Which investments to put in an ISA

grey_gym_sock

if you now have more-or-less enough capital that you could live off it if you weren't earning, there is a good case for not contributing so much to pensions that you could no longer live off your capital (until you get access to the pensions again). however, that may well still leave some scope to make pension contributions. it is even OK to run down your capital a bit before you get access to pensions, knowing that you will have enough from the pensions to recover your position when you do get access.

the positive reason to put something in pensions is the tax saving. the important point here is that, with little other pension provision, there is a good chance that you will be able to take out anything you contribute without paying tax on it at all (using a combination of the tax-free lump sum, and income set against your personal allowance). even with only 20% tax relief on contributions, that gives your money a 25% uplift (from 80 to 100). that is worth having. it's much less worthwhile when you have enough in pensions that you will probably be paying 20% on everything extra except for the TFLS - then the uplift is only 6.25% (from 80 to 85).

on ISA vs unwrapped: as a basic-rate taxpayer, you save 20% tax on the income on bonds/gilts/REITs (if you plan to hold any of those!) by putting them in an ISA. you don't save any tax on dividend (income from ordinary shares) by using an ISA. for capital gains, you have an £11k annual exemption for unwrapped investments; if you would be going over that, you save tax by using an ISA.

so it's perhaps best to start by putting bonds/gilts/REITs in ISAs, and only go on to putting shares in when you have space.

though this might change if your unwrapped investments are large enough that it will be difficult to avoid paying capital gains tax. arguably, you might then prefer to keep gilts unwrapped (paying tax on the income, but the income from gilts is low), in order to ISA some of your shares (potentially avoid paying CGT on large gains).

773567889

Thanks all.

I saw two more advisers today (one IFA and one restricted). That's three I've had initial interviews with, and I will be deciding over the next couple of weeks which one to go with - if indeed any - and what level of service I will need.

Neither of the ones I saw today could see any argument for pensions, but one agreed that it might be a good destination for any spare earned income.

Both mentioned wrapping some of my funds in Investment Bonds, which allow withdrawal of 5% of initial investment per year tax-free (or tax-deferred, really). The whole investment would still be taxable after that, but I understand there is flexibility and tax advantages that make it worthwhile. We only touched on it briefly, so I'll need to delve deeper - not least into the fact that it's an insurance policy, so still eligible for commission from the IFA I think?

grey_gym_sock

773567889 wrote: »

Neither of the ones I saw today could see any argument for pensions, but one agreed that it might be a good destination for any spare earned income.

i find that attitude very odd.

what you can put in pensions is limited to your total earnings for the year; that doesn't mean that the contributions have to come from earnings, or even from income. if it were beneficial (i'm not saying it is), then you even could spend your entire net earnings, and then fund pensions contributions from other capital. money is fungible.

the point is: is it worth putting some money in a pension, which may save some tax, but loses access to the money for 2 decades or so.

Both mentioned wrapping some of my funds in Investment Bonds, which allow withdrawal of 5% of initial investment per year tax-free (or tax-deferred, really). The whole investment would still be taxable after that, but I understand there is flexibility and tax advantages that make it worthwhile. We only touched on it briefly, so I'll need to delve deeper - not least into the fact that it's an insurance policy, so still eligible for commission from the IFA I think?

i'm very suspicious of that. investment bonds effectively have basic rate tax paid at source, and it's only any higher rate tax liability which is deferred. they can be beneficial for higher rate tax payers who expect to become basic rate payers by the time the bond is cashed in.

it's also an opaque product (which usually means hidden, excessively high charges). an obvious thing to avoid, except when it makes sense for tax purposes.

i don't know whether commissions are still allowed.

innovate

grey_gym_sock wrote: »

the point is: is it worth putting some money in a pension, which may save some tax, but loses access to the money for 2 decades or so.

It is definitely worth asking whether locking the investment in for several decades is desirable. If I were in OP's shoes, I would most certainly lock some of my funds away for decades, simply because I can afford to, and because the taxman adds at least 20% to what I put in. Plus I get some tax relief for every contribution I make.

Note that locking the investment for several decades doesn't mean you aren't able to adjust your investment - - you can freely buy and sell funds/shares/whatever you hold in your SIPP throughout the investment period. Only thing you can't do is take any cash out of it before you are 55, and that age will probably rise in line with the increase in retirement age. However, this would not faze me since I have all my ISA funds, as well as other non-wrapped investments, that I can liquidise anytime I fancy.

May be I am overestimating how much the OP's sum of available money is, but to me it is just a complete no-brainer to put some of the funds into a SIPP (but I would use up my ISA allowance first).

773567889

grey_gym_sock wrote: »

what you can put in pensions is limited to your total earnings for the year

innovate wrote: »

It is definitely worth asking whether locking the investment in for several decades is desirable. If I were in OP's shoes, I would most certainly lock some of my funds away for decades, simply because I can afford to

That's the problem. The last few years my earnings have been very low (a few £K per year) so this is the maximum I would be able to put in to a pension. (I think I can put £3600 in even without earning.)

As and when my earnings increase, it would presumably make sense to put them away in a pension if I didn't need them. Even if I did, I wouldn't be against drawing more out of the investment pot (to spend) in place of the extra earned income if that made financial sense.

grey_gym_sock wrote:

i'm very suspicious of that. investment bonds effectively have basic rate tax paid at source, and it's only any higher rate tax liability which is deferred

....

i don't know whether commissions are still allowed.

Yes. I'll have to look further into the tax benefits. I think I will get some real numbers if I actually ask for a quote, which will help.

The adviser has now confirmed that it's not a commission product, but there are 'set-up' costs which would be around 2% in my case. This is on top his annual fee for managing the portfolio and (presumably) the fee for any product within the Bond.

I do think a Bond will have some value for me, given how long it will take me to shelter my money via other methods. It also seems to be a relatively flexible product in terms of when I cash it in. (I intend to hold it at least 10-15 years, so no early redemption fee.) If I'm not mistaken, I might be able to avoid a lot of the deferred tax by living abroad (which is quite possible anyway) at the time of surrender.

There doesn't seem to be much scope for DIY bonds though?

innovate

773567889 wrote: »

The last few years my earnings have been very low (a few £K per year) so this is the maximum I would be able to put in to a pension. (I think I can put £3600 in even without earning.)

It doesn't matter what you earned in the last few years - it is only the current tax year that counts. So if you earn £25K this year from employment, you can put £25K into a pension. This includes a 20% contribution from the HMRC, i.e. it only costs you £25,000. HMRCS will chip in with £5K. You also wouldn't have to pay any tax for this year - though you would have make a tax return to get any tax back. Same applies to any salary up to £40,000.

You are right, you can put £3,600 into a pension each year even if you don't work, as long as you are younger than 76. Like with the above example, it would only cost you £2,880 and the rest would come from HMRC. Plus, your income tax liability for the year would be reduced by £3,600.

773567889 wrote: »

There doesn't seem to be much scope for DIY bonds though?

What do you mean by that? You can DIY any bond you like. I am not suggesting HL are the best place to invest (they may or may not be for you), but they are a convenient place for getting a list of some corporate bonds:
http://www.hl.co.uk/shares/corporate-bonds-gilts/bond-prices/gbp-bonds. All of these can be DIYed, and for a lot less than 2%, which sounds an outrageously high charge for anything. Are you sure the IFAs you are talking to aren't taking the proverbial?

773567889

innovate wrote: »

It doesn't matter what you earned in the last few years - it is only the current tax year that counts.

Sorry, I wasn't clear. What I meant was that the last few years will likely be broadly similar to the next few. Not much earned income.

What do you mean by that? You can DIY any bond you like. I am not suggesting HL are the best place to invest (they may or may not be for you), but they are a convenient place for getting a list of some corporate bondsAll of these can be DIYed, and for a lot less than 2%, which sounds an outrageously high charge for anything. Are you sure the IFAs you are talking to aren't taking the proverbial?

Sorry. Me not being clear again! I was talking about Offshore or Onshore Investment Bonds, not government/ corporate bonds. (They shouldn't use the same word for so many things!

Like this (similarly, not specifically Scottish Widows, but that document sums it up well):

W scottishwidows.co.uk/extranet/literature/doc/SW58066

innovate

773567889 wrote: »

Sorry, I wasn't clear. What I meant was that the last few years will likely be broadly similar to the next few. Not much earned income.

you previously said you are a BR tax payer, so I had assumed you would earn at least £10K a year, and probably more. This may have been a wrong assumption but even £10K would be worth throwing into a pension as it only costs you £8K. Anyway, I think I have flogged the subject of pensions to death with you.

773567889 wrote: »

Like this (similarly, not specifically Scottish Widows, but that document sums it up well):

W scottishwidows.co.uk/extranet/literature/doc/SW58066

Not sure these would be my first choice for any investment, particularly not if they come with a 2% upfront charge. There is just about no advantage over other investments I can see - though they might fall outside of the RDR framework and therefore be popular with IFAs. What do you reckon the advantages over direct investments in e.g. tracker funds or managed funds or shares would be? What value does the investment bond wrapper add?

RickyC_IFSWP

It's important to understand when you'd like to use this money eventually and how much access you'd require.

Then you could clearly plan ISAs, Pensions etc. In an ideal world, you would use all the tax allowances/benefits.

Without knowing all the ins and outs, I wouldn't rule out pensions just because you're only eligible to invest £3,600 into it this year(it's still a start!). The fact that you haven't paid tax this year, but will still receive tax relief should surely be attractive.

There may be some advantages to using the offshore bond, but then you have to consider other risks and it's not usually covered by the FS compensation scheme. I'd lean towards the traditional ISAs, investment accounts and pensions.

p.s. there is no commission paid on any advised investment products, including the investment bond. The IFAs/RFAs should have explained how they charged for their advice at the meeting.

grey_gym_sock

773567889 wrote: »

I do think a Bond will have some value for me, given how long it will take me to shelter my money via other methods.

as a basic rate tax payer, you get charged very little tax on investment income. (i'm assuming you don't have so much capital that investment income will push you into higher rate tax.)

there is no disadvantage in using ISAs, as much as you can. and there is some real tax advantage in using pensions. but holding some investments outside any tax wrapper is perfectly fine.

this kind of bond might save tax for a higher rate tax payer. even then, it may not be worth the high charges. there's no point paying more in excessively high charges than you save in tax.

It also seems to be a relatively flexible product in terms of when I cash it in. (I intend to hold it at least 10-15 years, so no early redemption fee.) If I'm not mistaken, I might be able to avoid a lot of the deferred tax by living abroad (which is quite possible anyway) at the time of surrender.

if it has early redemption fees, then it is inflexible. ordinary collective investment products (OEICs, units trusts, investment trusts), held in ISAs or outside any tax wrapper, don't normally have any early exit penalties at all nowadays. why go for a product that does?

it's in the product provider's interests, not yours, to make it difficult to access your capital. even if you wouldn't want to take it all out and blow the money next year, and even if you're unlikely to switch between investment providers at the drop of a hat, it's nice always to have the possibility of switching - it keeps them on their toes.