Allocation to UK Equities

My Low Charge Investment Strategy requires a strategic nominal asset allocation to UK Equities of 20% of total portfolio value.  I then add my tactical asset allocation spin which given the current valuation of the FTSE100 requires that allocation be lowered slightly to 19.6%.  My current allocation is spot on 19.6% with allocations to all asset classes shown in the chart below.

Click to enlarge

Over the past couple of years I have been able to move my UK Equities investments into a position where I feel they are now relatively low expense and tax efficient.  Let’s look in a little more detail.

My UK Equities are now divided into two simple pots.  The first pot is 16.4% of the allocation.  This is all located within the Vanguard FTSE UK Equity Index Fund which is located within a Sippdeal SIPP wrapper.  I chose the Vanguard fund as it has good tracking of the performance of the FTSE All Share Index, which contains household names like HSBC, BP, Vodafone, Shell, GlaxoSmithKline, British American Tobacco, Diageo, BHP and Rio Tinto, while having a Total Expense Ratio (TER) of only 0.15%.  Note that on initial purchase you are subjected to a Preset Dilution Levy (SDRT) of 0.5% however this was not a major factor for me as I intend to hold the majority of this fund forever meaning this charge will become insignificant. 

The Sippdeal SIPP wrapper also subjects me to some extra expenses which are online dealing fees of £9.95 per purchase and a quarterly custody charge of £12.50, which covers all the funds within my Sippdeal pension.  For me Sippdeal was the cheapest pension wrapper for the asset types held with these fixed charges, as opposed to a percentage of asset value, helping as my SIPP pot is now relatively large.  Vanguard plus the Sippdeal wrapper have helped me reduce my costs significantly as the funds came from two old work Group Personal Pensions (GPP) which were both held with Aviva and were incurring high expenses of 0.85% and 1%.
Of course saving into a pension may not be right for everyone however for me as a 40% taxpayer now and a planned 20% taxpayer in retirement they are worth the risks. 

Within the pension wrapper I have also chosen to buy Income Funds (as opposed to Accumulation Funds), including the Vanguard UK Equity Index Fund, for two reasons.  Firstly, the dividends from all the funds held are pooled and then reinvested into the worst performing asset class which helps with my rebalancing.  Secondly, when I finally reach the age when I can access my pension (currently 55 but who knows what the government will have done to pensions by the time I reach that age) I don’t intend to buy an annuity but instead will be looking to enter Income Drawdown (also known as an unsecured pension).  The Income fund choice will mean that I hopefully don’t have to sell funds for the income and hence incur dealing charges.

The remaining 3.2% of my UK Equities are invested in a High Yield Portfolio (HYP) which currently consists of Astra Zeneca, Sainsbury’s, Vodafone and SSE shares.  This is all invested outside of tax efficient wrappers such as ISA’s and Pensions.  By holding the shares directly I I’m incurring no fund charges.  Additionally, in the hunt for the lowest charges possible I’ve chosen to hold the shares in a Hargreaves Lansdown Fund & Share Account.  I believe this fund gives me the lowest total costs with dealing charges of £11.95 per trade but importantly no annual management charges.

I have to invest some elements of my portfolio outside of tax friendly wrappers.  This is for two main reasons:

• I am investing such large sums monthly that I use up my annual Stocks and Shares ISA allowance well before the year is out.
• I will retire well before 55 meaning I will need revenue streams outside of pension wrappers for more than 10 years.  Additionally, I believe it is high risk to hold too much within a pension (I’m currently at about 38.2%) as governments can change the rules on a whim.  Imagine if this change was you can’t get access to your pension until you are 70...  

Even though the HYP is outside a tax wrapper I’m still thinking of tax friendliness.  As a 40% tax payer for the next 4 or so years I am seeing the dividends taxed at an effective rate of 25% however as soon as I drop to a 20% taxpayer, which could be for 40 or more years of retirement, the tax rate will drop to an effective 0% under the current rules.

The HYP strategy then means in retirement, providing the Hargreaves Lansdown and HMRC rules don’t change I will have no expenses and no taxes associated with the HYP.

As always DYOR.