Allocating across several accounts

Most people hold investments across several accounts and manage each as a separate portfolio, which is both more work and less effective than the alternative.

The single portfolio principle

The starting point.

The allocation that matters is the total across all accounts, not the allocation within each.

Which means replicating the same split in a pension, a tax-advantaged account and a taxable account is unnecessary duplication.

And it means the total allocation should be calculated by adding everything together, which many people have never done.

Including workplace pensions, which are frequently the largest holding and are frequently excluded from the mental picture.

Asset location

The reason to differentiate.

Different assets are taxed differently, and different accounts have different tax treatment.

Which means holding the most heavily taxed assets in the most tax-advantaged accounts improves after-tax returns without changing the overall allocation.

The general principle: assets producing income taxed at higher rates belong in shelters; assets producing returns taxed more favourably can sit in taxable accounts.

The specifics depend entirely on the jurisdiction, since the relative treatment of interest, dividends and gains varies.

The general patterns

With the caveat that local rules govern.

Bonds and other income-producing assets are frequently taxed as income at higher rates, which argues for sheltering them.

Equities producing capital gains may be taxed more favourably and may have annual exemptions, which makes them more tolerable in taxable accounts.

Assets expected to grow most belong in accounts where growth is untaxed, which argues for the highest-growth assets in the most sheltered account.

And these two considerations can conflict, which is why the answer depends on the specific rates and expected returns.

Complications

Which limit how far to take it.

Rebalancing across accounts is more complex, since selling in one and buying in another must be coordinated.

Withdrawal needs may force selling from a specific account, disturbing the location.

Pension access restrictions mean the sheltered account may be inaccessible for decades.

Available fund choices differ between accounts, particularly workplace pensions with limited menus.

And the benefit is modest relative to the benefit of simply using the shelters at all.

Which means asset location is a refinement rather than a priority.

The workplace pension constraint

Frequently the binding one.

Workplace schemes offer a limited fund menu, sometimes with only a handful of options.

Which means the pension allocation may be constrained, and the other accounts should be used to bring the total allocation to target.

If the pension can only hold a global equity fund, holding bonds elsewhere achieves the desired total.

Which is a practical application of the single portfolio principle.

Recording it

Which makes it manageable.

A single document listing every account, its provider, its holdings and its value.

Updated at the annual review.

Showing the total allocation across everything.

Which takes an hour to produce initially and makes every subsequent review straightforward.

And which is the document that any partner or executor would need.

Consolidation

Which reduces the problem.

Fewer accounts means less duplication, lower total charges and a clearer picture.

Consolidating old pensions is frequently worthwhile, with the caution that older schemes sometimes carry valuable guarantees that would be lost, and that defined benefit transfers require regulated advice.

Consolidating platform accounts is straightforward and generally reduces cost.

And closing dormant accounts prevents them being forgotten.

The rebalancing approach

Across accounts.

Rebalance using new contributions first, directing them to whichever account and asset is underweight.

Where selling is required, do it within tax-advantaged accounts first, since there is no tax consequence.

Sell in taxable accounts only where necessary, and consider using annual exemptions.

Which means the tax-advantaged accounts do the rebalancing work while the taxable account is left alone, which is generally the efficient arrangement.

The withdrawal order

Which matters later.

Which accounts to draw from in retirement depends on tax treatment, the treatment on death and any means-tested support.

The general considerations: managing taxable income within lower bands; preserving the most tax-advantaged growth for longest; and considering which accounts pass most favourably to heirs.

This is complex enough and consequential enough that professional advice is generally worthwhile at that point.

The practical summary

What to actually do.

Add everything up and calculate the total allocation.

Set the target for the total rather than for each account.

Use the constrained accounts for whatever they offer well, and adjust elsewhere.

Apply asset location if you have substantial taxable holdings and the rules make it worthwhile.

Rebalance with contributions and within shelters.

And record the whole thing in one document.

General information only, not investment or tax advice. Tax rules vary enormously by country — consult a regulated financial adviser and a qualified accountant.