DIY or hire IFA?

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Topic Author
sona
Posts: 3
Joined: Tue Apr 02, 2024 4:39 pm

DIY or hire IFA?

Post by sona »

Hi, all. I hope everyone had a nice bank holiday weekend.

I'm looking for some advice on whether I should hire a financial advisor to help with savings, investments, and pensions. Here's my current situation:
  • Age 35.
  • Single. No dependants.
  • Own my house outright.
  • I have a 20-year-old car, so no PCP, HP, etc.
  • Salary of £49k. This will be going up to £51k at the end of this month.
  • My pension contributions are 6%. My employer pays 11% (maximum). I increased my pension contributions from 3% to 6% in March last year. My pension contributions are salary sacrifice, so they reduce my taxable income and I pay less NI as a result.
  • I have no savings in ISAs. I stopped with my cash ISA a while ago because the interest rate was poor. I have heard of stocks & shares ISAs but knew nothing about them until recently.
  • I have £145k in cash savings. I plan to set aside about £5k for an emergency fund, and about £10k for a new kitchen. This leaves me with £130k to invest.
  • My disposable income is about £2,000 each month, as my outgoings are very little. I shop around for the best deals for utilities, etc.
  • I put a small amount away each month for things like Christmas, birthdays, insurance, car maintenance, etc.
  • I have a credit card but only use it for monthly expenditure. It gets paid off every month.
  • My current workplace pension pot is sitting at about £29k. I have three pension pots with other providers from previous employment, totalling about £22,100.
  • My state pension forecast is on track.
  • I don't have a student loan. I paid it off a few years ago through salary deductions.

I engaged with an IFA recently to understand their fees and ask what their recommendations are:
  • Upfront fee of £3k (2.3%), down from £3,611 (2.77%) after negotiation.
  • Ongoing advisor fee of 0.65%, down from 0.75% after negotiation. This will be deducted monthly.
  • Platform charge of 0.25% for ISA and GIA, and 0.30% for pension.
  • Investment fund charge of 0.22% for ISA, GIA, and pension.
  • Total ongoing charges are 1.12% for ISA and GIA, and 1.17% for pension.
  • ISA recommendation: Set up a stocks & shares ISA with Vanguard (LifeStrategy 80%) via Aviva Wrap and make an immediate lump sum contribution of £20k this tax year, and make another lump sum contribution of £20k in the next tax year.
  • Pension recommendation: Transfer and consolidate my three pension pots, from previous employment, to a new SIPP portfolio with Aviva Wrap. The fund will be Vanguard LifeStrategy 80%. Make a lump sum contribution of £36,760 immediately this tax year to benefit from tax relief of £9,190. Retain £36,760 in cash and set up regular pension contributions in the new tax year of £3,063 per month, so that each payment will benefit from £765.85 of tax relief.
  • GIA: Set up an investment portfolio with Aviva Wrap and make a lump sum contribution of £31,480. Begin regular contributions of £2k every month. Each tax year, use Bed & ISA to move funds from the GIA into the ISA, utilising the CGT allowance.
  • Currently on track to retire at 55, based on my current cashflow. Having children in the future will affect my cashflow, and I have no issue with this.

My mum feels that paid advice might help me, and my step-father feels that the initial and ongoing charges seem high and will add up over time.

My concern is that ongoing charges will eat into capital value during periods of low performance.

My friends know nothing about my financial situation. It's not something I feel comfortable talking to them about, as they have mortgages and children. I fear that my friends will treat me differently if they knew about my financial situation, and I don't want them to question their own. With a large of amount of cash savings and not having a mortgage, it's a card that I hold very close to my chest.

I'm in a bit of a panic because the end of the tax year is imminent. I don't want to miss out on the tax relief from the lump sum pension contribution this tax year, and I also don't want to lose my ISA allowance for this tax year. I'm torn between hiring the IFA and going it alone. I said to the IFA that I'm leaning towards engaging him on a transaction basis every year for the Bed & ISA service. He understood my point but still recommended the ongoing service as it'll be cheaper in the long run.

I'm sorry for such a long post. I wanted to ensure that I included as much helpful information as possible. I would be grateful for any advice you can offer. Thanks in advance.
dprees
Posts: 4
Joined: Wed Apr 03, 2024 1:45 am

Re: DIY or hire IFA?

Post by dprees »

It's quite possible to go it alone, and you will save significant sums of money by doing so. You may also find that you enjoy learning about financial planning--I did (and still do).

To learn more, go to YouTube, and search for James Shack, Pete Matthew and Ramin Nakisa. They all have extensive back catalogues of videos, explaining everything you need to know.

You do have limited time before the end of the tax year, so I would suggest setting up and paying up to £20K into a stock and shares ISA straight away (no need to invest it if you prefer to make that choice slowly). There are several good choices, but I pointed my son at Vanguard, where the setup/funding process was simple and quick. 0.15% p.a. fee.

You are of an age where you can still get a Lifetime stocks and shares ISA. You put in up to £4,000 per year; the HMRC adds 25% (£1,000). Note that you don't get your money back until you are 60 without penalty, but it is a good alternate way of saving for retirement. If you go this way, your overall annual £20K ISA allowance is reduced by your contribution to the Lifetime ISA (£20K-£4K=£16K left). My son set one of these up with Hargreaves Lansdown. 0.25% p.a. fee.

You could also set up a SIPP (self-invested personal pension) with Vanguard at the same time. If you wish to contribute to your pension this year, you still have time to do so.

Once the above is done, you have time to think things through, and decide on investment approach. VG LifeStrat 80% is not a bad way to go, but there may be better and cheaper alternatives for you. But it is better to be in the market than not--a good choice which you actually use is better for you than a long hunt for the best/cheapest solution.

Note that porting ISAs and SIPPs to other providers is fairly easy, so platform choice now is not too critical.

Don't feel guilty about your money situation. You earned it. You are in a great position financially, and will long-term do even better once you have investing sorted.
Last edited by dprees on Wed Apr 03, 2024 2:15 am, edited 1 time in total.
Genghis
Posts: 140
Joined: Fri Jun 26, 2020 6:53 am

Re: DIY or hire IFA?

Post by Genghis »

Dont bother with an IFA. They’re expensive and don’t have any secret sauce. In fact, some of the advice provided isn’t great.

Some things from me:

1. I’d have a higher emergency fund personally than £5k. You mention you hardly spend anything but how many months would this last? I prefer around 10 months but others 6. I sleep well at night and the thought of that money not working as hard doesn’t bother me.

2. Open up an ISA now with someone like Vanguard Investor and you can buy the life strategy 80 fund there if you like given that’s what the IFA recommended. I wouldn’t however given it has a UK bias. I’d probably put it in something like the Vanguard FTSE Global All Cap fund Acc. Then once you’ve learned (see below), you can add some bonds to it if you think necessary. If you’re not comfortable, leave it as cash within the ISA. Fund it by Friday with £20k. Then over the weekend do the same in the new tax year

3. Do lots of reading of Monevator and some books I recommend:
- Reset by David Sawyer, for the ease of it but not really the portfolio
- Investing Demystified by Lars Kroijer

Once you’ve learned a bit more, you’ll feel a lot more comfortable with what you’re doing.

4. later you could move ISA to a cheaper broker like iWeb as your funds grow.

5. for pensions, what the IFA suggested is prob what earns him / her the most. You need to work out whether what you’ve already got is what you want to invest in and at a reasonable price (around less than 0.4% all in).

6. Paying lots into your pension now may not be the best approach. You’ll be on £51k from next month and this will only go up. Will it go up lots over the next few years? Ie are you better off getting tax relief at 40% going into the pension than the 20% you’d be getting now? Could be worth paying into a GIA now and then paying into a pension in the future but this would need to be modelled a bit with some assumptions.

7. If it works out that consolidating pensions is best for you, research platforms. Someone like vanguard investor is good at first but as your pension grows best to look at fixed fee brokers like ii.

Were a friendly bunch here and will answer any more specific questions you have. Good luck.
dprees
Posts: 4
Joined: Wed Apr 03, 2024 1:45 am

Re: DIY or hire IFA?

Post by dprees »

I continued to think about your overall situation, and the question you asked, about the costs (and by implication, benefits) of using an IFA.

Your IFA seems reasonably good, on the whole. Costs are "OK", and has by and large given you good advice (though I hope they pointed out that you will not be able to draw from your pensions until you are at least 57, unless your existing pensions give you the explicit right to do so).

There is one real benefit to an advisor, which might well justify the fees they charge over the years. It is this:

at some point (probably more than once) the stock market will go into reverse -- a 25%, 35%, or even 50% drop will occur. At that time, your portfolio will drop by about the same amount. The biggest risk of DIY investing is panic-selling as the market tumbles. If you do this, you will have lost a great deal of money.

How does an IFA help? As the market falls, you'll call them for advice. They will very likely say "this is normal--stay the course--invest more now that stocks are cheap". If you don't sell as a result of that conversation, they will have more than justified their fees.

So are you a worrier? Will you possibly panic sell in a crash? Or can you see the long-term goal, realise that crashes are normal, part of the risk of investing, and that in the long-term (and you are investing with a 20+ year time horizon, yes?) the market will come right.

If the former, go with the IFA, for the value of that phonecall in the future. Or if you go it alone, you MUST be prepared to keep your money in the market when it tanks--it's not a loss until you sell.

One tip to aid the latter approach, I've found -- I try to think about how many units/shares I hold, NOT their current value. By adding to the number owned over time, I know my wealth will grow long-term. Current price does not matter--only the price when I sell, ion the future, at a time of my choosing.

Sorry for the conflictiong advice, but I hope some of it helps you!
Valuethinker
Posts: 49122
Joined: Fri May 11, 2007 11:07 am

Re: DIY or hire IFA?

Post by Valuethinker »

As per Genghis the fees on the IFA will kill you.

You can do this, by your own planning.

You should do the max ISA allowance each year. Although Vanguard ISA is not the cheapest, it is a good place to sit - you will be less tempted to change strategy. Basically one or two funds there, money goes in and done. Some years like 2022 it will fall, some years it will go up a lot. But you know it's there for when you finally retire.

You will need to plan for a new car at some point. They don't last forever - but it does depend on your mileage.
xxd091
Posts: 497
Joined: Sun Aug 21, 2011 4:41 am
Location: UK

Re: DIY or hire IFA?

Post by xxd091 »

Well done for taking charge of your own finances
That’s the first major step
You seem to be in a good position financially so no rush-you don’t appear to have to make any sudden financial decisions-just keep accumulating cash till you are sure you know where you want to put it for the long term
Start to educate yourself— no one can do this for you (unless you employ an expensive IFA )
Go slowly but surely and don’t do anything you don’t understand
It’s going to take a year or two to get going and your learning curve is for ever
Read read and read-there are no easy answers
What your IFA is suggesting is basically right but expensive and involves some very poor performers
Insurance companies are a nightmare (Aviva) -expensive,opaque charges with poor financial outcomes -steer clear of having anything to do with them
Personally (now aged 77-20+ years retired )with one SIPP.one stocks and shares ISA (Interactive Investor) plus an easy access cash ISA (Skipton BS) is all you need-mine currently is a low figure million pound portfolio with total running costs of 0.27% -something to aim for and achieveable but involves a lifetime learning
Take it steady and slow
xxd09
Topic Author
sona
Posts: 3
Joined: Tue Apr 02, 2024 4:39 pm

Re: DIY or hire IFA?

Post by sona »

Hi, all. Thank you very much for taking the time to write such detailed replies. I'm sorry that only now I'm replying - it's been a very busy day.

I won't rush to engage with an IFA because of time pressure with the tax year about to end.

I'll increase my emergency fund. I'll have a think of how much to increase it to.

I realised that I have an open ISA with HSBC that I haven't paid into for at least 2 years. It's not a fixed interest rate, so no penalty for withdrawal. I'll put £20k into it tonight and then another £20k on Saturday 6th April.

I'm maximising my employer's pension contribution. I pay 6% and my employer pays 11%. My employer won't pay more than 11%. I could either pay a lump sum contribution into a SIPP or workplace pension and get tax relief on it.

I'm a bit torn whether to pay a lump sum pension contribution this tax year. It sounds tempting because I can get 20% tax relief on a lump sum payment, up to 100% of my annual earnings. As my pension contributions are taken from my gross pay (before tax and NI), this lowers my taxable income. When my salary goes up at the end of this month, I'll still pay basic rate tax because my pension contributions will lower my taxable income below the higher tax threshold, so my lump sum pension contributions after the pay rise in the next tax year will have basic tax relief added. This is my gross salary and pension contributions after I get a pay rise:
  • Gross salary: £50,936
  • Pension contributions at 6%: £3,056.16
  • Taxable income: £47,879.84
If I make a lump sum pension contribution, would it be better to pay into a SIPP or my current workplace pension?
dprees
Posts: 4
Joined: Wed Apr 03, 2024 1:45 am

Re: DIY or hire IFA?

Post by dprees »

sona wrote: Wed Apr 03, 2024 2:20 pm If I make a lump sum pension contribution, would it be better to pay into a SIPP or my current workplace pension?
To answer this specific question: the charges in your current workplace pension are likely to be considerably above those you can acheive in a SIPP.

e.g., in a Vanguard SIPP, choosing LifeStrategy 80, the annual ongoing charges will be 0.22% for the LS80 fund, and a further 0.15% for the Vanguard platform fee, to a total of 0.37% p.a. Without knowing the details of your workplace scheme, it is impossible to say for sure, but it is likely that the fees charged there would be higher. So a SIPP is likely to be the better choice.

Given that you will be a basic rate taxpayer next year, you have no great need to rush to fund a SIPP (or other pension) this year (as pointed out by another responder earlier), except as a way of reducing your cash savings (which are subject to income tax on any interest earned, less the £500 interest allowance for 2024-25).

With respect to putting money into a cash ISA this week, to take advantage of your 2023-24 allowance, this makes sense. However, reactivating an old unfunded cash ISA may not be optimum: you may wish to check the interest being paid before committing. You should still have time to open a cash ISA elsewhere before 11:59pm on Friday. But if the old HSBC account is the only one you have time for, then using it makes sense. As long as it has no tie-in period, you can move it elsewhere in 2024-25.
Topic Author
sona
Posts: 3
Joined: Tue Apr 02, 2024 4:39 pm

Re: DIY or hire IFA?

Post by sona »

Over the past few weeks, I've been watching videos made by James Shack, Pete Matthew and Ramin Nakisa. Very informative. I really appreciate the wealth of information that people have to offer.

If I do want to pay a lump sum this tax year or monthly in the next tax year, as far as my relevant earnings go, would this figure be my taxable pay? My taxable pay is my salary minus my employee pension contribution, before tax and national insurance. If the figure is my taxable pay, I can then work out what my net contribution should be and add the tax relief on top to reach my taxable pay.

My cousin has an ISA with Vanguard. He's been invested in the FTSE Global All Cap fund for a while. It's diversified across different countries and company sizes, which is meant to be good. Although its asset location is 100% shares, which I'm curious about, as a mixed asset location is meant to be good from what I've heard (which might be wrong), but this fund is 100% shares although diversified across the world and various company sizes. Does global diversification offset a 100% shares asset allocation? I'll read into this to learn more. I might be talking complete rubbish after picking up on bits of information here and there, but I'm keen to learn.

I really appreciate the recommendations for books and websites. I'm looking forward to having a read. It's all a bit of a blur at the moment. Albeit a bit anxious about finding my way DIY, I'm a bit relieved that I didn't cave under pressure and go with the IFA. I am a bit of a worrier, but I'm sure I can overcome this. :happy
dprees
Posts: 4
Joined: Wed Apr 03, 2024 1:45 am

Re: DIY or hire IFA?

Post by dprees »

sona wrote: Wed Apr 03, 2024 6:17 pm If I do want to pay a lump sum this tax year or monthly in the next tax year, as far as my relevant earnings go, would this figure be my taxable pay? My taxable pay is my salary minus my employee pension contribution, before tax and national insurance. If the figure is my taxable pay, I can then work out what my net contribution should be and add the tax relief on top to reach my taxable pay.
Calculating the maximum lump sum you can pay into a pension each year can be complicated. There are tax implications if you pay in too much. Much depends upon the type of your workplace pension--defind contribution or defined benefit. Contributions from your employer can count, so it is not just based on your taxable pay less your personal contribution. See: https://www.unbiased.co.uk/discover/pen ... es-it-work

In your circumstances, there may not be a need to max out your pension contributions each year. Perhaps better to work out how much you might need in retirement, and then plan your contributions around that. Remember, withdrawals from pensions are subject to income tax, whereas withdrawals from ISAs/Lifetime ISAs (after 60) and GIAs is not. You can end up with too large a pension pot (crazy though that sounds). Better to have a mix of pots (pension/SIPP, ISAs, GIAs, cash savings)--it gives you choice as to where to draw money from when needed, both before and during retirement, which can minimise tax at the time you are using the money saved.
sona wrote: Wed Apr 03, 2024 6:17 pm My cousin has an ISA with Vanguard. He's been invested in the FTSE Global All Cap fund for a while. It's diversified across different countries and company sizes, which is meant to be good. Although its asset location is 100% shares, which I'm curious about, as a mixed asset location is meant to be good from what I've heard (which might be wrong), but this fund is 100% shares although diversified across the world and various company sizes. Does global diversification offset a 100% shares asset allocation? I'll read into this to learn more. I might be talking complete rubbish after picking up on bits of information here and there, but I'm keen to learn.
A globally diversified, all-cap fund is pretty much the best option for equity investment, so it is an excellent choice, though as ever there are arguments for how to do better.

The issue with 100% equity allocation is their volatility; bluntly, they can go up fast, but can fall further and faster. As I mentioned earlier, such losses can cause investors difficulty, because they feel forced to sell (to salvage some part of what they have "lost"). To reduce the ups and downs a little, an allocation to bonds instead of equities is used, typically 20% to 50%. As a rule, bonds tend not to fluctuate in price quite as much as stocks, and sometimes their value will move in a different direction than that of stocks. Hence the popularity of 80:20 (80% equity, 20% bonds), 60:40 and 50:50 portfolio allocations. Note that the type of bond/bond fund you use matters: developed world government bonds are safer, and therefore less volatile than corporate bonds, and also better exhibit the "flight to safety" effect where their prices rise when equities fall.

The issue with incorporating bonds into a portfolio when you are saving ("accumulating") is that they tend to reduce your potential gains over time. But if they help you to sleep at night, they are worthwhile. To get the best benefit from a bond allocation, it is generally recommended to rebalance your portfolio to bring it back into balance (i.e., to your chosen equity:bond allocation, such as 80:20), every now and then -- annually is fine, and only if the drift is significant (say at 85:15 or 75:25).
sona wrote: Wed Apr 03, 2024 6:17 pm I really appreciate the recommendations for books and websites. I'm looking forward to having a read. It's all a bit of a blur at the moment. Albeit a bit anxious about finding my way DIY, I'm a bit relieved that I didn't cave under pressure and go with the IFA. I am a bit of a worrier, but I'm sure I can overcome this. :happy
If you want further references which dig deeper into this stuff, then I can recommend several more resources. Three podcasts/Youtube series I highly recommend are:
1. Ben Felix
2. Money Scope
3. Rational Reminder

Caveat: all three include Ben Felix. He is a professional financial planner based in Canada, and his material is based on the academic literature (which is a GOOD thing), but he really explains it well. A little of the content is Canada-specific, but most is not. For you, at the start of your investing journey, I strongly recommend the Money Scope episodes 1 to 7 -- after that it becomes too Canada-specific for most of us.

Those podcasts don't talk about SIPPs, ISAs, etc. (apart from the Canadian equivalents now and then) they focus on the nuts and bolts of sensible investing. Really, really insghtful stuff. No marketing guff!

For reading, there many good books out there, but I'm going to mention two from the same author, Wade Pfau. I came across his work on one of the Rational Reminder podcasts, and have found these two books to be particularly helpful to understand how to plan for and save for retirement:

How Much Can I Spend in Retirement?: A Guide to Investment-Based Retirement Income Strategies

Safety-First Retirement Planning: An Integrated Approach for a Worry-Free Retirement

Forgive him the last chapter in the first book; it is essentially marketing for his firm. The rest of the book is definitely worth your time and attention, however, and the second book in particular offers a comprehensive approach to retirement finances.
HKexpat
Posts: 145
Joined: Thu Dec 24, 2020 4:21 pm

Re: DIY or hire IFA?

Post by HKexpat »

First, I think you have made the right decision to avoid this IFA. 3% upfront fee is a very large sum to pay for advice that you can get for free on this message board. After everything is set up, there's little use in paying an annual fee that will add up to tens of thousands. Sure, we don't all agree with each other... but neither do financial advisers. As long as you get the big things right, none of which are particularly complicated, the small tweaks aren't going to change your investment return by a percentage point, which is what you'd be paying to this adviser.

That is, don't sweat the small stuff. Trying to optimize and get things perfectly right might just lead to inaction, which is worse than any of the choices you could have made.
sona wrote: Wed Apr 03, 2024 6:17 pm My cousin has an ISA with Vanguard. He's been invested in the FTSE Global All Cap fund for a while. It's diversified across different countries and company sizes, which is meant to be good. Although its asset location is 100% shares, which I'm curious about, as a mixed asset location is meant to be good from what I've heard (which might be wrong), but this fund is 100% shares although diversified across the world and various company sizes. Does global diversification offset a 100% shares asset allocation? I'll read into this to learn more. I might be talking complete rubbish after picking up on bits of information here and there, but I'm keen to learn.
Bogleheads are big fans of Vanguard because of their low fees. Personally, I have 100% in VWRA, which is very close to the fund you are describing (I think it's VAFTGAG?) for non-ISA accounts. The reason this fund doesn't have any bonds in it is that you can create your own mix by combining it with a fund that contains only bonds. So people like me can have 0% bonds, and people who are more concerned about swings in the value of their portfolio can put some percentage of their money into a bond fund. Those tend to be better solutions than funds with fixed percentages because you might want to adjust them over time. Perhaps as you get older, you want to increase your bond share.

The one key thing to get right is to not adjust your investments for emotional reasons. If you see stock prices going up and fear that you are missing out, then sell all your bonds and invest in stocks... bad idea. If you see stocks crash and you panic, then sell all your stocks... bad idea. Ultimately, it doesn't matter a whole lot if you have 80% stocks, 70% stocks, or whatever else it may be... changing that percentage in response to market trends is where people mess up. The simple rule of markets is "buy low, sell high," -- but this adjustment leads people to effectively "sell low, buy high." Stock markets are pretty much flat on most weeks, then suddenly jump/drop in response to some news event. You don't want to make investment decisions after that news event has already happened. Note that this is very different from a rule such as "I will target (110 - MyAge)% in bonds and adjust every year at the beginning of April." The latter is unrelated to market movements and so not a problem.
Valuethinker
Posts: 49122
Joined: Fri May 11, 2007 11:07 am

Re: DIY or hire IFA?

Post by Valuethinker »

dprees wrote: Wed Apr 03, 2024 8:43 pm
sona wrote: Wed Apr 03, 2024 6:17 pm If I do want to pay a lump sum this tax year or monthly in the next tax year, as far as my relevant earnings go, would this figure be my taxable pay? My taxable pay is my salary minus my employee pension contribution, before tax and national insurance. If the figure is my taxable pay, I can then work out what my net contribution should be and add the tax relief on top to reach my taxable pay.
Calculating the maximum lump sum you can pay into a pension each year can be complicated. There are tax implications if you pay in too much. Much depends upon the type of your workplace pension--defind contribution or defined benefit. Contributions from your employer can count, so it is not just based on your taxable pay less your personal contribution. See: https://www.unbiased.co.uk/discover/pen ... es-it-work

In your circumstances, there may not be a need to max out your pension contributions each year. Perhaps better to work out how much you might need in retirement, and then plan your contributions around that. Remember, withdrawals from pensions are subject to income tax, whereas withdrawals from ISAs/Lifetime ISAs (after 60) and GIAs is not. You can end up with too large a pension pot (crazy though that sounds). Better to have a mix of pots (pension/SIPP, ISAs, GIAs, cash savings)--it gives you choice as to where to draw money from when needed, both before and during retirement, which can minimise tax at the time you are using the money saved.
sona wrote: Wed Apr 03, 2024 6:17 pm My cousin has an ISA with Vanguard. He's been invested in the FTSE Global All Cap fund for a while. It's diversified across different countries and company sizes, which is meant to be good. Although its asset location is 100% shares, which I'm curious about, as a mixed asset location is meant to be good from what I've heard (which might be wrong), but this fund is 100% shares although diversified across the world and various company sizes. Does global diversification offset a 100% shares asset allocation? I'll read into this to learn more. I might be talking complete rubbish after picking up on bits of information here and there, but I'm keen to learn.
A globally diversified, all-cap fund is pretty much the best option for equity investment, so it is an excellent choice, though as ever there are arguments for how to do better.

The issue with 100% equity allocation is their volatility; bluntly, they can go up fast, but can fall further and faster. As I mentioned earlier, such losses can cause investors difficulty, because they feel forced to sell (to salvage some part of what they have "lost"). To reduce the ups and downs a little, an allocation to bonds instead of equities is used, typically 20% to 50%. As a rule, bonds tend not to fluctuate in price quite as much as stocks, and sometimes their value will move in a different direction than that of stocks. Hence the popularity of 80:20 (80% equity, 20% bonds), 60:40 and 50:50 portfolio allocations. Note that the type of bond/bond fund you use matters: developed world government bonds are safer, and therefore less volatile than corporate bonds, and also better exhibit the "flight to safety" effect where their prices rise when equities fall.

The issue with incorporating bonds into a portfolio when you are saving ("accumulating") is that they tend to reduce your potential gains over time. But if they help you to sleep at night, they are worthwhile. To get the best benefit from a bond allocation, it is generally recommended to rebalance your portfolio to bring it back into balance (i.e., to your chosen equity:bond allocation, such as 80:20), every now and then -- annually is fine, and only if the drift is significant (say at 85:15 or 75:25).
sona wrote: Wed Apr 03, 2024 6:17 pm I really appreciate the recommendations for books and websites. I'm looking forward to having a read. It's all a bit of a blur at the moment. Albeit a bit anxious about finding my way DIY, I'm a bit relieved that I didn't cave under pressure and go with the IFA. I am a bit of a worrier, but I'm sure I can overcome this. :happy
If you want further references which dig deeper into this stuff, then I can recommend several more resources. Three podcasts/Youtube series I highly recommend are:
1. Ben Felix
2. Money Scope
3. Rational Reminder

Caveat: all three include Ben Felix. He is a professional financial planner based in Canada, and his material is based on the academic literature (which is a GOOD thing), but he really explains it well. A little of the content is Canada-specific, but most is not. For you, at the start of your investing journey, I strongly recommend the Money Scope episodes 1 to 7 -- after that it becomes too Canada-specific for most of us.

Those podcasts don't talk about SIPPs, ISAs, etc. (apart from the Canadian equivalents now and then) they focus on the nuts and bolts of sensible investing. Really, really insghtful stuff. No marketing guff!

For reading, there many good books out there, but I'm going to mention two from the same author, Wade Pfau. I came across his work on one of the Rational Reminder podcasts, and have found these two books to be particularly helpful to understand how to plan for and save for retirement:

How Much Can I Spend in Retirement?: A Guide to Investment-Based Retirement Income Strategies

Safety-First Retirement Planning: An Integrated Approach for a Worry-Free Retirement

Forgive him the last chapter in the first book; it is essentially marketing for his firm. The rest of the book is definitely worth your time and attention, however, and the second book in particular offers a comprehensive approach to retirement finances.
Wonderful post. Thank you for taking the time to provide such sound and detailed advice.
Valuethinker
Posts: 49122
Joined: Fri May 11, 2007 11:07 am

Re: DIY or hire IFA?

Post by Valuethinker »

sona wrote: Wed Apr 03, 2024 2:20 pm Hi, all. Thank you very much for taking the time to write such detailed replies. I'm sorry that only now I'm replying - it's been a very busy day.

I won't rush to engage with an IFA because of time pressure with the tax year about to end.

I'll increase my emergency fund. I'll have a think of how much to increase it to.

I realised that I have an open ISA with HSBC that I haven't paid into for at least 2 years. It's not a fixed interest rate, so no penalty for withdrawal. I'll put £20k into it tonight and then another £20k on Saturday 6th April.

I'm maximising my employer's pension contribution. I pay 6% and my employer pays 11%. My employer won't pay more than 11%. I could either pay a lump sum contribution into a SIPP or workplace pension and get tax relief on it.

I'm a bit torn whether to pay a lump sum pension contribution this tax year. It sounds tempting because I can get 20% tax relief on a lump sum payment, up to 100% of my annual earnings. As my pension contributions are taken from my gross pay (before tax and NI), this lowers my taxable income. When my salary goes up at the end of this month, I'll still pay basic rate tax because my pension contributions will lower my taxable income below the higher tax threshold, so my lump sum pension contributions after the pay rise in the next tax year will have basic tax relief added. This is my gross salary and pension contributions after I get a pay rise:
  • Gross salary: £50,936
  • Pension contributions at 6%: £3,056.16
  • Taxable income: £47,879.84
If I make a lump sum pension contribution, would it be better to pay into a SIPP or my current workplace pension?
Do you get salary surrender on the lump sum pension contributions? That additional National Insurance credit is really helpful.

Generally though I would take heed at the warnings about overcontributing to a pension - causes huge tax headaches.

In terms of asset allocation I think your best bet would be the Vanguard 60% equities 40% bonds fund. Move your ISAs to Vanguard - it is not the cheapest but set up so that you will be less likely to "chop and change". The equities should be global equities -- nothing else makes sense for a UK investor. You could also move your SIPP there - but I don't know much about that product.

Keep maxing out the ISAs every tax year.
glorat
Posts: 1042
Joined: Thu Apr 18, 2019 2:17 am

Re: DIY or hire IFA?

Post by glorat »

dprees wrote: Wed Apr 03, 2024 8:43 pm The issue with incorporating bonds into a portfolio when you are saving ("accumulating") is that they tend to reduce your potential gains over time. But if they help you to sleep at night, they are worthwhile. To get the best benefit from a bond allocation, it is generally recommended to rebalance your portfolio to bring it back into balance (i.e., to your chosen equity:bond allocation, such as 80:20), every now and then -- annually is fine, and only if the drift is significant (say at 85:15 or 75:25).
Firstly, dprees's posts is full of excellent advice! Great post.

One small UK optimisation is to realise that equities tend to outperform bonds so if you don't plan to withdraw any time soon, you should put equities in the most tax sheltered accounts (ISAs) and bonds in the general investment accounts. This has the added potential benefit of keeping those accounts simple.

My ISAs and pension pots are 100% equities, which are nice and simple. I just make sure I know my overall networth allocations so that in my other accounts I make up the bond allocation to the right ratio. And if I need to withdraw, I'll come off the non-tax sheltered accounts first.
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