Monthly or annual investing?

JustAnotherSaver

Something i wondered recently & i'm curious what others think.


Basic rate tax payer so disregard anything that applies to higher rate tax payers as that doesn't apply here.


I also invest via Cavendish Online and believe there is no charge for subscribing to my SIPP with monthly payments in that i'm not charged a fee every time i make a payment. I understand that some platforms do charge for this?


Now if i could pay in say £1000 per month then that dwarfs anything you can put in a singular 5% regular saver and maybe the response would be a little different.
I currently pay in £200 per month. I've just had a rise and this will go up a little but until i see what difference it makes it'll stay at £200 for now. So this is within your regular savers.


I was wondering whether it'd be better to continue putting the £200 direct in to Cavendish each month as i am doing or whether to put it in to a 5% regular saver for 12 months, guarantee 5% on each payment in, let it mature & then put the matured account in to the SIPP instead.


I'm aware that by saying which would you do someone will probably throw out a 3rd option that i haven't thought of but i'll chance it ..... which would you do?

cjv

I would invest it monthly for the tax relief as it is higher than any regular saver would pay.

Terry_Towelling

cjv wrote: »

I would invest it monthly for the tax relief as it is higher than any regular saver would pay.

True enough, but the tax relief would still be added if you chose to invest the proceeds of a matured regular saver - and you'd get a bit more relief due to the interest also being invested.

Trouble is you can't predict how the market will be performing if you choose to wait until your RS matures in a year's time. You might find the market has risen and your RS interest isn't enough to make up for the units you will have 'lost' due to the higher cost.

Conversely, you might find the market has fallen and you get even more for your money.

Obviously you can't predict it with monthly contributions either, but you will have more control over the timings of your contributions.

I guess the way to view it is that in the longer term any small variations in purchase price versus the possibilities of having had to pay more (or less) to get your units is probably not going to be a big deal.

The big caveat though, is nobody knows which is the best way to approach it because that requires hindsight in advance.

JustAnotherSaver

Terry_Towelling wrote: »

True enough, but the tax relief would still be added if you chose to invest the proceeds of a matured regular saver - and you'd get a bit more relief due to the interest also being invested.

Trouble is you can't predict how the market will be performing if you choose to wait until your RS matures in a year's time. You might find the market has risen and your RS interest isn't enough to make up for the units you will have 'lost' due to the higher cost.

Conversely, you might find the market has fallen and you get even more for your money.

Obviously you can't predict it with monthly contributions either, but you will have more control over the timings of your contributions.

I guess the way to view it is that in the longer term any small variations in purchase price versus the possibilities of having had to pay more (or less) to get your units is probably not going to be a big deal.

The big caveat though, is nobody knows which is the best way to approach it because that requires hindsight in advance.

I guess this is where the classic phrase of time in the market rather than timing the market comes in to play then?

Zero_Sum

You could hedge your bets & pay £100 pcm in each of RS & SIPP?

darkidoe

Difference is marginal if you are in for the long run. Biggest positive is that you have a plan and you are sticking to it. Don't sweat the details.

MK62

JustAnotherSaver wrote: »

I was wondering whether it'd be better to continue putting the £200 direct in to Cavendish each month as i am doing or whether to put it in to a 5% regular saver for 12 months, guarantee 5% on each payment in, let it mature & then put the matured account in to the SIPP instead.

Both are viable options - no way to know beforehand which would be better (unless the cash paid monthly into the SIPP is just left as cash in the SIPP account).

One slight detail.....you don't get 5% on each payment into a regular saver account....if you paid in £200 for a year into a RS account with a headline rate of 5%, you'll get about £64 in interest....


Personally I'd pay it straight into the pension each month and get the tax relief working for you earlier....on average you'd be slightly better off doing that, but there is no guarantee either way.

bowlhead99

MK62 wrote: »

Both are viable options - no way to know beforehand which would be better (unless the cash paid monthly into the SIPP is just left as cash in the SIPP account).

Agreed, you can't tell the outcome in advance.

5% a year is not a bad return for medium risk assets in the current environment. In the SIPP you might get more or might get less. In the regular saver, you definitely will get that 5% because it's contractual with full FSCS protection in case of bank/building society failure.

I would be happy taking the guaranteed rate of 5% if I was only going medium risk with the pension anyway. Why take a risk if you can get a nice return without risk. If I was aiming for higher risk / higher return with the pension, my long term expectation for the money would be a bit higher than 5%, so I would probably skip using the regular saver and invest the money whenever it became available to me. That would leave capacity in the high interest regular saver product for other money that I wasn't committing to investment (ie normal cash savings).

One slight detail.....you don't get 5% on each payment into a regular saver account....if you paid in £200 for a year into a RS account with a headline rate of 5%, you'll get about £64 in interest....

This perhaps just serves to confuse the OP, but what you mean is simply that they won't earn a full 5% return on every penny that goes into the RS account because most of the pennies do not sit in the account for an entire year. The first month's contribution does, but the last month's contribution is only there for a month.

But all the money in the RS account *does* earn at the nice rate of /5% per year/ for all the time it's in the account, even if that time is only a month so it's only a twelfth of 5%.

Likewise all the money in the investment product inside a pension, if it was returning 5% a year, would not deliver 5% on every contribution within that initial first year period when the last £200 contribution was only there for a month.

It seems reasonable to talk about rates as annualised returns- whether we mean an investment total return or a bank account AER - as rates 'per year' are a sensible way to compare products.

Personally I'd pay it straight into the pension each month and get the tax relief working for you earlier....on average you'd be slightly better off doing that

If you put £100 in a pension and turn it into £125 including tax relief and grow it using investment returns net of charges at 5% a year, after the year is up the pension will contain £131.25.

If you put £100 into a high interest savings account and grow it using high interest receipts at 5% a year, after a year is up you'll have £105. If you put that into the pension you will turn it into £131.25 with tax relief.

So, 'get the tax relief working for you earlier' is, in that situation, hokum.

The difference in performance between the two choices does not come from choosing to get tax relief early or late. The difference in performance would only arise if the investment returns net of charges produce a different rate of return than the high interest account; and they might be higher or lower which as you say is unknown. It is not the tax claim that drives the result.

If you do suspect your returns net of charges will be higher than 5% annualised on the investment assets, then yes invest sooner

Note also that there may be income tax to pay on your interest income if you don't have any personal savings allowance / 0% band / personal allowance.

MaxiRobriguez

The money is such a small figure (no offence) that the a regular saver is the sensible option - it could be used as your emergency fund.

5% net is probably more than you're going to be getting by investing in funds at the moment frankly.

MK62

bowlhead99 wrote: »

If you put £100 in a pension and turn it into £125 including tax relief and grow it using investment returns net of charges at 5% a year, after the year is up the pension will contain £131.25.

If you put £100 into a high interest savings account and grow it using high interest receipts at 5% a year, after a year is up you'll have £105. If you put that into the pension you will turn it into £131.25 with tax relief.

So, 'get the tax relief working for you earlier' is, in that situation, hokum.

Who said anything about returns being identical?

In response to the OP's question "which would you do?", I simply stated "Personally I'd pay it straight into the pension each month and get the tax relief working for you earlier....on average you'd be slightly better off doing that, but there is no guarantee either way"

Perhaps I should have stated

"Personally I'd pay it straight into the pension each month and get the contribution and tax relief working for you earlier....on average you'd be slightly better off doing that, but there is no guarantee either way",

but I thought it was obvious that's what I meant.

steampowered

Historically, the average long term return generated by the stock markets is 7-8%.

That is a smidgeon higher than the 5% you'd get on a regular saver.

So, assuming that you are investing for the long term (10+ years), statistically it is likely that you would be better off putting the money straight into an investment rather than putting it into the regular saver for a year - though the difference is pretty marginal.

Personally I would use the "regular saver" as my emergency cash savings pot - since "regular saver" funds can be withdrawn at any time, albeit you won't get the 5% interest if you withdraw.