Moving from Growth to Income

Truffle_Snuffler

Following on from a previous thread in the Pensions & Retirement forum, I am considering moving my ISA to diversified income producing Investment Trusts. As a relative novice, I would like to discuss this & welcome any comments or criticism.


The ISA is currently made up of mostly Vanguard LifeStrategy 80 index trackers & is worth around £100k. It is held on the Charles Stanley Direct platform.


I have looked at the suggested IT portfolios on the Money Observer website which looks to have a good track record for income & has also managed to protect & grow the capital sum.


I would like to know the most cost effective way of transferring from one to the other.
Does this involve converting my units to cash & then buying ino the ITs (while obviously not losing the ISA status)?
Given that CSD are increasing their charges, would it be better to move to a lower cost platform, & if so, which one?
Would any income automatically be paid tax-free or does it involve paying then reclaiming from HMRC?
Any other comments/advice?


Once again, Thank You in advance for any help you can give.

ColdIron

You will need to sell your funds and then purchase the ITs. Be sure that you understand how they work as there are important differences

CSD could cost £350 pa, which is a lot, but they operate a loyalty program on shares which might reduce this to £140/£240

https://www.charles-stanley-direct.co.uk/Your_Benefits/Loyalty_Programme/

There are plenty of low, or no, annual fee providers for shares, even HL are capped at £45. Compare some charges here

http://monevator.com/compare-uk-cheapest-online-brokers/

If you do switch be sure to do it by instructing your new provider and not by moving the money yourself. It would make sense to transfer as cash to avoid the transfer fees

ISAs are not taxed (except stamp duty on share purchases) so yes your income will be tax free

msallen

Truffle_Snuffler wrote: »

Does this involve converting my units to cash & then buying ino the ITs (while obviously not losing the ISA status)?

Yes. All within the ISA though - don't withdraw the cash.

Truffle_Snuffler wrote: »

Given that CSD are increasing their charges, would it be better to move to a lower cost platform, & if so, which one?

Possibly. You need to run the figures. If you are not contributing any more to the ISA (or at least only rarely) then you would probably be better on a platform that charges a flat fee per trade but nothing to hold, whereas if you will be making (for example) monthly deposits then a %age based charge may be better.

Truffle_Snuffler wrote: »

Would any income automatically be paid tax-free or does it involve paying then reclaiming from HMRC?

As long as everything is inside the ISA then HMRC aren't involved at all. Dividends from the ITs will be paid into the ISA and you can withdraw them from there tax free.

bostonerimus

You need growth to produce income. So whether you are using ITs or regular funds it all comes down to capital gain, dividends and interest in the end.

JohnRo

Not quite what you're asking but as you say you're a novice and already with CSD, switching from free trading in funds to charged trading in shares.

One of the main things to consider if you haven't already, that will affect which platform is best over the longer period and perhaps more so than the valuation itself, is how frequently you plan to trade.

Horses for courses.

The number of likely IT purchases or sales in any given year, over the duration, is worth giving some serious thought to because it can get relatively expensive if you miscalculate. Charges are one of very few things investors have any significant control of.

I use CSD to make one IT/ETF purchase or sale each and every month. That negates their platform charge which would otherwise be 0.35%pa capped at £240pa and effectively reduces the charge to the cost of the 12 trades alone, currently £11.50 x 12 = £138pa.

The downside, it needs to be monitored consistently and managed or the scheme benefits will be lost, just one missed monthly purchase or sale means the platform fee won't be negated and instead that months proportion of the annual 0.35%pa fee will be applied. That could push the cost closer to or even hit the £240 annual cap in just one month if the portfolio valuation is very high.

On £100K you'd be charged just over £29 in any one month where no qualifying trade was made, so a lot more than one £11.50 trade (plus any stamp)

If you then still need to make that missed purchase within the year the cost has gone up a lot, so making an effort to avoid one missed monthly trade is very important, to keep costs as low as possible.

CSD are definitely not the cheapest out there but much cheaper than most comparison tables seem to detail if the strict, once monthly trading schedule is used. I much prefer CSD's platform and customer service to the cheaper alternatives and view the cost difference as money well spent.

Another CSD bonus is that their ISA offering is flexible which is immensely useful for sloshing money about when operating and growing a dividend paying portfolio. It effectively allows the ISA (within the allowance) to act as a 0% deposit account with BACS transfers free.

Their failing if you require it, is that they don't offer international trades online via the web portal and their telephone dealing service which does, charges an extortionate amount imo.

Hope that helps.

Audaxer

Truffle_Snuffler wrote: »

The ISA is currently made up of mostly Vanguard LifeStrategy 80 index trackers & is worth around £100k. It is held on the Charles Stanley Direct platform.

One option is keeping it invested in VLS80 and drawing a percentage income from growth and dividends, i.e. a total return approach. There could be a downturn in the markets, but at the end of the day you could still have more capital in your ISA in the long term rather than selecting a bunch of ITs or funds and taking natural income only in the form of dividends.

I'm in a similar position to you and have some VLS60 and HSBC Balance Strategy as well as an income portfolio of mainly equity income and fixed interest funds. I'm a bit torn between wanting to rely on natural income and going for total return.

My advice would be that unless you are sure about how ITs work with the premium/discounts and gearing etc., and are confident about setting up, managing and rebalancing a portfolio of ITs or active funds, it might be easier and more profitable keeping your ISA invested in a multi asset fund like VLS80 and taking a percentage of the total return as income.

ColdIron

Remember that relying on income from regular sales regardless of market conditions comes with some risk for early retirees. Depleting your capital early on can put a serious, sometimes irrecoverable, spanner in the works. You will need a plan B

Truffle_Snuffler

It's starting to appear than nothing is as simple as I would have liked. Putting money away was easy. Getting it back out, not so!! Maybe need to sit down with a pro?

stephenadarglas

ColdIron wrote: »

Remember that relying on income from regular sales regardless of market conditions comes with some risk for early retirees. Depleting your capital early on can put a serious, sometimes irrecoverable, spanner in the works. You will need a plan B

That is very good, important and crucial advice.

dunstonh

You dont need to income to provide an income.

Using gains is just as effective and with modern platforms offering cash accounts, you can take a fixed regular withdrawal from the cash account and just refloat it periodically from sale of units.

Truffle_Snuffler

ColdIron wrote: »

Remember that relying on income from regular sales regardless of market conditions comes with some risk for early retirees. Depleting your capital early on can put a serious, sometimes irrecoverable, spanner in the works. You will need a plan B

Thanks for this. Part of the income is to bridge a gap until a DB pension can be accessed without penalty (about 6 years). I would still like to do this without depleting the ISA if possible though.