Stocks/Shares ISA question...

cambsman

hi all, ive been wanting to set up a stocks and shares ISA for a couple of weeks now, (i figure you can put tracker funds in there?) thought id better do it before deadline passes.

Anyway, ive been thinking about starting a fidelity (moneybuillder?) tracker based on the all share index due to the low costs, although reading the bumpf, it doesnt pay any income - ie dividends from its investments. Does anyone know what happens to the dividends - ie. are they re-invested, so if the market rises 10% over the next year and the average dividend is 5%, my investment should rise 15%, rather than actually 'track' above the 10%. Or do fidelity and the fund managers quietly pocket the 5% dividend and hope you will be content with 10% growth. Are there any tracker fund that pays out dividends?

Secondly, if there arent any that pay out dividends or income, is there any point in me bothering with an S/S ISA as im very unlikely to use my 8 or 9k (not sure exactly what it is) capital gains allowance anyway? I guess as my investments accumulate over the years (just turned 23, so hopefully will put a bit away every year for quite a few years) i should use the allowance, it just seems a bit wasted on investments that dont give any tax free dividends/income.

thanks all.

dunstonh

the income is taken into account within the unit price as there are accumulation units only. It has a current yield of 2.04%.

Being a FTSE all share tracker, you wouldnt expect above sector average growth that often so you shouldnt perhaps be looking at 10%, let alone 15% as a long term average. You should be working on a 7-10% average (that is reflected in 10 year performance at an average of 7.4%).

With the higher level of risk a FTSE all share tracker has, I dont think it offers that great a value.

Also, single fund investing is poor qualify investing. Eggs all in one basket will lead to lower returns over the long term.

cambsman

Sure, the 10% and 5% were only hypothetical figures, i agree that it is doubtful either will be reached in the forseeable future. 7.4% is a perfectly tolerable yield, i basically want 2-3% above what i would get in a decent cash savings account, where most of my funds would remain. and it would most likely stay in for a reasonable amount of time (5-10 years at a minimum) Thanks for the tip on the increased risk of the all share index, atm i am quite risk adverse, and therefore am not investing in any single stocks. I did a few years ago( 2003-04), as i believed shares were relatively cheap then, but im not so sure now. I just feel the need to use this years ISA allowance even if it isnt the best time to be buying, over the longer term ideally the tax benefits would mitigate any short term decline, thats my hope anyway.
My question was simply are there any tax benefits for me if im not investing in anything that doesnt give dividend income. Would a trackers dividends be re-invested, but taxed at some point if not in an ISA anyway, even if i dont recieve it as income?

Similarly, point taken about single fund investing. I would just put this years allowance into that specific fund (or a UK based tracker), maybe next year going for a foreign based fund. Although im not sure about current exchange rates other than the dollar, so definetly something for me to look into, although i have no intention in buying any fund that has foreign investments this year.

dunstonh

7.4% is a perfectly tolerable yield, i basically want 2-3% above what i would get in a decent cash savings account, where most of my funds would remain

For a medium/high risk fund, I would want more than 7.4%. You would be looking at 10-15% average with the equivalent risk.

atm i am quite risk adverse

Perhaps the FTSE all share tracker isnt the best place to start then. A few years back you would have lost 40% in one year on this fund. Not the sort of volatility to match your profile. UK Other bonds, UK equity and bond or UK equity income are all lower risk.

cheerfulcat

My question was simply are there any tax benefits for me if im not investing in anything that doesnt give dividend income.

Dividends come with a now non-reclaimable tax credit of 10%. A basic rate tax payer has no more to pay. They are still free of higher-rate tax in an ISA. Income from gilts and bonds is tax free for everyone in an ISA.

BTW, the CGT exemption of £8800 ( for this year ) may seem sufficient at the start but after a few years' successful investing, if you haven't used an ISA you may regret it!

EDIT: Meant to add, iShares ETFs are Dublin listed and pay a gross dividend so are genuinely tax-free in an ISA.

cambsman

cheers for the replies.

I must say im surprised that the all-share tracker wouldnt match my risk profile, and is classed as a medium/high risk fund, id always thought as it was a large and diversified fund it would be one of the less risky ways of getting into the stock market. As for there being a crash in the period till about 2004, while i cant see any double digit growth, i highly doubt shares are as overvalued as they were when the FTSE100 hit around 7000. I may be wrong, and i'll have to look into this before buying a fund, but im sure the yields and p/e's cant be as poor as they were just before prices fell 40%. Even so, as i say, at the very least the investment would be held for (at a minimum) five years.