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Answers to YOUR Questions

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And what our experts say.

Hello, I have opened my first Stocks and Shares ISA (Vanguard 60/40) with £5000, and my company pension is the new standard 5%/3% contributions. I have enough easy access savings to cover emergencies and an old Cash ISA with £7000 (transferred to new rate), I was wondering what would be a next good step, add to S&S ISA or open a SIPP for retirement? I'm new to investing/pensions, so I'm looking for more managed accounts until I build up a better understanding of the investment world.

Kevin, Strathclyde

14 June 2019

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Pete Matthew

Sounds like you're doing great work, Kevin!

Your emergency fund

The only money you should keep in savings accounts - including Cash ISAs - is your emergency fund of 3-6 months' expenses, and any money you think you're likely to spend in the next 2-3 years, for instance for buying a new car or changing the boiler. Cash held on deposit is losing money in real terms, so don't keep any more money there than you need to.

After that, I remain convinced that for most of us, the only two accounts we need are a pension and a Stocks and Shares ISA, plus a Lifetime ISA if you have designs on owning your first home one day.

Workplace Pensions

Before you open a separate pension, really get to know the cost structure of your workplace pension.

What is the annual charge of the pension itself, and of the underlying funds in which you are invested?

Chances are, if your employer is a decent size company, that there is an element of subsidy there and the running costs of the scheme are pretty low. It therefore doesn't make any sense to open a separate pension with potentially higher charges.

Don't be tempted by the posh-sounding SIPP. It's just a pension, though with some wider investing options which you probably won't make use of just yet. There's no point paying for functionality you don't need, plus there's real value in keeping things simple, in my view.

Maximum pension contributions

Find out what the maximum contribution is that your employer will match, and pay that much into your pension if you can.

If you have some money spare on top of that each month, pay it into your S&S ISA. As time goes on, and you build up a decent balance in your ISA, you can start favouring the pension more, as tax-relief will always make your money do better in a pension than an ISA.

Find out more

There are some great done-for-you solutions which Boring Money have covered in detail.

There's also some great resources online to help you learn about investing.

Well done so far, keep going and good luck!

My husband and I are in our mid-30s and are completely new to investing. We have over £100,000 split between our two cash ISAs. As we are intending on purchasing a house in the next 5 years, the majority of our savings will be used for a deposit. However, we would like to make a long term investment (minimum 10 years), so are intending on putting £10,000 each in a Stocks and Shares ISA, as well as an ongoing £500 each a month. We're happy with some risk i.e. 6-7/10. Whilst we know this might be a tad trickier, we're really keen on investing in ESG funds/companies only. As we'll have a Stocks and Shares ISA each, we're not sure how best to 'diversify' and whether that's even possible given we want to make ethical investments? Would it be better if one of us uses a robo-adviser and the other a traditional platform? For one to go for an active and the other a passive approach (although I'm not sure if there is an ethical index)? Should one go higher risk than the other? Any guidance would be appreciated, Emma

Emma, Herefordshire

13 June 2019

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Simon Bullock

First of all...

Although I don’t know your specific circumstances, so cannot give you advice, your proposed approach of clear differentiation between cash set side for a house purchase, and long-term investment monies strikes me as very sensible.

It is also worth noting, on the risk point you mention, that you could consider a slightly higher risk approach for the £500 per month than for any lump sums, even if those lump sums are invested on 10+ year timescale. The £500 per month will de facto get drip-fed into the markets.

You’ll need to be careful, of course:

As and when you get within five years of potentially wanting to access the monies. At that point, you might want to go the other way, and start steadily reducing the risk profile on both your regular investments and the capital you’ve built up.

Robo vs Traditional

Regarding your thought process around robo-adviser vs. traditional platform - it’s worth differentiating financial planning on the one hand, with access to underlying investment funds/portfolios on the other.

Both might be provided/mimicked by a robo-adviser proposition, but traditional platforms such as AJ Bell Youinvest and Hargreaves Lansdown (I assume that’s the sort of thing you are referring to as 'traditional') tend to only offer options around self-directed/’DIY’ investment selection, not financial planning (though that is perhaps starting to change).

Whatever you decide on these two discrete areas, it’s hard to see why you and your husband would take different approaches, but I may have missed something.

Investing ethically

On the question of ethical/ESG investing, there are a number of options you could explore and it’s important to understand that different ‘green’ investment approaches vary widely.

Looking at ‘negative screening’ (the exclusion from a fund or portfolio of certain sectors, companies or practices based on specific ethical criteria), as one example, some funds screen out as much at 70% of their listed shares, whereas in contrast others screen out nearer to 20%. What ‘ethical investment’ means and the criteria defining it, can differ a lot between companies.

One of my clients was surprised to find a charity that is invested in an ethical fund but nevertheless holds shares in Shell!

The point being, it’s worth checking the policy of any fund/portfolio you’re considering and seeing if they match your priorities.

For some people, their version of ethical investing is focused on animal testing, others big oil, still others gender balance on the board, it varies widely from person to person. A few of the many managers with offerings in this place you might want to take a look at include Kames Capital and Standard Life Aberdeen, there is some good research online offered by sites such as www.hl.co.uk.

Finally

A passive vs. active choice is, in principle, no different to whether you want an ESG/ethical screen or not.

Assuming that by ‘active’ you mean ‘stock picking’ - i.e. a manager trying to ‘beat the market’ and/or reduce risk by favouring one share over another (regardless of any ‘automatic ESG screens’ that may or may not apply) - then, simplistically speaking, the active vs. passive choice comes down to whether you believe you can select an active manager who will add more value, than their additional cost.

As for your question about an ethical index, the two most well known and credible ethical investment indices for UK companies are the FTSE4Good and the Dow Jones Sustainability Index (DJSI).

I’m not aware of there being as many passive options in ESG investing though, compared to the wider market, so that might be a consideration.

Good luck on your journey, if you want a helpful guide on your broader financial plan, I recommend One Page Financial Plan by my pal Carl Richards – if you email us at equiries@mulberrybow.com, we’ll send you a free copy.

Best,

Simon

I'm a 56 year old man & my wife is 59. We have Stocks and Shares ISAs, SIPPs & workplace pensions in our own names. We both work for my Limited company on £12,700 wages. We have minimal outgoings. The company funds our SIPPs directly, so no need to reclaim tax. It's likely that I will be receiving a significant amount in compensation in the coming months. We will be making use of the ISA allowances, but is it possible to pay SIPP contributions from the compensation payment? If it's possible, what are the limits? £40,000 per year each, up to 100% of earnings each year? Or if we decide not to work, £2880 per year with tax relief, making it £3,600. If pension significant contributions are not possible, what might we consider when looking for a tax efficient home for the compensation?

Andy, Lancashire

12 June 2019

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David Stone

Hi Andy,

You seem to have a good understanding of pension funding rules, and in terms of making personal contributions you have stated the right limits.

If the compensation is paid to you

Assuming the compensation is paid to you personally and is not “pensionable” (unlikely), then there is little more you can do in terms of pension funding, although you could look to “carry forward” any unused allowance from the previous 3 years.

However you have to enough income in the current tax year to make this effective as a personal contribution, which in turn would require that you increase the salary from your company, which would then suffer both employee and employer National Insurance on that increased salary… you can see how this quickly gets rather complex!

Let's simplify...

I suspect that you’ll need to look at other investment opportunities.

A simple idea might be to consider a pair of General Investment Accounts or GIAs.

These are not tax “wrappers” unlike Pensions and ISAs, and so any income from the underlying investment (normally dividends) would be taxable as would any profits (Capital Gain). However there are attractive allowances you can use to offset against these taxes, such as your £2,000 per annum dividend allowance, and £12,000 per annum CGT allowance. You and your wife will each qualify for these.

Other benefits of GIAs are that they tend to be available across most investment platforms, are typically cheap and simple to manage, offer a wide variety of underlying investment choice and are also accessible at any time.

I hope this is helpful and best of luck.

David

I am a self-employed sole trader. If I was to open a Personal Pension, as I am self-employed, would my pension contributions count as a Business Expense, on my Excel spreadsheet of expenses, incurred in running a small business? I would just like to know a Yes or No answer please. Many thanks in advance for answering my question!

Anna, Warwickshire

11 June 2019

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Danny Cox

In short...

No.

As a sole trader...

If you employ any other members of staff and make contributions to their pensions, that’s a business cost, so you can get tax relief on contributions as a business expense.

However, any contributions you make for yourself are not a business cost, they are personal contributions, so you don’t claim tax relief in the same way.

If you’re a basic rate taxpayer, the tax relief is added automatically by the provider to your contributions. For every £100 you put in, £25 is added.

If you are a 40% taxpayer, you also need to include your total personal pension contributions (including tax relief) on a separate part of your self-assessment form, under Tax Reliefs. This will ensure you get the additional £25 tax relief you would be entitled to.

Hope this helps.

 

You may find these pages helpful:

Annoyed Self-employed - Flying solo in business is thrilling. But the twists, turns and bureaucracy can be tricky to navigate.

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