Using ISA for regular income

adamcartney

I'd like a second (or third+) opinion on how to use my ISA allowance to get a regular income.

I've max-ed out the current accounts that pay decent interest as well as this year's allowance for my cash ISA. I also have 4k directly in a Fundsmith Acc ISA that is for the long term so don't mind having that tied-up and which I will add to again next tax year. However, with derisory interest rates on the cash ISA, I'd like to use a Stocks & Shares ISA to invest in a fund or IT that will pay a regular income (I'm a higher-rate tax payer). Obviously, this means moving my Fundsmith ISA to a platform and then buying a fund/IT alongside it within the platform.

The major drawback of this is that I'm currently paying 1% AMC to Fundsmith but the charge to hold through a platform would be about 0.6-1% higher plus the charges to hold the additional funds/ITs.

I think I'll just have to bite the bullet and do this but would like to hear if you think this is not worth it or if there is another way to go to a regular income. I've heard it's tax-efficient to invest in bonds via an ISA but everything I hear about bonds makes it sound that we are in the middle of a big bubble that will soon burst when QE ends/interest rates rise.

Any thoughts very welcome.

Primrose

My only comment is that if you decide take income from a stocks & shares ISA, it will not necessarily be on a monthly basis as different funds pay out on different dates, so income could end up being paid quarterly, six monthly or annually. (Haven't taken any income from my funds yet so unsure how it works out ,) but would this affect your cash flow?

CLAPTON

adamcartney wrote: »

I'd like a second (or third+) opinion on how to use my ISA allowance to get a regular income.

I've max-ed out the current accounts that pay decent interest as well as this year's allowance for my cash ISA. I also have 4k directly in a Fundsmith Acc ISA that is for the long term so don't mind having that tied-up and which I will add to again next tax year. However, with derisory interest rates on the cash ISA, I'd like to use a Stocks & Shares ISA to invest in a fund or IT that will pay a regular income (I'm a higher-rate tax payer). Obviously, this means moving my Fundsmith ISA to a platform and then buying a fund/IT alongside it within the platform.

The major drawback of this is that I'm currently paying 1% AMC to Fundsmith but the charge to hold through a platform would be about 0.6-1% higher plus the charges to hold the additional funds/ITs.

I think I'll just have to bite the bullet and do this but would like to hear if you think this is not worth it or if there is another way to go to a regular income. I've heard it's tax-efficient to invest in bonds via an ISA but everything I hear about bonds makes it sound that we are in the middle of a big bubble that will soon burst when QE ends/interest rates rise.

Any thoughts very welcome.

a regular income means having cash on a regular basis: you can simply withdraw money on a regular basis : it doesn't have to 'pay out'

xylophone

I've max-ed out the current accounts that pay decent interest as well as this year's allowance for my cash ISA.

You have contributed £15000 to your cash ISA in this tax year?

colsten

adamcartney wrote: »

Obviously, this means moving my Fundsmith ISA to a platform and then buying a fund/IT alongside it within the platform.

Why obviously? Leave it where it is if you are happy, and open another S&S ISA elsewhere.

bowlhead99

I don't think you have to be too worried about platform fees being 0.6-1% higher and then fees for other funds etc on top, implying the total costs would be 2% or more.

The platform or broker service is generally going to cost 0.2, 0.3, 0.4% at the most. If you hold Fundsmith at Charles Stanley for example their platform fee is 0.25%, plus the ongoing 1% costs that are taken from the fund's own assets by Mr Smith.

So if you held £5k of Fundsmith with 1% costs on that bit, and £5k of FundJones with 0.8% costs on that bit, you'd be paying an average of 0.9% funds costs and 0.25% platform fee on the whole lot, which is 1.15%. That's a lot less than 0.6-1% above your current 1% costs.

Different platforms have different fee structures. Example Youinvest only charge 0.2% for holding funds and 0% for holding shares or bonds or ITs, but they do charge a fiver or a tenner to buy or sell (unless you buy regularly at £1.50 for a monthly purchase). TD Direct charge 0.3% on funds but with no transaction fees. iWeb charge 0% but don't have a regular investment facility so you pay a fiver on every trade as you build your portfolio, and they have an account opening fee.

Depending on what you want to hold and how much, one provider will be better than the others but generally it's probably quite a bit cheaper than you think, if you thought platform charges might be a whole percent.

A thought on using ISAs to provide an income if you already have enough income to be paying high rate tax... Generally the goal is get as much as possible into a tax wrapper and try not to touch it so it can grow, right?

So, it would seem strange to be drawing out income from the tax wrappers, depleting them, just so you could afford to spend money on things like... putting next year's allowance into a tax wrapper. Better to simply spend your pension income or unwrapped investment income or employment income, and not spend what is already in the tax wrappers.

Colsten's comment about leaving fundsmith where it is, makes sense. Even if you wanted to buy more fundsmith next year, you could buy the new fundsmith on a platform alongside your other holdings and leave your existing fundsmith ISA where it is. The only restriction is that you can't contribute to two separate s&s ISA holdings in a tax year unless you transfer everything out of the first place to keep all that year's money together. Once you're in year 2, you can leave your year 1 stuff where it is.

Only issue with having multiple S&S ISA pots and some of them being single-provider... If Fundsmith suddenly doubles and you want to exit part of it to rebalance into other holdings, you are a bit stuck because Fundsmith only have one thing you can hold in their ISA and to move the money into another holding means messing around with a transfer process to redeploy it.

adamcartney

Thanks all.

I would ideally like to invest in both the Fundsmith and some new fund(s)/ITs next tax year so it looks like I will have to move to a platform. However, as mentioned by bowlhead99, this could be a cheaper than I had imagined.

Also, I understand the point about long term investment and I have that approach for my SIPP and Fundsmith but I also want to earn some income from the extra cash that I have left over every month after expenditures - I don't want to put this in bank accounts where it won't earn any interest. So I want to invest it in a IT (within the ISA wrapper) with a history of paying dividends. Does this sound like a sensible idea?

jimjames

adamcartney wrote: »

Thanks all.

I would ideally like to invest in both the Fundsmith and some new fund(s)/ITs next tax year so it looks like I will have to move to a platform. However, as mentioned by bowlhead99, this could be a cheaper than I had imagined.

Also, I understand the point about long term investment and I have that approach for my SIPP and Fundsmith but I also want to earn some income from the extra cash that I have left over every month after expenditures - I don't want to put this in bank accounts where it won't earn any interest. So I want to invest it in a IT (within the ISA wrapper) with a history of paying dividends. Does this sound like a sensible idea?

Are you retired?

Is there a reason why you want/need the extra income? If not then reinvesting it will compound and give better long term returns.

Mistermeaner

Is OP missing the point that all funds 'pay' an income its just what you choose to do with it.

An inc fund pays you the dividend as cash for you then to do something with.

An acc fund pays the same dividend but auto spends it buying more of the same fund (essentially) thus preserving the tax wrapper on the original investment and dividend payout (as well as potentially be charge efficient)

Generally if you are actively earning and saving there is no sendible reason for taking dividends out as you can achieve the same nett effect easier by choosing acc and just investing less. Or even selling portions of your acc fund to produce inc as and when you need it

TrustyOven

ggb1979 wrote: »

An acc fund pays the same dividend but auto spends it buying more of the same fund (essentially)

It's not though. It's increasing the value of the fund, but not increasing the number of units. Dividends are not paid depending on the value of your funds; they are paid depending on the number of units you have.

ggb1979 wrote: »

Generally if you are actively earning and saving there is no sendible reason for taking dividends out as you can achieve the same nett effect easier by choosing acc and just investing less.

That's the problem though - the more the price per unit increases (due to Acc), the harder it is to keep buying the same number of units in the future.

Mistermeaner

TrustyOven wrote: »

It's not though. It's increasing the value of the fund, but not increasing the number of units. Dividends are not paid depending on the value of your funds; they are paid depending on the number of units you have.



That's the problem though - the more the price per unit increases (due to Acc), the harder it is to keep buying the same number of units in the future.

I said "essentially" as in nett terms the same effect is acheived, if you look at the total value of your holdings (no of units X price of units)