Ok then - How do I choose a S&S ISA!

jamesd

You can keep cash in the account for a long time, perhaps years. You're not forced to be 100% invested all the time, just to have the money there for the purpose of investing. Otherwise a higher rate tax payer could put cash in there to get just 20% tax charge on interest instead of 40%, with no more risk than a savings account.

What is your objective for this money? When will you need it? What sort of drop would you tolerate over a year or two without giving up?

Middle_Sister

I have invested by £3.6K for 08 into a cash ISA with Abbey. I would like to invest the rest into a stocks & shares ISA but haven't got a clue where to start. Last year I invested £4K into a Maxi ISA but its lost about £500. I have quite a few shares in Tesco which I would like to put into my stocks & shares ISA but someone said you have to sell them first then buy them back. I am thoroughly confused. I want to keep the shares so I don't know what to do for the best. Help.

stphnstevey

jamesd wrote: »

You get an interest only mortgage and pay the interest in it. With an interest only mortgage you can then make it an ISA mortgage by using a stocks and shares ISA, a pension mortgage by using a pension, or a mixture by using both.

In the pension case you can only use the lump sum and from 2010 it can't be taken until you're 55.

At 5% growth rate for 25 years you need to be paying in 1338 a month, after tax relief. Per dunstonh's 1.67 times factor for higher rate tax that costs you 1338 / 1.67 = 801.20 a month.

At 6% you need 1149 that costs you 688.
At 7% you need 982 that costs you 412.
At 8% you need 836 that costs you 501.
At 9% you need 709 that costs you 425.
At 10% you need 598 that costs you 358.
At 11% you need 503 that costs you 302.
At 12% you need 422 that costs you 252.

And 12% is the long term average for the UK stock market so I'll stop there. For a 200,000 mortgage over 25 years the starting difference between repayment and interest only is 312 a month. If you got 9% average you'd end up with the 200k mortgage paid and 600k in the pension pot, having paid only 113 a month more to get that pot.

So, add your mortgage repayment part to your pension contributions and end up doing rather nicely because of the extra money you have growing in the pension instead of just repaying debt and making only 5-6% from saved debt interest.

Ok, whats the summary version!!;)

ie What benefits does this have over a stand alone pension and mortgage?

earlgrey_3

lesleyfb wrote: »

I have invested by £3.6K for 08 into a cash ISA with Abbey. I would like to invest the rest into a stocks & shares ISA but haven't got a clue where to start. Last year I invested £4K into a Maxi ISA but its lost about £500. I have quite a few shares in Tesco which I would like to put into my stocks & shares ISA but someone said you have to sell them first then buy them back. I am thoroughly confused. I want to keep the shares so I don't know what to do for the best. Help.

Silly as it sounds you do need to sell shares before you can buy them again inside your ISA - usually called bed and breakfasting or bed and ISA.

I don't know what other shares/investments you have so that may make a difference. Most managers charge a fee for running an ISA with individual shares though TD Waterhouse http://www.tdwaterhouse.co.uk/ seem to be an exception. That looks better than the stockbroker I use who just charges a small flat fee for dividend collection or Selftrade who charge a flat £25 pa for the whole lot. You need to look at all the various charges and see which would suit you best.

Although I'm not fond of unit trusts because of the massive charges (to quote Patricia C. Dunn, former CEO, Barclays Global Advisors "Investment managers sell for the price of a Picasso what routinely turns out to be paint-by-number sofa art.") there can be a case for them in ISAs because there's usually no additional charges for the ISA wrapper.

They get paid from the trail commission they get from the unit trust manager. An exception to that are the lowest cost unit-trust tracker funds where they get little or no trail commision and so the ISA managers usually require an additional management fee.

Have you worked out whether or not you'll benefit from a shares ISA - which isn't quite as straight forward as with a cash ISA?

butterfly72

jamesd wrote: »

What is your objective for this money? When will you need it? What sort of drop would you tolerate over a year or two without giving up?

you've got me at the first question! I don't really have an objective as such.. I guess I'm putting it away for the future.. retirement mainly (top up pension), security etc. I don't need it for anything particular in the near future. I see it as a long term investment. I can afford to lose it all as its extra and its already in the account waiting to be invested. Also I'm aware that I could lose it all! I could tolerate a big drop and hang in there to the bitter end. Saying that I don't want to be reckless and throw my money away. I'm now drip feeding this years ISA. Heres my possibles again:

Invesco Perpetual monthly income plus
Allianz BRIC
Neptune Global equity.
An alternative energy fund


I already hold:
JPmorgan NR
Gartmore European selected opportunities
Threadneedle european
2 other UK/europe funds but can't remember what

Any thoughts?
thanks

stphnstevey

butterfly72 wrote: »

you've got me at the first question! I don't really have an objective as such.. I guess I'm putting it away for the future.. retirement mainly (top up pension), security etc. I don't need it for anything particular in the near future. I see it as a long term investment. I can afford to lose it all as its extra and its already in the account waiting to be invested. Also I'm aware that I could lose it all! I could tolerate a big drop and hang in there to the bitter end. Saying that I don't want to be reckless and throw my money away.

You are contradicting yourself a little? Maybe you need to decide your level of risk and long term plan. This will help you choose which funds are best for you.

jamesd

stphnstevey, assuming around 6.5% investment growth you pay twice the repayment part of the mortgage into the pension and end up with four times that in pension pot. Take one times to pay the mortgage off and the other three timies is left for the pension. The extra tax relief on the mortgage payment part and the higher growth rate of the investments compared to mortgage repayments delivers the benefit.

Do it with mortgage repayments and you don't get the tax relief or the higher growth rate.

stphnstevey

So as I understand it, your just channelling the additional mortgage payments you might have used to reduce your mortgage into what you believe is a better performing investment than an ISA and has a tax advantage.

I seem to remember someone explainig to me on here that an ISA has the same tax relief as a pension? As you can take 100% of an ISA whenever you like, rather than restricted to 25% and 55, would an ISA not still confer the tax benefit but also allow more flexibility?

Addressing what I think was your second point, a pension being a better investment than any other, ie an ISA, my experience is that the funds are very similiar and you have a wider access to funds in an ISA?

Also, depending on mortgage rates vs investment returns, if they were similiar (which they are not too far off today) would the arguement for being better than repaying the mortage be cancelled out as the return on investment in a pension be similiar to the interest you would pay on the mortgage by not paying it off?

jem16

stphnstevey wrote: »

I seem to remember someone explainig to me on here that an ISA has the same tax relief as a pension? As you can take 100% of an ISA whenever you like, rather than restricted to 25% and 55, would an ISA not still confer the tax benefit but also allow more flexibility?

An ISA has no tax relief on the way in but you don't pay tax on the way out. A pension has tax relief on the way in but you are taxed on the way out - apart from the 25% tax-free lump sum. The pension can be good if you are a higher rate taxpayer as you have 40% relief going in and possibly only 20% taxed on the way out if you become a basic rate taxpayer in retirement.

jamesd

stphnstevey, no reason for the pension investments to perform better than ISA investments. The tax advantage is the only one. But both are likely to perform substantially better than just saving mortgage interest. Investment gains long term can be maybe 1.5-2 times mortgage rates and after allowing for inflation that gives them even greater advantage (because inflation is a higher percentage of the growth of lower growth investments - 5% inflation and 6% growth is just a 1% edge, 5% inflation and 9% growth is a 4% edge).

If the investment growth rates were identical in an ISA and pension the pension would still win in the cases where a pension makes sense because it has the bigger tax advantage. It wins even if all it does is grow at exactly the same rate as the mortgage interest rate.

A SIPP style pension has a wider range of investments allowed in it than are allowed in an ISA. It's just a case of whether the pension provider offers them. A basic personal pension might only offer 100 or so insured pension funds and would have less choice than a basic ISA. Something like HL's offering is fairly similar for both.

The pension gets tax rebated on the way in and the 25% tax free cash is also not subject to tax on the way out. The remainder is liable to tax.

A higher rate tax payer can get 40% tax relief on the way in and the untaxed 25% can be used to pay off the mortgage. That leaves the remaining three quarters subject to tax as income when it's taken.

A basic rate tax payer also gains a bit on the tax side from the lump sum but it's more interesting for basic rate if the pension is via salary sacrifice, where the extra employee NI contributions aren't deducted, so those add to the money going into the pension. So basic rate with salary sacrifice looks like 100 gross contribution and 11 NI saved for a cost of 80. So gain on the way in is 111/80 - 1 = 38.75% increase. Not as nice as the 67% for higher rate but not bad. And some employers will add part of their employer NI saving as well, a still better deal.

So it's worth thinking about to get the basic pension income that you want and perhaps use some ISA money to pay the balance of the mortgage capital off. Depends how high you want the taxable pension income to end up. With basic rate and salary sacrifice it's fairly likely that doing part ISA and part pension will be better than all pension. Otherwise the pension pot target value so that 25% can pay off the mortgage might be too high compared to the current income.

And as dunstonh noted, for pure basic rate it's much less useful. Takes higher rate or NI saving from salary sacrifice to be really interesting. And the right risk tolerance, financial stability and timescale. So definitely not for everyone. Just a useful tool as part of the picture for those who it's suitable for.