Where to begin with S&S ISA's

Cruixer

Hi,
Just looking for a bit of where to begin in thinking about Stocks and Shares ISA's. I posted recently in the retirement planning forum about pensions etc, and in summary we have recently sold an investment property and paid off the mortgage on the home we expect to be in for life or downsizing, in mid forties and both still working full time just into higher tax bracket, but have fairly low outgoings. Our main cost in the coming years will be our one child, who is now 4. Pension situation seems good, with both on reasonably good work pensions and I've also started paying additional contributions to reduce my higher tax rate liability.



Long story long, we still have about £60k sitting in the Marcus bank accounts left over from the investment property sale, that we don't expect to need in the short to mid term, and don't know what to do with, having never really invested before outside of property.


Looking at the options, it seems like bank interest is a real terms loss against inflation, and cash ISA's have very poor interest, so I am thinking that the best option would be for both of us to use the cash to max out our ISA allowance for 17/18 and then maybe again after April.



Happy to be corrected, but if this does look like the sensible move, would appreciate any advice on where to begin with this. The guide on here seems to suggest that taking the provider with the lowest platform fees is the way to go, that seems a bit too simple to be the whole story!



Thanks.

Alexland

Personally I pay enough into my pension each tax year to completely eliminate my higher rate tax liability and as a bonus it reduces my income so we qualify for child benefit again.

Could you make a one off pension contribution to avoid higher rate tax this tax year?

In terms of ISAs you could consider opening a S&S ISA with iWeb (good platform for lump sums as no ongoing fees) and depositing in a balanced risk fund such as Vanguard LifeStrategy 60 for 5+ years of ups and downs. If you could invest for longer consider the higher risk Vanguard LifeStrategy 80 fund. Both are likely to beat inflation, eventually.

Alex

Joe_Bloggs

You could hold fire until after Brexit deadlines rather than risk the sporadic ups and downs given Brexit uncertainty.
J_B.

Cruixer

Thanks Alex. I have just recently realised the pension as a way to reduce my higher tax liability and I have arranged for the maximum extra pension contribution from December payroll for the remainder of the year.



Thanks for the tip on iWeb and Vangaurd, I will look into this.



What do you mean by "beat inflation eventually"? Wouldn't you expect this to be significantly better than inflation over a 5 or 10 year term? A quick look at the past performance on the vangaurd site seems to indicate roughly around a 9% return over the last 5 years, versus inflation of around 3%, if I am reading this right.

Cruixer

Thanks Joe, do you think this is serious consideration, even with a 5-10 year investment?

eskbanker

Joe_Bloggs wrote: »

You could hold fire until after Brexit deadlines rather than risk the sporadic ups and downs given Brexit uncertainty.
J_B.

The point being made repeatedly on this forum to those citing Brexit uncertainty as a reason to defer investing is that anyone planning a sensibly diversified (i.e. global) and long term investment strategy shouldn't be swayed by potential short term fluctuations in (what should be) less than a quarter of their portfolio - there are always 'sporadic ups and downs' somewhere, it's the nature of investing!

Alexland

Cruixer wrote: »

What do you mean by "beat inflation eventually"? Wouldn't you expect this to be significantly better than inflation over a 5 or 10 year term? A quick look at the past performance on the vangaurd site seems to indicate roughly around a 9% return over the last 5 years, versus inflation of around 3%, if I am reading this right.

Yes but those were years in which the market returns were mostly excellent, there was low market volatility and the pound was devaluing (increasing the pound value of the mostly overseas assets). You can't just extrapolate those 5 years forward and expect those gains to continue. It doesn't cover a complete economic cycle. Vanguard are forcasting lower returns over the next 10 years.

https://www.vanguardinvestor.co.uk/articles/latest-thoughts/markets-economy/vanguard-economic-market-outlook-2019

For example in a market crash you may see share prices drop 50%, a 80/20 fund drop 40% and a 60/40 fund drop 25%. There are no market crashes in your sample period. Now if you are diversified enough (VLS contains thousands of companies from around the world) then your fund should recover eventually but it can take time and people make the behavioural error of selling low in fear.

So investment is very much a waiting game having confidence you will get above inflation return, eventually.

Alex

Cruixer

Alexland wrote: »

Yes but those were years in which the market returns were mostly excellent, there was low market volatility and the pound was devaluing (increasing the pound value of the mostly overseas assets). You can't just extrapolate those 5 years forward and expect those gains to continue. It doesn't cover a complete economic cycle. Vanguard are forcasting lower returns over the next 10 years.

https://www.vanguardinvestor.co.uk/articles/latest-thoughts/markets-economy/vanguard-economic-market-outlook-2019

For example in a market crash you may see share prices drop 50%, a 80/20 fund drop 40% and a 60/40 fund drop 25%. There are no market crashes in your sample period. Now if you are diversified enough (VLS contains thousands of companies from around the world) then your fund should recover eventually but it can take time and people make the behavioural error of selling low in fear.

So investment is very much a waiting game having confidence you will get above inflation return, eventually.

Alex

Thanks for this. When I looked at the site for Vanguard 60 and 80 last night they only had historical information, presumably they don't want to tell you about a bleaker outlook on their sales page!


3-5% doesn't seem like a great return over 10 years. Money in the bank is covered by the savings guarantee, interest rates are creeping up and I am already getting 1.5% tax up to the savings allowance, which will be the full £1k if I keep my tax rate down.



I can't help wondering if I am better off pushing the money towards the pension rather than an ISA. The contributions there go into an investment pot, so presumably returns will be similar, but even at the lower tax band I would be getting a 20% bonus on everything I put in based on the tax saving. My understanding is that it can also be taken out as a tax free lump sum, so are there any benefits to an S&S ISA over just putting the money in a pension pot?

Alexland

Vanguard are owned by their US customers (a bit like a building society) so can be a bit more objective in how they present future outlooks. That forecast is 3% to 5% per annum compounding so between 35% and 65% over 10 years. It very much depends on how reasonable market prices are looking in 10 years time.

Once you have contributed enough to get down to basic rate if you put a further £100 into a pension you might save £20 tax but, under current rules, you can only withdraw 25% tax free and the other 75% would be at your retirement income tax rate (so would probably be taxed at 20% assuming you are drawing other state and private pension income to use up your personal allowance) so the saving could be marginal. Things also become less favourable if you reach the lifetime allowance.

As such these decisions very much depend on your circumstances and volatility tollerance.

Alex

Cruixer

So, let me see if I understand this correctly. Presuming all at 20% tax rate now and at retirement. Presuming I have £100k gross income to invest for easy maths.

I can put that full £100k into a pension tax free.

If I put that £100k gross income into an ISA I have to pay 20% tax first, which means I am only putting in £80k.

Presuming pension investment fund performance and Vanguard fund performance are the same, and both are 50% compounded over 10 years, then I would have:

Pension: £100x1.5=£150k - tax on 75% of fund (£112.5kx.2=£22.5k) = £150k-22.5=£127.5k


ISA £80 x 1.5=£120k

The pension looks slightly better all else being equal and my maths being right, so what are the other benefits and drawbacks of each?

For me I know that if I die before retirement, my beneficiary gets nothing that's in the pension investment pot, just my defined benefit salary pension, while the ISA would be inherited. I suppose there is more flexibility with an ISA, in terms of when it can be taken out, but in my case I can't see much difference, because I would be investing for retirement in either case.

Are there any other considerations?

Alexland

Yes basic rate pension contributions are slightly better but you are locking the money away and if you hit the LTA due to the higher rate tax avoidance you may find you pay a penalty withdrawing those extra contributions you made from basic rate income. Risk of hitting LTA is why I only pay enough to avoid higher rate tax.

If you have access to a DB pension scheme that makes things interesting as there may be more than just tax benefits to making additional contributions. Also you may choose to make contributions to a money purchase scheme (such as a SIPP) in parallel which would go to your beneficiaries.

https://www.youinvest.co.uk/pensions-and-retirement/accessing-your-pension/sipps-and-death

Alex