Checking IFA advice before investing

dunstonh

*Sigh*

If you hold a share - let's for argument say it's Lloyds Bank, which pays a dividend of around 6.2% currently- you will pay no tax on this dividend income if you are on basic rate.Nil,nada. 6.2% income into your bank account tax free, no effect on the capital.

Dividend income is tax free to basic rate taxpayers.

Providing you remain a basic rate taxpayer with that income.

In addition, after you've bought the share, if you keep it in account with no annual fee, or hold it as a share certificate, it will cost you nothing to hold the share.Nil. No charges.

No other tax or fee is payable for holding shares.

Using your example and the available capital of £900k getting a 6.2% gross dividend puts the OP straight into higher rate tax.

Plus would you want to put £900k into one share. OK, I know you didnt mean one share alone but how many would you hold with £900k? An investment portfolio of funds would hold probably no more than 2% in any one share at maximum with the average being under 1%.

What about capital gains?

You might have to pay this if you sell. But you have an allowance of 9,000 a year, pretty high.Anyway, you're interested in the income right? Selling will be rare.

Again, using the OPs £900k, at 10% growth, thats £90,000. The £9,000 CGT allowance doesnt even come close to covering that.

So, your examples would put the OP into higher rate tax and given him an annual CGT bill of £32,400 (if it was to be paid yearly).

Or he can pay an annual managment charge to have a fully diversified porfolio, invested and managed by professionals, not pay any CGT himself or have any higher rate tax pay all for an amc around 1.25% which on £900k is £11,250. If invested offshore, the gross roll up could be even more beneficial.

Just to say that I have nothing against NMAs, quite the reverse.But we have yet to see a poster on the site who has actually had any dealings with one.

Just because people who have used NMAs are not posting, doesnt mean they dont exist. I can say totally with confidence that there are people posting here who have used an NMA.

Chrismaths

Lloyds, the perennial equity income investors favorite. It yields 6.4% - woo-hoo!
It has a dividend cover of 1.3 times, and a PEG of 3% - that's earnings growth of 3%. If the UK consumer finally rolls over, Lloyds TSB will be one of the worst hit. It makes a significant proportion of it's money out of PPI (payment protection insurance), and if the regulator finally stomps on the misselling of this awful stuff, than you could see that dividend come under some serious pressure. Considering the only people who own Lloyds are people looking for a yield - a cut in the dividend would be disastrous for the share price - I'm pretty sure it would kick it out of your 'risk-controlled' portfolio Ed?

Then again, maybe it will get taken over. We don't know. Lloyds as a share seems to have a pretty asymmetric risk profile though. Sod the tax consequences - they apply as much to equity based unit trust and oeics as much as to a share - you don't need to buy a share to get access to tax benefits. And in fact, divis are not tax free, but paid net. Your share of the companies profits have already suffered corporation tax at 30% - GB just no longer refunds any of that to us, or pension funds.

And regarding your famous 1% = 25% of fund - what does 2% annual outperformance equal? Price of everything, value of nothing, as usual.

EdInvestor

I thought the OP was investing 350k?

One would not usually take an income out of a share portfolio of more than 5% a year if one could avoid it - so that would be 17,500, that's what the OP said he was happy with. So he's a BRT.

Of course you don't pay capital gains tax every year ( what gave you that idea?) - you only pay it if you sell the shares. The idea of the HYP is that you hold to eternity, so it's almost completely hassle free for the investor after setup.Some people will sell and rebuy annually to use up their allowance, some can't be bothered.[A 10% growth rate will include 5% in divis of course, no CGT involved.] Over the years one can ISA the portfolio to deal with CGT.

I know you find this hard to believe but it's actually not necessary to incur costs by continually buying and selling shares (aka "churning" the portfolio ) if all you want is a stable income. Brokers and fund managers do it of course because that's how they make money, they don't get paid for doing nothing.Conversely,sensible private investors keep trading to a minimum.

Dividend income BTW is considerably more stable than cash interest rates, and historically rises over time to beat inflation.

I can say totally with confidence that there are people posting here who have used an NMA.

You mean other than you?

Chrismaths

What if one of your 'eternal' stocks is taken over? Abbey? O2? BAA? How many of the stocks that were in the FTSE 100 10 years ago are still there? Not many. - some get taken out, some merge, some well, just get smaller. We have no idea if a good investment today will continue to be in 3 years time, let alone 10, 20, 30 years hence.

Wrap up your investments in an offshore bond, and you can take up to 5% per annum (cumulative), and after that hits 100% (after at least 20 years), you can surrender individual segments, so you only pay tax on the profit on that segment, with top-slicing relief. All this for 1% upfront, and £90 per quarter - you can even invest in ETFs in offshore bonds, which I know you like.

The OP was going to do an IB with £350k, but he said he had 900k total to invest. So he's likely to be a HR tax payer without some decent financial planning.

dunstonh

Of course you don't pay capital gains tax every year ( what gave you that idea?) - you only pay it if you sell the shares.

I know you dont but it would build up on that basis and be paid one day.

I know you find this hard to believe but it's actually not necessary to incur costs by continually buying and selling shares (aka "churning" the portfolio ) if all you want is a stable income. Brokers and fund managers do it of course because that's how they make money, they don't get paid for doing nothing.Conversely,sensible private investors keep trading to a minimum.

I don't find it hard to believe. My "favoured" fund supermarket doesnt charge a penny on fund switching and there is no initial charge or bid offer spread.

uberzoldat

dunstonh wrote:

Just because people who have used NMAs are not posting, doesnt mean they dont exist. I can say totally with confidence that there are people posting here who have used an NMA.

Like me for example.

People will more often not post when they have had a bad experience with someone/thing, not the other way around. How many people have posted about bad NMA experiences?

EdInvestor

..you can even invest in ETFs in offshore bonds, which I know you like.

Not really a fan of tracker type products personally ( as I think I've made clear I don't like paying fund charges even lowish ones;)), but if you're gonna do that kind of thing, ETFs are cheap and there's a wider variety of indices available than with conventional U/T tracker funds.

EdInvestor

My "favoured" fund supermarket doesnt charge a penny on fund switching and there is no initial charge or bid offer spread.

But what's going on inside the fund itself? Buying and selling of shares, stamp duty and other bundled stuff like research etc can add another 0.5% to charges.This is hidden at present ( though the FSA's going to require it to be revealed soon I believe, after much pressure.It's part of a process called "unbundling".)

So even with the NMA,apart from the initial costs, you've got annual charges of 1.5% AMC for the fund, up to 0.5% for the hidden fund charges and another 0.5% for the IFA. Annual 2.5%.

Ouch. So if 1% eats up 20% of the fund over 20 years, what does 2.5% do?

See why I don't like funds?

Your investment doesn't have to work nearly so hard if there are no charges to pay - there is much more room for down periods, and therefore it's all much less risky.

jem16

dunstonh wrote:

Just because people who have used NMAs are not posting, doesnt mean they dont exist. I can say totally with confidence that there are people posting here who have used an NMA.

I've used an NMA too. As uberzoldat says a lot of people post on forums because they have a problem or a bad experience and are looking for help/advice. Most people ( and more's the pity ) don't post good experiences.

Chrismaths

Your investment doesn't have to work nearly so hard if there are no charges to pay - there is much more room for down periods, and therefore it's all much less risky.

And methinks your investments are lazy - If you were to invest in the iShares UK divi ETF, you wouldn't pay stamp duty - so you are 0.5% up already. And you'd only pay 1 dealing fee. And oh god I just lost the will to carry on.