Pension and dividends

[Retro]

Apologies for long post, sent this to S-i-l who wanted some 'how to get started' advice.

No-one is sorting out my retirement so I take this all very seriously !

First - If you want better returns, you have to accept more risk, there is no way to get one without the other.

For me – this means investing in shares but how to do this ?
There are 3 main ways:
1. Invest directly in individual shares BT, SSE, Unilever ? – Why do you think you can do better at this than fund managers with hundreds of analysts ? You can’t so don’t even think about it.
2. Buy funds being run by these managers to use their expertise ? Sounds tempting but it turns out no-one can beat the market forever and last years best are very unlikely to be next years. Plus, because of the higher charges eating your returns, they have to do really well to beat the index over time. Over 10 years ~80% don’t beat the index and you have no way to work out in advance which 20% will do !
3. Buy the cheapest index tracking funds you can find – Smart individual investor money does this, you buy the whole market, a computer buys and sells and you get the market return. It’s dull but it works. See this for some proper zealots who like to sleep at night.
Video:Bogleheads® investment philosophy - Bogleheads

Ok – I’ve decided to do this, what next ?
You have to choose between ISA’s and SIPP’s for starters.
SIPPs vs ISAs: pensions win if you’re saving for retirement | Monevator

This explains it far better than I can and this site is brilliant for straightforward advice about how this all works, read as much as you can stand !
DONT under any circumstances pay someone to rob you blind and put the money into ANY of the pension providers, if fund managers are bad, this is legalised theft with the advisor, the pension provider and the fund manager all taking a cut.

In v.short – SIPP’s work really well if you are high-rate taxpayer but will be low-rate when retired (v.likely). Plus, new flexibility on getting the cash out makes a SIPP even better.
Plus – you can’t get the cash till 55 and for a lot of people this is REALLY important to stop them doing something stupid, which is anything usually.

Ok I want a SIPP, what now ?
HL.co.uk – Hargreaves Lansdowne are the biggest fund supermarket (FTSE100 company) the website tells you how, its very easy to get started and you don’t need much money.
Vanguard LifeStrategy funds turn passive investing catatonic
This is talking about a low-cost fund from Vanguard (Largest fund mgmt co in the world and they specialise in index funds.)
IF I was starting from scratch I would setup a monthly payment into a lifestrategy 80 fund and forget about it for 10 years.
This puts 80% of the money into stock markets all over the world (you never know what area might do well -Asia, US, Europe), don’t try to guess, just have some in all.
The other 20% is in fixed income, bonds from companies, government IOU’s. This reduces the risk as they are not exposed to market falls.
OTHER STUFF TO THINK ABOUT:
- Market falls are as inevitable as cold weather in winter, they are not a maybe they are only a when. So, why do we bother ? Because the markets tend to go up 2 years out of 3 and if you give it enough time (10 years at least !), you will do better than any savings fund, this has been true for hundreds of years.
- DO NOT PANIC WHEN THE MARKET FALLS AND SELL, they always recover and you will be glad your monthly payment was buying up all that cheap stock because you would not have the courage to buy – This is because of PCA – Pound Cost Averaging. Risk tolerance
- YOU HAVE TO FIGHT YOUR INSTINCTS – People are their own worst enemy, they buy and sell at the worst times, follow the crowds, over trade (extra charges) and are biased to their view etc etc There is loads written about behaviour theory, no-one is immune and so you need to take the decision away from yourself.

So, I would:
- Setup a SIPP with HL.
- Setup a monthly payment into the Vanguard Lifestrategy 80 fund (Gvmnt will top this up as a tax incentive, great for high-rate payers, you might have to claim the additional 20% through your self-assessment but this is easy)
- Hold your nerve and when the market falls you need to think ok, that means I will be getting more for my money this month.
- Try not to do anything else...

Finally, this is not the gospel, this is only my opinion, so be sure this is right for you and please don’t be swayed by what I am doing because there are NO guarantees.
I can find you plenty of people who won’t touch shares, think you should buy-to-let, buy wine, rugs, carbon credits etc etc AND I have made most of the mistakes highlighted, wondered why and started reading everything I can to find out.

Also:
5% From The FTSE vs 0.62% On Cash Is A No-Brainer

Why Do Investors Make Bad Choices? - Bloomberg View

Good post, just a couple of things you might want to think about.

1. A Sipp with H/L will incur charges of 0.45%p.a. which makes the trackers more expensive.
2. A tracker is not necessarily the best investment. If a share rises, the tracker has to buy more of that share and if a share falls, the tracker has to sell part of its holding.

[Zero Liability]

Thanks for the explanation and the links, they look very well written, so I shall peruse them later today. It looks like their funds offer global exposure.

Personally, I also intend to put some money into commodities (incl gold & silver) or at least indexes specialised in them, as well as REITs and P2P lending. I think the latter is in fact preferential to bonds, particularly now that you can stick it into ISAs, even accounting for default risk on them.

[Boo]

1. Invest directly in individual shares BT, SSE, Unilever ? – Why do you think you can do better at this than fund managers with hundreds of analysts ?

One reason would be that you care about the investment return because you are directly affected whereas a fund manager only cares about the kickbacks they get from the firms they invest in.

Boo

[Wary]

I believe you can also carry forward any unused thresholds from the previous 3 tax years, regardless of whether any contributions were/will be employee or employer. This being so, if you've made no contributions for the past 3 tax years then you can presumably make up to £40K + 3 * £50K = £190K for 2014/15.

Someone please correct me if this is not so.

[ASB]

I believe you can also carry forward any unused thresholds from the previous 3 tax years, regardless of whether any contributions were/will be employee or employer. This being so, if you've made no contributions for the past 3 tax years then you can presumably make up to £40K + 3 * £50K = £190K for 2014/15.

Someone please correct me if this is not so.

There are restrictions on carry forward. The major one being that the scheme had to be in place. So if you didn't have a scheme set up, no carry forward.

HM Revenue & Customs: Calculating and paying the annual allowance charge for pension savings

This is pretty clear on how contributions are allocated and the transnational rules.

[Zero Liability]

One reason would be that you care about the investment return because you are directly affected whereas a fund manager only cares about the kickbacks they get from the firms they invest in.

Boo

Indeed. Also, the key is to find well run companies with good track records and future profit potential, that are well priced, i.e. invest in value. I think early on though trackers are useful whilst you build up your assets.

[unixman]

Yes, so if you have a gross salary of £10,000 then you can contribute £10,000 gross which would be a payment of £8,000 (net).

To to summarize the summary, a tax saving of up to 2k is available to contractors who follow the low salary/high dividends model. From their low salary of about 10k (2014 figures), they get the tax break by making a personal contribution of 8k into their personal pension scheme. The 8k becomes 10k in the pension fund. This is despite the fact that they have paid no income tax on their 10k salary.

Taking a wider view, paying into your pension straight from the limited company offers potentially bigger savings and more flexibility.

[jamesbrown]

One reason would be that you care about the investment return because you are directly affected whereas a fund manager only cares about the kickbacks they get from the firms they invest in.

Boo

Investing in individual companies or even groups of companies is a mugs game for the average punter, especially if they are switched out fairly regularly, due to transaction costs. There are very few market-beating strategies (look through the history of Nobel prizes) and very little prospect of the average punter exploiting them. A low-cost index-linked fund is the best bet for an average punter investing for the long-term, whether through a pension or any other vehicle. The average punter will struggle to identify "value" because they simply don't have the time to dedicate to the myriad concepts that might imply "value" and even analysts that do have time are frequently wrong.

[unixman]

Hi, if someone at Nixon Williams is still reading, can I ask the same question again, but with regard to charity donations, rather than pensions.

If I make a charity donation, can I still gift aid it, even though as a low salary/high divident contractor, I pay no basic rate income tax ?

[captainham]

Hi, if someone at Nixon Williams is still reading, can I ask the same question again, but with regard to charity donations, rather than pensions.

If I make a charity donation, can I still gift aid it, even though as a low salary/high divident contractor, I pay no basic rate income tax ?

Recent thread on GiftAid here:

http://forums.contractoruk.com/accou...-gift-aid.html