Fees Conundrum

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.

Trivial Sums?

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?

Thanks, GFF

13 Comments

  1. We pay our SIPP expenses from our unsheltered Share Dealing Accounts because it’s equivalent to wangling a little more into our SIPPs.

    It makes no difference for our ISAs because we have far more ISA capacity than we have money to fill them. Boo hoo.

    It may be a scandalous thing to say on a FIRE website but the annual ISA allowance seems rather high to me – generous to the saver but rather expensive for the taxpayer. £40k p.a. for a couple from teenage years to death. Good Lord!

    Some trade-off with pensions might make sense – e.g. scrap the Lifetime Allowance on pensions but introduce a lifetime subscription allowance on ISAs.

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    1. On the ISA, £20,000 a year is a ridiculous amount. The benefit for the government is that few people actually use the full £20,000 – they could make it £1m a year and it would not cost them much more.
      A bit like the LISA, it’s a bung to those that don’t really need it (but I will still make hay while the sun shines)

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      1. George Osbourne increased the ISA allowance to the current limits, doubled previous limits. Clearly their kids’ trust funds are not very tax-advantaged anymore so they need to shovel their money (primarily from historic wealth) somewhere! As it stands, we have benefitted from the 20K limit as we are higher earners, and now have a healthy pot that is tax-sheltered, but really despairing this country takes care of those with capital… while income tax is being taxed something stupid like 40-45% for higher earners.

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  2. Interesting I thought paying from the sipp would have been best. Sure you can take 25% out tax free once you are old enough. But if you pay the fees from it, is that not like getting 100% tax free now?

    I probably have misunderstood something.

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  3. Interesting. With HL I pay the fees for SIPP and ISA from the dealing account, a little over £20 a month as the fees are capped at £200 and £45 for SIPP / ISA. HL let you set this up online, so easy to switch it about. I’m no longer funding the SIPP with new money apart from transfers (stopped work) and still have stuff to “Bed & ISA” for a few years. My thinking was I didn’t want the fees to keep nibbling away at what I have building up in the tax sheltered accounts. I keep investments in the dealing account that pay enough dividends to pay the fees. I’m know this may not be the “correct” thinking on it but it is mainly psychological for me. I might switch it the other way when I’m drawing down the SIPP and ISA, as they will be funding my living costs and hence fees as well.

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  4. On second thoughts: maybe I should draw my tax-free lump sum and then pay the SIPP fee from the remaining taxable SIPP capital. That’s cheaper than drawing taxable income from the SIPP and then paying the fee from the taxed income.

    Shall I throw IHT considerations into the pot? I could convert the rest of the SIPP into an index-linked annuity, gift the resulting surplus income down the generations, and avoid the SIPP fee altogether. But at the cost of a large loss of flexibility.

    Urgh, it’s hardly worth fussing over a few quid per month.

    Does anyone know whether the tax-free lump sum counts as income if you are calculating surplus income?

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  5. “Tax free lump sum doesn’t count towards your taxable income.” Quite: that what they mean by tax-free. But you can give away, free of IHT, surplus income – the money has to be unnecessary to cover your normal expenditure, it has to be classified as income for this purpose, and your gifts have to be regular (for some unspecified time).

    I know that capital raised by, for instance, cashing in Premium Bonds, doesn’t count for this purpose. But does taking a pension TFLS count? I’d assume that it doesn’t, but does anyone here happen to know?

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  6. We pay the fees from our current accounts. In the last twelve months that’s meant £442 of current expenditure but it has saved our tax protected accounts from being reduced by that amount.

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