Single Index Tracker or multiple

[Brainworm]

I have around £130k sitting as cash in a SIPP account with Hargreaves Lansdown. I also have about £10k sitting as cash in an ISA account.

I have spent several weeks reading and watching Meaningful Money and Boring Money to help me decide how to invest. I've found lots of answers, but have a few remaining that I am hoping someone here can answer.

1. I think index tracker funds are the way forward for me (a few weeks ago this would have been gibberish to me - I'm a complete novice). With my SIPP, should I put the full amount in one fund or buy several? I imagine that my ISA is small enough to warrant only 1
2. I want to making monthly payments into my SIPP and ISA. How straight forward will it be to add money to my selected funds when doing so?
3. Any advice of funds and/or platforms would be greatly received.

Thanks everyone xx

How important is FSCS protection to you?

With retail investments, fraud could happen but I've not come across it. So you buy the investment, the money goes in, and you own the underlying assets. If the admin system provider went bust, it would be a pain but you still have the underlying investments. If the fund provider goes bust, more of a pain but the funds assets are still there, so would eventually be liquidated.

So I don't spread amongst different providers, but if you want to spread between fund houses (Vanguard, Fidelity, HSBC, BlackRock etc) then you could do.
You could have multiple platforms (admin systems) but it adds more complication.

You could use one fund in a SIPP, the same fund in an ISA and have both the SIPP and ISA on the same platform.

It should be very easy to setup recurring monthly payments with most platforms.

Vanguard Investor - once you have verified your bank account (by sending in first page of a statement, photo of it is fine) then a direct debit is easily setup. If SIPP and ISA are both on the platform you would have two direct debits. You can setup the direct debit so that the money goes into a fund(s) or goes in as cash and sits in the account awaiting your instruction to invest it.

Some platforms do it all online, others may still need a paper form completing to change the direct debit but I expect that will be phased out soon.

Thanks so much Nick!

So, it's not unwise to put all the cash sitting in my SIPP in a single fund. This is great news as I'm finding it hard enough to select 1, let alone more!

That makes sense - the direct debit being in to the fund rather than the SIPP or ISA account.

Thanks again.

Yes, it's fine to just use one tracker fund, but bear in mind that if it's a global tracker, then around 60% of it will be in US stocks. That's fine if you're happy with that and have a long time horizon.

Some investors think that US stocks are overvalued and that there is better value elsewhere, so they curate a selection of regional trackers to create their own global fund. For example, if you think that emerging markets will grow at a faster rate than developed markets, you may want more exposure to them. The problem is that it's trickier to manage, and easier to make mistakes, arguably, as it's effectively active management using passive vehicles.

Other investors will tell you never to bet against the US as there are better growth prospects there. and always will be as it's a more business / innovation friendly environment.

If you do go for a Global tracker, bear in mind that they don't all track the same Index... the FTSE World Index has greater exposure to emerging markets than the MSCI World. Either is fine, as long as you know what you're buying.

Thanks Clematis.

I am not at all confident and I don't feel confident about making a sound/ informed decision about which markets to invest in.

I sort of assumed that the spread of markets the fund invests in differ according to the 'sector' options on the platform I use to find the fund. With the HL fund finder, instead of using the Sector filter to specify regions, you can select 'mixed investment' (with 0-35%, 20-60% and 40-80% split options).

Have I got thing wrong? Will the all be around 60% US market?

@Brainworm , so much depends on your time horizon - i.e. how long you can leave the money untouched.

Those funds that hold a mix of equities and bonds are aimed at investors with different timeframes. So, someone buying a fund with 80% or 100% in equities is likely to be closer to the beginning of their investing journey, than someone buying a fund with more than half of the investments in bonds, who may be close to retirement.

I'm assuming that you are in the former group, so most would advise you to have the bulk of your investments (if not all) in equities (ie stocks and shares - the terms are used interchangeably).

At the moment, we're in a slightly odd position in that equities (especially US equities) have held their value pretty well in spite of inflation and rising interest rates, whereas bonds (by which I mean conventional government bonds) have taken a hammering, and now offer decent value for the first time in a long while. So for someone starting out, having some exposure to bonds in the mix is perhaps not such a bad idea. Something like Vanguard Lifestrategy 60 or 80 (with 60% or 80% in stocks) might be worth looking at.

But if you have a really long time horizon, a straightforward global index tracker containing equities only is a fine choice. If you are on HL, set the filters to find global passive funds only, and you should see options from Vanguard, Legal & General and HSBC. Make sure you pick the Accumulation units (dividends are added to the investment so that they compound over time, rather than being paid out as income).

Every fund will be different, each one will have fact sheet that will show you the breakdown by geography and sector invested. So it totally depends what fund you are talking about, but no one is going to say be 100% in the FTSE 100 for example. Some people are 100% in the S&P 500 but they are then only invested in the US.

You haven't said how old you are or what your objectives and timeframes for the money is? That is massively important in informing how you invest.

For me personally I'm invested only in the FTSE Global all cap index fund with Vanguard. It's about as diversified as you can get in a fund and it is all equities. You could try and create the same/similar portfolio yourself and have lower costs, but from what you've said about your knowledge I wouldn't do that. This fund is essentially allocated by what's called the market capitalisation - it will be roughly 60% US stocks because the US makes up roughly that % of the global economy.

Don't be paralysed by inaction because there are so many options. Your money being sat in cash is likely losing value by the day.

Thanks everyone. I really appreciate your help.

I have about 15 years before I retire. I am at the top of my game in terms of income (around £100k). I am hoping I can sustain that as long as possible, but I'm not confident I will.

I was completely rinsed in a recent divorce and now have a £300k mortgage when I thought at this stage I'd be mortgage free.

My plan is to put £20k away in an ISA every year and, over 10 years, this to serve the mortgage debt. However, I need to think about whether I am better of trying to do some of the lifting here by paying off some of the mortgage with the 25% tax free withdrawal. I do worry about changes being made to pension rulings and so think this is risky....which is why I think an ISA is the way to go.

I also plan to put away any money left over each month into my SIPP.

I have a workplace pension that is poorly performing and has very limited investment options (and high fees) but I keep it as my employer contributes 8% of my salary.

I expect that's more information than is helpful...but this links to my ignorance in this area!

It is true that I have been paralysed by inaction. I was so stupid in leaving all this 'boring stuff' to my ex and being so ignorant. I thought it was a fair exchange for me to earn the money and him to manage it. This stupidity has undermined my confidence in my capacity to make good financial decisions.

I have given myself until Monday to make a final decision and then move forward. Posting here is part of my final decision making!

The additional information is helpful, @Brainworm . The good news is that you have plenty of time to improve your situation, and a good salary.

I understand the urge to do something and avoid paralysis, but don't forget that the cash in your SIPP (if held with HL) will be earning fairly decent interest (less so in the ISA) while you do your thinking and learning. Ideally, you should get to a point where you have made a considered decision over your fund choice(s) so that you won't be tempted to chop and change.

If you are uncertain about going all in at once, you could always invest the money in chunks over a few months. Fund dealing is free with HL, so as long as you stick to funds, it won't cost you any more.

As regards whether you use the ISA or SIPP cash to pay off the mortgage, that's a decision you can review over time, and probably doesn't impact on how you invest. But using up the ISA allowance if you can afford it is a no-brainer. Contributions at that level over a 15 year period of compounding should mean that you do pretty well in most scenarios.

Thank you for replying and for giving advice. I really appreciate it.

I have to keep reminding myself that 'all isn't lost' and that there is time to bring about a decent position.

My plans had been to retire at 60 and with a modest pension that would afford a simple life (I am cheap to run!). This plan was linked to the anticipation that around 60 I will find it more difficult to secure work at the salary I now bring in.

I think I just need to go flat out with saving and investing when I can, so if my concerns about work come to fruition, I will not have squandered the opportunities I have now.

Thanks again!

I have given myself until Monday to make a final decision and then move forward.

That is the right thing to do. Set yourself a time to take action, and do it. You can always change things later. I spent far too long going around in circles not actually putting money in to investments.

Pick your core fund, pick the platform which has that fund at the lowest cost based on your frequency and value of contributions.

HL is fine as a platform to use. If your core fund is on Vanguard Investor, then that platform is likely lower cost than HL. When fund value gets to around £80k then platforms with fixed fees, rather than percentage fees, like Interactive Investor are lower cost. Though ii has recently lowered fees on ISA (but I don't think they have on SIPP).

'mixed investment' (with 0-35%, 20-60% and 40-80% split options)

That would be the percentage of equities.
If you select: Mixed Investment 40-85% Shares, Accumulation, Tracker
you get a list of 3 funds... two of which are Vanguard LifeStrategy funds. Those funds have a percentage of equities and a percentage of bonds/gilts.
The funds have investments spread around various countries, the largest percentage is likely to be in the US.

Example: Vanguard LifeStrategy 80%
https://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/v/vanguard-lifestrategy-80-equity-accumulation
United States 36.83%
United Kingdom 23.10%
Ireland 7.18%
Japan 4.96%
France 2.60%
Germany 2.06%
Switzerland 1.77%
China 1.55%
Australia 1.45%

and they will invest in Bonds/Gilts and shares in companies in various sectors:
Bonds 18.76%
Software & Computer Services 6.86%
Technology Hardware & Equipment 6.11%
Commodities 6.05%
Pharmaceuticals & Biotechnology 5.84%
Banks 5.53%
Non-Renewable Energy 4.71%
Retailers 2.93%
Personal Care, Drug & Grocery Stores 2.52%
Investment Banking & Brokerage Services 2.39%

I've been tinkering around with investment strategies for the past 40 years or so, and have found that there is no silver bullet. But you sure can waste a lot of time looking for one.

You have enough time (by which I mean 10+ years) to go all-out on equities. I have a single investment vehicle.

VWRL: Vanguard FTSE All-world ETF

-Vanguard charges low fees, and is pretty reliable
-This fund contains thousands of constituents, from all around the world, providing diversification unattainable by other means
-The fund displays pretty steady growth, with moderate volatility.
-It a "distributor", offering a small 2% dividend, which is useful for paying fund manager fees, and perhaps incrementally building up an interest earning cash "pillow".

People say that the USA is overweighted, at 60-65%, in such global indices. But consider:

The capitalisation of all the companies and markets in the world is reassessed every day, by millions of investors and traders, executing billions of transactions. You must be very confident of your own uniquely superior analysis skills to believe that the global consensus is wrong and that you are right.

Having said that, if and when US market dominance declines, then its weight in the ETF will be correspondingly and automatically reduced by Vanguard during its quarterly rebalancing procedure. No need to intervene personally.

Nobody can beat the market. If that sounds a bit dramatic, read this article:

Calpers and Bridgewater

which shows that Calpers - a huge public employee pension find, and Bridgewater - a gargantuan hedge fund, cannot beat the returns generated by a low cost, passive, super-diversified ETF.

If you are earning £100k you have a huge opportunity to pay more into your pension. The tax relief can't be beaten.

Thanks Hitchens.

I have been advised that I shouldn't rely on there being a 25% tax free withdrawal on pensions in 10 years time and so this is a risky strategy.

However, if saving/investing £20k a year, over 10 years, there would be £40k extra in the pot, just from tax relief (should the tax relief rules remain the same).

My pension won't grow to £1.3 million in this time, (from £100k now) so I would need to pay tax on the amount I withdraw in excess of the 25% tax free amount - and will pay higher rate tax on that. As things stand (which I doubt they will be in 10 years), this would likely take me into the 45% tax bracket for the year of withdrawal.

It all depends on what happens in the markets as to how much my tax free 25% will be. This, and layering in changes to pension allowances and income tax rates means the ISA versus SIPP decision isn't all that straightforward.

A year ago, the above would have been like a foreign language to me. I now feel like I have the language comprehension of a primary school child trying to study for A levels - so what is written above could all be incorrect!

Sounds like you are on the right track. Many people assume they will be basic rate taxpayers in retirement, even if they are paying higher rate tax while working. But when you run the numbers, that's not always the case.

I only ever paid basic rate tax, but saved hard, and with tax thresholds frozen for an extended period, I potentially face paying higher rate tax when my work and state pensions kick in. I'm now running down my SIPP by taking higher withdrawals now. Some would say it's a nice problem to have, but I don't see why I should pay higher rate tax when I only got tax relief on contributions at the basic rate. I certainly wish I'd put more into my ISA and less into my SIPP.

Of course there's always the risk that governments might start tinkering with ISA's. There was talk recently of putting a limit on pot size - i.e. a tax on investment growth. Nothing came of it, but you never know. At least with an ISA you can take out the money quickly if that risk materialises.

Gosh, that does sound really unfair about paying more tax at the retirement end!

I think changes to ISAs could be linked to setting ceilings on annual contributions or tax free withdrawals but even that seems more controversial than tax free allowance and income tax changes to SIPPS. Everyone knows that these are subject to change.

With ISAs, we have been taxed on the income and told that there is no further tax to pay. Therefore, scrapping or freezing them seems like the only 'reasonable' change.

Having said all that - reasonable and government don't seem to go hand in hand these days

I don't think you can second guess what Government may do. Sometimes they leak things out to see what reaction they get, so freezing ISA at £100k max, may be one of those leaks, and they may or may not implement that.

They will always mess with taxes, trying to make it look like we pay less tax when we actually pay more - such as by freezing a threshold!

That's true.

Im not adverse to paying tax, especially if it means society accesses good quality services. I'm also not adverse to changes in rates of tax in line with what is needed to address societal changes. What is difficult is if/when fundamental changes are made that go beyond this.

However, those of us trying to navigate this are automatically in a better place than many.