I'm maxing out some allowances. Through which account should we invest in bond trackers and which in stock trackers?

30 June 2021

Question by Justin

My question is what to do when I am in a position that I am maxing out my ISA/my wife's ISA, my SIPP allowance (£4k per year), and my wife's SIPP allowance (not earning so £3,600 per year) with less than half of my annual retirement savings and the rest needs to be invested through either a general account in my wife's name or through a general account in my name (as a higher rate tax payer)?

We want to invest conservatively in a bucket of stock trackers and bond trackers with very low fees through our various ISA/SIPP/general trading accounts (starting at 80:20 stocks-bonds and rebalancing over the next 25 years to a 30-70 ration) but can't work out where we should put bond trackers and where we should put stock trackers. I see arguments for both. My first thought is that bond trackers should go into the SIPPs and ISAs as they are income-generating. But then I guess that my wife can absorb a whole bunch of income each year. Then I thought that actually the stock trackers will hopefully see the largest gain, so to protect against CGT in the long-term, they should go into the ISAs until they are full, then the SIPP and finally my wife's general account. Then looking at CGT annual allowances, I figured that actually perhaps I should have a general trading account myself where I put just stock trackers so that when we look to withdraw at retirement, I can take advantage of my CGT allowances. As you can see, I have got myself into a bit of muddle in my head around what the right allocation strategy of bond trackers and stock trackers across ISAs/SIPPs and General Accounts should be when you are maxing out your ISAs/SIPPs with less than half of your annual contributions. Thanks so much for your thoughts.

Answered by Boring Money

Hi Justin! What you have done well is to maximise your ISA and pension each year first, which is great. Next as you rightly point out the next best 'account' would be a general investment account (GIA). I have clients in your similar situation. We usually recommend that the wife holds the bulk of the assets that need to be saved in a GIA because any dividends from equities (stocks & shares) will be using up her annual dividend allowance of £2,000 and anything above this will be taxed at 7.5% as a basic rate tax payer.

As a higher rate tax payer anything above £2,000 would be taxed at 31.5% (or 38.1% as an additional rate tax payer). The bond funds will pay out interest income which will be offset against her savings allowance of £1,000. Any income above this will be taxed at 20% as a basic rate tax payer. As a higher rate tax payer this would be taxed at 40% for you (or 45% if you are an additional rate tax payer) an your annual savings allowance is £500 (or £0 if your an additional rate tax payer). So as you can see there is value to holding both bonds and equities in each of your wrappers from a tax perspective. It's more the GIA asset split which is more important between spouses. I should also add that equities are growth assets, meaning their function is to grow the value of your investments. Bonds are defensive assets, they are the insurance policy for when markets fall and provide little return. High income bonds/high yield bonds etc. are not defensive assets therefore from a risk/reward perspective you are better off to take risk in equities than trying to target an income from bonds.

Answered by

Boring Money