Teacher AVCs, long term Stock & Shares ISA investing, and independent financial advice.

typeractive

Hi all,

I have been doing a lot of research recently. I feel I may be at a point where I need someone to help me 'sense check', and that's likely to be an Independent Financial Advisor, but I'd only want to pay for the initial advice, and not an ongoing % for managing my portfolio. 

To answer the most common question of 'why do you want to invest? / what is your goal?', well frankly I have always been a saver. I like the security of having money. That said I do like a nice car but haven't treated myself to one for 8 years. So my goal is really more for the fun of saving and making my money work for me - I want to try and maximise the impact of compound interest. 

The mortgage and loan for renovations will be paid off next year.

I have always saved in a cash ISA and never thought about the risky stocks and shares ISAs until I have been reading and watching lots of youtube videos. So my plan is to move across my cash ISA into a Stocks and Shares Global Index fund. I'm currently looking at the Vanguard Lifestrategy 100 Accumulation. I will then maximise this with the yearly allowance and hopefully not touch it. As I get closer to retirement I may look to transfer to a less risky strategy such as more bonds based.

Next I have been looking at AVC's. I am a higher tax rate payer in the teachers pension fund, so from what I can see I can use the Prudential AVC platform. However their fees are quite high (e.g. 0.68%). So I have been looking at the maths to work out (theoretically) if I would be better saving my left over pay into other stocks and shares (after tax), or taking advantage of the tax relief and paying into an AVC. As a very rough example of my calcs if I put my remaining pay into S&S's averaging 6.78% for 20 years, I'd need to find an AVC that can return 3.15% to equal the return but of course I'd want it to perform better. I am finding it quite hard to find the annual past performance of the Prudential AVC's but I'm working on it (and yes I appreciate past performance doesn't dictate future prices, but I do think it helps to take a look at least). The AVC route does have the setback of not being able to access it for a lengthy period, and then from my understanding only 25% is tax free on drawdown. So I wonder are AVC's really worth the tax advantage? I'm unsure if I'm just being tight and wanting to avoid paying so much tax!  I've got around 20 years left in my career, and I can't see me taking early retirement as I think I'd genuinely be bored. I could always start the AVC's later but the thought of paying that tax bugs me.

I've got a good handle on my budgeting and spending with built in emergencies and contingency balance. However I won't be able to buy a new sports car for quite some time (very none MSE!) ....and I know once I bought it I'd be having kittens over the upkeep...but we all have our weaknesses. 

So I think I might be at a point where I need to validate some of my thoughts with a professional, but that in itself brings on challenges such as finding a good advisor, who'd be willing to work with me by checking my thoughts / figures, making suggestions and helping me get them into action. I'm not adverse to returning to them to track it in the future but I don't want anyone managing it all for me as such. 

So does anyone have any thoughts on my plans on S&S ISA global index funds, AVC's (worth it?), and advice on selecting an IFA? Any ideas on how much I'd be looking to pay for one off advice?

Thanks  

Albermarle

My first bit of advice is to expand your research into regularly reading this forum and the Pensions forum. They are very good sources of info, on all the questions you mention in your post.

Couple of initial comments.
Investing via a pension ( ignoring your very valuable Teachers pension here) is normally better for building up a retirement pot due to the tax advantages, even taking into account some tax can be paid on withdrawal. This applies especially if you are higher rate taxpayer in employment, and will be a basic rate taxpayer in retirement ( the large majority are ) 
S&S ISA's are better for money that can be put away for 10 years or more, but might  be needed before your late Fifties .
With a pension there is nothing to stop you starting your own pension, rather than utilising the AVC from Prudential, although I am not sure if there are some special advantages with using the in house AVC ( I am not a Teacher) .

I have always saved in a cash ISA and never thought about the risky stocks and shares ISAs until I have been reading and watching lots of youtube videos. So my plan is to move across my cash ISA into a Stocks and Shares Global Index fund. I'm currently looking at the Vanguard Lifestrategy 100 Accumulation. 

Historically in the long terms, share markets have beaten cash returns hands down. So in fact staying too much in cash is the more risky option. However.....
Cash interest rates are currently above inflation, and share prices ( especially in the US ) are quite 'hot'
So not sure about the wisdom of diving  straight from cash at a good interest rate, into a relatively high risk 100% equity fund . 
Unless you have other savings and you are only looking to invest some of them?

Hoenir

typeractive said:

 I want to try and maximise the impact of compound interest. 

Stock markets aren't linear in nature. More akin to riding a roller coaster in the dark. You never know when the next sharp drop will be. If you are saving for a objective such as a car. Then cash might be the better option. The risk in stock marketinvesting is volatility. The higher the risk level the greater the potential swings between high and low points. 

Key rule of investing is to never to risk more than you can afford to lose. 

typeractive

Albermarle said:

My first bit of advice is to expand your research into regularly reading this forum and the Pensions forum. They are very good sources of info, on all the questions you mention in your post.

Couple of initial comments.
Investing via a pension ( ignoring your very valuable Teachers pension here) is normally better for building up a retirement pot due to the tax advantages, even taking into account some tax can be paid on withdrawal. This applies especially if you are higher rate taxpayer in employment, and will be a basic rate taxpayer in retirement ( the large majority are ) 
S&S ISA's are better for money that can be put away for 10 years or more, but might  be needed before your late Fifties .
With a pension there is nothing to stop you starting your own pension, rather than utilising the AVC from Prudential, although I am not sure if there are some special advantages with using the in house AVC ( I am not a Teacher) .

I have always saved in a cash ISA and never thought about the risky stocks and shares ISAs until I have been reading and watching lots of youtube videos. So my plan is to move across my cash ISA into a Stocks and Shares Global Index fund. I'm currently looking at the Vanguard Lifestrategy 100 Accumulation. 

Historically in the long terms, share markets have beaten cash returns hands down. So in fact staying too much in cash is the more risky option. However.....
Cash interest rates are currently above inflation, and share prices ( especially in the US ) are quite 'hot'
So not sure about the wisdom of diving  straight from cash at a good interest rate, into a relatively high risk 100% equity fund . 
Unless you have other savings and you are only looking to invest some of them?

Thank you for the reply @albemarle . Yes I remember reading the drop back to 20% tax on pension in retirement. I was a bit unsure if I could opt to another AVC provider. Both of these points are why I think I need someone to help look at the numbers and approximate forecasting 'what ifs'. Basically testing my ideas - so coming onto a saving forum is a good start on that!  

And yes I agree that keeping money in cash is also risky the other way over. I think with risk, many of us have been scaremongers to think that all investing is the same as current markets like crypto where the volatility is extreme. I do not deny that getting into a S&S ISA will not come with troughs. I have looked at a number of index funds and seen the drops so I do expect it to happen. I do have other savings, but as you point out I am looking to invest significantly over a long period of time. This is the risk. I am looking to take the risk, be savvy with my other spends and saves, and live in hope that the world economy performs well hence a large index fund is my thinking. I still need to do research on which one - which is hard work.

typeractive

Hoenir said:

typeractive said:

 I want to try and maximise the impact of compound interest. 

Stock markets aren't linear in nature. More akin to riding a roller coaster in the dark. You never know when the next sharp drop will be. If you are saving for a objective such as a car. Then cash might be the better option. The risk in stock marketinvesting is volatility. The higher the risk level the greater the potential swings between high and low points. 

Key rule of investing is to never to risk more than you can afford to lose. 

Thanks @hoenir . Yes, I am not expecting a linear return. I've looked into the S&P 500 history and whilst it returns a near circa average of 10 or 11% there are almost no years that it was 10/11% with swings wildly in both directions. Hence my consideration of time in the market, but at my age I feel I don't have as long as I would like (annoyed that this stuff wasn't taught in schools). Time is one of the big advantages in investing. 

As for the car, well....I'd like that, but it will be very expensive in all aspects. If it ever happens I would try to buy that with money aside from the investing to try and maximise that compounding.

Excellent point on only invest what I can afford to lose. I'd be gutted to lose all my money as it is a lot and it has took me a long time to get here. Yet on another side I'm not using it and I do have other pots in place so I will survive, with a degree of comfort. But there is no denying your point here is completely true. Thank you.

typeractive

RE: AVC's and using PRU, it is possible to use other companies too.

dunstonh

I have always saved in a cash ISA and never thought about the risky stocks and shares ISAs until I have been reading and watching lots of youtube videos

Its worth noting that cash ISAs can give you greater risk than a stocks and shares ISA.

So my plan is to move across my cash ISA into a Stocks and Shares Global Index fund. I'm currently looking at the Vanguard Lifestrategy 100 Accumulation.

You say you want a global index fund but then say you are looking at a global managed fund.    Its usually best to match the fund to your chosen style.

It is also worth noting that going from 100% cash to 100% equities is a big jump in investment risk.   Can you handle the periods when you will see the value nearly halve?

Next I have been looking at AVC's. I am a higher tax rate payer in the teachers pension fund, so from what I can see I can use the Prudential AVC platform.

 It is the old fashioned AVC product.  Not a platform.

So I wonder are AVC's really worth the tax advantage?

Yes they are. The pension wrapper beats S&S ISAs for most people.  Both share the same investment options and charges.  The only difference is the tax and how you draw them.   

 I could always start the AVC's later but the thought of paying that tax bugs me.

You are not looking at the whole scenario.  Money you pay into the ISA has already been taxed and NI paid.  You are forgetting the pension gets reliefs.

I was a bit unsure if I could opt to another AVC provider.

FSAVCs were abolished in 2006.  The need for AVCs to still be offered was removed at the same time.  However, some employer retained their AVC product but those that did typically kept their original dated product from that era and haven't modernised it much or at all.   Hence why it looks more expensive compared to personal pensions and SIPPs.

. I do not deny that getting into a S&S ISA will not come with troughs. I have looked at a number of index funds and seen the drops so I do expect it to happen.

So, lets look at two scenarios and put monetary values on it.
1)   Your value is £100k.   Then markets crash and your value is now £55k.      What do you do next?
2)  You started your investments but they are lower than they were when you started 10 years ago.   What do you do next?

InvesterJones

Some cold budgeting and pension forecasting might be in order - just to see where you are with your goals, how you can get there with the least amount of risk, and on the fun side, you might find out you can afford that car after all - savers *can* get to a position where they're saving for saving's sake, and never get around to actually spending what they don't need Approach your car wants with the same savvy hat and you might be able to find what you want and run it (I too dreamed of a sports car, then along came Toyota with a 'pound shop GT3' which has a 10yr warranty, cost less than a Vaux Astra, and I get it serviced down the road at normal prices )

typeractive

Thank you @dunstonh. I will do my best to reply in a similar fashion

How do you do the multi quote? I can't figure out the code for that. My brain is already fried with all this financial stuff. So we will need to use italics I think! 

"Its worth noting that cash ISAs can give you greater risk than a stocks and shares ISA."

Agreed - as I am learning.

"You say you want a global index fund but then say you are looking at a global managed fund.    Its usually best to match the fund to your chosen style."

OK I need a little bit of help here or to look into this more. I thought this Vanguard product is a global index fund? If not could you point me towards some examples (not taken as financial advice).

"It is also worth noting that going from 100% cash to 100% equities is a big jump in investment risk.   Can you handle the periods when you will see the value nearly halve?"

Indeed I could lump 100%, or I could dollar cost average it across over time? That's something I was considering if possible. Either a period of a year / 2/3/4 years transferring whilst putting in my monthly allowance?

"It is the old fashioned AVC product.  Not a platform."

Did I use the wrong terminology in the wording 'platform' here? Apologise, I really meant that PRU as a provider, not a platform (like Vanguard, trading 212, investengine etc).

"Yes they are. The pension wrapper beats S&S ISAs for most people.  Both share the same investment options and charges.  The only difference is the tax and how you draw them."

As we've talked risk in here, the Prudential Fixed Interest S3 has returned an average of -3.62% over the last 4 years, with 0.66% fees added on top. In my calculations it actually still beats Saving with a 0% interest rate after tax (which is amazing when you think of it), but if that rate drops to say -4% then my after tax take home saves would technically be better off. I hope it wouldn't perform at this level for 20 years, but theoretically is this possible when we're talking about risk? It should be noted that product is one of their lower risk ones. It's largely constructed of UK bonds, so maybe they will hit a maturity later so my point could be pointless. Just thought it was worth asking.

I do need to learn more about how to draw them down. 

"You are not looking at the whole scenario.  Money you pay into the ISA has already been taxed and NI paid.  You are forgetting the pension gets reliefs."

I understand this. My point was. The money in AVC's is locked away. It is non accessible until 55? So my point was I could start doing this later if I wanted access to more money now (apologies if I was unclear on that).

"FSAVCs were abolished in 2006.  The need for AVCs to still be offered was removed at the same time.  However, some employer retained their AVC product but those that did typically kept their original dated product from that era and haven't modernised it much or at all.   Hence why it looks more expensive compared to personal pensions and SIPPs."

So is this a good thing, or an indifference? i.e. it is what it is?

"So, lets look at two scenarios and put monetary values on it.

1)   Your value is £100k.   Then markets crash and your value is now £55k.      What do you do next?

2)  You started your investments but they are lower than they were when you started 10 years ago.   What do you do next?"

Bitcoin? (just joking!).

Prompt 1, I could look to do as I say, transfer the money gradually over time to help smoothen some of the bumps. I'm doing my best to try and spread the risk with an index / fund that hits many markets. 

Prompt 2, play it safe and kick myself in 20 years for never having the balls to give it a go.

Either way, keep researching and look for some expert advice, which in itself is also hard to find. Which I see by your signature you are experienced with. So thank you for taking the time to give prompts and question me. This is what we need, so we can think. Do you have any advice on sourcing an advisor to help get me started as I outlined above?

Hope i'm making sense - thank you for helping me

typeractive

InvesterJones said:

Some cold budgeting and pension forecasting might be in order - just to see where you are with your goals, how you can get there with the least amount of risk, and on the fun side, you might find out you can afford that car after all - savers *can* get to a position where they're saving for saving's sake, and never get around to actually spending what they don't need Approach your car wants with the same savvy hat and you might be able to find what you want and run it (I too dreamed of a sports car, then along came Toyota with a 'pound shop GT3' which has a 10yr warranty, cost less than a Vaux Astra, and I get it serviced down the road at normal prices )

Thank you @InvesterJones. I do think there is quite a bit of that. Saving for the sake of it. I've always been like this. But I do buy the things I like. I've bought the sports cars in the past, I do tend to look after everything and hang onto them a long time. My current car is nice, and was expensive when new. I bought it for practicality. Wanted German, needs to be diesel and automatic for the mileage. It serves it's purpose on all levels, I just keep looking at the thirsty sports cars and think 'one day'. Which long term investing, pension and budgeting may very well achieve....if i make it that far! lol Thank you for the reply  

LHW99

With your Teacher's pension, could you look at buying "Added Years", in comparison with AVCs?