Investing newbie with questions...

Not_Me_Officer wrote: »

So firstly i see i'm going to be charged 0.45%. Looking around this seems on the higher side, correct, or not?

Correct, that is about the highest of the percentage-based providers that you could possibly find.

However if you only have £1000 invested all year it's only £4.50, so it's cheaper than the fixed fee providers who charge some lower amount and then a fee for every type of transaction.

I was surprised by the charges if i understood them right. I thought HL didn't charge to deal? Or was i just badly misinformed?

They charge explicitly for each transaction when you want them to execute a buy or sell trade on the stock market. However, if you just want to subscribe into an open-ended fund, they do not charge for that, as they cover the cost of that work in the 0.45% platform fee that they charge on the fund value. See below:

I then notice the £11.95 charge. What is that exactly? £11.95 per purchase (so if i pay in £100 per month then it's really only £88.05? £11.95 per year? Is that even applicable to a tracker fund?)
£1.50 for "regular investing". I'm guessing this is the one that is deducted from my monthly contributions, so that £100 is actually only £98.50?

The £11.95 transaction fee at HL is a charge for buying shares, exchange traded funds or investment trusts. Those are things that their brokers would need to buy for you on the stock exchange (which is an open market in which you agree to buy a share of the company or trust off somebody who wants to sell, with prices changing up to several times a second during business hours). For dealing with an order for you on the stock exchange it is £11.95 per transaction (a buy or a sell).

Alternatively for 'regular investing' of stock exchange listed investments, whereby your orders are pooled with other investors on a fixed day or two per month and dealt with on a bulk basis (rather than a real time, personal trade just for you), the charge you £1.50.

As you can imagine, it would be quite expensive if every time you wanted to spend £100 to buy an investment it cost you £11.95 or even £1.50. Really you would only want to incur a transaction fee to directly buy shares or ETFs or investment trusts off the stock market if you were spending several hundred pounds (or preferably several thousand pounds) on each transaction.

But HL don't charge those trading fees if you are not actually trading anything on the open market. Many investors do not buy shares in individual companies or investment trusts off other people on the stock exchange. If you are merely placing an order to subscribe into an open-ended investment fund (OEIC or Unit Trust), whereby HL or Cavendish inform the fund manager that you would like to put £x into their fund at the next valuation point, and the fund manager issues brand new shares in their fund to you at that time - the investment platform does not charge you.

They are already getting their 0.45% per year of your fund value (up to a quarter of a million quid), so they can afford to carry out that activity for you for 'free', i.e. no transaction cost. Similarly if you want to redeem your shares in an open-ended fund (give up the shares and have the manager cash them in), then they will not charge you. Whereas, if you were holding shares which could only be disposed of by selling them to somebody else on the stock market, they would charge you £11.95.

Your question 'is that even applicable to a tracker fund': it depends what type of tracker fund it is.

- If it is a 'normal' open ended fund (OEIC or unit trust) which you find from the big list of funds at 'fund prices and research' on the HL website (http://www.hl.co.uk/funds), then there is no transaction fee and the work is covered by the annual 0.45% charge on the first quarter million pounds of value.

- If instead is an 'exchange traded fund (ETF)' then that's a special type of fund that is bought and sold on the stock exchange just like share in an individual company such as Tesco or HSBC or Microsoft. HL would charge you £11.95 (or £1.50) for the purchase and £11.95 for a sale. Those are charged on things you would find in the 'share prices and stock markets' section of the HL website (http://www.hl.co.uk/shares).

For ETFs and other things bought on the stockexchange inside an ISA, you only pay the 0.45% annual fee up to £45 (i.e. on the first £10k rather than on the first quarter million) because they are expecting to make transaction fees off you.

Just for completeness - if you are not using an ISA for some reason, just a simple 'unwrapped' general investment account (they call it the fund and share account) HL don't charge the 0.45% at all on stock-exchange-traded stuff because there is less HMRC admin and they are getting transaction fees so don't need to make as much money off you; but they still charge you the 0.45% fees on the open-ended funds stuff.

Not_Me_Officer wrote: »

The one fund i will be looking at closer once i finish the book is the VLS perhaps VLS80. I'm 34. Not to say that's where i'll put my money but from what i've picked up so far both through the book and online that is the first place i'll be looking. My monthly contribution will be around the £200 mark. It'll actually probably be a bit more but i prefer to give figures on the conservative side.

So i take from this then that i will only be charged the 0.45% and not any trading charges. Even still, i may as well take a closer look at Cavendish if i can get the same thing for less.

Correct there is no transaction fee at HL for buying an open ended fund such as Vanguard Lifestrategy 80% Equity or any other open ended fund.

However if you are happy with one fund from one manager and that provider has a 'direct to customer' offering rather than you needing to go through a fund supermarket or broker, it is always worth looking at that option. In the case of Vanguard, their recently launched direct retail offering is at https://www.vanguardinvestor.co.uk/home and has an annual percentage fee of 0.15% with no transaction fees. That's cheaper than both HL and Cavendish.

The 'downside' is only products from Vanguard are available, however if you only want or need one fund and you are happy with that one, it is not much of a downside You could always transfer later to someone else, some years down the line. But don't get too hung up on platform fees to the extent that you cut yourself off from all the other funds available to save 0.1% which is basically only a tenner on £10k and dwarfed by your investment gains or losses. If there is a better non-Vanguard fund for your needs that you could get from Cavendishonline or someone else and not from Vanguard because it's not a Vanguard fund, then don't let the tail wag the dog.

You touched upon ISAs. I haven't fully decided. Before i went into this i was 100% pensions. At the moment i'm keeping an open mind sort of but i will either be placing my money in the form of a pension or S&S ISA.

The real downside with going to Vanguard direct is that they don't currently offer SIPPs or LISAs while other platform providers would. They will probably look to add other options in due course once they are fully up and running (their UK platform is relatively new).

Another question ... i have approx. £7,500 to deposit. Whether it's with HL,Cavendish or whoever, would you throw that in in one whack or drip feed it bit by bit (and if so what would your bit be?).

If you are putting in (say) £250 a month, you are already drip feeding £3000 a year into your funds as you earn money. So over the course of your life, viewed on a five decade timeframe from now until your mid-80s life expectancy, the money you invest is being 'dripped' into the markets at £3000 (or more) a year. So in the grand scheme of things it doesn't really matter if this £7500 is coming in this year or next year or the year after or some averaged midpoint.

If putting it all in today and then seeing a 40% loss over the next 12 months would freak you out, feel free to drip it in at £600pm. But (a) you might end up buying fewer units for your money that way, because markets generally go up rather than down, and (b), if you only just get your £7k deployed by May 2018 and *then* there's a crash with 40% loss over the following 12 months, you are no better off than if you invested today and had the crash start tomorrow.

Unless you have a lot of luck - or psychic ability to time markets perfectly - you will never get it exactly right whether you decide to buy now or defer. Investing by drip drip drip can be a good psychological crutch to make you feel better that your money is not so much at risk. But, you want your money to be at risk, that's the whole point of investing - to take risks and reap rewards. If the risk is too high, simply pick something lower risk.

With only £7500 it's worth asking whether you have already maxed out the top bank current account offers and regular savers offering up to 5% risk free. If not, and if you are naturally averse to risk, it might make sense to just go ahead and do your lump sum to the S&S ISA or LISA or pension now but then be dripping your £200pm or £250pm or whatever into a bank or building society regular saver taking no investment risk for a decent return, and then once you get a year down the line you will have a maturing ~£3k lump which you could put into the markets next May/June time, and at that point you could reconsider if you wanted to carry on using regular savers or investments on the new money becoming available to you.

Re: the LISA-

A LISA, compared to a normal S&S ISA, gives a 25% bonus on new money contributed, with the restriction that if you want to withdraw it out before age 60 (other than in limited circumstances such as buying a first property or being terminally ill) you will have to pay a 25% penalty of everything you take out (so the penalty would be greater than the bonus received, if you wanted early access).

If you are definitely going to be able to afford to put the money away until age 60+ rather than age 55 or 50 or 40 or whatever, then LISA is fine and preferable to S&S ISA; a free bonus from the government is not to be sniffed at.

However, most people can get a similar effect by putting their money into a pension ; if you put £4k into a pension as a basic rate taxpayer, the government will give tax relief to top it up to £5k (which is mathematically the same as if they had given you 25% 'bonus' in a LISA) and then when you reach retirement age you might well be able to draw some or all of it out tax-free within your personal allowance.

So, getting tax relief now on money into a pension and paying no tax later is almost as good as putting your taxed salary into a LISA and getting a bonus on it and drawing it out tax free later. I say 'almost' because withdrawing a pension out without any tax whatsoever in retirement will require you never take out so much in one tax year that combined with other taxable income you over your personal allowance... whereas with a LISA you can take it all at age 61 to go and buy a Porsche convertible if you like. With a pension you couldn't take out that amount of money tax free all at once because it would take you into high rate tax for that year.

A pension also has the potential benefit that it is not taken into account for means testing and bankruptcy and is not within your 'estate' for inheritance taxes. But the major potential advantage of a pension that Martin alludes to, is that if you are employed, your employer will be willing to contribute into a pension for you, and in some cases will put more in if you put in. And if it is a salary sacrifice scheme you can save on your national insurance bill too. So Martin's comment about self-employed is that if you are employed, you should definitely not turn down the free employer money within the pension just so you can go off and do a LISA investment yourself. Martin doesn't want people to reject perfectly good free money from their employers and go off and do their own thing with a LISA and be overall worse off.

Whereas if you are self-employed that's not really a consideration because getting free employer money is not something that's on the table anyway. So that's where his comment probably came from.

If you are a high rate taxpayer it makes relatively more sense to use a pension because the maximum potential tax relief is way higher than the bonus that's available in a LISA. Even if you are a low rate taxpayer now and only expect to be a high rate taxpayer in a few years time, it's fine to avoid LISA and do S&S ISA instead for now, because you can remove it in a few years penalty-free and put it in to a pension for high rate tax relief at that point, whereas there is no penalty-free withdrawal in a few years time if you went the LISA route.

So, whether a LISA is more useful to you than pension or S&S ISA or not is something that will depend entirely on your personal circumstances, and you shouldn't take a soundbite generalisation that "it's basically not good for me" without understanding why it is that a person would suggest it's not good for your spare £200pm. The reason and assumptions might be valid, or they might not be relevant.

For example, you mention that up to now you have only been investing in pensions rather than S&S ISAs. So let's assume you have been investing in pensions for a while and will continue to invest in pensions for the next thirty years, building up a substantial pot of money from you and your employer and tax relief. Then you retire and your income from work stops. You might well have enough private pension built up to be able to max out your personal allowance with pension income each year until your state pension kicks in, and once you've run out of personal allowance any extra pension income will only get an initial 25% tax-free lump sum, with the remaining 75% being taxable at basic rate.

So in that scenario, where you will already have reasonable pensions but are able to contribute another amount now...

...for example £4k now into a pension creates £5k of pension after the tax relief, but you would be paying basic rate tax on 75% of that pension when drawn out, which is about £750 of tax out of the £5k. Or £1500 tax on £10k or £3000 tax on £20k; basically a decent chunk of tax is going to be lost whatever the £5k grows into. Whereas if you contribute £4k now to a LISA and get a government bonus of 25% taking it to £5k of investments, there is absolutely zero tax to pay when you draw out the £5k or £10k or £20k over the age of 60. So, LISA beats pension quite soundly, in that example.