Saving for the future.

[DonkeyApple]

cymtriks said:

Pensions are not really a priority at your age.

!!!!!!!!!????????????

[DonkeyApple]

MrAdaam said:

I've just got myself settled in at work, a nice place for now that's going to set me up well I hope. The pay is average and I know that I'm going to have to be 'smart' about how I look after my money if I want to afford some luxuries. Let alone move out and live comfortably.

I also think now would be a good time to start thinking about the future with regards to how I'm going to look after myself. A good pension is going to be a must so I can relax in later life among other savings I wish to try and put into place towards a mortgage, new car and whatever else I may need.

Being only 19, I'm at a loss as to where to start with regards to where I should be asking for the advice so why not the almighty PH? I have an ISA set up at my bank, no credit cards and debt to my name. I'm tempted to get myself a credit card to provide myself with a history for when I do make the jump and apply for any big finance options such as a mortgage. I presum the more positive history I can get the better.

I'm thinking along the lines of a pension, my ISA and then another 2 savings account as a rainy day fund and something to put in savings towards expensive luxuries. I'm currently with Lloyds TSB but I'm open to hearing about anywhere giving good rates on long term saving.

Any advice on how to go about things? I guess I'm looking for a general direction on how to go about things - resources on the 'net or whatever.

Cheers.

Excellent position to be in at 19 and with no debt.

A credit card is prudent so long as you restrict your own credit limit and direct debit it to you current account to settle each month. That way you get a month's free interest on purchases (not really that much but a good habit). More importantly your purchases are protected and are not with a Debit card. It's tool to control spending, not increase it. Only you know how disciplined you are so wether this will work.

ISAs: Do you actually need an ISA? They are the most missold financial product on the market. Cash ISAs make sense, as they simply save you from paying tax on the interest. If you have an equity ISA then you need to ask yourself why. The reason sshould mostly be to save yourself from tax. But, you have an annual CGT allowance of £10k a year, as such, most people are paying huge fees for a product which is saving them from something that they are not even liable for.

You can usually access exactly the same funds via a normal equity account and avoid all the premium costs and admin fees that are larded on top in an ISA.

Re the pension, you cannot start early enough, who knows what life will hold but having funds regardless of what comes your way is prudent. However, you need to find the right balance of what money goes into your pension and what into savings as you cannot access pension funds until key criteria are reached. Again, only you know what cash requirements you will have over the 10 years but it would be fair to assume that you intend to purchase a property and so a deposit fund is probably the key criteria going forward, and so savings should be weighted more towards that then a pension at this stage. 10% of salary into pension is probably the minimum and the earlier you start the better. Most people in the UK have left it too late and will be relying on the State for their income. Most of those people do not realise this yet.

Ultimately, the most import aspect is to control spending and avoid unsecured debt. Do both of those, as you seem to have been and the savings plan aspect becomes easier and easier.

[ringram]

Mr D. Apple, surely ISA protection at the right price for Equities is a good idea depending on dividend income?
Capital gains I accept your point. But if you have high yield shares I would imagine a low cost ISA would be of value to protect the dividend income? Subject to some calculator checks.

[walm]

If you were lucky with the investments and yielded 10% capital growth per annum, saving £10k per annum would give you CGT headaches in year 5.
ISAs aren't THAT expensive are they?

[markcoznottz]

covmutley said:

Two words; Compound interest.

Its easy to say I will save £3k a year and in 20 years will have £60k, with a bit of interest on top but its better than that.

I turn 30 next year and have paid into a pension since 21, but I want to start saving so I can retire at 60- a 30 year plan. Looking at the compound interest you can acrue over such a period makes saving look far more appealing, although I have ignored the effect of inflation!

You wont beat inflation. The odds are stacked against an average worker now. You would have to increase the amount you put away each month to keep up let alone beat inflation, thats if you even trust the governments inflation figures which we know are fiction.
Even with low interest rates, how many people are actually saving?. Not many il bet, ISAs arent worth the paper they are printed on, just not worth the hassle or the opportunity cost.
The best type of pension is as we know the final salary pension which is index linked, and is a future proof product. So unless you have a ferrari f40 or a lhd porsche 964 rs in the garage its tough times.

[DonkeyApple]

ringram said:

Mr D. Apple, surely ISA protection at the right price for Equities is a good idea depending on dividend income?
Capital gains I accept your point. But if you have high yield shares I would imagine a low cost ISA would be of value to protect the dividend income? Subject to some calculator checks.

First of all, I'm slightly out of touch with this side of the market, so may be wrong. However, my understanding is that part of the great ISA swindle of my compatriots in the City is that there is absolutely no tax saving on dividend yields until you are a higher rate tax payer.

Divis in an ISA are pre-taxed at source at 10% just as if you held the physical away from any supposed tax wrapper. This was part of the massive raid by Gordon Brown that crippled the savings potential of basic rate tax payers in their ISAs and pensions. It was one of his most shocking actions but one that is often forgotten, aimed directly at the working man and average family.

Once you are a higher rate tax payer then the saving kicks in and an ISA becomes a prudent wrapper to look at.

Re CGT, and this is answering another post, if you held the same investments for life then holding them within an ISA and making the bold assumption that you would have good returns would shelter your CGT liabilities. However, no one should hold the same investment for long period, it is essential to have some aspect of active management to your portfolio. As such, this means that every few years you would be selling out of some positions, either fully or partially and re-investing in other suitable markets.

This means that any sensibly managed investment portfolio, because you will be buying and selling an element of the portfolio each year, allows you to easily utilise your £10k per annum CGT allowance.

Even if you didn't want to actively manage your portfolio, you would have to choose a product which would be consistant over several decades. This would preclude individual equities, as companies change, as we've seen with BP this year, Railtrack, Cable & Wireless etc in previous years. This means youd be prudent to use something like the FTSE 100 ETF. The interesting thing about the FTSE100 compared to the FTSE 350, which is the 100 plus the next 250, is that the next 250 are completely irrelevant, as are much of the 100 in controlling the direction, the charts between the two show a near perfect correlation. What this means is that in the absense of bed and breakfasting, you can sell out of a position in the FTSE 100 ETF to crystalise some gains and utilise your tax breaks and so as to not lose exposure to the market you can go long an equal amount of a FTSE 350 ETF or equivalent. You could also go long the exact amount of FTSE 100 ETF as a spread for 30 days and then switch back to physical. The latter saving you stamp duty.

If you are a basic rate tax payer and saving modest amounts each year the great ISA and PEP sale of the last 2 decades is a massive mis selling scam designed to extract enourmous fees through execution charges and annual account fees.

Just a small amount of additional planning means that there is no tax liability to pay to shelter from and no fees, which over 20 yrs makes an enormous impact on your returns.

The depressing fact is that most funds are not created to give the end client good returns but to give the issuer and their sales agents solid upfront and trailling fees.

The kind of funds that are run by the best people and give the best chance of superb returns have high buy in levels or are private.

I wish more media would pick on this industry and point out the truth but sadly, guess which firms make up much of the media's advertising revenue?

Edited by DonkeyApple on Thursday 16th December 20:37

[covmutley]

markcoznottz said:

covmutley said:

Two words; Compound interest.

Its easy to say I will save £3k a year and in 20 years will have £60k, with a bit of interest on top but its better than that.

I turn 30 next year and have paid into a pension since 21, but I want to start saving so I can retire at 60- a 30 year plan. Looking at the compound interest you can acrue over such a period makes saving look far more appealing, although I have ignored the effect of inflation!

You wont beat inflation. The odds are stacked against an average worker now. You would have to increase the amount you put away each month to keep up let alone beat inflation, thats if you even trust the governments inflation figures which we know are fiction.
Even with low interest rates, how many people are actually saving?. Not many il bet, ISAs arent worth the paper they are printed on, just not worth the hassle or the opportunity cost.
The best type of pension is as we know the final salary pension which is index linked, and is a future proof product. So unless you have a ferrari f40 or a lhd porsche 964 rs in the garage its tough times.

Sure you're right. The inlaws have a lot of savings but when I saw a pile of leaflets advertising the fantastic rates I just thought there was no point. But is this current imbalance a short term situation?

Plus, working throung my first recession has scared me because without some 'float' it would probably be game over for me pretty quickly! To me the savings would be about freedom as much as anything. To invest, to spend, to help family, lose my job and take 6 months to find another without threat of home being repossesed, to be able to commit to a business venture etc.

[walm]

DonkeyApple said:

This means that any sensibly managed investment portfolio, because you will be buying and selling an element of the portfolio each year, allows you to easily utilise your £10k per annum CGT allowance.

What happens when you have MORE than £10k to pay???

Answer: you pay through the nose.

I really don't know the exact fee differential between an actively managed quasi-tracker vs. an ISA tracker, but as soon as you have savings of >£100k that CGT limit becomes a problem no?

[DonkeyApple]

walm said:

DonkeyApple said:

This means that any sensibly managed investment portfolio, because you will be buying and selling an element of the portfolio each year, allows you to easily utilise your £10k per annum CGT allowance.

What happens when you have MORE than £10k to pay???

Answer: you pay through the nose.

I really don't know the exact fee differential between an actively managed quasi-tracker vs. an ISA tracker, but as soon as you have savings of >£100k that CGT limit becomes a problem no?

You'd need about 100K in the pot before you got to the point of being very likely to utilise your full allowance. Andthat is assuming a 10% return which is toppy. At which point, you would obviously look to split your tax liability across to your partner.

This means that in reality CGT in conventional circumstances is statistically going to be a problem worth dealing with when you have roughtly in the region of £200k in the markets.

Now, in everything that I've been talking about I have been refering to younger people in the lower tax bracket where such a portfolio size is not likely to be an issue.

In the case of someone starting out it's likely to take up to 10 years of maxing the ISA entitlement to get to this level, but the reality is that it is once you reach this level that an ISA makes sense in the first instance.

Equity ISAs are a tax gift to the wealthy and a fee scam for most normal rate tax payers. Cash ISAs make good sense if you can get a good rate.

[groak]

Don't get married. Don't have children. Spend money as fast as you get it. Borrow as much as anyone will lend. And one day die owing a fortune.

By the way, with particular regard to your far-distant-future saving, when exactly are you going to die? And how do you know for certain that you won't be dead by breakfast time tomorrow? Or on 26th May 2011? or..etc etc etc.....

Do you drive? I do. And many times only the Grace of God has prevented me from the afterlife. How do you know you'll be that lucky?

[DonkeyApple]

groak said:

Don't get married. Don't have children. Spend money as fast as you get it. Borrow as much as anyone will lend. And one day die owing a fortune.

By the way, with particular regard to your far-distant-future saving, when exactly are you going to die? And how do you know for certain that you won't be dead by breakfast time tomorrow? Or on 26th May 2011? or..etc etc etc.....

Do you drive? I do. And many times only the Grace of God has prevented me from the afterlife. How do you know you'll be that lucky?

Stats favour outliving a Scotsman

[groak]

DonkeyApple said:

groak said:

Don't get married. Don't have children. Spend money as fast as you get it. Borrow as much as anyone will lend. And one day die owing a fortune.

By the way, with particular regard to your far-distant-future saving, when exactly are you going to die? And how do you know for certain that you won't be dead by breakfast time tomorrow? Or on 26th May 2011? or..etc etc etc.....

Do you drive? I do. And many times only the Grace of God has prevented me from the afterlife. How do you know you'll be that lucky?

Stats favour outliving a Scotsman

....as in longevity (not disputed...we don't like gibbering senility) or as in how much excess can you cram into one (shortish) lifetime (hotly disputed)

[walm]

DonkeyApple said:

You'd need about 100K in the pot before you got to the point of being very likely to utilise your full allowance. Andthat is assuming a 10% return which is toppy. At which point, you would obviously look to split your tax liability across to your partner.

This means that in reality CGT in conventional circumstances is statistically going to be a problem worth dealing with when you have roughtly in the region of £200k in the markets.

Now, in everything that I've been talking about I have been refering to younger people in the lower tax bracket where such a portfolio size is not likely to be an issue.

In the case of someone starting out it's likely to take up to 10 years of maxing the ISA entitlement to get to this level, but the reality is that it is once you reach this level that an ISA makes sense in the first instance.

Equity ISAs are a tax gift to the wealthy and a fee scam for most normal rate tax payers. Cash ISAs make good sense if you can get a good rate.

I am with you now, this makes total sense.
In fact, from what you say even as a higher rate tax payer you should save your first £100k or so in a regular account BEFORE then putting the extra into ISAs.

[Shadow62]

A couple who have used the full allowance for tessa & ISA allowances since they were introduced could now have a tax free pot of over £1,200,000.