Need to invest large sum - advice required

[jonareynolds]

My father-in-law has just died, and my wife is about to receive a large legacy (about £200,00). In the past have used HYP(-ish) techniques, but have lately fallen back on ETFs (VUKE, UKDV, VMID), as I don't really want to think too much about things. These three choices were made mainly on the basis that they have low charges. Most, if not all, investments have been made within ISAs.

We want to invest the legacy, and trackers/ETFs seem a reasonable way to go. I'm happy to stay with UK trackers, but I'm a bit unclear about tax. I think the three I have come with a 10% tax credit, and so we wouldn't pay lower rate tax on the income, even if I invested outside an ISA. There is a *possibility* that we might at some time drift into higher rate tax, depending on how much is drawn down from our pension funds.

Would it be better to find an accumulation fund (or funds), taking no regular income, and then take out lump sums that do not exceed the Capital Gains limit, as and when needed?

Is this correct? Is this sensible? Which funds would good (i.e low charge) choices?

I realise that this is a good sort of problem to have, but I never thought I'd have to deal with sums of this magnitude, so I'd be grateful for any advice.

TIA for any suggestions.

Jon

[tjh290633]

The tax credit is no more. Everybody has a dividend tax allowance of £5k this tax year, falling to £2k after April 5th.

If you want income, then one obvious way would be to use one of the baskets of ITs which Luniversal suggested on TMF. On the other hand your suggestion of encashing accumulation funds overlooks the fact that the distributions accumulated are, in fact, taxable as income, so you would see no benefit.

My choice would be to go with ITs, and if you are not bothered about the amount of income, go for the big global ones, ATST, FRCL and WTAN.

TJH

[Alaric]

Would it be better to find an accumulation fund (or funds), taking no regular income, and then take out lump sums that do not exceed the Capital Gains limit, as and when needed?

There's no tax difference between Income and Accumulation units of funds available to mainstream private investors. If you want to supplement your income, buy the Income units, otherwise buy Accumulation, but be warned that the implied income in Accumulation units needs to go into your tax calculations and a record kept as it can reduce any eventual CGT liability.

[hiriskpaul]

My father-in-law has just died, and my wife is about to receive a large legacy (about £200,00). In the past have used HYP(-ish) techniques, but have lately fallen back on ETFs (VUKE, UKDV, VMID), as I don't really want to think too much about things. These three choices were made mainly on the basis that they have low charges. Most, if not all, investments have been made within ISAs.

We want to invest the legacy, and trackers/ETFs seem a reasonable way to go. I'm happy to stay with UK trackers, but I'm a bit unclear about tax. I think the three I have come with a 10% tax credit, and so we wouldn't pay lower rate tax on the income, even if I invested outside an ISA. There is a *possibility* that we might at some time drift into higher rate tax, depending on how much is drawn down from our pension funds.

Would it be better to find an accumulation fund (or funds), taking no regular income, and then take out lump sums that do not exceed the Capital Gains limit, as and when needed?

Is this correct? Is this sensible? Which funds would good (i.e low charge) choices?

I realise that this is a good sort of problem to have, but I never thought I'd have to deal with sums of this magnitude, so I'd be grateful for any advice.

TIA for any suggestions.

Jon

The complicated tax credit system has been replaced, starting this financial year. You now get a dividend allowance of £5000. Anything you earn above this amount is taxed as income at 7.5% basic rate, 32.5% higher rate. So if you invest 100k each you should be ok next year, but the allowance is reducing to £2,000 from April 2018. The best thing to do is to work your investments into ISAs as you can using annual allowances and cash generated within the ISAs. Sell and repurchase inside the ISAs. For ETFs the cost of selling and buying should be low as spreads are very tight and there is no stamp duty to pay.

You cannot avoid income tax by investing in accumulation units or accumulating ETFs. HMRC treats these as income received and reinvested. If you want to keep things simple, avoid these outside tax shelters. Vanguard are an excellent choice either for funds or ETFs. If your broker levels a platform charge for funds, stick with ETFs, or consider another broker.

You can mitigate against tax on your ETFs by holding lower yielders outside ISAs and higher yielders inside. Typically that means US/Japan outside (VUSA/VJPN Vanguard ETFs), Europe, Asia Pacific, UK and if you want them emerging markets inside (VERX, VAPX, VUKE/VMID and VFEM), but by 2018 this should not matter too much as by then you should have been able to have worked at least 40% of the legacy inside ISAs. If you just want something very simple though, just put it all into one of the Vanguard world tracker ETFs.

[nmdhqbc]

Some lower yielding investment trusts could hopefully give more growth and keep your dividends lower. Some that I own...

Aberdeen Asian Smaller Companies Investment Trust (AAS)
Scottish Mortgage Investment Trust (SMT)
Finsbury Growth & Income Trust plc (FGT)
BlackRock Smaller Companies Trust (BRSC)

But to be honest I have them as minor element in my core portfolio as I'm spending my dividends now. If I was you I would not let tax have too much of an impact on your choices. Getting the right balance in your portfolio is more important.

[nmdhqbc]

My apologies. I just realized this thread is in the passive investment forum and that's what you asked about. My response is all active suggestions.

[BarrenWuffett]

My choice would be to go with ITs, and if you are not bothered about the amount of income, go for the big global ones, ATST, FRCL and WTAN.

TJH

These may well be an option but as the question is posted on the passive investing board, I assume the OP is looking for suggestions relating to index funds and/or ETFs.

I would seriously consider the Vanguard Lifestrategy options for a 'buy-and-leave-alone' strategy as they offer the required exposure to equities/bonds in a single fund, reasonably low costs at 0.22%, globally diverse and automatically rebalanced.

[tjh290633]

My choice would be to go with ITs, and if you are not bothered about the amount of income, go for the big global ones, ATST, FRCL and WTAN.

TJH

These may well be an option but as the question is posted on the passive investing board, I assume the OP is looking for suggestions relating to index funds and/or ETFs.

I would seriously consider the Vanguard Lifestrategy options for a 'buy-and-leave-alone' strategy as they offer the required exposure to equities/bonds in a single fund, reasonably low costs at 0.22%, globally diverse and automatically rebalanced.

I suggested that he might do better elsewhere, but was mainly pointing out his misconceptions about tax on accumulation units.

Anyway, ITs can be buy and leave alone, with very good results, better than most trackers.

TJH

[foxy]

My choice would be to go with ITs, and if you are not bothered about the amount of income, go for the big global ones, ATST, FRCL and WTAN.

TJH

These may well be an option but as the question is posted on the passive investing board, I assume the OP is looking for suggestions relating to index funds and/or ETFs.

I would seriously consider the Vanguard Lifestrategy options for a 'buy-and-leave-alone' strategy as they offer the required exposure to equities/bonds in a single fund, reasonably low costs at 0.22%, globally diverse and automatically rebalanced.

I suggested that he might do better elsewhere, but was mainly pointing out his misconceptions about tax on accumulation units.

Anyway, ITs can be buy and leave alone, with very good results, better than most trackers.

TJH

This is the passive investing board.

Passive investing involves a portfolio of sensibly allocated cheap index trackers.

ITs are actively managed funds and have their own board. They have no place on this board.

Ditto for HYP.

Can you please stop posting your dogma on here.

Moderator Message:
Agreed poster asked:-

We want to invest the legacy, and trackers/ETFs seem a reasonable way to go. I'm happy to stay with UK trackers, but I'm a bit unclear about tax. I think the three I have come with a 10% tax credit, and so we wouldn't pay lower rate tax on the income, even if I invested outside an ISA. There is a *possibility* that we might at some time drift into higher rate tax, depending on how much is drawn down from our pension funds.

Keep on topic. Will leave posts for now but anymore will be removed unless poster responds. Raptor.

[BarrenWuffett]

Anyway, ITs can be buy and leave alone, with very good results, better than most trackers.

I agree they can be buy and leave and some provide good returns over long periods but when you say better than most trackers, I believe all the evidence points to the opposite - most managed funds/trusts do not provide better results than most index funds (but SOME will give better results).

[jonareynolds]

Thanks to all for your comments.

I'd obviously missed the change in the taxing of dividends - thanks for pointing this out. Must try to pay more attention in future!

I'll look into the Vanguard Lifestrategy scheme and try and track down Luniversal's basket of ITs (does anyone have a link?).

I posted this in 'Passive Investing' because I'd started moving some of my investments into them, and thought this would be a cost-effective way of investing my lump sum (and wasn't sure where else to post). I guess all I really want something that is almost 'Buy and Forget' - I'm prepared to do a little buying and selling, but don't want to spend too much time fiddling about. Sorry if this led to some off-topic discussion - I still found it interesting.

Once again, thanks all.

Jon

[ReformedCharacter]

Thanks to all for your comments.

I'll look into the Vanguard Lifestrategy scheme and try and track down Luniversal's basket of ITs (does anyone have a link?).

Jon

Link to Luni's last roundup:

http://boards.fool.co.uk/last-roundup-13459341.aspx

RC