Advice on S&S ISA Funds

DrEskimo

ValiantSon wrote: »

Your ISA rate is rubbish, as you rightly recognise. There is no real advantage in cash ISAs for basic rate tax payers unless they have very significant cash savings and do not wish to transfer those into investments.

I agree with Alex that moving your emergency fund into better paying current accounts and regular savers is a good way forwards. Nationwide FlexDirect will pay you 5% on £2500 for one year, so I would split the fund across that and another one or two accounts, e.g. Tesco (paying 3% on £3000 - although you do need two direct debits to operate that account) and TSB Classic Plus (paying 3% on £1500).

You'd have access to Nationwide's regular saver allowing £250 p/m at 5%. I'd suggest a First Direct or HSBC current account also to give acess to their regular savers too - First Direct gives 5% on £300 p/m and HSBC 5% on £250 p/m. (Neither of those accounts require direct debits - HSBC needs 2 standing orders, which you could use to help shift the money around between the different accounts). If you were able to switch an account to HSBC you would also get £150 swithching bonus (+£50 in 12 months), or switching an account to Frist Direct would get you £125 switching bonus. Obviously both acounts need to be funded each month, bu the money doesn't have to remain in them so you can move it around (First Direct = £1000 p/m and HSBC = £1750 p/m).



Factor in exit fees from Hargreaves Lansdown. They charge £30 plus £25 for each fund. Depending on how many funds you currently hold then it may total quite a lot. Would you save this with another platform? (If you already hold the funds you list then your exit charges would come to £130). Although you might want to think beyond just the one year saving/cost.

However, see comments below....



If you did decide to consolidate those funds into just Vanguard LifeStrategy then you could sell the existing funds on Hargreaves Lansdown and purchase the Vanguard fund(s) there too - with no trading costs on funds - (thus keeping everything inside the ISA wrapper) and then transfer to Vanguard's ISA for a much lower fee.

If you went for just VLS60 or VLS80 then you would pay 0.37% p.a. If you mixed VLS60 with VLS80 then you'd pay two fund OCFs, so your annual fees would be 0.49%, i.e. 100th of a percent more than Hargreaves Lansdown charge for just the platform fee. At some point your investment will get to a point where Vanguard are no longer the cheapest provider, so keep an eye on that and re-evaluate the costs. N.B. Vanguard charge no exit fees.

If you went for a regular monthly payment into your ISA then, of course, Vanguard charge nothing for this. They also allow you to set a direct debit up to make those payments and you can allocate them straight away to purchasing new units in your funds. They also allow you to pay your account fees by direct debit, so there is no loss in investments.

Alex has mentioned the advantage of a LISA, but that the available S&S LISAs are very limited. Oddly, the best option seems to me to be with Hargreaves Lansdown. I've posted in another thread on this today, but can't find it now . In it I've tried to give some cost comparisons for the different providers. You might want to have a look. (If it find it again I'll post the link.



Certainly doesn't sound silly. You do need to look at this as a long term thing and 10 years is probably a minimum. At 30 you have probaby got another three decades before retirement, so you shouldn't need to touch it for some time. You seem to be in a good financial position.



I'd look to keep your income below the higher rate threshold, assuming you aren't pushing significantly over it, and it sounds like you aren't. If you are well into the higher rate bracket then you should probably maximise pension contributions, but accept the tax for what it is and enjoy the benefits of your income!

8% isn't bad, but there are plenty of us paying double or more, so if you could put more in, which it sounds like you could, then I'd suggest doing so. And the tax relief is an additional incentive!

As to the mortgage, overpayments are probably a good idea, assuming you don't incur fees - double check what you are allowed to pay. Obviously it will save you interest, but in reducing your LTV you also increase the potential for better deals on remortgaging and, paying it off faster will give you more disposable income sooner to plough into investments and/or pension.

Cheers Valiant, much appreciated.

I will have a look into those savings accounts and start looking at the T&Cs to see how it would work. Never one to turn down free money....

I think I quite like the investment strategy I have come up, in terms of VG 60% and three index trackers, and while I may save a bit of money by transferring to another platform, I think the costs and additional time is putting me off. I will look into more detail before ultimately deciding, but so far I have £150 invested in just the HSBC FTSE 250, and a direct debit that is set to make it's first debit next week. So it would not be hugely costly to move, but more time and setting up.

Of course as my investments grow, I could begin to regret this decision...!

I guess it depends on your definition of 'significant', but over half of my self-employment earnings will fall in the higher tax bracket I think. I've only done it for 5months, and on average I have earned about an extra £2k a month. Hard to know if this will continue for the remaining 7months though. I have stuck 50% aside in a regular savings account in preparation for my self-assessment tax, as I'm not 100% sure exactly how much I will owe. £5k is earning 1.5%, but the next £5k will only earn 1%, so I am tempted to move any more into my NS&I premium bond account, on the hope that I will get the average 1.4%. Obviously this isn't really 'my money', so not too fussed where it goes as long as it's zero risk.
I have used an online calculator (sorry cant post link), but not fully confident in it. Mainly due to how it calculates the additional student loan contributions. I am on a plan 1 student loan and was told by the loan company that both my employment salary and self-employment salary will be treated separately. So I only pay 9% on anything above £17,775 on my employment salary, and only pay 9% on anything above £17,775 on my self-employment salary. I thought this was rather generous, as I initially thought it would just be combined and I'll pay 9% on everything I earn from self-employment. Indeed this is what the online calculator assumes too....if anyone knows for certain that would be great!

While my contribution based on my standard salary is 8%, if I look at it in terms of my total annual (predicted) income, it is only 5%. So I am thinking of adding the same amount again as an additional contribution into my pension, which will increase my coverall contribution to 10%. I will do some more research, but upon first glance I think my pension provider will do further matching on additional contributions, so this, coupled with my higher tax rate, suggests to me that pensions would be better that LISA? Then anything remaining can go to mortgage over-repayments and beefing up my 'enjoyment' budget.

And yes I checked with my mortgage provider, and I wont be anywhere near the 10% per year mark to worry about fees.

ValiantSon

DrEskimo wrote: »

Cheers Valiant, much appreciated.

I will have a look into those savings accounts and start looking at the T&Cs to see how it would work. Never one to turn down free money....

Hope you find them useful suggestions. Just one slight correction - Tesco require three direct debits. Sorry for earlier mistake; keeping the requiremtns of all the different accounts in my head is liable to produce the occasional error.

DrEskimo wrote: »

I think I quite like the investment strategy I have come up, in terms of VG 60% and three index trackers, and while I may save a bit of money by transferring to another platform, I think the costs and additional time is putting me off. I will look into more detail before ultimately deciding, but so far I have £150 invested in just the HSBC FTSE 250, and a direct debit that is set to make it's first debit next week. So it would not be hugely costly to move, but more time and setting up.

Of course as my investments grow, I could begin to regret this decision...!

If you are happy with your current plan then no need to change it. Perhaps in the medium term investigate different platform charging models as there are cheaper ways of doing it and every pound spent in fees is a pound lost in returns (and the subsequent compounding). Have a look at this comparison table for platforms http://monevator.com/compare-uk-cheapest-online-brokers/.

With current sums invested it is probably percentage fee platforms that would suit you best. Cavendish Online might be a good option as they only charge 0.25% platform fee with no charges for dealing funds and no exit fees. Given Hargreaves Lansdown's exit fees you might actually save by selling your investments there, closing the account and then opening a new S&S ISA with Cavendish to re-purchase the funds. There is a slim chance that this would cost you in the change in price, but it probably won't and even if it did it would be a tiny fraction in comparison to Hargreaves Lansdown's fees.

If it were me then I would make the changes as, although at the moment the amounts we are talking about are small, they won't remain so as your investments grow, and why pay more anyway?

DrEskimo wrote: »

While my contribution based on my standard salary is 8%, if I look at it in terms of my total annual (predicted) income, it is only 5%. So I am thinking of adding the same amount again as an additional contribution into my pension, which will increase my coverall contribution to 10%. I will do some more research, but upon first glance I think my pension provider will do further matching on additional contributions, so this, coupled with my higher tax rate, suggests to me that pensions would be better that LISA? Then anything remaining can go to mortgage over-repayments and beefing up my 'enjoyment' budget.

If it were me then I would definitely up the pension contributions. 5% is fairly low, 10% is better, and 15% is even better still . If your employer will match increased contributions then that is even better - they are in effect giving you a tax free pay rise! What a nice employer.

Best wishes.

DrEskimo

So after a bit of research thought I would update this...
Turning more into a pensions related thread now, so possibly in the wrong area..!

So both my previous employment and my current employment have pensions under the defined benefit scheme. I was in employment for a total of about 6yrs between 22 and 28, where I earned an average of £23k. Since I did a PhD in the final 3yrs I only worked 1day a week, so my FTE was about 4yrs, and my defined benefit from this is about £1,500 per annum.

So basically, not a lot...!

My current employer is also providing a pension on a similar defined benefit scheme. 1/75 of my salary as an annual payment and 3/75 as a lump sum. Obviously I have no idea what my average earnings will be over the next 35years, or if I will even stay with my current employer for so long (academic, so unlikely..), but I am in a fairly junior position and would hope for a few promotions along the way, so it looks like getting an annual defined benefit of £25k is realistic, assuming I stay of course.

Any additional contributions will go to a separate investment builder. My employer will only match 1%, so I will get an extra 1% on top of the 8%. If I contribute an additional 8% (£256) towards this, and assume an average return of 5% in the investment (and 2.5% inflation), it will be an extra £200k in a lump sum.

So question is...do I contribute the extra to the investment builder and enjoy the tax relief, or do I just keep the additional income and enjoy it/invest it in my S&S ISA? I guess the 40% tax relief on AVC given my self-employment makes the pension investment the most economical sound decision....

Anything else I'm missing....?

Alexland

I don't understand how you might change employers and are still likely to build up a decent DB entitlement. Getting access to a DB is increasing unlikely in the future as employers close them to both new and existing members. I wouldn't base your retirement planning on having access to a DB scheme for the next 35 years!!

From what I understand of your position I would definitely contribute enough to the DC scheme to both get employer matching and avoid 40% tax to catch up with the missed years.

Alex

DrEskimo

Alexland wrote: »

I don't understand how you might change employers and are still likely to build up a decent DB entitlement. Getting access to a DB is increasing unlikely in the future as employers close them to both new and existing members. I wouldn't base your retirement planning on having access to a DB scheme for the next 35 years!!

From what I understand of your position I would definitely contribute enough to the DC scheme to both get employer matching and avoid 40% tax to catch up with the missed years.

Alex

Yes very good point!

I suspect you are right. Take advantage of 1% match and the tax relief.

I'm finding it difficult to work out how to plan appropriately when my long-term employment plans are quite uncertain. Might stay at this uni for many years, might move back to industry, or might go full set-employment...!

Not to mention working out what my immediate costs might be, such as moving home, buying a car again or getting married...

If my income is the same level as the last 5months, I have enough to do mortgage overpayments, ISA S&S investments, AVC to the pension and cash savings for immediate purchases. To be fair there is little reason to think it wont stay the same (might go up if anything..), but I may need to re-structure my contributions to each to get it more in sync with my plans.

DrEskimo

So a small update...

I now have £1,000 in my HL ISA, split across 4 funds. One of which is the VLS 60% (55%). The other 3 are tracking funds (15% each).

I think my reasons for this was that I thought having just one fund in the form of a VLS was not diversified enough, afraid just one fund was too simplistic! However, doing more research on here (I'm still about, quietly reading and absorbing information!) and elsewhere, I think it was naive of me to try and expand the allocation of the VLS through my own very inexperienced choices...! After all, the allocation of the VLS has been carefully considered by people far more knowledgeable than me....

So I have been thinking about selling the three funds at their current rate, and using that to buy shares in HSBC Global Strategy Dynamic. This would essentially be like having just the VLS 60 and VLS 80 to get a VLS 70 ( I am happy with lowering my risk profile slightly, and may adjust the proportions to give me closer to 75), however from what I've read the HSBC could provide a bit more balance compared to two VLS based global funds due to their choice of bonds and lower weighting to the UK market.

Obviously my choice of funds it my decision to make, but just wondering if I am missing something obvious about selling funds so soon after, and using them to reallocate into a single fund? Obviously the recent dip has meant they are worth a little less than what I bought them for, but my logic is that the HSBC Global fund will be worth less too, so shouldn't have a huge effect overall? I think the HSBC global dynamic has faired a bit better than my 3 chosen funds over the last month, so I think I am a tiny bit worse off when I compare the prices between now and last month, but I don't think it will amount to much over the long run? Unless of course there are other charges/fees I am missing...? Obviously the simplicity I think will be worth it.

With regards to everything else, I am overpaying on my mortgage just to achieve the shorter term I want, and I have calculated my tax based on my PAYE and self-employment, and have about £7k in savings now. I have opened a Nationwide account to start moving most of that to the 5% current account and savings account.

I will likely be adding additional contributions to my mortgage, even just 1% to get the 1% match to the DC part of my USS pension, but I am seeing how my self-employment work pans out this year before I make any decisions.

ColdIron

With only £1,000 in play just choose one fund and forget about it, it won't make any useful difference at this level

DrEskimo

ColdIron wrote: »

With only £1,000 in play just choose one fund and forget about it, it won't make any useful difference at this level

I think the term 'overthinking' is probably appropriate here....:p

Obviously I am adding to this on a monthly basis, and that amount will depend on disposable income, but should be around the £500 mark.

dunstonh

I now have £1,000 in my HL ISA, split across 4 funds. One of which is the VLS 60% (55%). The other 3 are tracking funds (15% each).

Over complicated and totally pointless for £1000.

Lets say your random selection gives you a whole 1% better return over the next 5 years compared to just the VLS. That is £10. You are just as likely to end up £10 worse off too.

Stick with a single multi-asset fund and stop faffing about.

DrEskimo

dunstonh wrote: »

Over complicated and totally pointless for £1000.

Lets say your random selection gives you a whole 1% better return over the next 5 years compared to just the VLS. That is £10. You are just as likely to end up £10 worse off too.

Stick with a single multi-asset fund and stop faffing about.

As above, I've only just started, hence the amount is so low. I fully expect the amount to be around £30k at least in 5yrs time.

Would your advice still be the same?