Margin Lending options (as substitute for savings)

[Brit71]

Currently I have £14,000 savings. When next year's ISA opens that will be £10,000 - which will be a cash cushion for a few years (perhaps increasing it with inflation). This might go up a bit as this is where there bits and bobs of leftover cash goes (main savings vehicle is the pension).

Should I be looking instead at putting that money (and a bit of my current ISA) into a broker that allows margin loans, invest the money on the same reinvestment schedule as I have with my ISA and SIPP and use the margin loan facility as my rainy day fund? It would mean my savings are earning dividends and are exposed to long term capital growth.

I know that there will be tax on the dividends but as I'm currently a basic rate tax payer after salary sacrifice for pension I will have £2,000 tax free of dividends that could be used and so £40,000 would be fairly tax free for a few years (might have to watch capital gains though).

Are there downsides or alternatives that I'm missing?

There doesn't seem to be much in the forum on margin lending, but please point to stiff I missed. I have seen

[daverobev]

Eh no don't do it. The ISA's tax free-ness is amazing over time - no cap gains no divi tax nothing.

Once you're filling your ISA and using as much pension contribution as makes sense, then sure open an ordinary investing account. Interactive Brokers are great and yes absolutely they have cheap margin loans.... but you can only draw a certain amount against your investments, and if things drop hard you may suddenly find yourself margin called == selling low against your will. It is the sequence that is scary - you lose your job because of a recession and stocks drop because of a recession and suddenly you're selling off your stuff at a bad price.

Margin amplifies your returns - losses and gains. You want to have a solid chunk put away before looking at it. Like... £100k in your ISA and £150k in your pension, say? Something like that. THEN putting £50k, 100k into a normal account and using it to back £10, 20k of emergency money? Ok, that's all right, you won't get margin called with that and you have a lot of other stuff backing you up anyway.

[Brit71]

Eh no don't do it. The ISA's tax free-ness is amazing over time - no cap gains no divi tax nothing.

Once you're filling your ISA and using as much pension contribution as makes sense, then sure open an ordinary investing account. Interactive Brokers are great and yes absolutely they have cheap margin loans.... but you can only draw a certain amount against your investments, and if things drop hard you may suddenly find yourself margin called == selling low against your will. It is the sequence that is scary - you lose your job because of a recession and stocks drop because of a recession and suddenly you're selling off your stuff at a bad price.

Margin amplifies your returns - losses and gains. You want to have a solid chunk put away before looking at it. Like... £100k in your ISA and £150k in your pension, say? Something like that. THEN putting £50k, 100k into a normal account and using it to back £10, 20k of emergency money? Ok, that's all right, you won't get margin called with that and you have a lot of other stuff backing you up anyway.

Thank you for that. I'm already above those levels with my ISA and SIPP, so is it that looking at a dealing account makes sense above that level or that the risk of liquidation is still too high? I'd be looking at a generous margin, of £30,000 to cover £10,000 (obviously when needed) and I'd be using a FTSE tracker to reduce the risk of a catastrophic fall. Admittedly I'd have to take 10-15,000 out of ISAs to have that cover, but the loss of tax relief seems like a price to pay here.

[daverobev]

I would work at it slowly and only after filling your ISA each year. Don't take money out of the ISA.

30k to replace 10k of emergency fund... it comes down to your own risk tolerance of course, but yes over time the market is going to return more than any savings account. I don't think I'd want to go much above 20% margin, personally. There are much smarter people on here who will probably say a higher percentage is perfectly safe though.

[Brit71]

I would work at it slowly and only after filling your ISA each year. Don't take money out of the ISA.

30k to replace 10k of emergency fund... it comes down to your own risk tolerance of course, but yes over time the market is going to return more than any savings account. I don't think I'd want to go much above 20% margin, personally. There are much smarter people on here who will probably say a higher percentage is perfectly safe though.

Thank you very much for the challenges, I do need to think this through.

The thing that seems to be the big issue here is the margin call.  These usually happen when the LTV is 80%.  So the FTSE would need to fall about 58% for a margin call if there was a 3:1 ratio.  It would need to fall 75% for a margin call on a 5:1 ratio.  I think that the risk of a 58% fall is small (and I should have time to put in measures before that happens).  There's two dangers I do see though, firstly that my emergency fund could shrink in a really bad market - so in effect I have £6,000 to borrow - or that I could become tempted to borrow for bigger things (or investing).  The first is really a function of the amount that I think I'll need and whether I'm comfortable with this amount dipping over time.  The second is a matter of financial self discipline.

I understand the issue with ISAs and tax, but we already have a £2,000 dividend band that is unused.  Unless the FTSE starts yielding big it's unlikely to breach that.  (I have a complication in that I've already used that).  The CGT is more difficult but if it looks like a CGT liability is coming up then it's possible to sell and buy a different fund\share before the end of a tax year.

Just like buying dividend paying shares rather than keeping money in a FTSE tracker, there does seem to be more overhead in this.  I need to consider that carefully.

[Manchester]

The best advice I can offer is KISS (keep it simple, stupid!) lol.

We'd probably need to know your:

age
planned retirement age
total N/W (broken down)
planned annual spend in retirement


The initial red flag from your posts is

Admittedly I'd have to take 10-15,000 out of ISAs to have that cover,

.  An ISA is a brilliant investment tool.  You're massively increasing your risk - which you might be comfortable with.  It may be a foolish risk to take depending on your situation.

I've attached the best investment flow chart, which I find very useful.