Using those pesky ISA allowances

earlgrey_3

We've both just retired but still a few years off 65. Although an ISA won't benefit us currently from the point of view of income tax when we get to 65 it looks as if our income will be too high for the age-related extra allowance and we'll have to jigger our savings between us to have any chance of avoiding the 40% rate.

So rather than think too much about it now was thinking of putting £4000 each into something like L&Gs all-share tracker fund or possibly half in their fixed interest trust- just to hold onto our allowance. There's no upfront fee and 0.5 or 0.75 annual fees. I'd then give our finances more attention in the months ahead possibly looking at making use of the capital gains allowances etc. We already have around £150K mostly in a neglected UK share portfolio plus some in non-UK trusts and rather more than that in cash savings. We put the maximum in cash ISAs each year.

Does that make any sense at all? I looked at other S&S ISAs and they all seem to have either management fees attached or upfront fees. Is there something else I should look at or just forget about it altogether for this year until we've decided exactly what to do? All suggestions appreciated.

dunstonh

Does that make any sense at all?

Yes and no. Utilising the ISA allowances makes sense. Restricting yourself to a couple of L&G funds doesnt.

I looked at other S&S ISAs and they all seem to have either management fees attached or upfront fees.

Charges are a secondary consideration. The difference in charges is minimal over the long term yet the potential in returns is far greater. If you are going DIY, most funds wont have an initial charge with a DIY fund supermarket.

earlgrey_3

Why I looked at them was that it seemed a low-cost way of parking the allowance for a while and I assume we could move it elsewhere and retain the allowance at a later date without much cost or trouble? At some point we'll get some decent advice and decide what to do from there.

If we went for a self-managed ISA the basic annual fees look proportionally high unless we commit more funds in future years. Do fund supermarkets have any fees for managing the ISA wrapper around UTs? If I understand it correctly, the cost of moving in and out of the mentioned funds would be very low with no additional charges for the ISA bit so would keep us flexible.

We do have £150K or so in other equities, apart from cash savings, so it wouldn't be a case of a single egg as such and I'm not someone who has sleepless nights over the latest valuation of investments.

dunstonh

Do fund supermarkets have any fees for managing the ISA wrapper around UTs?

Fund supermarkets are the cheapest way to buy unit trusts and there is no point buying direct any more. There is no additional charge with most of the fund supermarkets either.

earlgrey_3

Thanks very much for your help. I'll have to look into fund supermarkets.

(I'm starting to wish they would get rid of all these complicated tax perks and just knock a few pence off the basic rate for everyone.)

Bazn

dunstonh wrote: »

The difference in charges is minimal over the long term yet the potential in returns is far greater.

err... i beg to differ... differences in charges are only magnified and compounded in the long run. thats an important reason why trackers beat most managed funds.

of course, you shouldn't pick an investment solely based on the charges, but don't be under the impression that charges ddon't add up in the long run! a difference of 1% per annum compounded over several years can be quite considerable.

Aegis

Bazn wrote: »

err... i beg to differ... differences in charges are only magnified and compounded in the long run.

I think you may have misread what dunstonh was saying. His comment was that the difference in charges between providers amounts to nothing in the long run, not that a difference in charges in general means nothing in the long run. In other words, that the charges for a lot of providers will be pretty much the same in the long run.

thats an important reason why trackers beat most managed funds.

Except that they don't, of course.

I hear this one touted a lot, usually by people who have come straight over from the Motley Fool website. However, the articles that this information comes from rarely show their sources, and their information seems to blatantly contradict what you can find on places like Citywire, where tracker funds in even the second quartile of any sector are a rarity, with most appearing in the third quartile over the 10 year range. To me, that means that most tracker funds will under-perform most managed funds, rather than the other way round (as TMF would have us believe).

The other important missing bit of information is which managed funds they want to compare their trackers with. Some of the managed funds are ones that no-one with an ounce of sense would go near (mostly bank funds), which invariably appear at the bottom of the tables. Anyone around here asking after a Halifax fund, for example, would probably be told to stay well away. If you exclude all such funds from the performance tables, the tracker funds start appearing woefully close to the bottom of the performance tables, while most of the remaining (well-)managed funds are up towards the top. Admittedly, the chances of picking the best managed fund are fairly slim, but if you pick one with an excellent track record over 10 years, you're likely to find yourself outperforming the index in the long term, and beating pretty much any tracker that comes near.

of course, you shouldn't pick an investment solely based on the charges, but don't be under the impression that charges ddon't add up in the long run! a difference of 1% per annum compounded over several years can be quite considerable.

Very true, and when comparing like-for-like performance, the lower charge should definitely win. However, I'd rather pay a 2% charge on a 12% annualised gain than a 0.5% charge on a 9% annualised gain any day of the week

Bazn

hmm ok sorry if i misunderstood.

as for tracker performances, its difficult to compare over 10 years, as lots of managed funds do not have a 10 year record yet.... perhaps underperforming managed funds are closed down over the years to hide their poor record?

just as a personal note - don't mistake me for a TMF tracker fanboy! i am most certainly not, and i realise that trackers buy high and sell low, which is a fundamental flaw.

i believe that stockpicking can add value to fund performance as long as the fund is not a constrained "closet tracker". however, the advantages are greatest during times of valuation "divergence and distortion" between companies and sectors - i.e. right now.
however, during times of benign growth, such as the 1990s, trackers are probably hard to beat.

Aegis

Bazn wrote: »

hmm ok sorry if i misunderstood.

as for tracker performances, its difficult to compare over 10 years, as lots of managed funds do not have a 10 year record yet.... perhaps underperforming managed funds are closed down over the years to hide their poor record?

While it's true that a lot of new funds exist and probably close down quite quickly, looking over 10 years eliminates the bandwagon type funds that appear in response to a market desire to follow a short-term trend. I don't doubt that a lot of the funds that have started lately solely to follow the latest high-risk sector will probably have a lot of trouble staying afloat if any bubbles burst and investors end up bailing out en masse. However, this is something that a little research on the subject can help anyone avoid, and also explains why I picked 10 years as my benchmark. It includes the tech crash, which means that the managers either saw it coming and avoided the stocks after a certain point, or that they didn't flood into the sector along with everyone else. In other words, they know how to deal with bubbles and crashes. Established managers with good track records are the way to go with managed funds, rather than bank funds or brand new funds looking to chase the next big thing.

I'm sure you'll agree that this is a sensible strategy for picking managed funds, even if you disagree with me about their long term suitability over trackers

just as a personal note - don't mistake me for a TMF tracker fanboy! i am most certainly not, and i realise that trackers buy high and sell low, which is a fundamental flaw.

Phew!

Sorry, we've had a few of those lately, it's refreshing to see someone state that trackers are better than managed without being a die-hard TMF fan!

i believe that stockpicking can add value to fund performance as long as the fund is not a constrained "closet tracker". however, the advantages are greatest during times of valuation "divergence and distortion" between companies and sectors - i.e. right now.
however, during times of benign growth, such as the 1990s, trackers are probably hard to beat.

I can certainly follow your reasoning on that one. I've not been around long enough to truly appreciate the more tranquil times in the markets. Since I started getting interested, the markets have been in a near-constant state of flux even during the times when the general trend has been upwards. At times when the sectors all correlate well with each other, even down to most of the shares, I can certainly understand that a manager would have a difficult time adding value to the process, but I genuinely believe that a good manager will generally continue to do so in all but the most calm of circumstances.

Post more in this area, this has been a fun discussion so far!