Having figured out about platforms, tax-sheltered accounts, and a bit about funds, let’s take a look at how to optimise things to get and keep the most money.
The lower you can get your costs, the better. We’re embarking on a long-term project where any gains or losses will be magnified over time due to the power of compounding, so any small improvements you can make may really add up.
After cost, the other factors are products and service. In terms of service, you could say that a cheaper platform like Vanguard is more limited in that they only offer their own funds rather than letting you buy shares in individual companies. This may limit some people, but be fine for others.
What to look for
At the Platform level, you want to minimise your fees.
If you are in the UK and starting out, then I recommend looking at Vanguard as your platform. They are cheap and simple. It’s the company founded by Jack Bogle, the inventor of the index tracker fund.
If you have more than £100k to invest straight away, or want to be able to buy shares in individual companies, or want to be able to accept employer pension contributions, I’d check out Interactive Investor.
The reason for the above recommendations, apart from their good service, is that their fees work slightly differently. Vanguard charge a platform fee based on the value of your portfolio, ie a small percentage. And this is capped. Interactive Investor, on the other hand, charge a flat monthly fee. Well, II’s fees vary slightly depending on whether you have a SIPP as well as an ISA, and they do offer an introductory plan that’s cheaper. But that’s the essence - when you’re starting out, Vanguard’s percentage fee is cheaper; once your pot gets bigger, Interactive Investor’s flat fee makes them the cheaper choice.
If you want a LISA account, few platforms offer them - probably the best place to look is Hargreaves Lansdown.
For junior accounts, Fidelity currently charge no platform fees to under 18s.
There are other platforms out there, and things don’t stay set in stone, so do run a comparison of fees and the services provided to see which is right for you.
Free platforms
There are also some “free” platform operators, such as Trading 212 and Freetrade. I’m not a fan. Clearly they have costs, and are here to make a profit from you, so where are they making their money? The two possibilities that I can see are 1) hidden costs, such as a wider spread between the buy and sell price of shares and funds, so they make a bit of profit each time you trade. (This would mean they’re incentivised to prompt you into trading frequently - a certain way for you to lose money.) Or 2) the service is a loss-leader, trying to grab market share and then sell their book of business to another operator. This suggests an unstable environment where you can expect to be sold along to someone else shortly. Not great!
Should you run multiple platforms for safety?
There’s nothing to stop you having accounts with a number of platforms, but I see no advantage to doing so, unless you want specific accounts like LISAs which aren’t supported elsewhere. This isn’t like bank accounts, where the government guarantees money on deposit up to a limit of £85,000 per institution. If your platform went bust, they aren’t holding your money - they used it to buy your shares. The shares remain yours. The government would pass your account to another platform to administer, and while it may take some time to sort things out, you ultimately still own your shares.
At the account level, you want to minimise your tax.
This means using pensions, ISAs, etc, to make sure you are keeping your investments free of tax, as much as possible, and that you’re making the best use of the different allowances you get for these.
At the fund level, your priorities are to minimise fees and maximise performance.
This usually means that the best choice is a fund with low fees, 100% invested in global equities, with a wide coverage of companies included in the index.
If you invest in a SIPP, the “free money” we often talk about comes from the government, and it’s meant to be them giving you your income tax back on the money you have put into the pension. This happens automatically with your basic rate tax. About six weeks after your contribution, a further dollop of money (25% of what you contributed) will appear in your account.
If you are a higher rate taxpayer, the extra portion doesn’t come automatically, you have to claim it. You do this either by filling out a self-assessment tax return for the year, or phoning or writing to HMRC to make a claim.
It’s best to set up an automated monthly contribution into your investment accounts, and all platforms support this, although you can also make additional contributions for any spare money which comes along.
Most platforms will also let you set up automated buying of funds (or shares) with these regular contributions.
My suggestions for funds are as follows:
If using Vanguard’s platform, I suggest their VWRP fund. Their platform fee is 0.15% of your holdings per year, their fund fee is 0.22%, giving a total of 0.37%. (Although Vanguard also have a platform charges cap, so this may work out lower for you.)
This is the “accumulating” version of this fund. That means that any dividends from the constituent companies are rolled up into a higher value for the fund.
You’ll also find “income” or “distribution” versions of funds. These pay out any dividends to you for income. For now, you probably want to be in the Acc versions. (The only exception to this is if you’re investing in a taxable account, where you’d need to pay tax on the dividends, so it is helpful for them to pop out making it easier for you to track them.)
If you’re trying to optimise things, you’ll have slightly conflicting goals. You want as much free money as possible from using pensions, but you also want to ensure that you have money available and not tied up till pension access age, to fund the earlier part of your early retirement.
We refer to this as “bridging” till pension access. The best place to put this bridge fund money is in a stocks & shares ISA. You can get at money in an ISA at any time.
Fees
Fees are a part of the landscape, so don’t expect to ever fully avoid them, though you can try to minimise them.
After fund performance, fees can be the thing which dents your wealth the most.
You’ll come across platform fees, account management fees, trading fees, fund fees, and if you’re unlucky, advice, contribution and withdrawal fees. Yes that’s seven types of fee.
For the beginner, a platform like Vanguard can work out cheapest because they don’t have any flat fees such as a monthly account fee, they just charge you a small percentage each year of the money you have invested with them. Their annual account fee is currently 0.15%.
As you build more wealth, a flat fee platform such as Interactive Investor will become the cheaper option. Their monthly service plan of for example £11.99 becomes a bargain once you have more money invested.
Once your funds have grown to say £80k it may be worth doing a price comparison again to see which platform works out cheapest for you.
In each case there will also be fund fees, for instance Fidelity Index World Acc is 0.12% per year.
As for the other types of fee, trading fees can mostly be avoided. Vanguard simply don’t have them. Interactive Investor bundle in one free trade per month, plus unlimited “free regular investing” using an automated direct debit and automated buying one day per month, which you can tweak at any time.
The fees for each platform will be available on their websites, so it’s worth having a look and totting up what you would be charged.
Obviously, try to avoid those with advice fees, contribution fees, and withdrawal fees!
Note that in these examples, Vanguard offer both a platform and funds. Confusing, I know!
Transfers
If you have old personal pensions or workplace pensions, they may well have high fees and a poor choice of funds. I suggest comparing these with the alternatives available on the diy platforms. It’s usually simple to transfer these old pensions, which you’d set up from within your new platform. The only difficulty is any “live” work pension, which you need to keep active in order to get the contributions from your employer - never pass up free money. Some will allow “partial transfers” of money to your SIPP, but not many. In those cases just try to switch from the default funds to the best available, in terms of global equity coverage and low fees.
Planning your bridge fund
If you are doing this in your 20s, planning a retirement in say your 30s, pension access age is a distant dream and the heavy lifting will need to be done by your bridge fund. For a retirement at age 40, as little as a sixth of your money should be in pensions.
On the other hand, if your target retirement age is your early 50s, then you’ll only need a few years funding before your pension kicks in.
So in this respect, your bridge fund should be as small as possible, to safely get you through.
If you are unsure of the right split between pensions and ISAs, remember that you can start off and make adjustments later. It will probably be some years before you have too much in any one account. Then there is always the possibility to move some of your ISA savings into your SIPP later on, subject to allowances.
One thing to bear in mind is that pensioned money becomes inaccessible until you’re pushing 60. (The exact date is another thing the politicians keep tinkering with.) So if you are likely to need this money for any crises or life events before then, consider keeping enough accessible. On the other hand, putting it in your pension is a great way to see your total climb quicker.
You can model this using fireplanner to get a sense of how changes to these choices impact the outcome. It’s not an exact science, but it will certainly give you a broad idea.
State Pension
When optimising, remember that your eventual state pension will be useful. It provides a portion of income that is guaranteed and not subject to the whims of the stock market, and it lasts until the end of your life.
If you are retiring early, consider opting to buy additional years of state pension entitlement through your National Insurance, as it works out good value.
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