Cash ISA to ready-made S&S: good idea?

cyan_ee

I have a 5K Cash ISA which the interest rate came down to 0.65% last year.
I am thinking of transferring this to a ready-made S&S ISA.

I looked at the Share Centre’s “funds of funds”.
This looks good for someone like myself - choose the risk level, sit back and hope for the best - but am I right?

The website says:
"there’s no dealing commission, account admin fee or initial charges. Just the ongoing fund charges within the underlying fund.”
The Ongoing Charge Figure inc. AMC 0.75% is 2% (for low to mid risk)

Grateful for any advice, thank you!

masonic

Ouch, those charges look very expensive at the upper end of that range.

bowlhead99

Yes, those fees are really high.

Generally, for an actively managed fund you might see an annual management fee charged by the fund manager making the decisions, of somewhere between 0.5% and 0.8%. Then there are some extra running costs of the fund - usually between 0% and 0.3% depending how efficient the fund is and whether the manager covers the costs out of his own fee. So generally the 'ongoing charges figure' or OCF of an active managed fund is in the 0.5-1.0% range (the latter being pretty expensive, most are lower).

You would then pay a platform fee from the investment platform that you're buying it through, but someone with a lowish amount to invest would use a percentage-fee platform and probably pay about 0.25% for that. So all in, if you pick the funds yourself, you'd be paying between 0.75% to 1.25% for the expensive ones. You can get cheaper funds which are less actively-managed and more passive in nature, but the 'fair' comparison is to look at the prices for actively managed funds which is what the Sharecentre F-O-Fs buy.

So by selecting a fund yourself and just buying it on a platform, let's say it costs you 1%, and the fund is a cautious one so it gives maybe 3-4% on top of inflation which is 5-6% gross return over the long term. The fees are 16-20% of your return but after losing your 1% off the underlying performance, you are still making 4-5% a year (lets call it 4.5%) so after a decade your £5000 is worth almost £8000.

However, in the Sharecentre model, they are charging you 0.75% on top for making decisions about what bunch of specialist funds to buy, and then all the costs of the platform access and the running costs of the underlying funds are wrapped up in 'other ongoing charges' so you have an OCF of 2%.

So now when you look at your potential performance, the investments are still producing that 5-6% gross return but you are only getting 3-4% of it (let's call it 3.5%). So instead of your £5000 turning into £8000 over the decade, it only turns into £7000. And that's before the effects of inflation mean that £7000 in a decade doesn't really buy a lot more than £5000 does today.

The only way it can be worth paying 2% for a fund service (eating up between a third and two-fifths of the expected gross return before inflation) is if the person selecting the funds is absolutely amazing and the funds all do fantastically well and make a whole percent more than an average cautious mixed assets fund, year in year out. Statistically that's not going to happen and you will be disappointed by paying the massive costs on a cautious fund. You would be much better just going to buy a cautious mixed asset fund or two yourself.

On a brighter note, you say you are only talking about a sum of £5k. Have you already stuffed the maximum you can into all the top high-interest paying current accounts and regular saver deals? For example you can get 5% on £2.5k sitting in a Nationwide current account which gives access to their 'regular saver' account paying 5% on up to £500 a month.

5% for ZERO risk from a bank, is much more sensible than paying 1% or 2% to get access to 'cautious managed' investment funds which probably only give the same sort of return, or perhaps lower, before those 1% or 2% charges, AND have investment risk.

Obviously if you were talking about £50k then investments are more 'worth it' because you wouldn't find enough super-high interest deals to be getting 5% on all of them (although you can still do a lot better than your 0.65%).

cyan_ee

Thank you very much for the detailed explanation! I need to sit down with a cup of tea and digest your posting but so grateful you saved me from diving into this expensive deal.

I have a few cash ISA's and some are locked for another few years, but the total is still around 20K.
My naïve plan was to start a ready-made ISA with 5K to learn how things work then move more into S&S.
Maybe I was over-ambitious!

I can save 7K in the next financial year which I would put 2.5K into Nationwide as you mentioned but not sure what to do with the rest.

Should I just stick to ordinary savings and Cash ISAs?
I am so depressed to see my tiny savings gets even smaller with the inflation and the low interest rate .

eskbanker

cyan_ee wrote: »

Should I just stick to ordinary savings and Cash ISAs?

Not if you're happy with the principle of investing instead of saving and are satisfied that money you invest is committed for the long term and that you have alternative readily-accessible short-term emergency money available as a 'rainy day' pot.

I don't think that bowlhead99 was trying to dissuade you from investing and to stick to cash, just that your initial choice of Share Centre fund wasn't particularly tempting. Many novice investors (including myself, so not intended as pejorative or patronising!) start off with a low-cost multi-asset fund, such as the Vanguard LifeStrategy range, with other similar products available from Legal & General and BlackRock among others.

Pick one of these funds at an appropriate risk level (sites such as Trustnet and Morningstar offer comparisons) and then a platform to hold it for you (comparisons available at the likes of www.comparefundplatforms.com and http://monevator.com/compare-uk-cheapest-online-brokers/), and IMHO it's a great way to get your feet wet with investing....

bowlhead99

cyan_ee wrote: »

I can save 7K in the next financial year which I would put 2.5K into Nationwide as you mentioned but not sure what to do with the rest.

Should I just stick to ordinary savings and Cash ISAs?
I am so depressed to see my tiny savings gets even smaller with the inflation and the low interest rate .

The £2.5k I mentioned was what can sit in a nationwide current account but I also mentioned that you can put £500 per month into nationwide's regular saver which also pays 5% on all the money in it at a point in time until it automatically converts into a normal savings account after a year and you effectively have to start moving the money back into a new one.

First Direct similarly have a 5% regular saver at £300pm. So with £500pm+£300pm going into those accounts each month, you'd be up to £4k earning 5% in the regular savers after only 5 months (as well as the £2.5k in the nationwide current account). Then there are other similar ones from people like Marks & Spencer for another bit of monthly cashflow.

You could not reasonably expect to get greater than 5% return on low to medium risk investments when bank base rate is only 0.25% and bond yields low and stockmarkets are at historic highs. And the 5% we are talking about from the banks is risk free.

That risk free return is available for limited amounts of money as a nice special promotional deal for retail customers. Big institutional investors and pension funds cannot use those regular saver accounts to hoard their millions, so they are forced to accept 1-3% on bonds with low growth prospects in the public markets . If you decide to take an S&S-based solution, you will be buying the investments available in the public stock and bond markets and competing with those other massive investors for how low a return you are forced to accept to get your money deployed at a lowish risk level. It does not make financial sense to do that and buy low yielding, risk-based investments, when you can get high yielding risk free savings accounts.

If you want higher returns over the long long term, or on substantial amounts of money, then yes ultimately you have to embrace higher risk investments, and S&S investments and pensions are a good way to do it. But when you are looking for a low risk investment proposition for relatively small amounts of money, it is very sound financial planning to use up all the good value cash-based accounts first. Once you are scraping around with accounts that only pay a couple of percent (same or lower level than inflation) then yes by all means start to take investment risk.

Obviously using current accounts does not get you any 'experience' of how the S&S markets work. So after you have maxed out all the good current accounts and regular saver accounts, then feel free to take some other money from your low interest cash ISAs and move them into S&S investments as there's no substitute for experience. But don't do that before you use up those good accounts. The good accounts are offering you risk-free returns. Whereas some of the investments in the public markets that people would traditionally hold in 'safe' portfolios are almost offering you the opposite: returns-free risk!

cyan_ee

Thanks very much eskbanker, I am having a look at the links now. I definitely would like to learn about investing but just looking at the Compare Fund Platforms makes me dizzy - so many terms I do not understand. I need to study a bit more before even think about investing!

Thanks again for bowlhead99, I read your first reply carefully and the next one. Your advice is clear and sound, much appreciated.

Someone I talked today mentioned free on-line courses for beginners such as Alison’s "Introduction to stocks and short selling”.
I might try one of those first.

bowlhead99

cyan_ee wrote: »

Someone I talked today mentioned free on-line courses for beginners such as Alison’s "Introduction to stocks and short selling”.
I might try one of those first.

Definitely do not do that. I don't know who or what Alison is but she/he/it is not a brand name in the world of financial education or someone that will teach you how to buy a professionally constructed medium risk investment fund and hold it inside an ISA.

You are not a beginner looking to indulge in buying and trading individual company shares to try to make a short term profit, or selling them 'short' to gamble on their price going down a bit, which is what the title of the 'course' implies. People put together such 'free courses' where they have a vested interest to help you understand how wonderful sharetrading is and how you can make lots of money very easily so that that you then pay to buy their 'amazing wealth building trading strategy' at the end, which is just a bunch of snake oil.

If you are looking to build your financial education with free online courses you could try something like the one from futurelearn (part of Open University) which repeats every few months. Next one starts in June. https://www.futurelearn.com/courses/managing-my-money It is a weekly course you access online over a period of eight weeks to work through the modules. It's not going to give you a degree level understanding of the world of finance but I can't see how it could hurt. Certainly not as much as a free course from someone who has a vested interest in teaching you how to gamble on markets.

But really for now you want to get your money working for you in higher interest accounts and by all means look around and read around this forum for ideas on good ISA platforms and products. Really that means investment funds where you buy a share in the fund and in turn it holds investments in shares and bonds and commercial properties both here in the UK and around the world.

You have no business trying to put together a portfolio of individual shares in single companies (e.g. buying shares in Tesco and Microsoft and Shell and Unilever) or gambling that they will go down by 'shorting' them. It is a massively high risk thing to do and can cost you 100% of your investment. Forget about courses that spend much time talking about that sort of stuff because if they tell you that's a reasonable thing to do as a beginner, they will just be trying to sell you on buying software or a system from them to try to follow a plan and become rich. If the systems worked they would not even need to be selling anything, they would be billionaires!

Courses that mention what a share is, what dividends are, what share prices do and why, are fine - to help you understand what a stockmarket is and so on. But buying individual company shares is not something you need to do yourself. Instead you buy a fund which has professional investment managers selecting the holdings, or perhaps automatically buying shares that follow a mix of different indexes to give you a balanced and medium risk blend of all different types of assets.

cyan_ee

Thanks again bowlhead99. I did not know what “Alison” was but now found the website : alison<dot>com (I am not allowed to post with link)
The finance courses here would be very likely what you've described.

Courses that mention what a share is, what dividends are, what share prices do and why, are fine - to help you understand what a stockmarket is and so on.

Yes that was exactly what I was looking for! I have no intention of dealing with shares and stocks myself directly but just want to understand the basics. Glad you suggested Future Learn.

When I started to use MSE nearly ten years ago to find a best deal on energy, I had no idea what ISA was! It has been a great source of information as well as educational, thanks to all those knowledgeable people like yourself on the forum!