S&S ISA examples for newbie

louiser_2

I've had cash ISAs for a few years now & reckon that it's time for me to start investing in some shares etc for the long term (basically to boost my pensions).....
...but despite reading quite a bit on these forums etc, I'm still struggling to get a grip on how the sums work on a S&S ISA.

I'm looking to put in about £250 a month, topping up as & when money is available. I gather this is called pound cost averaging (aka not having shed loads of spare cash as a lump sum). I won't be doing this until April / May, so I've got a fair bit of time to read up on stuff before then. I won't have a big lump sum to start it off, so if the fund supermarket or broker need £1000 initial dep, I'll have to wait a few months to save up.

I guess I'll go for some sort of funds so as to spread the risk & portfolio right from the start - something like the Smile fund supermarket looks managable though I hear that the discounts they offer can be beaten. HL sound v popular but the website is too daunting for me at the moment...(maybe not by April)

What I need now is some kind of illustration of how a S&S ISA might work in terms of the IC, AMCs etc.
If I put in 250 a month, spread across funds A, B, C & D, with IC of x... & AMC of y..., make a couple of swaps a year, what would an 'average' interest be over 5 / 10 / 15 years? If I don't invest further next year (might be out of work), will my investment just dwindle away, or can I leave it to grow to some magical pot of gold in 10 years time?
I know that the illustration figures wouldn't be in anyway accurate in terms of what will happen, but it would give me something to judge the options against.
Does anyone know of a website that offers this kind of illustration? I'm thinking of an investment version of the co-op mortgage calc (http://www.co-operativebank.co.uk/servlet/Satellite?c=Page&cid=1170921595486&pagename=CB%2FPage%2FtplStandard&loc=l)

Liz_the_Whizz

hi louiser

Don't know of any ready reckoner - S&S ISAs don't really lend themselves to that type of calculation as you don't get "interest" and returns are not guaranteed.

If you look around the internet at various insurance company ISA providers, they give illustrations of growth for 4, 6 and 8%. So that might give you an idea of what to expect typically. With the expected volatility this year, it would be a brave person who would predict returns for 2008.

And obviously it depends what you invest in - the best funds last year topped 70% growth. But then they might lose the same amount overnight. Risk v reward. But from reading other threads, when you have relatively little invested, the risk seem more attractive.

The reason lots of people (me included) use Hargreaves Lansdown is that they discount most (and in many cases all) of the initial fund costs (typically 5%), do not charge for switching and pass on a small amount of the trail commission they get from the fund managers as a loyalty bonus.

Plus though the H-L website might seem daunting now, it is pretty easy to use. If you look up a fund in their research area, it shows exactly what rebate they give on initial costs and also TERs (total expense ratios), which are often higher than the AMC.

The hardest thing for a beginner is which funds to choose. Obviously, the old adage holds true that you cannot rely on past performance. At the same time, you can't ignore it either. Websites like Citywire are big on sticking with the best fund managers. H-L have their Wealth 150 which gives ideas consistent performers. The investment ideas and popular funds list on their website echoes many of the funds which have cropped up on MSE discussions from time to time.

I've only taken an interest in S&S ISAs over the last 2 years, so am pretty much a novice myself. I got to a point where I felt I wanted to take the plunge, and I'm glad I did, most days;) .

But you need to have finances and nerves that can stand the kind of bad days that you just don't have with savings.

Good luck - post back your fund ideas, you are bound to get some helpful comments.

dunstonh

something like the Smile fund supermarket looks managable though I hear that the discounts they offer can be beaten.

Most IFAs are cheaper than Smile and you get advice thrown in. There is no reason at all to use smile (it uses Fidelity fundsnetwork as its backbone).

If you want to DIY then HL are your best bet for funds.

There is no legal of FSA requirement for illustrations to be issued on unit trusts. That said some of the providers and fund supermarkets do issue them in the standard laid out for life and pensions business. 4, 6 & 8% for UTs and 5, 7 & 9% for UT ISAs.

what would an 'average' interest be over 5 / 10 / 15 years?

First thing you have to do is stop using the term interest. Unless you pick a cash fund or fixed interest funds you are not being paid interest and even then it isnt really interest in the way that a bank account is.

If I don't invest further next year (might be out of work), will my investment just dwindle away, or can I leave it to grow to some magical pot of gold in 10 years time?

You should never see it dwindle away. Charges are a percentage of your holding. So they can never take it down to zero. Also, the tend to be around the 1.5% mark so if you look at long term averages betwen 7% and 9% (as a new investor its doubtfall you will want to jump in at the high risk end) then these figures are usually obtainable (subject to usual warnings) over the long term after charges.

munk

I wrote quite a long document for my brother about beginning investing and posted a small snippet of it on another thread here which covers some of your queries about ICs, AMCs and other costs - the snippet compares buying direct from an investment company vs buying through an IFA vs going DIY:

http://forums.moneysavingexpert.com/showpost.html?p=7928011&postcount=80

One note re what you said in your OP, you won't have to invest a min of £1000 if you're investing monthly for most funds.

dunstonh

Munk, on your post, can you amend the following:

You pay full annual management charges for each fund (usually between 1-3% pa)

The annual management charges will be the normal retail amcs. Which is typically 1.5%. HL will discount upto 0.25% typically so the cost difference with DIY as far as annual costs is typically 0.25%.

That assumes ISAs and unit trusts. With pensions, HL dont discount so an IFA should be able undercut HL if they want to.

Also, the IFA fund supermarkets all have online access now.
It may also be worth adding to HLs drawbacks that you have limited or no FOS protection as there is no advice. I know you mentioned no advice given but some people mistake HLs wealth150 and factsheets as being advice.

munk

Will pm you about this I think, probably not relevant to this thread.

louiser_2

Cheers for the help guys.
OK, I can see that a fund supermarket is probably the place for me as I want to be able to poke around & figure out which funds to go for myself. I suppose I'm just looking at this as a bit of a gamble & if I choose something thats turns out to be a poor performer, thats my look out, & I won't be grumbling about an IFAs rubbish ideas.;)
I can also see now that ML look good option (though I'll need to check again in a few months in case the situations changed).

Let me just check that I've got the sums right. If I kick start the ISA with £500, would it be 'normal' to put this into 3 or 4 different funds straight off? Completely just for the sake of argument as they're near the top of the HL website at the moment, say I choose:
Aberdeen Asia Pacific (Income), IC 4.25, AC 1.75, discounts IC 4.25, AC 0.375; and
Artemis Capital (Accumulation), IC 5.0, AC 1.5, discounts IC 4.75, AC 0.25;
...and split the investment between them.
Does this work out as:
AAP - no initial charge, AC =1.375, ie. leaving about £247 ish in the fund, and
Artemis - IC = 0.25, AC = 1.25, also knocking £3.75 off the amount in the fund?

...so the total cost of these are 1.375% and 1.5% respectively, and you're speculating that these funds will out perform a saving account by at least this percentage of interest (please forgive my misuse of the term)?

Then I'm assuming that each month when I pay in another £250 to the ISA, it'll be automatically be allocated as a split across my funds held, and incur the additional appropriate IC & AC charges?

It all sounded really scary at first, but I guess if it basically comes down to loosing a couple of quid each month to buy in, with the prospect of higher gains if stocks etc head upwards, I can sort of see how it adds up. Am I right in thinking that if everything is left where it is, next year I'll just pay the AC, so a much smaller amount is 'lost'?

Finally, I suppose one should intend to leave well alone and ride out any dips in a funds performance, but if you think one fund is going completely screwy, you sell it (for free?) & buy another (paying out the new IC & subsequent AC)?

munk

The total you would see added to each fund after each month's payment would be (£250 - IC (initial charge)). So for the aberdeen fund it'd be £250 since the IC is fully discounted and for the artemis fund it'd be £249.375 (£250-0.25% => £250 - 0.625 = £249.375).

The AMCs (annual management charges) are deducted from the NAV (net asset value or 'price') daily so the amc is effectively spread out across the whole year. The sitution is a little more complicated though - there are other annual costs involved as well as the AMC. The total of AMCs + these other charges is the TER (total expense ratio) which is really the key figure to keep in mind when finding out how much a fund charges per annum - again though these additional charges are reflected in the advertised fund price on a daily basis (or however often the NAV is updated).

There may be even more costs involved though when buying or selling unit trusts - such as the bid/offer spread (OEICs don't have a bid/offer spread in their pricing structure). I won't attempt to explain bid/offer spreads here, there's some good info here though:

http://www.incademy.com/courses/Unit-trusts-and-OEICs/Pricing-of-units---in-practice/8/1007/00000

Very roughly explained (hopefully someone will correct me if I'm wrong) the price you pay for a new unit (the creation price) may be more than the price you would receive if you sold a unit (the cancellation price) on any one day. The reasons are explained in the link above - if you search for 'cancellation price' on this forum hopefully there'll also be some info there.

I've noticed this on a few occasions where the price I paid per unit was slightly more than the advertised daily price (less than a percent or so) for the fund even though the IC was discounted down to 0% by hargreaves lansdown. Of course this means you're buying less units for the same price, so I was slightly concerned the first time I saw it. When I read up on this as I understand it this was because on that day the creation price for new units was slightly higher than the NAV price (which I confirmed by asking the fund house to provide the creation price vs NAV price on that day and indeed the creation price had been slightly higher and did tally with the price I paid).

Finally as for your question about switching from one fund to another, you pay 0.25% on all switches from one fund to another with HL. I've not noticed an initial charge being paid on a switch when buying new units/shares in the fund being switched into but again don't take that as gospel, best to ask for qualified advice - either an IFA or at HL if you decide to go for them.