Disclaimer

This article is for general information and educational purposes only. It does not constitute investment advice, a personal recommendation, or a financial promotion within the meaning of the Financial Services and Markets Act 2000

Readers should make their own independent assessment and where appropriate seek advice from an FCA authorised advisor.

​Why Invest In Financial Products and Markets.

To secure the finance to meet future lifestyle needs and do so in a tax-efficient manner.

How much

Calculate the sum you need to cover everyday expenses. Budget an amount needed to cover larger items such as holidays and other big purchases. To leave a sum out of income and other sources that may be invested.

​Where

Dependent on your time horizon and attitude to risk.

Criteria

To be successful, any investment of whatever nature should meet the following four criteria:

a) Minimise risk
b) Acceptable liquidity
c) Show a good rate of return (growth)
d) Be tax efficient

Options

For most people, two main options arise:-

Investment Property.
Does not meet all these requirements in particular points b) and d).

Financial Assets
Meets all these objectives, providing: – A balanced managed approach is taken.
Tax efficient vehicles are used. In the UK – Cash, Stocks and Shares ISA’s and SIPPs.

Paths to Financial Investment

There are three routes to investing in financial products- Direct or Passive Investing or a combination of both. So, let us consider each in turn.

Passive Investing

This is where you use an Independent Financial Advisor or Wealth Management Firm. These should be authorised by the Financial Conduct Authority (FCA). Charges for investment advice will be of the order of 1% to 2% of the value of the securities with a minimum charge.
You will want to select an advisor or wealth management firm which you feel will give you the results you want over the period you select. In the case of a wealth management business, you will likely see a sales representative. But you will want to know how they invest to create wealth and manage risk, their successes, and failures. Ask if you can interview a member of their investment team. The IFA (Independent Financial Advisor) may or may not have firsthand investing experience so
check this out. Having a basics knowledge of investing, covered in this course, will help you ask the right questions.

Direct Investing

If you decide to go this route you will also need to know the basics. You will need to decide whether you have the temperament to accept the ups and downs in your portfolio value. Devote time regularly to acquire the skills needed to research and invest to achieve the results you desire. Be prepared to allocate a specific period(s) each week to conduct your research and trades as well as update your records. If you are not, you will find it difficult to be your own investment manager.

There are ways to minimise losses in any one security which we will be covering later.
Basic Skills Online banking and spreadsheet management (more on this latter).

Combination Investing

There is a third course of action where you use a professional firm whilst also running your own programme alongside.
This is a practical way to help you acquire the skills you need. In fact, I started out this way when I retired.
Having determined that you would like to invest in financial products lets now move on to consider the tax efficient investment vehicles available now in the UK.

Tax Efficient Investment Vehicles

Stocks and Shares ISA’s Main points

1. All income and capital growth is tax free.

2. Can be cashed in whole or part at any time.

3. You can deposit up to £20,000 over the course of the tax year (25/26).

Junior Stocks and Shares ISA’s Main points

1. All income and capital growth are tax-free.

2. Can deposit up to £9,000 per tax year (25/26). Parents, grandparents, friends and other family members may contribute.

3. On the child reaching eighteen, this is automatically turned into a Stocks and share ISA.

SIPP Self Invested Personal  Pensions Main Points

A SIPP is a way of saving and investing for your retirement. All income and capital growth in your SIPP is tax free.

Personal contributions

You will receive tax relief at 20%, 40% or 45% on personal contributions depending on whether you are a basic, higher, or additional rate taxpayer. Your provider will claim the basic rate tax relief on your behalf and credit it to your SIPP. Higher rate taxpayers may reclaim an additional amount up to a total of 45% via their self- assessment annual tax return. This is paid by HMRC through an adjustment to your tax code. You need to be under seventy-five to receive these tax benefits.

Employer Contribution’s

Deposits may also be made into your SIPP by your employer, but no tax may be reclaimed on these. There are annual deposit limits, currently £60,000. (25/26). These contributions can be made monthly by direct debit and/or via lump sums.

Monthly Scheduled Purchases

Your platform provider should operate a monthly direct debit purchase facility. Here you select the funds you wish to purchase and the cash value of each trade. These are then automatically traded, added to your portfolio and the cost debited to your cash balance.

The minimum amount per fund is £25. This is a particularly useful facility as you do not have to time trades as you do when investing lump sums. You may of course also purchase in ad hoc lump sums. There are age restrictions for opening and paying into a SIPP. A minimum age of eighteen with an upper limit of seventy-five.

Age and Deposit Limits

There are age restrictions for opening and paying into a SIPP. A minimum age of 18 with an upper limit of 75.

There is an overall annual pension contribution limit, currently £60, 000 (25/25).

SIPP Options at Retirement

Your Pension may be taken from age 55 (57 from 2028). At this time, a tax-free lump sum may be taken of up to 25% of the value of the Pension up to a limit of £268,275 (Feb 26). With your Pension fund you have three courses of action:-

1. Purchase an Annuity which provides a fixed income for life. Upon your death this is annulled.

2. Drawdown. Where you take sums on a regular basis from your fund and the rest remains invested. Upon your death any balance forms part of your estate.

3. Combination. You could buy a fixed term annuity with part of your SIPP and leave the balance invested. Then initiate a regular drawdown from your pension pot at an appropriate time.

Occupational Pensions

For comparison purposes, it is appropriate here to refer to ‘Occupational Pensions.’ These are pensions funded by an employer during your service with them. The employer makes regular contributions in addition to those made by you. This pension is either:

a) A ‘Defined Benefits Pension’ which pays a pension based on your average earnings over the last few years before retirement.

b) Or, in most cases now, a ‘Money Purchase Pension’ which creates a pension pot which is used to purchase an annuity when you retire.

Whilst the employer contribution in an ‘Occupational Pension’ is welcome the following negatives apply: –

1. An annuity provides a fixed income for life but expires on death, unlike a  SIPP which forms part of your estate.

2. An Occupational Pension is set up by your employer, and you are dependent on the pension manager they select to manage its performance.

3. When you leave for a new employer, you may be able to transfer your pension fund into their scheme. If not, and with possibly several employers in your working life, you will be left with paper entitlement from each.

4. On the death of the employee a reduced pension may be paid to the surviving spouse if nominated.

You may be able to transfer your occupational pension into your SIPP but should seek professional help in evaluating this.

You can have both a workplace pension from your employer and a SIPP – they are different types of registered pension schemes. You can contribute to each subject to overall pension contribution limits, currently £60,000. (25/26).