'SAFE' Savings and Investment Strategy

Paul_Varjak

No longer wish to disclose personal information

blinko

top post thanks

Harvey's_Dad

Many thanks for the useful information.

I'm afraid I'm a bit new to mini stocks and shares ISA's; the first time I invested in one of these was in the last tax year with a L&G ISA FSTE all share index tracker.

Please forgive me if it's a stupid question but, regarding your suggestion to buy a mini stocks and shares ISA corporate bond, do you have any suggestions on which corporate bonds to choose or how I might be able to choose them myself? Or do I need to get an IFA?

carnet

Paul_Varjak wrote:

2.Open a mini stocks and shares ISA NOW and purchase a £4,000 corporate bond fund for that ISA from a Discount Broker that refunds all initial commission and rebates some annual commission (Hargreaves Landsdown springs to mind). Do not buy shares in an ISA as the tax paid on dividends is no longer reclaimable.

Better, IMHO, to invest in a good Distribution Fund within the "Cautious Managed" Sector which has committed itself to maintaining a minimum of 60% in bonds and therefore is allowed to pay out "interest" (gross within an ISA) rather than "dividends" (now net within an ISA). A good one here is the "Invesco Perpetual Distribution" Fund run by the very highly rated Neil Woodford (equities portion) and Paul Read & Paul Causer (bonds and fixed interest portion).

A good alternative to that fund is the "New Star Monthly Income Portfolio" Fund run by the very experienced John Cornes (who works for Laing & Cruickshank) which comes under the "UK Equity & Bond Income" Sector but also pays interest gross.

Much more scope for a better total return over the medium to long term, albeit obviously with a little more risk.

As always, DYOR.

The usual disclaimer;

This is not, and should not be construed as, investment advice.

Harvey's_Dad

Thanks carnet ; I'll have a look at those funds.

hobbesandco

I'm intrigued as to why you don't recommend buying shares in an ISA as it still protects you from capital gains tax (albeit everyone has a limit of around £8,200K anyways), dividends are taxed at 20% rather than 40% for higher-rate taxpayers outside an ISA and fees are often cheaper.

david78

Yes, good post. I'm off to open a regular saver with the Halifax now.;)

On the subject of tax on dividends. I believe the position is:

held Outside ISA or PEP
10% for basic rate tax payers
32.5% for higher rate payers

Inside ISA or PEP
10% for basic and higher rate payers (not 20%)

So higher rate payers save 22.5% tax on the gross dividend income.

lipidicman

Great suggestions - but I am still confused as to what to do about a bond fund - as I understand it if you buy them new and hold until maturity you have security of capital - but if they are second-hand/sold early or traded in a fund then you can lose money. I missed out on my 04/05 allowance because I did not feel confident to go ahead and I am still unsure.

EdInvestor

Regarding tax on dividends paid to shareholders the position is this according to my broker:

Outside ISA

0% for basic rate taxpapers
22.5% for higher rate taxpayers

Inside ISA

nil for both

ISA also protects against CGT.

I refer to dividends paid on individual shares, not funds.

This link might help to explain - you have to deduct the dividend tax credit from the tax rate to get the correct figure.

lipidicman

nil for both? - wasn't this the case before the change which made ISAs less attractive for stocks and shares? (cant remember the date)

EdInvestor

I think we'll have to agree to disagree on this Paul, but here's another explanation of this rather complex matter for those interested.

Let's just assume for a minute that I'm wrong and you're right, there is a 10% tax on divis.What does this basically add up to?

Let's say you invested 1000 quid in an index tracker.These funds pay a divi of about 3.5%.So for your 1k, in addition (you hope) to a capital gain, you would expect an income of 35 pounds a year. If you had to pay a 10% divi tax, this income would be reduced to 31.50.

Let's say that the market goes up by 7% so you have a capital gain in addition to your divi. Your total returns are 10.5% for the year, ie 105 pounds.The divi tax, if you had to pay it, would reduce this return to 101.50, that is 10.15% instead of 10.5%.

Now I don't know about you, but I wouldn't feel this was a very significant difference. Certainly not enough for me to avoid investing in shares competely.