How to stop S&S ISA fees eclipsing returns

[Pinkpupsx]

Looking for guidance around S&S ISA I have with Hargreaves Lansdown.

I opened this back in 2019 at the age of 24 to save for retirement. I’ve tried my hardest to do it all the correct way and spent a lot of time reading up on investing etc but still think I’ve buggered up.

To begin with, I had the money spread across many funds. It’s no doubt I didn’t see much in the way of dividends & interest (literally pence) so after realising my error, I consolidated down to the 4 best performing funds and now I’m receiving about £1.50-£2 a month which is set to reinvest, but my HL platform fees are approx £6.50 a month so eating away at this.

I know HL is supposed to be very pricey unless you have ETFs, so is it worth me transferring these funds to ETFs? Or move to another platform with less fees, or move directly to the fund providers such as Vanguard to cut out the middle man? Or, should I withdraw a chunk to make a deposit to my pension which has been impacted by my current maternity leave.

I know it’s a long term game, but at present I’d see more returns from an ISA, so I’m worried I’ve done it all wrong and not benefitting from it at all and have wasted 6 years of compounding etc.

Other than my pension, I’ve covered all other key financial areas already (emergency fund, mortgage overpayment, LISA, premium bonds) so wouldn’t be looking to use this money for any of them and want to keep using it for retirement.

I’d appreciate any guidance you can give!

What are you seeing in terms of capital growth? That's the main element of return with shares, not the dividends. With your long time investment horizon capital growth (tax free within an ISA) should be your main priority.

Thanks for your response. It’s currently +18.61% total gain. Hope I’ve answered that correctly!

So that's a good return. Sounds like you are doing fine.

Hargreaves Lansdown is quite an expensive S&S ISA platform for funds. Without wanting to sound rude, the way you have phrased your question does kind of imply you don't 100% know what you are doing - in which case I'd suggest keeping it as simple as possible. Vanguard has got more expensive recently, but it caps out very low compared to HL as your pot increases.

Question no. 1 would be why are you using a S&S ISA instead of a SIPP?

Can I ask why you've decided to use a S&S ISA rather than a SIPP if you're saving for retirement?

Sorry, cross posted with Whoknows!

Either way, from an investment point of view, regardless of your chosen option:
You seem confused by the difference between dividends / interest and the actual capital growth of your portfolio.
You have chosen to keep four funds on the basis of how they performed over the last x years.

These two things imply to me that you need to either a) get some proper financial advice or b) keep things as simple as possible so you can't mess it up.

I would firstly think about your options in terms of SIPP or taking advantage of any pension contribution matching offered by your employer. At 30, I'd then make sure your LISA is a S&S LISA, not a cash one (you already have a mortgage), and consider maxing this out each year whilst making sure the bonus contributions are also invested.

Once you are happy a S&S ISA is the appropriate place for your money, I would transfer your H/L S&S ISA to a Vanguard S&S ISA and put all your money in the "Vanguard Lifestrategy 80" fund. Keep contributing every month, regardless of performance. Review this in 15 years time when you are 45, and consider changing the bond allocation then.

Lots of very valid or "better" alternatives, but it would be really difficult to mess that up (you can't accidentally buy an income vs accumulation fund, for example), you won't be as tempted to start buying random funds that Vanguard don't offer, and the Vanguard fees won't escalate as the H/L ones would.

Don’t worry, it doesn’t sound rude - I don’t really know what I’m doing! There’s so much information online it can be quite overwhelming. I will check out Vanguard.

I set it up as an ISA initially as I wasn’t aware of SIPPs so was the best option at the time, and then habit took over and I have just been contributing to it over the years, but now at a point where I’m reflecting on all my finances and have only just heard of SIPPs. I will do some research on them.

Thank you, this is very good advice.

Yes, I will admit I do find the difference between dividends and capital growth of the portfolio confusing. I would say I’m more confused about the correlation of them not what they mean if that makes sense? My growth portfolio % always seems to be quite good, but I receive so little in dividends. Is this because the money is spread across four funds when I should only have a couple for the amount I have invested?

SIPPs definitely do seem like the best place for this money. I will do research on this.

In general high dividends go with low growth, and high growth goes with low dividends. But really it doesn't matter. Look at total pot size, not which type of increase it's come from.

That makes sense for mine then. In that case, is it normal that I need to top up the ISA with cash to cover the monthly platform fees as the funds aren’t generating enough to cover it?

Yes you can top up the ISA to cover fees if the dividends aren’t enough ,however you need to check that you don’t go above the limit for ISA contri potions if you are close to the max for the year. Alternately you could sell a small amount of investments to cover it. Personally I prefer to keep a bit of cash buffer to cover this.

SIPP would be better for retirement as you will get a top up of tax relief from HMRC when you contribute although there are limits to this if you are moving a lot in one year.

As per prior posts, you need to decide if you'd rather put this money in to a SIPP or S&S ISA or S&S LISA, or perhaps a combination of all 3. There are pro's and cons to going down the SIPP route, and you'd definitely also want to explore additional workplace pension too if you get matched employer contributions for that.

A lot of it comes down to your tax status at the moment (i.e if you are a basic or higher rate taxpayer). With a SIPP you are offsetting the tax burden until after retirement, at which time lots of people will be in a lower tax bracket than they are now (+ 25% available tax free). If you are only a basic rate taxpayer at present then the tax advantages are less obvious.

With both a SIPP and LISA there are also obviously very significant restrictions when you can access your money vs a S&S ISA, which is a big factor to consider. Do some reading - there are whole websites devoted to this very conundrum.

All 3 options need you to invest using a platform. Most people in your position will be buying "accumulation" funds where any dividends / income etc are reinvested automatically so you never see them. Instead, you simply see the value of your funds increase (or decrease....) over time as the market fluctuates. If you invested 6 years ago the likelihood is that your funds have grown quite substantially over that time. The alternative is an "income" fund which does actually pay out back into your portfolio & therefore you need to reinvest it yourself. Confusingly, there are often both options available for the same named fund.

A portfolio with 100% accumulation funds / shares will therefore always need you to "top up" to pay the platform fee. For the ISAs, it's a shame to waste your allowance on fees (or to see a portion of your funds automatically sold to free the cash up), so the best option is usually to make sure the fee is being paid from somewhere else - such as a standard "fund and share " account on H/L (super easy to set up) or direct debit from your own current account. There are options within the platform account areas to arrange this - H/L is a little confusing in this area though tbh.

Could you expand on your growth figures - is your investment growing 18.16% each year, or over the six years you've been investing?

A simple S&P 500 index ETF accumulating, shows 180% growth over that time frame. Fees with a low cost platform such as InvestEngine or Trading 212 are about 0.05% for the fund with no platform fees.
A global index tracker ETF is showing over 100% growth rate since 2019, with fees of about 0.1%

(Unfortunately, Vanguard has recently changed its fee structure so it's now relatively high for smaller investors at least until your investment reaches the £32K mark).

Investing for higher dividend returns is likely to be more suited to someone who has already built up their portfolio, has the benefit of high growth over many years and subsequently needs their fund to provide a steady income (in retirement for instance).

If you are saving for retirement in terms of when you can legally access your pension then you have about 35 years (earliest you can access pension funds currently is 67 from 2028), then the best way to start is via your workplace pension as your employer has to contribute to that to.

You can obviously then invest outside of that, either in a GIA (which doesn't have any tax benefits), a SIPP (which has tax relief benefits paying in but maybe subject to income tax at withdrawal) and a S&S ISA (you will have already paid income tax on money paid in but any gains are protected from tax).

For most people the bulk of their retirement financial planning likely means their pension. However, with a growing number of people wanting more financial flexibility many people are using S&S ISAs to provide that flexibility in terms of timescale and tax planning.

I can't advise you what to do, but you have plenty of time ahead of you to make the right steps now and a reasonably high likelihood it will pay off long term.

I'm 43 now, when I was 19 and I got my first proper job as an apprentice I paid 6% and my employer paid in 10%, I've worked for 5-6 different companies in the 20+ years along with a number of salary increases. I've always made sure that I pay in at minimum to my pension the % that maximises what the employer contributes, I quite often have paid in more to benefit from tax relief as a higher rate tax payer.

At the moment I've built up about £350k in my pension, and continue to pay 15% and my employer matches it, I am however now starting to pay less into my pension (still maxing the employer part at 15%) and paying more into my S&S ISA to give me flexibility.

90% of all of my invtesments across pension or ISA are just in a world wide index tracker fund. I have my pensions moved to a SIPP with Vanguard and my S&S ISA with T212 - same trackers in both. Keep it simple, find a global ETF with low fees and invest consistently over the long term, don't keep chopping and changing and don't pay too much attention to the news and impacts on the stock market

I can’t add any more to the excellent advice given above, but I would really like to recommend the Meaningful Money podcast which has taken me from zero knowledge to a reasonable understanding of how to look after my money. They also have a Facebook page which is a great source of information. Good luck!

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Great advice here. I would add that whilst Vanguard are good and still reasonably low fee you can only invest in their funds. I would also have a look at other platforms options, AJ Bell for example, I think do a cheaper app option.

Another good site for advice is Money to the Masses.

Just to add to a couple of points on here. The earliest age that you can access private pension funds is ten years before state pension age, so currently age 55 but rising to 57 in 2028.

Also, for those of you with HL accounts, you can contribute to a fund and share account and fees for your ISA (and SIPPs) can be taken from that, if you are trying to preserve as much tax free gain as possible.

Sorry, I see I have cross posted on the fund and share account.

I have moved from Vanguard to AJ Bell this tax year as it is cheaper when investing monthly.

@Millionaura is it easy to move?

I made it quite straight forward. I left my existing investment in Vanguard but cancelled my monthly payment at the end of the tax year. I then opened a new S&S ISA with AJ Bell for this tax year and now pay monthly into that.

I do need to investigate whether I should transfer my balance in but haven’t managed to do it yet.

Thanks, yes it's the balance transfer I was unsure of how to do.

I've not tried transfers between those specific platforms, but most of the DIY ones make it really easy. Just give the new platform the details of your other account and they do it all.