In praise of the Flexible ISA

Flexibility is a good thing in an ISA. For most of their existence, ISAs and their forerunners PEPs were both use it or lose it tax-free allowances, and one way tickets. You could contribute money to an ISA, but draw it out and you lose the tax-efficiency of that contribution. Put 20k into your ISA in one tax year but draw 10k out, your allowance for that year is 20k-10k

Flexible ISAs make this work right. In the above example your allwoance for that year is still £20k, as long as the net contribution is made within one tax year. Here’s the Building Societies’ Association on flexible ISAs.

Most of the running about flexibility in ISAs is made about Cash ISAs, and the advantages are most obvious in cash ISAs. For most people, however, Cash ISAs are a waste of time, because you can usually get a better return on your cash/lose less of it to inflation with non-ISA accounts, because most people have a £1000 tax-free personal savings allowance on interest. Typical interest rates in the UK are up to 2%, so if you are using this allowance to the full you have about £50k as cash savings. That’s quite a lot – if you have that amount held as cash then you should ask yourself if you are allocating capital in your best long-term interest1, although of course if you are buying a house or have a highly variable income then maybe that is OK.

I have a Charles Stanley Flexible ISA. Charles Stanley used to be a good option for modest sized ISAs up to about 50k, but they jacked up their charges about two years ago, to 0.35% of assets under management2. I initially got this account because the platform fees were low at 0.25%, and it was a place to do funds3.

0.35% p.a. is not terrible, but it’s not great either. If I go to Monevator’s broker comparison table and run a sharpened claw down the end column Good For I discover  CS is basically good for… drum roll, expectant pause … nothing.

I’d like to push back on that. I carry this account at the moment because

Charles Stanley’s S&S ISA is good for flexibility

Monevator’s broker comparison table is probably complex enough as it  is. It performs a pedagogic role, too, and we shouldn’t be encouraging people to dip in and out of their S&S ISAs. If you don’t have an edge in the markets then buy and hold is the way to make money on the stock market, not churning your holding like Frankie.

But flexibility has its uses, particularly for those around the 55 mark. You can only get hold of money in a SIPP after 55. People aiming to retire before then will have to use ISAs as well. I’ve done the taxonomy of retirement stages around 55 in this post five years ago.

If you have built up a decent ISA portfolio by your mid fifties, it hurts to see that go down, all that tax sheltering goes down the toilet. A flexible ISA gives you a chance to keep some of that tax sheltering potential.

An Ermine is on the final approach to drawing my main pension. I am burning up my SIPP to zero ahead of that, but I still have an ISA. I am an early retiree, not an extreme early retiree. I stopped working in my early fifties. Someone pushing things to the limit would need to burn up their ISA to 0 by 55, where they could start drawing their SIPP. They can take a tax-free pension commencement lump sum, and in principle they could shift this into their ISA.

The glide path towards retirement is complicated by the limitations of tax-privileged accounts splitting your capital up into silos

Simulated drawdown of an early retiree starting with 300k ISA and 500K SIPP and spending 20k a year, effects of inflation and compounding not shown (it won’t help them much because they are drawing down over the period and accumulation is only 20 years). If you are going to retire at 41, ie be retired for half your life you need to start off with a lot of capital. You probably need a tad more, see RIT for the canonical lived worked example.

The anomalous peak at 55 is because this individual takes their 25% tax-free lump sum from the SIPP at 55 and reloads their ISA which has run out of puff at that point. They draw half their 20k spending from the ISA after this point and half from their SIPP to minimise tax on the latter, and at 67 when their ISA runs out for the second time they get 8k State pension.

A fly in the ointment is their PCLS is ~£130k, which would take over six years to get into an ISA at £20k/year. There’s a case for this individual to use staged crystallisation4, ie drawing out their tax-free money in 30k stages and pitching 20k of this into their ISA and using 10k to offset their spending, slowing their taxable withdrawal from the SIPP to keep under the personal allowance 5, avoiding paying tax on the SIPP. This way the money in the SIPP keeps working for them.

But there are other ways to make this work. One is using a flexible access ISA. I withdrew £20k from my CS ISA early this year. This of course means I am out of the market, but it is easy to do when valuations are high. It also means that if there had been a market crash last year I could have got back into the market. An added bonus is that I save paying CS 0.35%*20k = £70 in annual platform fees and in theory I could have stowed that in some high-ish interest current account. Life is too short to yomp cash through a bazillion current accounts although I did save some of this with Nationwide for some paltry interest.

At the end of last tax year I raised as much cash as I could from all sources, and put £17k back into Charles Stanley. This was tough as I’d contributed £20k to iWeb as well in that year, hence the shortfall. Cash reserves are low on the final approach to springing another silo, else you are doing something wrong – probably underinvested…

reserves are low on the final approach

There was a disturbing moment where Charles Stanley’s IT systems showed this as a contribution to the current year the money is put in, ie as if I had contributed £17k to them as well as £20k to iWeb, which is a no-no. However, I had asked CS first if this £17k would be considered a withdrawal from previous years’ funds and they said yes, I have this in writing. HMRC haven’t kicked down my door with hob-nailed boots for overcontributing to the 2018/9 ISA year. I got it in writing from CS, honest, guv.

anti-money-laundering woes

I withdrew this money a couple of days after the new tax year, and CS said they would refund the money to the debit card it came from rather than do it by BACS transfer which is the normal way you make withdrawals. This is because of anti-money-laundering regulations, apparently I stick out like a dodgy geezer. To wit:

Thank you for your instruction to transfer £17,000 from your ISA to your designated bank account. Please be advised that procedures issued by our Compliance Department state that all funds recently paid into an account by debit card cannot be transferred back out by BACS. Therefore, as you recently credited these funds into your account, I’m afraid I am unable to arrange for them to be transferred into your designated bank account by BACS. However, I can confirm that I have arranged for £17,000 to be refunded back onto the debit card that you paid the funds into your account with.

Initially I thought I would be stuffed and all this work to preserve 17k of previous ISA allowance would be undone. So I ‘fessed up to CS why I was doing this and they reassured me that I could make a contribution of £37k this year (£17k old allowance retained over the tax year plus £20k new ISA allowance). I have to return the £17k to this CS ISA but I can make the new 20k contribution to any ISA provider. This isn’t a huge restriction because I can transfer the cash amount from CS after putting the 17k into their system.

The obvious question is where is a mustelid going to find £37k this year when I could only drum up £17k last year. The answer is I have burned nearly all my SIPP into the ground and will draw my main DB pension only a little bit short of its normal retirement age. There is a tax-free pension commencement lump sum associated with that, and I’d like to get that into the ISA, please. This old allocation will help with that. Sure, for a couple of years I haven’t been invested to the tune of £17k, but it’s not like valuations are particularly low these days, so I gained more by deferring my main pension another year than I would expect in future income stream from a couple of years’ worth of the 17k working in my ISA. I even got my Brexit bung (that’s the only mention of Brexit in this post, 😉 ) on this money. The opportunity cost would have looked very different in early 2009.

Unlike with a SIPP, where the answer is simple – always take the maximum PCLS, if only to shift it into an ISA, with a DB pension it’s not always the right thing to do to maximise the PCLS, and I won’t. But as soon as I draw that pension, it is enough that I will be a taxpayer again until death, so it makes sense to draw bit more than the minimum PCLS, because I don’t want to needlessly pay tax on the income.

It’s much better to get flexibility from in your offset mortgage than your S&S ISA

I have to jump through all these hoops because I have no mortgage. This all goes to prove the old adage, for God’s sake don’t pay off your mortgage early in a time of low interest rates, but make sure you get a long enough offset mortgage term so that your income isn’t qualified6 between retiring and having your PCLS or other capital amount to pay off the mortgage.

But I was a berk and in a fearful place, so I paid off my mortgage before retiring. Dumbass. Monevator’s case against paying off the mortgage is still a good one eight years after it was written, because interest rates are still on the floor and not about to rise any time soon.

What financial institutions think of people with no income. Perhaps with greyer hair in the case of retirees

Once you have retired you are looked on as a hobo with your worldly belongings in a bindle in the eyes of the financial system, because everybody they lend money to has an income and wants to spend more than they earn. I asked a mortgage broker if I could get a mortgage when I moved and wanted to own both houses for a short while. FFS I owned the old house cash, and had more than half the capital towards the new place. The mortgage broker could neither understand nor help. In his world the only reason people wanted to take out a mortgage was because they didn’t have enough financial capital to make the purchase, but they had human capital in terms of roughly four times their annual income.

It is possible to have capital assets enough to last the rest of your life but to have a liquidity squeeze at a particular time. Early retirees need to be wary of this, and there are two resources they can draw down on. Their mortgage if any, and as a long second best, their ISAs.

Why second best? The opportunity cost of drawing down on an ISA depends on what the markets are doing. if they are at high valuations like now, the opportunity cost isn’t so bad. If they are at lows, like in 2009, the opportunity cost is ghastly and probably best not taken, you could give up a lot of your capital for liquidity.

You end up like this guy, except he’s already lost his and you are about to lose capital for the sake of liquidity

The loan is also only good for one tax year. There’s a lot wrong with using your ISA as your lender of last resort, but in the end if you have to, transfer some of your cash from a non-flexible ISA to a flexible ISA to use it. This is now Ermine battle-tested and it works. I suspect that the cost of providing flexibility means flexible S&S ISA providers are never going to be the cheapest for platform costs, so you only want some of your ISA with one of them. It’s not a great solution, but in Der Not frißt Der Teufel Scheiße

  1. Although targeted at women, this Guardian article goes into the issues of cash as opposed to investing, the principles are general. Monevator has a good article on why do we invest, the context is that cash savings are not generally investing at rates of return typical today. 
  2. You can check CS current charges here 
  3. I use iWeb for shares and ETFs, because: no ongoing platform fees. 
  4. You do not have to crystallise all your SIPP at once with some providers. You can take a tax-free lump sum in stages in this case. You should note that as soon as you take more than the tax-free lump sum from a pension you trigger the money-purchase annual allowance(MPAA) which means you can only contribute up to £4k p.a. to a SIPP for the rest of your life. 
  5. The personal allowance in the UK is £12,500 at the moment, I have assumed £10k in the simulation to simplify the model. 
  6. Above all else don’t take the piss like this retired accountant who discovers at 77 that you’re meant to pay off an interest-only mortgage and mithers at his MP that it’s so unfair 

35 thoughts on “In praise of the Flexible ISA”

  1. here here, I need an offset mortgage and flexible ISAs without any question of doubt! They are both on the top of the TODO list.

    I have been patiently waiting for months for TIs report on getting the offset mortgage. I can only hope it is in his out-tray?

    Problem seems to be that the ISAs you want aren’t necessarily those that are flexible yet? Hopefully that will change – in the meantime I’ve got strategies for moving between the two in (hopefully) reasonable time-scales, i.e. in cash.


    1. Moving cash is the line I am going to take. I don’t particularly want to end up with more in the Charles Stanley account, so I will make the replacement contribution and then ISA transfer out the cash.

      Mortgages, OTOH, are easier to sort, provided you have an income at the time of taking it out. A decent mortgage broker ought to be able sort that for you? It was applying for one as a low-income early retiree where I got the ‘talk to the hand’ response.

      Paradoxically my pension-drawing future self will probably find it easier to get a mortgage, when there is a convincing answer to the ‘what is your annual income?’ question. By then, however, I can’t really foresee the circumstances where I would want one. I don’t have TI’s balls of pure titanium in investing against a mortgage. There again TI still has human capital and sees himself working for the foreseeable future, so his risk profile is very different. Unlike him I have earned all the money I will earn in my lifetime. Well, and he has more natural aptitude for this investing lark, hell, I’d mortgage up and invest against my house if I were him 😉


  2. The trick with getting the mortgage for me will be either temporarily modifying my (high %) SIPP contributions or possibly not mentioning them? Honesty wasn’t the best policy last time I spoke with a broker. They couldn’t get there head round it.


    1. Been a long time since I got the last mortgage, perhaps they ask more things. I’d be tempted to ignore the SIPP contributions, after all you do actually earn the money. It’s not like salary sacrifice, where you notionally don’t earn it first. You also get to switch SIPP contributions on and off, so unlike debt it doesn’t change your risk profile. I gather they ask people about debts these days.

      Better get that mortgage in before AI credit scoring becomes rife in a few years. The pariah status of FIRE is currently because of an apparently low income, with AI anybody that sticks out from the norm will become a bad guy. It makes you yearn for the avuncular bank manager of yore, as opposed to ‘computer says no’.


      1. technically I am salary sacrificing, but its completely under my control. I think I’ll keep quiet and see how it pans out.


  3. I don’t own a house, but expect to inherit the one I live in, which might be hard to sell. So I might need a flexible ISA to allow me to buy a new house first without bridging loans or CGT gains on my unsheltered assets. As FlexISAs aren’t competitive, I invest £19k into my cheap S&S ISA each April, but hold back £1k, so if I need a FlexISA part-way through the year, I can get own, sell off my holdings elsewhere, and transfer them out through the FlexISA. By Christmas the situation is clearer, and I can put the final £1k in to the normal ISA.


    1. That’s quite a neat idea, although it’s worth familiarising yourself with the rules on transferring money out of an ISA with your specific providers. Beats me what happens if you open the 1k ISA this year and transfer a load of money from another. Does that count as this year’s contribution? What if you contribute to the other in the same year? Trying to suss out the priorities with CS made my head hurt, enough to the extent that I make sure I don’t contribute to CS at all.

      There is a rule that you cannot make contributions to two S&S ISAs in the same tax year, presumably because there would be no way of tallying how much you had put in that year. Whether this is a Charles Stanley specific thing isn’t clear to me, but I wouldn’t make the assumption I can make contributions to one S&S ISA for 19k and open another that same year with a contribution of 1k and then xfer money to the latter from previous years. It might be possible, but there’s a lot of small print. I found it easier to delay my contribution to an ISA to March, but I do hear the counterargument that I’m out of the market for a year needlessly…


  4. Good points well made re timing and strategy for bridging the income gap.

    But I think you need to stop beating yourself up about paying off your offset mortgage before you retired, because it seems to me that – under the rules brought in through the MMR – the lender would *still* be required to consider affordability if drawings were made.

    The ‘offset’ bit means there would be no need for any new full mortgage application/offer or legal formalities, but I don’t think it can trump the regulatory requires. So early retirees may still come a cropper if they try to draw against the mortgage with insufficient conventional income to ‘afford’ the increased loan per the normal affordability checks.

    Others may have better information / experience on that point, of course!


    Liked by 1 person

    1. I currently have an offset mortgage ( normally fully offset ) and I can draw it down at will. I just get a nice popup warning me that by taking out capital it will need to be paid back ( or similar ). It’s at 2% so a useful, cheap loan facility for funding SIPP / ISA at the end of the tax year. However, I now face the complexity of considering renting out the property that has the offset mortgage on it. I need to establish if it’s actually worth changing the mortgage and renting the property or retaining the offset mortgage and leaving the property empty. Aargh !!!


    2. > the lender would *still* be required to consider affordability if drawings were made.

      Blimey. It wasn’t the case the one time I did draw down the overpayment from Birmingham Midshires some time before I retired. Getting the third degree seems needlessly nosey to me – I wasn’t drawing down below the original steady as she goes track, merely the overpayment. It was a question of pick up the phone , clarify amount, job done. I can see the affordability test should kick in if the borrower draws down below the original repayment track, as that’s effectively applying for a home equity line of credit, and does change the risk profile for the lender.

      There’s still a case to be made for retaining the mortgage, particularly before 55, even if you don’t overpay it. I would have been less skint in the years between 52 and 55. I am better off now, of course, but arguably I wouldn’t have to go through the fun and games of retaining the ISA allowance if I put the PCLS towards discharging the residual mortgage capital, which used to be what people did with that.


  5. I quite like the idea of a tiny flexible ISA waiting in the wings for a potential quick transfer

    With CS, would you pay 0.35% if you were just holding cash but in the S&S ISA? possibly not?

    Can you transfer cash from an S&S ISA into a flexible cash ISA? But maybe, even if thats possible, you can’t transfer back the opposite way? I’m not sure you can?

    Its all pretty confusing..

    Maybe this is the scheme:

    Non flexible S&S ISA –transfer in cash–> flexible S&S ISA, withdraw and spend on whatever, somehow recoup spent money (say a house sale) –transfer in cash–> flexible S&S ISA –transfer to original non flexible S&S ISA–> Back to square one without losing years of ISA contribution allowances?

    Click to access csd_flexible_isa_faqs_0.pdf

    Click to access cs_direct_rates_and_charges_nov_16.pdf

    Liked by 1 person

    1. It used to be that you couldn’t transfer (cash) out of a S&S ISA into a Cash ISA, but you most certainly can do it the other way. I have done exactly that – the desperate and fearful younger Ermine split 2008 and 2009’s ISA allocation into cash and S&S ISAs half split, before eventually that Monevator fellow slapped me around the chops with a wet fish to the effect if you aren’t buying into this market that is on its knees you will never do it, so in April I went all into the market in the AVCs though I half split the ISA because of the shorter availability.

      Fortune favoured the boldness in the AVCs and the S&S ISA. Despite taking the piss out of people who only carry cash ISAs it took me far too long to transfer that into my S&S ISA, I think I transferred that cash ISA into CS when I opened that in 2017-ish


      1. do you think holding cash in CS S&S ISA won’t attract the 0.35% fee? The charges pdf suggest its only charged on holdings of stocks/ITs/funds?


      2. > do you think holding cash in CS S&S ISA won’t attract the 0.35% fee?

        It would appear it doesn’t, reading that. I’ve never held lots of cash in there for any significant time. I confess i assumed they charged the fee on all assets under management. They don’t pay interest on cash, so you might as well transfer the bugger out and get some interest on it for 11 moths. I kept mine with Nationwide, which wasn’t a thrilling interest rate but more than I’d have got from CS and I didn’t have to open yet another account to do it.


  6. this is a very pertinent article and it sort of is a bit ahead of how I think things might pan out for myself.
    I used to have an offset mortgage and loved it for its flexibility – of course I’m not one of the idiots who could afford the deposit but not the repayments on their homes and thought that interest only didn’t mean that ath the end of 25 years you need to pay up or move out.
    So, IO mortgages are rationed and I’m on a repayment mortgage now – which is a bit of a shame.

    Additionally, I started making small over-payments to my mortgage recently but had a change of heart when I thought that I would be better off putting that money to work elsewhere or in a SIPP and use the TFLS at 58 to clear the mortgage. I’m 36 now, mortgage has 22 years left to run so I’d probably need to extend the mortgage to do this and I don’t know what mortgages are like if you RE.
    Just out of interest, to remortgage with the Nationwide recently, the process was very simple and they didn’t take any income checks – so maybe it’ll be fine to roll over from our 5 year fixed to a new product even if we are no longer salaried employees in 4 years time.

    I have our ISAs with YouInvest and they don’t have the flexible option which is a real bummer as I needed some money recently but couldn’t access it. Maybe YI will bring it in but flexibility is a great tool if you know how to use it safely. Sometimes it’s good to not be able to chop and change much – churning is not great and it’s maybe best to just buy and hold rather than chop and change.

    Thanks for the link to the Silo article – from 2014 but still relevant. Planning for the future is an evolving process and for FIRE, things change over time but the process (financial planning) is constant.

    Cheers! GFF


    1. > I have our ISAs with YouInvest and they don’t have the flexible option which is a real bummer

      You can open an ISA with Charles Stanley, transfer in the cash from YI and then use CS’s flexibility option to borrow the money. Replace and then if you wish ISA transfer the cash from CS to YI at your leisure. Note htat there’s nothing fast about inter-ISA transfers, think six weeks. But you can borrow from a non-flexible ISA using a flexible ISA.

      > Just out of interest, to remortgage with the Nationwide recently, the process was very simple and they didn’t take any income checks – so maybe it’ll be fine to roll over from our 5 year fixed to a new product even if we are no longer salaried employees in 4 years time.

      I would be uncomfortable relying on that assumption 😉 Your options of borrowing money as an early retiree are very few and they mostly suck. You could be seriously outta luck, should you need to do that at a time when the stock market has just taken a sucker punch, f’rinstance. Personally, I’d be prepared to pay a little bit more to carry an offset mortgage, though I take Jane’s point above that they could tighten up the qualifying rules at any time. The direction of travel is towards more regulation and income qualification, not less.


      1. I see what you mean – personally I think that Retire Early might = Expenses / 3% SWR + principal residence paid off. I can afford the interest on the mortgage at the moment and in a FIRE-lite scenario but paying off the capital is a serious drag on capital over the years and as others have written about, eating your assets to pay off a mortgage isn’t a great way to do things.
        The next logical step is lifetime equity release interest rolled up home loans – let your house do all the hard work and you can just spend that equity that you’ve earned.


      2. > lifetime equity release interest rolled up home loans

        Tragically that probably is the next logical step, in property-obsessed Blighty. You sort of rent from yourself. Well, after you rent the money to get started from a bank.

        In Europe they seem to have made renting both civilised and with reasonable security of tenure and freedom to make it a home. There’s a strong argument to be made that people, particularly those who haven’t got children, would be better off in secure renting – you don’t need to tie up capital that in many cases is of the same order as your pension savings at the high-water mark just before retirement.

        Imagine all that capital released into the economy and improving their quality of life. Obviously they would pay rent so it’s not all released into the economy, perhaps about half. People and companies that wanted to manage illiquid assets for the long term, say pension funds, could do so, and Brits could be free to move around the country and wouldn’t have to become accidental landlords. Nah. it’ll never happen over here. An Englishman’s house is his castle and his bulwark against the fear of death.


  7. I’ve stopped overpaying on the mortgage for first time in my life at 38. Not offset but fixed for ten years at 2.59% as I realised I was pension and equity heavy but not enough liquidity. Now building isa wealth and will eventually use dividends to pay the mortgage quicker I think. Mortgage is a touch over 3 x salary so although a big number it’s affordable. Just getting into the mindset


    1. Definitely worth pumping up the ISA for anyone wanting the option of retiring before the time you can get hold of a pension. It’s tough that the best way of doing all those things is over a long time, for people that experience significant career progression it’s probably ISA first then pension due to the tax advantages. And it’s tough to make the case of mortgage overpayments at current interest rates as opposed to saving in an ISA, even towards reducing the capital should you wish to do so.

      In the latter case best not be too hung on exactly when to pay down the captial though, more have a ten-year range of aimingto do that. Else taking a stock market retrenchment of 50% could be tough, though they don’t usually persist for 10 years!

      Liked by 1 person

      1. In my case i did it the other way round lol I’m contributing about 19% (about 17k a year) Inc employers contribution to my pensions and have about 200k in already so need to be a little mindful of the lta as it’s entirely possible with bonuses and a fair wind I’ll breach this

        I only started earning hrt money about 7 years ago. The tax advantages are hard to ignore but I figure leave some breathing room for a little closer to retirement even if that’s early 50s to allow myself some flexibility


  8. Thanks for another insightful and thought provoking post Ermine. I may be missing something but the simulated financials in your example of someone extreme early retiring at 40 just aren’t anywhere near achievable for people given the annual allowance pension cap of £40k, tapering down for incomes over £150k to a low of £10k. Unless someone’s received a massive inheritance or lottery windfall in their 20s, building £500k into a SIPP and £300k into an ISA by 40 whilst also building a life just isn’t achievable. Resigned myself to working a lot longer but trying to find more meaning in the work.


    1. Totally take that point, I guess I was lulled into easy assumptions with RIT’s worked example. He had a better pension regime, with a much more generous annual allowance which I think was changed around 2011 from about 250k p.a. and he also started into a market low.

      It seems tough to have both an annual allowance and a lifetime allowance. While I can understand that tax relief on pensions needs limiting, there are some occupations that are fast and furious. Continuing the alliteration theme, football and finance are obvious ones that spring to mind. I can get the LTA, but the annual allowance strikes me as arbitrary if there is a LTA.


  9. You’ve got to just play the hand you’re dealt but the change to the pension annual allowance seriously restricts the opportunity for early retiree wannabes earning significant incomes to build up a sizeable pension pot. The massive allowances baby boomers were afforded are a thing or the past.

    All first world problems! The alternative for younger people today is to just follow the Kim Kardashian Instagram route and get so wealthy none of this matters! Good luck with that…….

    Liked by 1 person

    1. > The massive allowances baby boomers were afforded are a thing or the past.

      Remember that it was only five years or so ago, however, when you had to buy an annuity with your pension capital to use it (unless you had a guaranteed pension income of 20k). That was quite restrictive in a different way.


  10. I’ve been running the no.s a bit more carefully and am now a bit more sanguine about whether a flexi-ISA is a necessity, possibly just a nice to have.

    My spreadsheet suggests that the tax hit on the dividends on 500k of ISA over 12 years (the amount of time it would take me to rebuild the ISA) would be in the order of 5k. 5k over 12 years isn’t going to overly worry me, hence nice to have rather than essential.

    This was working on the basis of approx 2% dividend yield and 7.5% dividend tax, i.e. basic rate. It would prob be a bit less as I haven’t taken allowances into account (I’m using the scenario of a non-working spouse).

    Potentially a tiny bit of time out of market could completely dwarf any tax-related savings.

    I’m only looking at tax on dividends and not CGT implications here, although given its all house related I’m not foreseeing huge (house-type) outlay in next decade or so.

    Need to investigate mortgage as well in more detail. Seems that you pay handsomely for an offset opposed to a standard interest only. Seems to be 4% rather than 2% (ballpark). Thats a lot to pay for the instantaneous control an offset would provide. The flexibility could be a double edged sword making spur of the moment decisions possible? I’m erring to interest only product between 2 and 5 years because it *wouldn’t* give me the chance to chop and change based on macro-events..

    If I could get a sub 2% mortgage I’m thinking on balance, its probably a sensible thing to take on, as long as the overall LTV is not too high, say in the 25% -33% range.

    I think TI went offset, and I’m wondering what premium he had to pay for it over a standard interest only. For him though, being more actively minded, it probably makes sense?


    1. > I’m only looking at tax on dividends and not CGT implications here

      I implore you to also think about the paperwork on your tax return. I was dead chuffed to finally sell out of my last non-ISA shareholding to minimise that. The only thing I’ll even think about holding unwrapped is gold, when was the last time you heard of gold paying a dividend? At least the CGT calculation is pretty simple in that case. Maybe it’s all OK if you are just going to hold VWRL of Lifestrategy, but even so, think of your future self 😉 BTDT for a family member, you really don’t want to go there. Or at least if you do, know what you are getting into before you get into it. For people with unwarpped shareholdings built up over years, taxcalc and the associated add-on dividend database is one way to reduce the pain…

      I’d been under the impression IO was being made harder to get, though I guess with a 25% LTV they will be more chilled than usual. Offset is not the only way to play the game. I never had an offset, but I did have a flexible mortgage, where I could pay down the capital and then draw down the overpayment, up to the original track of where I’d be. Perhaps that is a cheaper alternative

      > For him though, being more actively minded, it probably makes sense?

      Depends on your integration time, and your viewpoint on future interest rate variations, and to some extent GBP forex. Borrowing at 2% against a long-term real return of 5% could work, though I’d agree that for a 12 year period starting at relatively high valuations and the remote but not zero possibility of a Brexit cancellation jumping into the market with that amount is not a stupendously attractive deal. But if you are jumping out of the market then of course you are being sort of active 😉


  11. My sticking point is the time taken to complete a transfer – I’d hate for it to beggar up the house purchase because it took longer than expected. If it took 3 days then I’d do it without a question of doubt, but they are quoting 4 to 8 weeks and I know when I did it last it took 12.

    Interest only do seem harder to come by. A lot of income limits of 75 or 100k. Its a bit of a rich mans game now?

    Just one thing, you can’t compare mortgage rate against real return, it has to be mortgage rate against nominal return (or inflation adjusted mortgage rate against real return). My very simple model is just a 4% disparity between the two, which on a 200k mortgage would return 8k / year. It could go wrong in many ways but I feel like having a punt.

    Another sticking point is the time to get a mortgage, but if I could sneak one in in time, then that would massively reduce the kicking my ISA would get. If that didn’t come through in time it wouldn’t be end of world though as I still have access to funds, but a transfer by comparison, everythings in limbo – no access to anything until transfer complete!


  12. Notwithstanding that some folks may question whether holding a relatively large quantity of cash ISA’s is wise; is it not the case that because cash ISAs can be transferred to S&S ISAs that this route could be used to effectively get your tax free PCLS reloaded into your S&S ISA’s? This may mean that the resultant PCLS, paid as cash, would mostly be held in taxable accounts – but assuming you wanted to use the PCLS to pay off a debt (such as, say, a mortgage) then so be it.

    I am a new reader here and have now read through quite a number of your posts – all of which I found very informative. I do however, have a question about your posts on front running a DB pension with a short-term SIPP. Specifically, does the proposed scheme not become even more attractive for a non-earner aged 55 or more who could, at least in principle, use the same £2880 year after year to get an annual £720 tax uplift into a SIPP?


    1. > Notwithstanding that some folks may question whether holding a relatively large quantity of cash ISA’s is wise; is it not the case that because cash ISAs can be transferred to S&S ISAs that this route could be used to effectively get your tax free PCLS reloaded into your S&S ISA’s?

      Your ISA allowance can be split between cash and S&S ISAs at will. That is, for an ISA allowance of £20k you can put a total of 20k into ISAs in that tax year, 1k into cash and 19 into S&S or 19k into cash and 1k into S&S in no matter, But if you put 20k into cash or S&S ISAs then you may not put anything into the other type of ISA that TY. For technical reasons I believe you are only allowed to open one ISA of each type in one year, so put 10k with CS and you aren’t allowed to open another S&S ISA with the remaining 10k.

      This article was mainly about using the flexibility to ‘borrow’ your previous years’ ISA contributions to draw down, as long as you do all your borrowing and returning within any one tax year that’s OK with a flexible provider.

      If your PCLS is larger than 20k you aren’t moving it all into an ISA in one year, unless you give 20k of it to another adult and use their allowance.

      I am effectively running down some of my ISA in the last year before claiming the DB pension, using some of this trickery lets me borrow from my own ISA without losing the ISA allowance, ‘cos I will backfill that with a fair amount of the PCLS.

      > This may mean that the resultant PCLS, paid as cash, would mostly be held in taxable accounts – but assuming you wanted to use the PCLS to pay off a debt (such as, say, a mortgage) then so be it.

      That’s probably the most sensible way for most people to do that. If you are not a higher rate taxpayer in the relevant TY then your savings interest allowance allows you to get £1000 of interest tax-free. Say you are lucky enough to get a whopping 2% on your savings, well, that means you can get interest in taxable accounts on £50k of cash savings without paying tax on it. Cash ISAs pay relatively poor interest these days; you’re better off sweating taxable accounts first.

      Specifically, does the proposed scheme not become even more attractive for a non-earner aged 55 or more who could, at least in principle, use the same £2880 year after year to get an annual £720 tax uplift into a SIPP?

      Absolutely, that’s been me, so far, the principle is Ermine battle-tested. That will come to an end for me when I draw my DB pension because I will be above the personal allowance, a taxpayer for the rest of my life. I’m not asking for people to play tiny violins – it’s a good problem to have, to have enough pension to pay tax on it 😉 Though it is still worth it for a BRT taxpayer to wash £3600 through a SIPP as cash. Although you save tax going in but pay tax coming out, which would otherwise be futile, you only pay tax on 75% of it, so there is a free £180 p.a. going begging for the minor paperwork. As usual, be warned that as soon as you draw one penny of DC pension flexibly your money purchase annual allowance falls to £4000, if you expect to be earning post-55 then you need to think about this beforehand because it may be advanatgeous to you to put more than £4000 of your earnings into a SIPP for a few years.


      1. Thanks for the speedy and informative reply.
        WRT the situation where the PCLS is >£20k : is it not possible to effectively move all the PCLS into a S&S ISA in one lump by transferring cash ISA’s from previous tax years, assuming, of course, that you have sufficient cash ISA’s? The key point being that whilst cash ISA’s may no longer offer market beating interest rates they do still confer tax free status to the funds held within them and this should be considered before trading any cash ISA’s for a marginally higher interest rate in a taxable account.


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