Shares v savings

Devonsteve

Hi all, new here so go easy. Im 57 with moderate savings and just started investing some of it into shares. I have some savings in a fair interest rate savings account and keep this below the £1000 interest mark to save the tax. Ive got various shares now across the board with a 10 year plan to increase wealth for retirement. from what i can see, dividends dont pay much, certainly not to live off so although my money will be increasing due to share price growth, it will be just sat there? Im hoping to retire in 10 years so would i then sell my shares and then put that in savings? I would have to pay tax on it then though? Need a few pointers to improve my plan. Cheers all.

kimwp

Remember that you pay tax as a proportion of the interest you earn.

So it's better to earn £2k interest and paying tax than earning £1k interest and not paying tax.

Frequentlyhere

Where does your pension fit into all of this?  That's typically the most optimal way to put away money for retirement.

Devonsteve

Frequentlyhere said:

Where does your pension fit into all of this?  That's typically the most optimal way to put away money for retirement.

I have a works pension, a personal pension ive been paying into since about 1985 and two small pensions from previous employment that are frozen. I need to consolidate these sometime.

jimjames

If you are starting out then I wouldn't be buying shares or do you mean you are buying funds that invest in different shares?

Gaberdeen

Devonsteve said:

Hi all, new here so go easy. Im 57 with moderate savings and just started investing some of it into shares. I have some savings in a fair interest rate savings account and keep this below the £1000 interest mark to save the tax. Ive got various shares now across the board with a 10 year plan to increase wealth for retirement. from what i can see, dividends dont pay much, certainly not to live off so although my money will be increasing due to share price growth, it will be just sat there? Im hoping to retire in 10 years so would i then sell my shares and then put that in savings? I would have to pay tax on it then though? Need a few pointers to improve my plan. Cheers all.

First off, any money invested in Stocks and Shares should ideally be held in a Stocks & Shares ISA

This protects any capital growth from tax and it also means any dividends or interest / coupon payments are paid tax free (unless the jurisdiction of the security has WHT but that's usually specific to US/Canada listings)

If you don't have your investments in an ISA - you can have your broker perform something called a Bed & ISA - they basically sell down your non-ISA investments and rebuy them after moving the monies to an ISA account. They do this in the same trading cycle to prevent any big swings which could translate to losses.

I'll say right from the outset that individual companies are inherently risky investments, even blue chip shares have their bad days and they can literally swing from one extreme to the other in short order - my preference is to embrace risk-reduction through diversification - it's been well established that you can reduce your risk to that of the market as a whole (beta risk) by buying something in the order of 20+ evenly distributed market-diverse stocks - it's not recommended you do this unless you have the time to research each company you want to invest in because buying 20 oil and gas shares will not net you the same risk reduction for obvious reasons. If you do want to invest in individual equities, you should at the very minimum check their latest accounts, broker notes as well as whether they are cyclical, defensive or adventurous. If you know how to calculate ROE/PE/EPS this will stand you in good stead.

Investment companies and Trusts are inherently less risky than individual companies and can offer very good, market-beating returns - but they are not perfect - they tend to focus on a specific economic activity (REIT, O&G, Renewables etc) The key metric for trusts is NAV (net asset value) because every one of these needs to publish it on a frequent basis (usually monthly) - NAV is basically what the company would be worth if you wound it up that day - meaning it can trade at a material discount to what it's worth. Conversely, a trust that performs well over time can command a premium. You should at the very minimum check the latest accounts and NAV figure for a company before investing. Also, pay attention to the wind-up provisions that each company might have, this effectively means that the shareholders can vote to cease trading if they feel it is in their best interests.

That brings us to funds - of which there are myriad types - mutual/index & ETF

Mutuals / Index trade once a day and the NAV I described earlier is set by the trading manager every day - this means you can never get a discount or a premium, you get what you get. This makes mutuals/index funds a lot less volatile but it also means that they tend to be slow-burners - these funds usually describe "total returns" on 1Y 5Y and 10Y basis which include distributions such as dividends and coupon payments. Funds are generally made up of clusters of companies or instruments like bonds or gilts meaning they are diversified - making them less risky than the individual investments that make them up - there are two main types of funds, passive & managed.

Passive means not a lot of buying and selling will take place - fund managers will pick an assortment of investments they think will do well and will wait for the results. - the lack of trading almost always translates to lower running costs for the fund.

Managed means active participation in the market. The fund managers will adapt to geopolitical uncertainty, market trends and underlying influences like interest rates and forex. The intensity of trading means higher running costs.

Each fun will also usually have a method of returns for its investors - Income or Accumulation.

Income means that distributions are paid gross to shareholders - you can manually reinvest these or have them automatically reinvested via a process known as DRIP - if your trading platform offers it. Income is ideal for retirees who need an income derived from their capital - or if you want control over how you reinvest your dividends.

Accumulation units reinvest the dividends paid back into the fund, meaning that although you wont own any more shares - your "share" of the whole fund will increase proportional to the reinvestment. Over time this should mean that your investment grows at least in line with the dividend yield (although that is never guaranteed) The automatic nature of this means that accumulation funds have lower running costs vs income which is why there's a disparity between identical funds with different units.

ETF's or "exchange traded funds" behave more like equities or trusts, because they can trade at discounts and premiums despite being constructed in similar ways to index/mutuals. Because of the volatile nature of ETFs I don't recommend you get invested in these unless you have a stoic disposition. These tend to be very highly specialised (think AI focused ,or crypto focused) and some of the holdings in these can hold what are known as CFDs or "put & call options" - These are extremely high risk instruments that have bankrupted many, many companies over the years - CFDs are one of the few instruments that can have unlimited losses associated with them and as a result, your advised to stay well clear.

wmb194

Devonsteve said:

Hi all, new here so go easy. Im 57 with moderate savings and just started investing some of it into shares. I have some savings in a fair interest rate savings account and keep this below the £1000 interest mark to save the tax. Ive got various shares now across the board with a 10 year plan to increase wealth for retirement. from what i can see, dividends dont pay much, certainly not to live off so although my money will be increasing due to share price growth, it will be just sat there? Im hoping to retire in 10 years so would i then sell my shares and then put that in savings? I would have to pay tax on it then though? Need a few pointers to improve my plan. Cheers all.

What are you investing in? There are income strategies e.g., some companies and funds will pay 5% plus dividends annually.

dunstonh

Hi all, new here so go easy. Im 57 with moderate savings and just started investing some of it into shares.

Going into shares is an unusual choice.  Its diving in at the deep end as you need to research each of the companies you are investing in (assuming you are not just winging it).

Its more common for people to use funds.  What made you pick shares instead of funds?

from what i can see, dividends dont pay much, certainly not to live off 

That will depend on the shares you buy.   Some companies have a model that pays strong dividends.  Others pay little in dividends but use the money to grow the company faster which improves the share price.

 Im hoping to retire in 10 years so would i then sell my shares and then put that in savings? 

That wouldn't be a good idea.  You would be ravished by inflation over time.
Its not as if you are spending the money all in one go.  Its got to last 25-35 years.

 I would have to pay tax on it then though?

It would depend on the tax wrappers you are using.  One would presume you are using the pension tax wrapper as that is the most obvious choice for your objective.   

First off, any money invested in Stocks and Shares should ideally be held in a Stocks & Shares ISA

The UK has multiple tax wrappers and in this scenario (based on limited information), the pension tax wrapper would beat the ISA wrapper.

InvesterJones

Gaberdeen said:

If you don't have your investments in an ISA - you can have your broker perform something called a Bed & ISA - they basically sell down your non-ISA investments and rebuy them after moving the monies to an ISA account. They do this in the same trading cycle to prevent any big swings which could translate to losses.

[...]

ETF's or "exchange traded funds" behave more like equities or trusts, because they can trade at discounts and premiums despite being constructed in similar ways to index/mutuals. Because of the volatile nature of ETFs I don't recommend you get invested in these unless you have a stoic disposition. These tend to be very highly specialised (think AI focused ,or crypto focused) and some of the holdings in these can hold what are known as CFDs or "put & call options" - These are extremely high risk instruments that have bankrupted many, many companies over the years - CFDs are one of the few instruments that can have unlimited losses associated with them and as a result, your advised to stay well clear.

Most bed & ISA options do not do this in the same trading cycle, instead they sell first in one trading window, then at the following trading window at the earliest (but sometimes longer), buy with the cash. 

Derivatives are not limited to ETFs - you can also find them in mutual funds/OEICs and I think Investment Trusts.

ETFs aren't necessarily more volatile - if you have an index tracking ETF and compare it to an index tracking mutual fund/OEIC it'll have the same volatility when compared at a daily or greater time frame. The main difference is you can see the price of the ETF changing throughout the day, while the mutual fund/OEIC is valued only once a day. But compare them at the same time and they'll perform the same. And likewise, while some ETFs are indeed quite specialised due to the ease in setting one up, there are just as many very broad/diversified index trackers that have the same coverage as funds, but with cheaper platform fees in many cases.

Brie

Devonsteve said:

Frequentlyhere said:

Where does your pension fit into all of this?  That's typically the most optimal way to put away money for retirement.

I have a works pension, a personal pension ive been paying into since about 1985 and two small pensions from previous employment that are frozen. I need to consolidate these sometime.

Just to comment on the pensions.... I would set up a spreadsheet that shows what each pension's value is, what type of pension it is and how much you expect them to pay you.   Make sure you also get a state pension forecast (see below) as that will likely provide a nice chunk for you.  On my spreadsheet I've included the contact details for each of the pension admins just to save me having to search for it in paperwork or online.  

You may want to consolidate the pensions but there are good reasons not to as well.  At a guess from you age I wonder if either of the frozen pensions are defined benefit which will be nearly impossible to transfer anywhere due to the guarantees they include.   These might be available to you at an unreduced amount at a much earlier age than SP age which might help if you want to wind down your employment after 60.   

It's also handy to have things in different pots if it means you can deal with them differently.  If you have 2 defined contribution schemes (your current work pension? and the personal one) you might want to draw down on one and get an annuity from the other.  Of course you could combine them and then move the money about to do something similar but personally I work better looking at different pots.  But that's my brain and may not be yours!

Good luck and have fun with the investing!!  

Bostonerimus1

I would understand your workplace pension first. Is it a define benefit plan or a defined contribution type plan? You need to understand your pension as the tax efficiency of a workplace pension makes them the best investment for most people. I would continue with saving until you understand how investment funds and thier various tax efficient wrappers work.