Platforms, Accounts & Funds

This article is about the nitty gritty of becoming an investor. Which company to have an account with, what sort of accounts to use, and what stocks to buy in there. These three tiers can be confusing to beginners, so let’s try to get our heads around them.

Platforms

An investing platform is a service you use such as a do-it-yourself investing platform or the pension company who provide your workplace pension.

The most popular d-i-y platforms in the UK include Vanguard, Interactive Investor, Hargreaves Lansdown, AJ Bell and Fidelity.

Workplace pensions may be provided by a pension company such as Aviva or Nest. Generally you don’t get a choice in which platform is used, that’s down to your employer.

Accounts

There are three main types of account you can hold within your platform - a general investment account, an ISA, or a SIPP.

GIAs

With a general investment account (or GIA) you can buy, own, and sell shares and funds. You’re liable for taxes on your dividends and any capital gains from selling shares at a profit. In the cases of both dividends and capital gains there are small taxfree allowances each year. This is messy, plus it can be costly, so people try to use the following tax sheltered accounts instead.

ISAs

An ISA is an Individual Savings Account. There are both Cash ISAs and Stocks & Shares ISAs. We’re talking about S&S ISAs. There are also subtypes: Junior ISAs and Lifetime ISAs, more on them later.

Adults have an allowance of £20,000 per year which can be contributed to their ISAs. You can continue to run the same ISA over many years, you are just limited to adding a maximum of £20k of new money per tax year.

Anything you contribute to an ISA is from your tax-paid money. All growth and activity within the ISA is invisible to tax, so all dividends and capital gains from sales of stock are taxfree. You can withdraw funds at any time, still taxfree.

SIPPs

SIPPs are Self Invested Personal Pensions. They’re similar to a typical workplace pension - the government adds back in basic rate tax you have paid on your earnings, and you can invest the money in a variety of shares or funds.

This tax credit makes personal pensions the most useful account for most people. You can contribute up to 100% of your earnings to a personal pension each year, up to a cap of £60k per year. Bear in mind that this includes contributions to your workplace pension, so be careful not to go over your limit. The £60k is gross - so you would add say £48k and get £12k tax credit added.

At the lower end, even the unwaged are allowed to contribute up to £2,880 per year to a SIPP and have it topped up by £720 to make £3,600.

Every time you make a contribution to a SIPP, a further 25% is added in tax credit. Note that this takes a month or two for the government to credit it.

If you’re a higher rate or additional rate taxpayer, only basic rate tax is automatically added to your SIPP. You’d need to claim the extra tax back manually, either by a self assessment tax return or phoning HMRC.

As the pension is taxfree on the way in, we are unfortunately taxed on money on the way out. When you withdraw from a personal pension, this is treated as income for income tax purposes.

Happily, there are also some tax breaks at the tail end, to try to encourage pension saving. You get 25% of any withdrawal taxfree. And then the rest is treated as income, so you get your taxfree Personal Allowance (currently £12,570 per year), and then any drawings beyond that start to be taxed at 20%. This tax deduction is handled by the platform, a bit like paying PAYE tax on wages.

LISAs

The Lifetime ISA is a messy hybrid of the ISA and a pension. You can open one from age 18 to age 40, and continue contributing to it until you’re 50. You can contribute up to £4k per year, which forms part of your ISA allowance, so if you put the full £4k into a LISA you’d only have £16k allowance left for your regular ISA.

Like a pension, the money you contribute to a LISA gets a 25% tax credit. So if you contribute £4k you get a £1k tax credit.

And then like other ISAs a LISA is fully taxfree upon withdrawal.

But there’s a catch. The Lifetime ISA is intended to be used either to help buy your first home, or for retirement income from the age of 60. Any withdrawals for purposes other than these is hit by a penality of the tax credit being clawed back.

If you use it like a small pension allowance, it’s a good deal. It’s effectively taxfree both on the way in and on the way out. However, it only gets the equivalent of basic rate tax relief, so if you’re a higher rate taxpayer you’d lose out slightly using this compared to a pension.

As LISAs are small fry, fewer platforms offer them, so the very best platform deals don’t apply to them. Neither Interactive Investor or Vanguard offer them at present, so the least worst choice is probably Hargreaves Lansdown.

Junior ISAs

Kids are allowed a Junior ISA from birth to age 18, and they get an annual contribution allowance of £9,000. They can’t withdraw from the account until they’re 18, at which point they can cash it in or roll it into a normal ISA.

Many parents consider saving within these accounts for their kids. The main drawback is that upon them reaching the age of 18 it is theirs to control - if you end up with an irresponsible 18-year-old then there is nothing to stop them blowing the lot on booze and Lego.

Junior SIPPs

For completeness I should also mention these accounts, though they are seldom used. You can open a SIPP for your child and contribute up to £2,880 per year. They’ll get the tax credit. At age 18 it will turn into a regular SIPP, and eventually be accessible to them at around age 60. For most people this is too long a timescale, when they would rather be helping their kids with more immediate concerns like learning to drive or buying their first home.

Funds

The funds that I’d suggest you try to use are global equity index tracker funds.

Global because worldwide coverage means good diversification across lots of companies, industry sectors and national economies.

Equity as in completely in company shares, with no other things in the mix such as bonds (these are loans to governments or companies) or property investing.

I’d also avoid using the ESG variants of funds. These try to apply ethical tests and exclude “bad” companies, but I don’t think this really works. I’ll write a separate article on why. In short it costs more and performs slightly worse.

The reasons for choosing each of these things is to optimise performance - to have all of your money invested in the most profitable things, and to pay as little as possible in fees.

Beyond this, there’s not all that much difference between the many different global funds. Some cover more companies, and some have higher fees than others.

Some suggested decent options include:

Vanguard FTSE Developed World ex-UK Equity Index Fund

Vanguard FTSE Global All-Cap Index Fund

Fidelity Index World Acc

 

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