liabilities, income, outgoings.
Fees – Friction on you FI Freewheeling Bike Ride
Fees are a bit of a funny one because they are an outgoing on an asset but you don’t often see them as that and it’s just a decrease in your wealth. That’s the way the middle men like it and fees are like a mouse quietly nibbling away in your silo, one grain at a time. Fees are a drag on performance and it’s worth working out how to minimise your costs. I did this a few years ago and the aggregate savings are such that I pay less in fees now than 8 years ago despite having around 5 times the assets under management.
One way I’ve been able to keep it simple, safely is by lumping all (or most) of our SIPPs, LISAs, ISAs and shares into a single platform. We use AJ Bell YouInvest and I would recommend them to others but nobody ever signs up for these things (I’d get a £100 bonus and you’d get a great book to read – but hey-ho, this blog is for fun and not my side hustle).
YouInvest have been good to use and I can’t really complain (except that they publicly make a lot of money on my fees and decided to increase them recently) and they are still low cost – the fees are £10 a month for the SIPPs, £3.50 for the ISAs/LISAs and dealing account is 0.45%/annum which is £7.50 a month on a £20,000 investment (none held at present). Total fees work out at £17 a month for each of us or £34 a month (£408 a year)
As I wrote earlier this year I’ve filled our ISAs/LISAs already this year and for one LISA I decided to carpetbag a cashback deal and the same last year. That’s left one of our accounts with a debit of around £50.
Now, this has happened in the past and YouInvest said that so long as you have an aggregate credit, there’s no problem. But yesterday I got an email telling me to fund my account or else!
I wrote back to say, can you not let it slide since we have around £2,000 in cash across our accounts and £50 is nothing – but they said no – GIVE US OUR MONEY – that made me sit up.
Well, what they said next was a surprise “The easiest way for you to pay the custody charges would be if you just open a Dealing account online, fund it and send us a quick secure message confirming you wish custody charges from your Lifetime ISA (the charges can be taken from your other accounts too) to be taken from the Dealing account and it will be actioned for you.”
So there you have it; we’ve got the ability to have our custody fees paid for from another account. That means we can shift £408 a year into tax advantaged accounts (SIPP/LISA/ISA) by setting up a dealing account and funding from there. Or we could pay all fees from another account (LISA maybe?). I think that it’s a great development but I’m not sure what’s the best option to go for. So, I’ll try to think through the process
Pay Using Dealing Account
This boosts our cash amounts in tax advantaged accounts which is good but it does mean that more money from today is sacrificed to mainly help the SIPP & LISA which isn’t available for another 15-20 years. £408 a year costs me £408 a year now.
Pay Using LISA
Problem is that one of our LISAs has no money in it. But since the tax relief is paid on the way in (£1,000 top-up on £4,000) and it can’t be accessed until 60 – this might make most sense. But money kept in the LISA is free from tax. Also, neither LISA has dividend paying ETFs – so we’d need to jib things around a bit to have the cashflow to pay the fees. £408 a year costs me £326.40 a year and that £408 couldn’t be touched for 20 years.
Pay Using ISA
The ISAs are cash cows and I can access the money today if needs be. However, the money in the ISAs is free from tax and I’m building up our ISAs (currently around £200k but we’d like more). The money has already been taxed and there’s no bonus paid on it. £408 a year costs me £408 a year now.
Pay Using SIPP
This is a bit more complicated. Tax relief is paid/deferred on the way in (including corporation tax savings). So £408 a year fees only costs us around £326 now. That’s a saving. However, paying out £408 now means losing that 25% tax-free lump sum (that I believe in) which puts the saving at £306. So spend £326 now to save £306 later? But then there’s the lifetime allowance, are you still paying into a pension etc.
What’s the Best Way to Pay Fees?
I’m pretty sure that the best way to pay fees is from a separate account – if you have the money (and we do). This maximises the amount in tax-free accounts. But if you are pressed for money, the LISA is the first place that you should go dipping. I love the LISA (but think that it shouldn’t exist) but others don’t (they are misguided in my opinion or have different circumstances) and the main drawback is that you can’t access it until the age of 60. Paying fees on LISA money allows you to keep the bonus money (an £81.60 saving a year for us). The ISA is cost neutral but the benefits of ISA money are worth keeping. The SIPP is possibly the worst due to tax relief and the 25% tax free lump sum but if you are in danger of hitting the Lifetime Allowance, it might make sense to deplete the SIPP first.
You might think that £408 a year is a trivial amount and not worth thinking about (much less blogging) but I disagree. If I can avoid the 8.75% dividend tax on £408 worth of shares paying 4% each year for 20 years that’s an extra £300 on the Gentleman’s Family coffers. And that’s the most cost negligible scenario (savings on dividends in with/outwith tax wrappers), other scenarios can give much higher savings or prove that a different course of action is better. If you aren’t calculating, you are guessing and I like to be sure of these things to allow me to keep it simple, safely.
I’d like to know what others think on this – am I wrong in my assessment?