What to do with our savings?

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  • bostonerimus
    bostonerimus Posts: 5,617
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    My issue with VTCs is in the title "Venture Capital". So it's speculative small cap. I would advise the OP to maximize other tax advantaged options like pensions and ISAs first. Also paying off the mortgage is a very conservative approach and I would once again only think about it once pensions and ISAs are fully funded.
    “So we beat on, boats against the current, borne back ceaselessly into the past.”
  • jamesd
    jamesd Posts: 26,103
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    kidmugsy wrote: »
    Where is the best place to learn more about them?
    The VCT section of The Lemon Fool is useful.
    kidmugsy wrote: »
    For instance would you please give links to some of your own posts on the subject?
    Use the forum advanced search with jamesd as the poster and VCT as the keyword. Albion would also be a useful keyword.
    kidmugsy wrote: »
    do the dividends remain tax-exempt in the hands of whoever inherits them after the death of the original investor? Even if the inheritor is a discretionary trust?
    Yes, the dividends are also income tax exempt for those who buy on the stock market instead of via a new issue.

    I don't know about the discretionary trust interaction but expect the to be exempt when the trust is paid. A different thing to how those being paid from the trust are taxed. Get advice on this.
  • Thrugelmir
    Thrugelmir Posts: 89,546
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    If something is too good to be true it normally is. Sometimes being boring is the safest approach. As one should only invest what one can afford to lose. Capital can take years to accumulate yet minutes to be wiped out.
  • jamesd
    jamesd Posts: 26,103
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    edited 15 May 2018 at 11:58PM
    My issue with VTCs is in the title "Venture Capital". So it's speculative small cap.
    It's smallish companies, compared to the main stock markets

    1. Company gross assets no more than £15 million
    2. No more than 250 employees
    3. Less than seven years old

    All at the time of the investment, which can be up to £5 million.

    VCTs vary greatly in what they look for, ranging from highly speculative completely new companies trying to exploit a new invention to older late-stage companies with a proved product and plan which are looking to expand.

    If you pick a VCT that's been around for a while instead of a completely new one you get some possible advantages:

    A. The companies it previously invested in have had time to develop and you're buying these more proved investments, not just those within the original investment limits.
    B. It may hold investments in things that are now deemed too low risk to be allowed for new money, good if reduced risk is what you want. My biggest holding has hydro and wind power, schools, hotels and care homes, all no longer allowed for new money.
    I would advise the OP to maximize other tax advantaged options like pensions and ISAs first. Also paying off the mortgage is a very conservative approach and I would once again only think about it once pensions and ISAs are fully funded.
    None of those come close to the tax advantages of VCTs. A 30 year old can get 150% tax relief before reaching pension access age, five lots of 30% Plus the benefit of the tax exempt dividends along the way.

    You do need to pay attention to your overall mixture of investments. It looks as though noworries182 wuld still be decently diversified, given the savings, continuing to save and being able to decide what potion, if any, to put into VCTs.

    Pension and ISA maxing first eliminates those who can get some of the greatest benefit from VCTs: income in the basic rate band.I haven't done any VCT investing with money taxed at higher rate, only basic. Then after five years they/I just keep on recycling the same money while upping the ISA and pensions with the boost from the ongoing income tax saving.

    I'd definitely go with enough pension contributions to get full employer matching.

    I'm now less keen on always trying to use the full ISA allowance because it's so high now that most people can't use it: £20,000 per person, so two thirds of noworries182's combined income. I've even withdrawn over £50k from my ISAs a year or two ago because of the relative ease of replacement later. Good for those with high enough incomes to be able to do everything, though.

    The VCTs I've held long enough to show results have been delivering reasonably, particularly my largest holding, Albion (AAVC). Not all and not perfect but good enough. But I've been saving so much for so long that VCTs are only about 8% of my savings.
  • jamesd
    jamesd Posts: 26,103
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    kidmugsy wrote: »
    I know you're a consistent fan of VCTs. Where is the best place to learn more about them?
    If you're curious, my current holdings are given here.
  • bostonerimus
    bostonerimus Posts: 5,617
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    jamesd wrote: »

    The VCTs I've held long enough to show results have been delivering reasonably, particularly my largest holding, Albion (AAVC). Not all and not perfect but good enough. But I've been saving so much for so long that VCTs are only about 8% of my savings.

    Anything giving dividends like 8% is going to be on the riskier end of the spectrum, you don't get lots of tax relief and big dividends for nothing. If it's only 8% of your portfolio then go for it. But I would not advise the OP to use VCTs just yet as they are still learning and even when/if they do get into them I'd keep the allocation small.
    “So we beat on, boats against the current, borne back ceaselessly into the past.”
  • atush
    atush Posts: 18,719
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    I dont agree With Digger at all.

    What is your LTV? if it isnt ideal, putting Some of your money into the mtg might be a good idea, but not alot/all.

    What pensions do you both have? Pension is a good idea for some of your money (esp from earnings not savings in your case).

    You do need some of the cash to remain in cash- but getting some interest so keep maybe 6 months outgoing in cash- 30K maybe? Then put some in pensions (particularly for the OH if they are taking a career break), some in S&S isas and maybe some towards the mtg (or not) depending on the LTV.
  • theoretica
    theoretica Posts: 12,256
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    How much interest are you paying on the mortgage? How likely are you to want to move as your family grows?
    But a banker, engaged at enormous expense,
    Had the whole of their cash in his care.
    Lewis Carroll
  • jamesd
    jamesd Posts: 26,103
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    Anything giving dividends like 8% is going to be on the riskier end of the spectrum, you don't get lots of tax relief and big dividends for nothing.
    Albion is actually towards the lower end of the VCT risk range. The deals were asset-backed, typically with a building that could be sold if necessary. So the school building, the care homes or the hotels. That's why I favoured it. Asset backed investing of this sort was banned for new investments as too low risk in the last batch of VCT rule changes.

    One quirk of VCTs is that because the dividends are tax exempt many look to pay out most of the total return after costs that way. So my AAVC holding is up 31% based on its cost to me after 30% discount (which means 91.7% of the undiscounted price, a capital loss on that). But it's paying me £2,1614 a year in tax exempt dividends. Based on current undiscounted valuation that's 7.6%. At the time of first purchase a review service estimated that it'd be losing about 1-2% a year of capital paid out in dividends, so not unexpected to get some capital back that way. At the moment the directors expect that revenue from the care homes will produce an ongoing positive capital change.

    Albion recently cut the dividends of most of the other VCTs they run a bit to prevent them from dropping in capital value via their dividend payments.

    If you compare to the main UK stock market at a bit over 5% plus inflation annual total returns long term, 7.6% minus the capital loss before inflation is not actually high. Fairly comparable, but the smaller companies are riskier. That's the price paid for the tax treatment. How much of that 30% discount ends up being realised on sale is one of the unknowns.

    The top five FTSE100 companies are paying dividends of 9.5%, 7.8%, 6.7%, 6.6% and 6.5%. With anticipated capital gains. Centrica, SSE, BT, EVRAZ, M&S. Three regulated utilities, a mining company and a retailer.

    Definitely expect more risk than a UK stock market tracker but it doesn't have to be very high risk unless you deliberately choose that sort of VCT. You can find rankings of them based on their investment types to get some idea where each one sits. I don't think any VCT is lower than the high risk classification of the UK stock market, though.
  • jamesd
    jamesd Posts: 26,103
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    But I would not advise the OP to use VCTs just yet as they are still learning and even when/if they do get into them I'd keep the allocation small.
    Yes, one of the interesting aspects of noworries182's post was the mentioning of types of savings more than investments.

    Also the redundancy provision mention. Investing via a pension is definitely unsuitable for the redundancy aspect for a 30 year old. VCTs initially the same until some get close to five years owned. At least the early part of redundancy provision needs to be in cash accounts, maybe backed up by investments within an ISA.
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