I receive a lot of questions about “how to start investing” and this month alone I’ve fielded more questions than ever before, so, as a belated birthday present to myself I decided to get this all out into a simple blog.

A couple of housekeeping points first:
 
Any tax rates and thresholds mentioned in this post will be correct as at the time of writing but tax is something that gets tinkered with all the time so this could get dated pretty quickly but using figures will help you to understand how it all currently works, in principle.
 
Everything I share here is information not advice. Once you decide to actually start investing you would be well advised to:
     a) do some further research yourself; and
     b) speak to a fee-only all-of-market independent financial advisor.
Fee only means they don’t charge you a percentage of what you have to invest (that is, they charge a fixed fee) and all-of-market means they can offer products from a range of institutions..
 
Ideally, you should only invest money that you will not need for at least 5 years. This is because share market prices move up and down a lot and if you need that money before five years is up, there is more chance that you might have to sell at a loss.
 
Investing is a long-term game, the longer the time you can wait, the higher the probability of being up. Over a 20 year period, the S&P500 (which is the 500 largest listed companies in the USA) has returned a positive return 100% of the time.  While the future may turn out to be different, you are generally well advised to leave money invested for as long as possible.
 
While my aim is to make this discussion as simple and as unintimidating as possible, at times it will feel really complex not because investing is hard but because we invest within the context of a very complicated and convoluted tax system. But you have to get to grips with our tax system to get ahead with investing…anyhow,…I’ll divide this into four parts to keep it clear:

• Part 1 (04:54) is all about what sort of investment account to put your money in;
• Part 2 (19:14) lays out what to think about when deciding which institution to invest your money through;
• Part 3 (26:35) helps you think about how much to invest over time;
• Part 4 (30:22) provides pointers regarding what you should invest in. Part 4 is very much based on how I choose to invest and this is the area where you may want to talk to more people about including your chosen IFA.

Feel free to jump to the part that you need and which is most relevant to you...

You can think of your 'investment account' or ‘investment vehicle’ as the “house” where your money is kept. There are three different types of vehicles:
 
1. A pension be it a workplace place pension or personal pension (aka a Self Invested Personal Pension) allows you to invest money before it is taxed;
2. A “stocks and shares” individual savings account or ISA allows you to invest money after it’s been taxed but all dividends and capitals gains are tax free;
3. A taxable brokerage account – means you invest money after it’s been taxed and any capital gains and dividends are also taxable.
 
Any business that offers the services to buy or sell shares and investment funds will typically offer all three vehicles, i.e. they will usually offer pension accounts, ISA accounts, and taxable trading accounts.
 
There are different pros and cons of investing in each of these three. I will highlight the main pros and cons.
 
PENSIONS
 
I am only going to cover defined contribution pension schemes in this post, which is what most people have nowadays. I won’t cover defined benefit pension schemes in which the employer commits to pay you a specific amount from a pre-defined retirement date until death.
 
The rules are much the same between the two but if you’re responsible for your own retirement income as is the case if you have a DC scheme you’re likely to be more aggressive with building that pension pot. I’ll cover the difference between DC and DB pensions in a future post.
 
Pros of investing through a pension

• Current rules allow you to access to pension money from the age of 55. This is good because once you invest, there is no temptation to spend the money on a new kitchen, holiday or anything else. There are, however, plans to peg this to 10-years below the state pension age – so, wherever the state pension age set, personal pensions could be accessed 10 years prior to that…
• The money you invest is pre-tax – so tax is only calculated on the portion that remains after what has gone into your pension. If you’re in the 20% tax bracket this is all automatic, however, if you’re in the 40% tax bracket some of the tax deduction will have to be calculated when you do your self assessment tax return and it reduces what you owe in tax.
  • As a simple example, if you earn £45,000 and put £5,000 into a personal pension, tax is calculated as though you earn £40,000.
  • If you earn £60,000 and put £12,000 into your personal pension, tax is calculated as though you earn £48,000 so you effectively take yourself out the 40% tax bracket completely but a portion of this tax reduction has to be claimed via your annual self assessment return. Your pension vehicle can only claim tax back from HMRC as though you’re in the 20% bracket only. So, it is important to fill out a self-assessment tax return if you’re 40% or 45% tax rate payer and are paying substantial amount into your pension.

 
Cons of investing through a pension

• Money gets taxed on the way out. A tax free lump sum can be paid up to a maximum value of £250,000. After that, all money is taxable as it is drawn according to the prevailing income tax rates of the day.
• You don’t have access to the money until age 55 so if genuinely need it for something important, e.g. a dream house you’re willing to sacrifice pension savings for, it’s not available. It’s worth noting that if you have a terminal illness you can get early access to pension savings but this is beyond the scope of this post so I won’t talk about the details on this.

 
Rules on how much you can invest in a pension…
 
There are limits on how much you can invest via pension each year and over your whole lifetime.
 
Firstly, the annual allowance is the maximum you can put into your pension each year and still get a tax benefit. This is currently £40,000 gross (i.e. before tax) or your full annual income, whichever is lower. So, if you earn £30,000 a year the maximum you can put into a pension is £30,000.
 
I am sorry that this is getting complicated already but the UK tax system is mad – so a little detail is essential.
 
A key thing to note is that not all income qualifies towards this pension contribution limit. Earnings from property aren’t allowed. So if all your earnings are from a buy-to-let property portfolio that is in your name, the maximum you can put into a pension is £2,880 and with the government tax benefit this is grossed up to £3,600. So, you’d only invest £2,880 into the pension and it would be grossed up to £3,600.
 
If your BTL properties are in a company, then you could pay yourself a salary (and you’d need to follow rules on national insurance contributions too) and whatever your salary is – up to the £40k annual allowance limit – would be the maximum you could pay into a pension and still get a tax benefit.
 
The second limit is the pension lifetime allowance which is just over £1m at the moment. This may sound like a high limit but it includes capital gains not just contributions so you can easily breach the limit.
 
For instance, if you had £250k in your pension at the age of 35, a 7% growth rate in your portfolio would mean the money doubles every 10 years, so even if you didn’t invest anything else, that £250k would grow to £1m by the age of 55.
 
Ideally, the lifetime pension allowance should grow with inflation but it’s frequently frozen and was even slashed from £1.8m in 2012 to £1m in 2017.
 
This post is not about pensions but they are one of the primary vehicles you can invest through so hopefully what I’ve said so far will help you understand whether is this is the best vehicle for you.
 
Depending on how much money you have to invest, I would look at putting some money in both a pension and an ISA and if you have more besides then you can put some into a taxable investment account.
 
ISAs
 
I love ISAs because once the money goes in, you don’t have to think about making tax declarations any more – it’s all tax free from that point.
 
Pros of investing through a stocks and shares ISA
 
I won’t cover cash ISAs here as this post is specifically on getting started with investing in stocks and shares.

• Tax advantages. The key benefit of investing in an ISA is that all capital gains and dividends grow tax free and can be withdrawn tax free.
• Large limit. The annual limit is £20,000 nowadays which is huge for most people and it can allow you to take a fair amount of money out of the tax man’s reach.
• Easy access. If you need the money from your stocks and shares ISA you can usually take it out whenever you want. Usually instantly, in some cases you may need to wait up to 30 days.

 
Cons of investing in an ISA

• Post-tax investing. You invest money that has been taxed unlike with a pension where the contribution is pre-tax.
• Easy access. If you find it hard not to spend then the fact that funds in an ISA are easily accessible could prove to be a problem for you

 
Whether you plan to invest in a SIPP or ISA depends on your financial position and future plans, e.g. retirement goals, goals for your children if you have any etc. As tax advisor to my friends and family I recommend different things depending on what I know about the person including their propensity to choose spending over saving or investing, there is no blanket rule.
 
Taxable brokerage account
 
If you have maxed out your £20,000 ISA allowance and your spouse’s £20,000 ISA allowance and your £40,000 pension allowance then the next place you would look to invest is via a taxable brokerage account.
 
If you are saving that much though, you may want to just spend more…better holidays, more life experiences etc.

So, you’ve figured out whether to put your money in a pension, an ISA or even taxable account, you now need to decide where to open your pension, ISA or taxable account. The way to think about this is, if you had money to save, one of the questions you would want to answer is ‘which bank should I keep my money with’, that’s the decision we are trying to make in part 2.
 
If you have a workplace defined contribution pension, that decision is usually made for you although in some cases you’re offered limited options. You are allowed to have a personal pension outside your workplace in addition to the work one but I personally I’m happy with the options provided by the provider of my DC pension at work so I don’t contribute more to another SIPP.
 
There are three options open to you when it comes to type of institution:

• Brokerage firm that only offers investments from third parties – e.g. Hargreaves Lansdown or iWeb;
• Financial institutions or banks that offer the chance to invest in individual companies or investments from third parties as well as their own funds – e.g. Fidelity, HSBC;
• Financial institutions or banks that only offer their own funds, e.g. Vanguard.

 
The key driver of which platform to use is:

• User friendliness of the platform – either the app or the website;
• Customer service – when you have an issue, is it easy to resolve via the phone or online?
• Convenience – in the past, I would not have recommended holding an ISA or SIPP via your banks as these tended to have higher fees, poor customer service and were simply not user friendly – their apps were far behind the likes of Hargreaves Lansdown BUT many banks have really stepped up their game so it’s worth seeing if your bank’s investment platform may suit your needs.
• Fees – most platforms charge an annual management charge or fee but I use iWeb because they have no platform fees but charge just £5 to buy and sell investments. However, I never recommend iWeb to beginners because you can’t automate your investing which is essential if you just want to set and forget.

 
Fees – annual management charge
 
Of the platforms I would guide you to research, these are the annual platform fees you can expect to pay as a beginner. In many cases the fee falls as your portfolio grows:

• Hargreaves Lansdown: 0.45%
• Fidelity: 0.35%
• Vanguard: 0.15%
• HSBC: 0.25%
• Halifax: £36/year (i.e. not a % fee) – automating investments is charged at £2/trade so you can keep fees low but you trade manually this is £9.50 per deal, quite pricey.

 
In addition to platform fees, whatever you invest in will have an ongoing annual fee. Ongoing fees usually range from as little as 0.05% to over 1.00% and in some cases as much as 3%. Watch out for the ongoing fees of what you buy as this is what can really harm the growth of your portfolio.
 
There may also be fees for leaving or joining the platform.
 
Look at all chargeable fees before committing to an account – you can always change institutions if you change your mind but it’s better to do your research before you even start. Any institution regulated by the Financial Conduct Authority, FCA, will be transparent about all the fees charged. Don’t invest through any unregulated institutions.
 
As I researched this article I discovered that Junior ISAs at Fidelity are not charged an annual management charge and I immediately transferred all my children’s ISA investments to them from Hargreaves Lansdown. That was £55k in total – their investments of £20k each, have grown well over time so despite the poor stock market returns of 2022, they remain up. If you’re interested in how I invested for my kids see my post, Q&A: How can I save and invest for my children?
 
I won’t spend a lot of time on fees but will link to several articles that discuss fees across a range of platform:

• Interactive Investor – Our guide to the best investment platforms for beginners
• moneysavingexpert.com - Find the best ISA or investment platform
• investorschronicle.co.uk - The cheapest DIY platforms on which to hold your Isa
• comparefundplatforms

s​If you have a lump sum to kick start your investing, that’s great. You can invest it all in one go, however, some people prefer to spread a large investment into smaller chunks spread over 2 or 3 months. There is no real benefit in this if you are investing for the long-term – in fact, data suggests that lump-sum investing beats drip feeding your investment into the stock market 75% of the time. But if it makes a psychological difference to you, you can split a large lump sum over a few months.
 
What’s large? That’s for you to define because if I had a large sum to invest, I would invest however much I plan on investing all in one go.
 
Generally, most people don’t have a large sum and the decision is about how much to invest each month. Investing monthly, over a long period of time, is called ‘dollar cost averaging’ into the market as your shares are cheaper in a bear market and more expensive in a bull market so over time you are paying the average price of the market.
 
If I was working with a specific person, I would want to know how much they want to have at the age of 50 or 55, either as an annual income or in total and I would back calculate the amount they need to invest monthly, today, to achieve that goal. You can do this for yourself using an online calculator - I like the investment calculator on Dave Ramsey's website, you can ignore the fact that it has a $ sign and put in your GBP investments - the sign doesn't matter - I assume a gross return of 7% (that's the return before inflation is taken into account - with average inflation of 3% this is a net return of 4%). You can also ignore links to other resources as they are US-centric.

​Equities / shares

​Investing in the shares of companies is called investing in equities. Equities pay dividends if they have money left over after paying all costs including interest on their debt. Some companies, especially fast growing companies, choose not to pay dividends and instead re-invest the money. If you buy the shares in a company, you’re known as a shareholder and you also make a return or loss from any increase or fall in the price of shares. So, if you buy shares for 10 and they grow to 12, that’s a 20% return; if their price falls to 8, that’s a 20% loss (the profit or loss is only realised if you sell, i.e. a loss is only a loss on paper - not a real loss - unless you sell, so, if share prices fall they can be left invested so that they recover in price).
 
Debt / bonds
 
Investing in the debt that companies issue is called investing in bonds. Bonds earn a fixed and known return.
 
There are a few options you can choose from, here I’ll suggest 3 for you to look into:
 
Option 1: 100% stocks in a diversified fund
 
If you’re starting out in investing, you should be satisfied to earn the average stock market return by investing in a low cost diversified index fund. It requires a lot of time to identify specific companies that are undervalued or those with great growth potential and you don't need to do this to do well with investing - in fact, the evidence suggests just putting money in one or two diversified passive funds gives better returns than stock picking yourself and trying to beat the market.
 
I personally prefer stock indices that track the S&P500 (these are the 500 largest companies in the US) – these funds usually cost 0.10% or less. Large US companies usually have global sales and source materials internationally so I feel it is adequate diversification that implicitly includes Europe and exposure to many emerging markets without having to worry about corporate governance issues.
 
The historical average yearly return of the S&P 500 is 9.645% over the last 20 years, as of the end of November 2022. This assumes dividends are reinvested. Adjusted for inflation, the 20-year average return (including dividends) is 6.932%. (source: tradethatswing.com)
 
If you prefer to invest in the UK stock market, you can choose fund that tracks the FTSE-100 in the UK.
 
In the 20 years leading up to 31 December 2019, the FTSE 100 had an average annual return of 0.4% if dividends were not re-invested but this rose to a not insubstantial return of 4% a year if dividends were reinvested.
 
Option 2: Target date funds
 
Target date funds are funds that invest based on the assumption that you will retire in a given year. These funds have a higher proportion of riskier equity investments and a lower proportion of bonds which give a fixed and known return. As the retirement date approaches, more and more money is invested in bonds and less and less is invested in equities.
 
Some in the investment community consider that target date funds get too conservative too quickly because no one retires and needs all their invested money straight away.
 
So, if you want to have some money in equities and a portion in bonds, you could start with a target date fund with the retirement date set further in the future than you plan to retire - perhaps set it 20 years further than you plan to retire especially if you're partly saving to pass on an inheritance rather than just for your retirement needs.
 
Option 3: Ready-made funds
 
Many institutions offer ‘ready-made funds’ to get you started with investing and if you choose to go with that, as I did when I first started investing, take that as a learning opportunity.
 
Seek to understand what is in those funds, what the fee structure is and if you don’t like the underlying investments or see that the relative fees are high, either don’t buy them in the first place or seek to move away to other investments.
 
I do not recommend investing in single stocks, e.g. buying specific companies as this exposes one to a lot more risk than tracking a whole market so I won’t cover single stock investing here. I used to trade in single stocks myself but I no longer do.

I know all this information might seem confusing so I thought I’d give you an example of all this in action.
 
So, as an example, about 3 years ago, unprompted, I told a 30-year old couple I know and like that if they wanted to have £300,000 or so when they are 55, in addition to their work place pensions, they should put £100 into a SIPP every month.
 
With a lump sum like that they would have the option to retire early and as DINKies (double income no kids) I knew they wouldn’t feel that kind of investment even if it fell to zero – and with the government match they would be 25% up from the outset due to the tax saving.
 
As I knew they were first time investors and quite risk-averse I got them to put almost all of the invested money in S&P 500 trackers with about 10% in an actively invested fund.
 
They use Hargreaves Lansdown – I chose this for them because their customer service is great and you can easily get a person on the phone – but as their funds grow I might get them to move to a cheaper provider. I’ll review this when they have £50,000 or so.
 
Three years later, they have about £20k between them (they invest a little more than I suggested). As I wasn’t happy with the performance of the actively managed fund, I got them to sell all of that and stick to low cost diversified funds.
 
They’re happy with this set and forget strategy and aren’t much interested in overthinking it and unlike most of their friends have savings. In about four years, they will also be mortgage free to boot – based on a repayment plan I’ve advised them to stick to. Financially they’re on a great track and are also enjoying life…
 
So, investing doesn't need to be complicated or big. You can start small and increase your investment as you learn more, develop confidence, and start to understand how different investments work...OVER TO YOU!

If you want help with setting up your investment account and selecting funds, click the PayPal link below to book me and fill the form in to tell me a little about your situation. Your booking gets you two one-hour phone calls during which we will chat through what you want to achieve with investing then I'll help you set your investment account up in your own name and automate everything for you.

When you’re at one point in your life it’s often nearly impossible to imagine having much more than what you’ve got – or maybe that’s just my lack of imagination – anyhow, in this podcast I recount the steps we went through to move from our £385,000 beautiful terraced home to a £1.1m detached bungalow in the same neighbourhood.
 
We did all this in 2020 but, even as recently as in 2017, when I walked past the homes on the street where we now live, I thought actually living in one of them was pure fantasy for us and at that point, it was.
 
It took getting a proper second income, a stamp-duty holiday and an all-time low 5-year fixed interest rate of 1% to achieve this, oh, and a few consumer loans for a short period.
 
Was it worth it, 100%.
 
One thing I forget to mention in the episode is that one of the key drivers was I saw already expensive properties getting more expensive and mid-priced (like our terrace) to low-priced properties appreciating very little in value or even falling in price – how does that work? I am not sure but I figured there was some kind of bifurcation in the property market with average incomes driving prices on the lower end and something bigger at play with bigger, more expensive properties – they tended to be owned by business people not restricted by average incomes, some people with inheritances and hence large sums to play with and people with much larger incomes…whatever it was, I wanted in.
 
The funny thing is, if we sold our new house right now, we would be in a position to buy our old house mortgage-free AND still have £200,000 to £300,000 in change ALTHOUGH our old house has gone up by about £30-40k!
 
Listen to the episode and let me know if you have questions.
 
Here’s my property course on Udemy.

Hi Heather

My name’s Grace. I’m looking into saving money for my little one so that it can be invested in the same way as government-backed child trust funds. My older one has a child trust fund but I don’t know how to go about opening something similar for my younger child. As I understand it, banks don't offer government-backed child trust funds anymore.

Hi Grace,
 
Thank you for this message.
 
In podcast episode number two, I talked about how you can save and invest for children in today’s world. All that information is still relevant so please have look at that post for ideas on the best saving strategy.
 
A Child Trust Fund (CTF) is a long-term tax-free savings account for children.
 
You cannot apply for a new Child Trust Fund because the scheme is now closed. The alternative available for today’s parents is the Junior Individual Savings Account or junior ISA.
 
What is a junior ISA?
 
A junior ISA like its adult equivalent is a tax-advantaged account that can be used for saving or for investing in the stock market. Once you place money into a junior ISA it cannot be withdrawn until your child is 18 and it legally belongs to your child so you would not have control over how that money is used.
 
This is not necessarily a bad thing but it’s something you will need to consider when you’re making a decision. I know a few people that don’t want to use junior ISAs because they don’t want their children having cash that they as parents can’t fully control. Personally, I think that I would still be able to guide my children about the wise thing to do with the money and if they didn’t want my advice that would still be useful information for me to know.
 
My approach is that because you won’t have full control over the money you might want to limit how much you put into the junior ISA so that your child doesn’t have too much money available at the age of 18.
 
 
The junior cash ISA
 
Saving into a junior cash ISA is like saving into any bank account, it earns a very poor interest rate and is therefore not a great idea at a time when interest rates are so low.
 
A junior stocks and shares ISA
 
The alternative option is a junior stocks and shares ISA.
 
The value of the stock market falls and rises but when money is invested over a long period of time it tends to rise. For example if you are investing for a 10-year period or more you can have a reasonable degree of confidence that your investment pot will produce a good return – certainly a better rate than current savings rates.
 
In podcast episode 2 you will see that my strategy is to invest £4k/year from birth to age 5 and then stop once I have put £20,000 into each child’s ISA.
 
Once I reach that I stop and just watch the money rise and fall. My son’s £20k investment now has a value of £26,000 and he isn’t 6 years old yet. If the stock market enjoys a 10% return on average over the next 14 years he will have just over £100,000 in his stock account from that £20,000 that I invested – that is the miracle of compounding, something Einstein called the 6th wonder of the world.
 
Even if the pot only grows at half that rate, that is at 5%, he’ll still have £50,000 – that’s a princely pot of cash that could be used for university or a deposit on his first home.
 
How to set a Junior ISA up
 
If you want to open a junior stocks and shares ISA there are many brokers you can use. To start off with, I would suggest you look into

• Hargreaves Lansdown or
• Fidelity

 
I have provided you with links to pages that will give you  more information on the junior ISA.
 
Personally I use Hargreaves Lansdown for my children. The fee for using the platform is 0.45% per year versus 0.35% at Fidelity.
 
HL have a user-friendly app and have made setting up direct debits so that investing for my kids is easy.
 
The key difference between HL and Fidelity besides the platform fee is that Fidelity also create investment products and may therefore have an incentive to push some of their own products to you. HL aren’t completely innocent though, they earn more if you invest in actively managed funds so they have an incentive to recommend actively managed funds to you.
 
The best strategy is to know what you want to invest in. As a new investor you might want to keep things simple and put the money in low-cost diversified index funds. These are funds that are invested in many companies so you won’t be putting all your eggs in one basket.
 
Here are example of funds that my children are invested in:

• FundSmith Equity, Class I – Accumulation
• Lindsell Train Global Equity, Class D – Income
• L&G Global Tech Index, Class I – Accumulation
• L&G International Index Trust, Class C – Accumulation

 
I have given you a link to each fund’s page so that you can read more about what the funds are invested in and what the fees look like.
 
I hope this helps you kick start investing for your children. Junior ISAs do not have the government boost that the Child Trust Fund did but they are a very similar product and have much more flexibility attached to them because you can invest in a wide range of products.
 
Even if you start of with a small amount, it will give you some confidence and you will begin to learn how the stock market works. Investing for our children is the path that got us investing for ourselves too.
 
Good luck and keep in touch.

Heather
​p.s. subscribe to my podcast and ask me any money question, HERE - do it now!

Hi Heather!
 
I'm 22 years old and I've been trying to get a good control of my finances. I'm still a student so I don't have a regular income. I've set up a LISA account to save for a house but I'd also like to begin saving for retirement. I've looked everywhere online but nothing seems to explain what different kinds of pensions there are, how to open them and how they work. Please help!
 
Alex

​Alex, this is an amazing question to be coming from a 22 year old! Well done for setting up a Lifetime ISA, that's a good move especially as they are considering phasing that scheme out.

​I have been meaning to write a post on personal pensions this since Christmas because another person asked a few specific questions so I’ll tick their questions off in this post too as they could apply to you as well at some point in the future.
 
PENSIONS!
 
Pensions are one of my favourite topics. If you were in a job you would have access to either:

1. a defined benefit pension plan; or
2. a defined contribution plan

but I won’t cover either of these here as you are not currently working. I will cover DB and DC pension schemes in a future post and in podcast episode 24 (links to my podcast are here).
 
What you need to open is a self-invested pension plan or SIPP.
 
When you do have a work place pension, you can also have a SIPP in addition to it; there are no penalties for doing so unless you’ve reached the annual limit for investing in a pension but this isn’t something most people need to worry about.
 
Once you open a pension account, you need to decide how you want ​your money to be invested. This is your decision unless you hire a financial adviser. However, even if you do get financial advice I always strongly advise getting some financial knowledge so that you can judge whether you agree with the advice you are getting or not. Every financial adviser has her own beliefs and biases about investing, that's human, the question is whether you agree with her.
 
Most people don’t know a lot about investing (including me when I started working) so some investment sites might ask you to answer a few questions on how you feel about risk-taking and then they suggest “ready made portfolios” to you to invest in which would be aligned with what you say your risk tolerance is, your “stated” tolerance for risk.
 
On some sites you might have access to “target retirement funds” this means you state when you want to retire and they adjust the risk of your investments based on that. For example, if you want to retire at the age of 62 which is 40 years from now, in your case, you would select a 2060 target retirement portfolio. The fund manager would then manage the risk by investing in more risky stuff now when you are far away from retirement and as you approach retirement the balance of investments would be adjusted away from higher risk, higher return investments towards lower risk, lower return investments.
 
The risk-return relationship is very important here. If you say you have a lower tolerance for risk then the options you will be given will have a lower associated risk but also a lower return on your money.
 
If you have a long time until retirement, and being 22 Alex, you have a very very long time until you need to retire then you can afford to take more risk. Personally, 100% of my stock investments are in equities (that is, they’re invested in company shares) because I get a fixed bond-like return from property investing so that balances it out.
 
By comparison, the average investor will usually have a portion invested in bonds and a portion in equities. By buying bonds you lend money to companies or a government and they pay you a fixed amount for that loan. As a lender, you are not a part-owner of the company and as such you don’t get a share of the company’s profits as you would if you invested in the shares. By the way: shares, stocks, equities are usually used interchangeably – they mean the same thing in most cases.
 
Equities vs. bonds
 
I won’t go into too much detail on equities vs. bonds but here are some important differences:

Why am I telling you all this? Because you need this sort of high level knowledge to decide how your money will be invested. What portion of your investments will you put into equities and what portion into bonds?
 
If you’re investing in ready-made portfolios and they give you an indication of risk, the higher risk portfolios have more equities and the lower risk portfolios have less equity investments.
 
Single stocks or index funds
 
You can manage your risk by only investing in funds or portfolios that invest in a wide variety of companies.
 
Some people find it more exciting to buy a single company's shares (single stocks) but that is much more risky than investing in funds because a fund is a diverse portfolio of lots of companies. As Index funds include a large number of companies, the complete failure of any one of those companies would have a much more limited impact on your return. I have dabbled in buying single stocks myself and I can tell you that it’s very difficult to choose winning stocks – to maximise your chance of winning “buy a whole stock market”, either by buying index funds that track a whole country or by buying index funds that track a whole industry.
 
If you do want to dabble in single stock investing, don’t put any more than 10% of your portfolio into them and as your portfolio gets larger I would reduce that to 5%. So, for every £1,000 invested don’t put more than £100 into single companies and as you move towards a portfolio worth £100,000 I would personally reduce single stocks to no more than 5% of my investments. These are arbitrary percentages and as you gain experience you will decide what feels more appropriate for you.
 
Actively managed vs. passively managed funds
 
There are two main types of fund to choose between, actively managed funds and passively managed funds.
 
Passively managed funds track a whole market such as the S&P500 which tracks the 500 largest, listed companies in the US or the FTSE100 which tracks the 100 largest listed companies in the UK - I emphasise listed because there may be companies that are just as large as those listed on the stock market but because they are privately owned you wouldn’t have access to buy their shares.
 
Alternatively, instead of tracking the whole market in a given country you can choose to invest in a specific sector such as utilities or technology or consumer goods.
 
Actively managed funds have an actual person choosing which shares are likely to outperform the market and investing in such undervalued shares or choosing companies that are likely to grow rapidly and enjoy a rapid increase in value. The objective of an active manager is to beat the market index, while the objective of a passive fund is to match the return on an index.
 
Now, you would think active funds, managed by "clever" fund managers are likely to beat the average market return from passive funds, right? Unfortunately, history has taught us that this very simply isn’t so: over 95% of the time fund managers do not beat index trackers. Not only that, the fees on actively managed funds are higher so even if you observe that an actively managed fund has achieved the same gross return as a market tracker you would be earning less from the active fund after fees have been deducted.
 
Where to start? Where to start?
 
I realise that this is all very technical stuff especially if you are beginner so here are links to a few indices to get you researching and investing. These are all funds I am invested in but I am not recommending you invest in them, only that you look at them to see what is included in each fund, what countries are represented, which companies are invested in, what the fees are and what returns have looked like over the last 5 years.
 
I have put the fees each fund charges in brackets as the fees charged is one of the primary reasons I choose whether or not to invest in a fund. Fees can dramatically erode your return so you should always consider what the fees are before you invest in anything:

• L&G Global technology index (annual cost: 0.32%, passively managed)
• Vanguard US Equity Index (annual cost: 0.10%, passively managed)
• L&G US Index (annual cost: 0.10%, passively managed)
• Fidelity Index US (annual cost: 0.06%, passively managed)
• Fundsmith Equity I (annual cost: 0.95%, actively managed)

 
Even from the above you can see the large difference in fees between my actively managed fund and the passively managed ones. However, I am personally convinced by the management of Fundsmith. Their investment philosophies are aligned with mine and I think they have the potential to beat the market over time but I don’t put all my eggs into the Fundsmith basket despite my confidence in them.
 
In summary, if you invest in a self-invested pension plan there is no commitment to a fixed pension income at the point of retirement. You therefore need to carefully decide how the money is invested. In doing this you need to consider:

1. How much of your portfolio do you wanted allocate to equities vs. bonds?
2. Will you dabble in single stock investing or will you stick to diversified funds that track a whole country or industry?
3. What markets and industries do you want to invest in? e.g. I don’t have any UK-focused index funds  because I started investing in equities more intentionally after Brexit and I don’t think the UK’s prospects are certain enough for me to put any of my hard earned pension investments into the UK stock-market.
4. Will you invest in actively managed funds given their atrocious historic performance or will you stick to passively managed index funds?

 
Where can you open a SIPP?
 
The biggest difference between the various platforms where you can open a SIPP is the user interface, customer service and the FEES.
 
In a nutshell you might be charged any and all of the following fees:

• An account opening fee;
• An annual management charge (AMC) for the platform;
• A dealing charge for buying index funds;
• Usually a different dealing charge for buying shares;
• If you buy index funds, each fund has a different annual on-going charge;
• There are other fees but I’ll just give you the first four listed here.

 
Here are a few places you can open a SIPP account including the fees. The money to the masses website has a table showing what the fees look like depending on the amount invested. I recommend you have a look at that but below I share four that I consider to be popular and cost effective.
 
Halifax share dealing

• No account opening charge.
• SIPP administration charges: £22.50 per quarter (values less than or equal to £50,000) and £45.00 per quarter (values more than £50,000). Other charges may apply.
• Dealing charge: £12.50 per trade; £2 per trade if you schedule automated regular investments

 
Hargreaves Lansdown

• No account opening fee
• 0.45% AMC
• Dealing charge for shares: starts at £12 but falls as you buy more shares;
• There’s no dealing charge for buying or selling funds.

 
iWeb

• No account opening charge.
• SIPP administration charges: £22.50 per quarter (values less than or equal to £50,000) and £45.00 per quarter (values more than £50,000). Other charges may apply.
• Dealing charge: £5 per trade.
• Big note: you can’t automate investing, you have to manually make your trades every time.

 
Vanguard

• No account opening fee
• Annual account fee 0.15% capped at £375

The big difference between the Vanguard platform and the others above is that you can only invest in Vanguard’s own funds, they don’t offer products from other fund managers. However, the other platforms I have listed will give you access to Vanguard funds and a plethora of other fund managers.
 
Having only Vanguard’s funds is not necessarily a bad thing, they are cost effective and if you have an ISA elsewhere in addition to the SIPP at Vanguard, you can use that to invest in funds run by other institutions, e.g. Legal and General and Fidelity to name a few. Vanguard are very well rated in terms of performance and customer service in addition to having good fees. That said, you could save money on the account fee by investing in Vanguard funds via Halifax share dealing or iWeb and those two platforms would give you access to a wider variety of funds as well.
 
Also, Vanguard’s minimum investment is £100/month or £500 lump sum. If you want to start out with £25/month which at your age is absolutely fine, then you need a platform that will allow lower monthly contributions.
 
Where do I invest?
 
I have a SIPP for my son at Hargreaves Lansdowne and I have a SIPP for myself at iWeb. The fees at iWeb were the cheapest for my ISA and I decided to have my SIPP there too as the fees were reasonable although not the cheapest at the time I opened it. It didn’t make sense to have a SIPP elsewhere to save not very much money.
 
iWeb don’t offer junior ISAs and I wanted to keep my son’s SIPP with his ISA as well so I added it to his Hargreaves Lansdowne account. Based on the small amounts being added to his SIPP (£100 per month) the SIPP fees were actually cheaper at HL but they would have been more expensive for me because my SIPP account has much more invested than my son’s.
 
To cut a long story short, where you choose to open a SIPP can also be influenced by where you have an ISA and whether you want these to be kept together. It’s not necessary to have your investments all in one place, I certainly have several investment accounts for various reasons. Before you decide speak to a few people including family members so you have a flavour for where your social circle seem to be investing, if at all.
 
How much can you put into the SIPP each year?
 
You can have a SIPP if you're resident in the UK whether or not you pay tax but your earnings impact the maximum amount you can put in each year.
 
If you are not employed via the PAYE system, the maximum is £2,880 if you are not employed which becomes £3,600 including  the government top-up which is equal to what you putting times 100/80.
 
When you are employed you can put the equivalent of your full salary into your pension up to a maximum of £40,000 per year.
 
I won’t go into lifetime limits for you as you are so young and will discuss those in my general post on pensions.
 
Can you have a SIPP if you are a British citizen living abroad?
 
You cannot make contributions to a SIPP if you are not a UK resident even if you have a British passport. You have to be a UK resident. If you have spent some of the year abroad and some of the year working in the UK, HMRC counts the number of days spent in the UK to confirm if you are UK resident. I won’t go into detail here because the actual number you need to qualify as a UK resident depends on whether you were a UK resident in the previous few years.
 
You can, however, set up a SIPP if you're resident overseas and want to transfer a UK pension from a previous job to the SIPP (but you cannot make further contributions to it). So, for example, if you have a pension with a UK employer and want to transfer that to a SIPP while you are abroad, you can do that.
 
If you’re resident abroad but paid in the UK and pay tax here you can also have a SIPP. So, for example, some British expats work abroad but are paid in the UK and pay a portion of their tax in the UK and are likely to qualify, however, speak to an accountant or financial planner to make sure you don’t fall foul of any rules if you’re ever in this complex domicile situation.
 
What happens if the company you have your SIPP with goes bust?
 
If your SIPP provider becomes bankrupt, your money should remain unaffected. Your money is not invested in the SIPP provider themselves; they either simply manage your investment or act as a platform for you to manage your own investments.
 
I hope this helps!
Heather
 
References:
What happens if my SIPP provider goes bust? 
Build a low-cost DIY pension

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​Hi Heather,
 
My name’s Grace. I recently started investing in stocks and shares and want to know the type of returns I should realistically expect? I’m especially interested in how long it will take for my money to double in value.
 
Thanks

Great question Grace, thank you for asking it.
 
I will start by telling you a little story. When I first started working, I didn’t believe in long-term investing on the stock market. My philosophy was that you buy shares at a good price and when the price has gone up high enough, you sell, take the profits and move on. You know, the buy low, sell high philosophy.
 
My philosophy has since changed. I believe you should buy shares and ideally never sell them except to manufacture a dividend while you are in retirement and I’ll give you two experiences that turned my thinking on this so radically.
 
In about 2006, I bought about $2,000 worth of Apple shares. The price at the time was $70-something. I sold a couple of years later when the price had trebled feeling like a complete winner. If I had held onto those shares they would now be worth about $30,000 (maybe more, it hurts too much to sit down and calculate the exact amount) AND I would have additionally enjoyed about 14 years of dividends from Apple which I would have reinvested back into the stock as I always do. Note that the price you see now shouldn’t be compared to the price I paid directly because Apple had a 7 for 1 stock split in 2014.
 
The way that works is that for every share you own, they split it into 7 shares and the price for each becomes one-seventh of what it was. The lower price is designed to make buying shares more palatable to smaller investors.
 
Anyhow, had I held the shares to retirement, I could have either benefitted from the dividends to support my living or sold them slowly for income to support my lifestyle in retirement (this is called manufacturing your own dividend). FYI, I’m only 36 so retirement is still a while away for me as I enjoy working and don’t plan to stop working for a while yet.
 
The second story is what happened to my pension savings from a job I had that had a defined contribution plan – this is a retirement plan that depends on how the stock market. Unlike the traditional workplace pensions the income in retirement is not based on a fixed formula.
 
Anyhow, I didn’t know much about pensions at the time but a colleague called Karen Matthey told me that even if I didn’t believe in pensions I should pay in up until the match “because it was free money” – I think the company matched contributions into the pension scheme up to a maximum of 3%. I didn’t even know what “up until the match meant” – I was 24 and clueless but I listened to her and did just that. By the time I left that job in 2012 I had just shy of £30,000 in my pension account and within 5 years that had grown to £60,000, that is, it had doubled. I didn’t expect this performance at all and it’s at this point that I started taking the whole investing long-term thing seriously.
 
Now, this made me curious to find how long it takes for an invested amount to double, which is exactly what you’re asking, Grace, and it’s at this point that I discovered what they call the rule of 72.
 
With the rule of 72, you take the investment return you expect, divide it into 72 and that’s how long it will take for you money to double. So, if you expect a 10% return, then your money will double in about 7 years. (72/10); if you expect a 7% return then you money will double in 10 years, it ‘s a very easy calculation.
 
Because my money doubled in 5 years, it’s also quick to calculate that I earned an average return of 14.4% (72/x = 5).
 
And keep in mind that I wasn’t invested in anything fancy: all my money in this pension was in a passive global equity tracker, it still is – and my old employer pays all the fees so I just let that pension pot sit there, I can’t touch it until I am at least 55.
 
If that money earns at least an average return of 10% (this is the actual historical stock market return), then over 21 years the money will double three times: 60k will double to 120k in 7 years (that’s by 2024, and it’s actually growing faster than this right now) which will double to 240k 7 years after that which will double to 480k 7 years after that (that’s by 2038 when I’ll be hitting 55). That’s insane, all from an initial 30k investment! After I figured this out I was annoyed at myself for not taking the stock market and pension investing more seriously and I’ve been making up aggressively for the last 3 years.
 
At the end of the day though, it’s not about crazy returns for me, it’s about making a commitment to investing healthy amounts monthly.
 
It’s very hard for most people, my younger self included, to believe that even £100/month invested over 30 or 40 years will amount to much but it is really surprising how these small amounts add up.
 
What stock market return should you expect?
 
There are no guarantees in the market, but the 10% average has been remarkably steady for a long time. That said, from year to year returns are very volatile. You will only get the average market return if you buy and hold, do not try to time the market.
 
Personally, I model my investments in excel based on a 7% gross return (gross return meaning the return before adjusting for inflation) this would be about 4% after inflation of 3%. My general reading suggests that expecting a return after inflation of 6% is realistic: my 4% net return is therefore not over optimistic.
 
If the experts are telling you to expect a real return of 6% that would make it a gross return of 9% because inflation tends to average 3%, using the rule of 72 you would expect your money to double every 8 years. Simples.
 
To ensure you end up with enough money in retirement, perhaps base your returns on a lower number so that either you end up with more money than you need or so that you can retire early because you reach your goal much sooner.
 
Key takeaways?
 

1. To calculate how long it will take your money to double, divide your expected return into 72.
2. You only get the average market return if you buy and hold.
3. Model your investment projections using a 7% gross return, which is 4% after inflation to be conservative.
4. Invest every month without fail, every little counts.
5. We haven’t covered it here but in addition to investing in equities, invest a portion in something lower risk like bonds or property.

​
If you are enjoying listening to my podcast, please give me a 5* rating wherever you listen to podcasts. If I don’t yet deserve your 5*, please let me know how I can earn it.
 
I hope this helps!
Heather

If you have any personal finance questions send them to [ME] – I will answer whatever piques my fancy via a blog post. 

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​Hi Heather,
 
Happy new year!
 
I’m a big fan of yours and have been following you for a while. I bought all your three books.
 
I would like to open a stocks and shares ISA for myself and two children aged 16 & 14 but I don’t know where to start due to fear of risk. I want to invest 15% of my income in stocks and also considering real estate.
 
I have seen some recommendations like Vanguard or Hargreaves Lansdowne but I’m clueless on what to go for. I am a nurse and the only debt I have is a repayment mortgage. I just finished paying off credit card debt.
 
I saw your post on Malawi Queens.
 
Please help.
Thank you
My name’s Angela by the way.

Angela – congratulations on getting rid of all your credit card debt, you must be super proud of yourself.
 
And a massive thank you for supporting me by buying my books. Book sales are helping to pay for the production of “The Money Spot” podcast so I don’t take your purchase for granted – it’s really appreciated.
 
Stocks and shares ISA
 
When it comes to investing in stocks and shares ISAs, target a minimum investment period of 5 years and ideally your should invest for much longer than that.
 
Is the money that you want to save for your children for university or for something else?
 
I will assume it’s to contribute towards the cost of university. One important thing that you need to keep in mind is that although tuition fees are given to students as long as they apply for them, the maintenance loan is assessed according to household wealth; basically, children that come from wealthier households are eligible for a smaller maintenance allowance. Only children from households with a total income of less than £25,000 qualify for the full maintenance loan.
 
In addition, students that live at home get a smaller maintenance allowance and those that attend universities outside of London qualify for a lower maintenance loan.
 
In my opinion, the less debt children can get themselves into by the time they graduate, the more disposable income they’ll have when they land their first jobs and the faster they can save for a deposit on a mortgage.
 
If you want to read a little more about what you might need to contribute towards university costs, have a look at the moneysavingexpert.com website. The site has a ready-made calculator that will tell you exactly how much you need to save for each child to contribute towards university. Or, for parents that don’t want to contribute then it’s how much their children will need to earn from a uni job to fill the gap.
 
The calculator will also tell you exactly how much you need to save every month from now to make sure you have enough by the time your child starts university.
 
Child aged 16
 
For your 16 year old, saving into a stocks and shares ISA is too risky because university is just around the corner – the stock market generally doesn’t offer good returns for periods of less than 5 years.
 
The safest option for the 16 year old is probably to save into a high interest account, this might not be a cash ISA so shop around. The best rate you will find at the moment is between 1.45% to 1.65%.
 
Child aged 14
 
As you could put money away for five years for your 14 year old, a stocks and shares ISA makes sense here. Again, use the calculator on money saving expert for an idea of how much you will need to contribute each month if you don’t want your children to have to work through university.
 
Your ISA
 
For your own ISA, you have a limit of £20,000 per year. If you prefer, you can save all the money into your own ISA rather than into junior ISAs so that you have more control over it.
 
Money saved into a Junior ISA is legally belongs to the child named on the account when they turn 18 and you would have no control over how they choose to spend it.
 
Risk
 
Before I tackle where you should save I will say that you have every right to fear taking risk with your money, you’ve worked hard to earn it so you should rightfully want to preserve what you have earned.
 
The safest path if you are investing in shares is to avoid single stocks and to invest in diversified index funds. There are two main types of fund to choose between, actively managed funds and passively managed funds.
 
Passively managed funds track a whole market such as the S&P500 for the USA or the FTSE100 for the UK; alternatively, instead of tracking the whole market in a given country you can choose to invest in a specific sector such as utilities or technology or retail.
 
Actively managed funds have a an actual person choosing what shares will outperform the market and investing exclusively in those. The objective of an active manager is to beat the index, while the objective of a passive fund is to match the return on an index.
 
Now, you would think the funds managed by clever fund managers are the ones to go for, right? Wrong! History suggests that over 95% of the time fund managers do not beat the index. Not only that, fees on actively managed funds are higher. The cheapest are about 0.5% nowadays and the most expensive charge in the region of 2%. Many passive funds now charge less 0.2% or what industry professionals call 20 basis points or bps.
 
How can you improve your risk appetite?
 
Improve your understanding of how stock markets work. I would recommend two investment books, if you can, get the audio versions:
 
Charlie Munger: The Complete Investor by Tren Griffin and
Common Sense Investing By John Bogle (the inventor of passive investing)
 
Which platform should you use for investing?
 
I personally use iWeb for share dealing because they are the cheapest but I wouldn’t recommend iWeb for most people because you can’t automate your investing. That said, iWeb have good fund centre that helps you sort through the different indices and allows you to order them in different ways, for example, you can sort funds or shares from those with the lowest fees or starting from those that are enjoying the highest return down, you can also exclusively analyse the different sectors that you might want to invest in – technology is enjoying pretty good returns at the moment but I don’t put too much into tech because it’s volatile it goes up fast and can also come down fast.
 
Even if you ultimately choose to invest using a different platform you might want to use iWeb for stock selection if their analysis tools are better than where you end up.
 
iWeb’s fund centre is actually easier for discovery than HL – HL seem to have a vested interest in people selecting actively managed funds so those show up more prominently on their site. They don’t seem, for example, to have a tool that allows you to just look at absolutely every fund they offer ordered by fees. If I just haven’t found this function, someone please help a sister out and send me the link.
 
So, what platform should you use?
 
The two options you have suggested (HL and vanguard) are very different.
 
The likes of Vanguard only offer their own funds. This isn’t a bad thing necessarily but it would mean you need to be sure you won’t want to invest any other fund manager’s products and that is a hard position for a beginner to take.
 
The likes of Hargreaves Lansdown offer you access to a large universe of fund managers. HL don’t create funds, they are essentially a supermarket for other fund managers. It’s the difference between shopping at Aldi and Sainsbury’s. If you want choice, you go to Sainsbury’s; if you’re not too bothered about choice and want to save money, you go to Aldi, but you’re mostly only going to find Aldi’s own-brand products at Aldi – this is not a perfect analogy but it’s not a bad one.
 
Vanguard’s passively managed index funds are known for being very cost effective but they’re platform charges are not the cheapest. At least not in the UK.
 
The likes of Fidelity have a hybrid model: they offer their own funds and other fund managers’ products BUT if you use their tools for selecting funds, which I did to write this piece, the resulting suggestion is one of their own funds.
 
The biggest driver for where you invest should be fees, customer service and ease of use of the platform.
 
Fees
 
Platform fees are the fees you get charged for using a given platform.
 
Vanguard       0.15%
HL                   0.45% (if less than £250k and 0 if > £2m)
iWeb               0
Halifax            £12.50
Fidelity           0.35%
 
Either way, if you have less than £50,000 invested the differences in fees aren’t that dramatic but as you start approaching £250,000 in investments you will feel the difference. Once you have £250k invested, and trust me you will get there, on iWeb you would be paying £60/year (if you trade once a month) and on HL you would be paying £1,125 for the same assets invested.
Little tip, because I invest for both my husband and I, instead of splitting monthly investments in half, so half goes to his account and half to me, each month I do one trade for either me or for him so that the net result is that we do 6 trades each. This saves £60 in dealing costs every year. Obviously I could save even more by doing one trade a year but as our incomes are paid monthly it’s better to invest monthly rather than just keep the money in a savings account for one trade at the end of the year. I’d lose all the gains I make within the year.
 
Transaction fees are the fees you pay for buying an investment product – these can be a fixed sum or a percentage. Some platforms will have one charge for buying and selling shares and another for funds.
 
Vanguard       depends on the product – 0.02% to close to 2%
HL                   0 for funds, £12/share falling to £6 a share for 20 trades +
iWeb               £5
Halifax           £12.50/share or £2/month for scheduled investment
Fidelity           £10/share or £1.50/month for scheduled investment
 
Because Fidelity’s platform fees are cheaper than HL, I am tempted to recommend them but I think you should make the decision. Why don’t you spend an hour a day on each of the following three site: HL, Fidelity and Halifax. Download their apps and see what you think of them. If by the end of that analysis you’re not sure then I will suggest you use HL as a beginner and as you figure out how things work move platforms, it’s very easy to do that.
 
Also, it’s worth mentioning that I pulled a couple of funds that I invest in on Fidelity and you pay more for them via Fidelity because HL negotiates discounts with actively managed funds due to the volume of business they direct their way.
 
 
NOW – I have spoken a lot about investing as I felt that that’s what you wanted me to focus on but I think this discussion would not be complete without me saying that, ultimately, if the stock market scares you, then you can go the property route.
 
Property
 
There are many strategies you can follow with property. You can rent to families, or students or even another subset of people. One of my friends specialises in letting property to truck drivers. Letting to students or a migrant group like truck drivers has high turnover which means you need a lot of time to manage the property. And if you went down the AirBnB route that’s like managing a hotel because you have to think about changing sheets and cleaning literally week-on-week – as involving as it sounds, I have a friend who has a full time job as a professor and has also grown a good property portfolio on the side with a mix of AirBnB and family lets.
 
The key is to start with your first property.
 
Have you heard of the 3 for 1 property strategy?
 
With this strategy you set a goal of investing in 3 buy to let properties and you work to have all mortgages paid off by the time you retire.
 
This would mean that you live in one fully paid off house and you would live off the rent of the three properties – this reduces the risk somewhat. For each buy-to-let property you would target a given amount of rental earnings that you can choose yourself . For example if each property earned £800 per month, then you would retire on £2,400 / month. This would be linked to inflation because as prices rise, rents also tend to rise and sometimes rental increases rise far faster [example].
 
If this feels safer for you and you have at least 20 years until retirement then think about either just going for the 3 for 1 property strategy with a good lump-sum saved in a savings account for emergencies might feel less risky OR follow a combination of investing small amount in the stock market with property as your security blanket.
 
Massively enjoyed answering this question, Angela, especially from a fellow Malawian. It’s nice to know other people are investing and getting wealth focused.
 
Let’s summarise what you need to do:

1. Reduce your fear of stock markets by reading widely. Start with Charlie Munger: The Complete Investor by Tren Griffin and Common Sense Investing By John Bogle.
2. Spend one hour on different nights on platforms you could potentially use for investing – HL, fidelity and Halifax are good places to start.
3. If you’re going to invest in property think about the ideal type of client: families, students or some other group.
4. If you’re going to invest in property think about whether you’re going to try to follow a given model. I gave examples of the 3 for 1 strategy, AirBnB but there are many more.

 
I hope this helps!
Heather

If you have any personal finance questions send them to [ME] – I will answer whatever piques my fancy via a blog post. 

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Hi Heather,
 
Based on the things you told us about investing, my husband and I started putting £125 per month each into our SIPP pension. I hope this isn’t a silly question but what are these savings for? When can we expect to start spending that money and should we try to spend it in specific ways or on specific things? Both my husband and I are 30, we don’t plan on having children and our jobs have fixed pension benefits.

​Thanks 
Flora
 
Hey Flora,
 
That’s a great question. While everyone has a different value system, there are two main reasons that I strongly recommend that people put money into a self-invested pension plan or SIPP a) flexibility and b) security including funds to help pay a mortgage off early.
 
A SIPP can be better than a stocks and shares ISA, in some cases, because you effectively pay less tax and because you can’t use the money until you are about 58 so it forces you to save.
 
Let’s talk about each reason in turn:
 
The first reason: is flexibility over when to retire
 
In the past, a lot of work-based pensions (aka defined benefit pension plans) used to allow early retirement from between the ages of 55 and 60, most of these type of scheme are being completely phased out and are instead being linked to the state retirement age which for you is currently expected to be 68. There is talk of moving this to age 70, so this is a future possibility.
 
Whatever happens, the funds that you build up in your SIPP can be taken from 10 years before the state retirement age. This means if the state retirement age moves to 70 you will still be able to use money that’s sitting in your SIPP from the age of 60.
 
If you and your husband are putting £125 each into a SIPP then when you are 55 years old, you and your husband’s combined pot of savings would be worth £135,000 if the pot of money only grows fast enough to keep up with inflation of about 3%; if you get growth equivalent to the average stock market return of 7% then you would have £250,000 at the age of 55 and if you get an average stock market return of 10% you would have £410,000 saved up.
 
At age 60 the figures would be £180,000 @ 3%, £375,000 @ 7% and £700,000 @ 10%.
 
These sort of returns aren’t cuckoo. According thebalance.com, “the S&P 500 Index, delivered its worst twenty-year return of 6.4% a year over the twenty years ending in May 1979. The best twenty-year return of 18% a year occurred over the twenty years ending in March 2000.”
 
Various sources suggest the S&P 500 has returned 10% before inflation if you buy and hold the money you invest into it. But of course, it’s useful to remember that this past success doesn’t guarantee that future returns will be as good.
 
Right now you would struggle to find a bank account that gives you an interest rate of 1.5%.
 
Back to flexibility on when you retire, however, unless you believe the US has no room for growth, then this total of £250/month you are saving could amount to a lot of money over a 25 to 30 year period and this would allow you to retire with a decent income well before the state retirement age.
 
If your mortgage is fully paid off by the time you retire then your cost of living could be low enough that even a modest growth in the SIPP would provide a comfortable income before your state pensions and work-place pensions kick in.
 
 
The second reason: to save the money is the added security from having extra retirement income
 
Having money in a SIPP means you can top up your retirement income.
 
Having the SIPP would mean you have 5 sources of income:

• two state pensions – yours and your husand’s – (keep in mind that we have no idea how the level of state pensions could change over time);
• your workplace pension;
• your husband’s workplace pension; AND
• the SIPP.

 
If the pension income from your jobs is lower than your final salary having access to extra funds will mean you can more or less maintain your lifestyle. This will be especially important if one person lives a lot longer than the other.
 
There is one special feature that the SIPP has but all the other 4 pensions do not: and that’s the fact that if you or your husband dies the state pension stops coming through and the work-place pension either stops completely or is massively reduced. However, whatever money is outstanding in the SIPP would fully transfer to the spouse without penalty.
 
Just to be clear, I will make that point twice: a work-place pension either dies with the person and at that point the spouse receives nothing or, from that point, the spouse gets a heavily reduced benefit – usually 50% or one-third of the amount that was being received before their spouse died.
 
A LOT OF PEOPLE forget this about SIPPs and other defined contribution pensions. I won’t go into the differences between defined benefit and defined contribution pension plans here but if someone is interested go to themoneyspot.co.uk and leave me a voicemail with your request.
 
Finally, when can you expect to start spending that money and should you try to spend it in specific ways or on specific things?
 
Technically, the plan is that you will never have to spend the capital but can just spend the growth.
 
If the fund is worth £250,000 when you start drawing from it and you are earning a 10% return per year at that point, then you could just withdraw the 10% (i.e. £25,000) or less and spend that.
 
If your withdrawal rate is lower than the growth rate of the fund then your retirement would continue to grow even as you take money out.
 
Note that some research suggests that the ideal withdrawal rate to maximise the likelihood that the money will never run out is 4%. But given you have pension income from your jobs in addition to the state retirement and you’re not worried about passing wealth on to children you could be more aggressive than this.
 
As for how you spend that money, well that is up to you and is a great problem to have. Having more money doesn’t only mean more holidays, it also means you can buy private health insurance which might be a necessity to avoid NHS waiting lists at a time when health problems are more likely. This would give you a lot of peace of mind.
 
Ability to pay mortgage off early
 
One thing worth adding, is a note that once you can withdraw money from your SIPP you are allowed to take 25% out as a tax-free lump sum. If your household had £250,000 saved up, you could take £62,500 out in one go which could be used to clear all or most of your mortgage.
 
You would then be allowed to take the rest out as an income or you could buy an annuity – with an annuity you essentially buy a fixed income which keeps being paid to you for the rest of your life.
 
I wouldn’t recommend an annuity for you given you have two fixed pensions coming in already, you don’t need the extra security and annuities don’t tend to be worth the money now that interest rates are so low. What you could do instead of buying an annuity is withdraw what you need from the SIPP every year. You would pay taxes based only on what you take out and could manage the withdrawals to minimise the tax bill.
 
I hope this helps.
 
Heather

Hi Heather,
 
I want to earn extra income, however I work as a nurse in the NHS which takes up my time, do you have any suggestions on any investment that can make money. I am also interested in the stock market but don’t know where to start.
 
I am interested in both generating extra monthly cash flow now and increasing the amount of money I have in retirement.
 
Denise.
 
Hi Denise,
 
Thanks for this question. I love it because I have two nurses in my immediate family, my mother-in-law was a nurse for a long time and my cousin is still one now.

​The, “how can I make a little extra cash now” question is one I asked myself quite recently because I wanted to put extra cash into our household ISAs. There are a few things you can do to boost your cash now:

1. Work a few more shifts every month (and look for higher paid jobs).
2. Do some extra work in another field.
3. Invest in or produce products that make cash.
4. Teach
5. Invest in property.

1. Working extra shifts / locum shifts  

My mother-in-law says this is not a great idea because being a nurse is hard enough work, as it is. I agree that it is very demanding work but one of the great features of working at the front line of medical services is that you can actually make more money by working more hours, even temporarily. Some jobs don’t offer opportunities to earn more by working more, you’re paid a fixed annual salary and that’s it - no overtime. Overtime either goes uncompensated or is compensated as time back in lieu.
 
You can sign up to a locum agency and do the same type of work for higher pay on your free days.
 
If you want to really juice up your income you can even look at things like working a 4-day week in your regular NHS job (your NHS pension would therefore be lower) and work for a locum agency on the 5th  day. The advantage with this strategy is that you will boost your income without working more hours because the hourly rate is higher as a locum nurse. If the extra income is invested wisely it could more than make up for the lower NHS pension.
 
Also, keep your eyes open for higher paying promotions.

2. Do some extra work in another field.  

If you have another skill that you can monetise you can look into doing extra work in that field. So ask yourself, "what other skills do I have?" I'll give you an example from my own life:
 
In my early 20s when I worked in banking the bonuses were not good one year and to make some extra money I slipped flyers into doors offering massages (for women only) at my house for £25/half-hour. I had someone sign up that very day. I had done a course in therapeutic massage at London College of Massage for fun and when I needed it, that skill helped me boost my income. I didn’t do it for long but it showed me that if I wanted to earn more money I could monetise other skills in my free time.
 
There are some things you can do that don’t even need a new skill such as babysitting. You could sign up at childcare.co.uk or sitters.co.uk and your credentials as a nurse would be very attractive to people that needed a babysitter for nights out or weekends. You haven’t said whether or not you have childcare responsibilities of your own so I don’t know if this is possible for you.
 
If you have skills that you can monetise online then list yourself on freelance websites like upwork or fiverr. There is a wide range of professions people hire for on these sites. I have used these sites myself to buy all manner of things including artwork, copy, copy editing and even voiceovers! Imagine that, all you’d need as a voice over artist is a microphone that records your voice clearly. Some people make serious money side-gigging on these sites.
 
These first two options are not completely aligned with your question as you asked for “investments that you can make” but I decided to add them to give a fuller answer.

3. Invest in or produce products that make cash.  

Investing in something necessarily involves parting with money in the hope that you’ll earn even more money. You haven’t said how much money you have to invest so here are a few options.
 
Can you make something that people would be interested in buying that you can sell on etsy, eBay, amazon or Facebook marketplace?
 
Make a few samples of what you want to sell and list them on all these sites. I ran a product business myself for almost 6 years mostly using Amazon so I would recommend that you:

1. Try several marketplaces to see where your product sells best – in my experience, eBay and Amazon seem to attract very different types of people – I haven’t tried any other marketplace. I personally sold most of my products on Amazon in the US and sent the products there so Amazon could fulfil them for me.
2. Have a look at my course on “Product: How To Start A Product-Based Business” – I have set it up to be completely free for the next three days only. This is enough time to go through all the videos.
3. Don’t produce too much before you see how well the product sells.
4. Avoid buying expensive machinery before you have seen evidence that your business has potential to make a decent return for you.

I would never discourage anyone from starting a business but having experienced it, I would tell you that it is very hard work. It involves a lot of long hours and is nothing like as glamorous as our culture makes being an “entrepreneur” sound. A business could consume absolutely every free moment you have – evenings and weekends. And all that time might not even produce a profit. Investing in a business comes with a lot of risk – stats vary depending on source, however, 80% to 90% of businesses fail in under 3 years.

4. Teach  

Could you make money teaching something online? You could create a course and list it on Udemy, Teachable or another similar site. This would take some time to produce well, in the first instance, then you would need to spend some money on marketing your course but you could keep the costs very low.

Alternatively if you want to teach a GCSE or A-Level subject (High school level) or even a university course level, you can sign up to places like tutorful (previously, tutora). 

5. Invest in property.  
​
If you have enough for at least a 25% deposit then it may be worth looking into property investment. Because interest costs on buy-to-let property are no longer fully tax deductible, (that means, you can’t subtract the interest payment from the rent you receive before calculating your tax bill), property is not as attractive an investment as it used to be. That said, if you can buy a place with cash, or if the property produces a high enough profit to clear the mortgage within a reasonable amount of time (I personally target 10 to 15 years) then it could be worth doing.
 
Overall, the option you go for will depend on your risk tolerance and the amount of cash you have to invest. If you are relatively risk averse and don’t have cash to invest then working more to earn more will be more attractive. If you can tolerate some risk and do have some spare cash saved up, then investing in property will provide you with medium risk while investing in a business will be the higher risk option.

If you’re looking to boost future income then you have two main options:

1. You can invest in property or
2. You can invest in the stock market - and, of course, you can do a bit of both.

 
Property investing we've already talked about.
 
The stock market provides a good return over long periods of time; most investment advisors would suggest an investment horizon of 5 years or more. Putting money into the stock market in the hopes of a good return in a year or less is gambling rather than investing, that's why I didn't offer it as an option when we were thinking through how to "boost income now".

The most tax efficient options for investing the stock market are investing via an ISA or a SIPP. ISA are individual savings accounts and SIPPs are self-invest pension plans, they are a type of personal pension.
 
If you invest the money via a SIPP then you won’t have access to that money until you are between 55 and 58 years old. The exact age will depend on your age and has been set at the state retirement age minus 10 years.
 
The SIPP is a good option because for every £100 you put in, HMRC pay back £25 of tax and this saving is automatic. It is claimed by the SIPP provider and is shown on your investment account. The maximum you can put into a pension a year is £40,000 or your salary whichever is lower. So, if you earn £30,000/year you can put up to £30,000 into your pension without getting a tax charge. If you earn more than £40,000/year and haven’t reached the lifetime allowance of £1.055m, you can put up to £40,000 into your pension without getting a tax charge/penalty.

I will be writing several blogs on investing over the next few months that should hopefully build your confidence to make the move. In the meanwhile, you might find this useful: What platform should you use for investing and what should you invest in.

I hope this is helpful.

Have a question?
 
If you have any personal finance questions send them to [ME] – I will answer whatever piques my fancy via a blog post.

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Once you have decided on an investment strategy for yourself or for your children you need to decide where to invest and what to invest in.
 
WHICH PLATFORM TO USE FOR INVESTING
 
Choose a platform that has the lowest fees for the highest convenience. Fees change over time but when I was deciding on a platform I found these articles:

• ii.co.uk - Our guide to the best investment platforms for beginners
• moneysavingexpert.com - Find the best ISA or investment platform
• investorschronicle.co.uk - The cheapest DIY platforms on which to hold your Isa
• comparefundplatforms

 
In the end, I chose iWeb for myself and Hargreaves Lansdown for the children’s investments.
 
Why iWeb?
 
I chose iWeb because annual fees are zero (after a £25 account opening fee) and you only pay £5 per transaction.
 
As I only transact once a month (on pay day), our annual household fees are £60 and if you consider that I only transact on either my account or my husband’s account in any given month, then we are only paying £30/year per account. More than fair.
 
The main problem with iWeb is that they don’t do junior ISA and you can’t automate investing. I don’t mind manually investing for my and my husband’s ISAs because we invest different amounts in different funds each month.
 
Why Hargreaves Lansdown?
 
They do junior ISAs, they have a good app and you can fully automate all your investing – their customer service is also pretty good; if you call you will get through to a human pretty quickly.
 
Ultimately, I don’t expect the children’s ISAs or pensions to have a value greater than £100,000 before they’re adults so a platform with a percentage fee will tend to be cheaper than one with a fixed fee.
 
When they’re older I’ll advise them to move to a cheaper platform.
 
Which platform will work best for you?
 
Unless you’re an investment buff that actually enjoys making monthly investment decisions, I recommend you choose a platform that allows automation, possibly Halifax share dealing or Cavendish; one of my friends recommends Fidelity.
 
For children, transact within a junior ISA. For yourself or partner, an adult ISA. If you can invest more than the annual limit then use the ISAs first before transacting via a taxable account.
 
WHAT SHOULD YOU INVEST IN?
 
Unless you have a lot of time to research different companies, I would only invest in low-cost (passive), well-diversified mutual funds such as an S&P500 tracker or a FTSE100 tracker. Passive means the fund is not actively managed, it just follows the stock market so your return is essentially the average market return.
 
Research suggests that actively managed funds (ones where a ‘clever’ manager stock picks) generally underperform the market in the long-run.
 
My long-run strategy is to have 70-80% of my money in (safe) passive funds and 20-30% in actively managed funds. ETFs? I don’t do ETFs – I think funds make more sense.
 
Over to you.
 
Have a question?
 
If you have any personal finance questions send them to [ME] – I will answer whatever piques my fancy via a blog post.

• Related blog post: How to save and invest for your children
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Hi Heather

I just had my first baby. I'm 31 and married. Do you have any tips for how I can think about saving and investing for my baby? 

Thanks,
Diana

Hey Diana,

This is an awesome time to be asking me this question. I also started planning for my first baby as soon as he was born.

You will be at an advantage if you start saving and investing for your children as soon as they are born. You will need to balance what you can afford with what you want to achieve for them. Firstly, what’s the goal? What are you saving for?

1. University?
2. To cushion their retirement (and reduce your inheritance tax bill)?
3. To help them with their first home?

 
1. UNIVERSITY
 
University costs c.£60,000 in tuition and living costs for a 3 year course at the moment - £10,000 for tuition and books, £10,000 for living – living costs can be higher or lower depending on whether you live at home, etc..
 
£60,000 is a huge amount of money and this cost is likely to rise in the future but it makes the maths too complicated to think about possible cost increases.
 
Option 1 for university savings
 
If you can save £20,000 in a tax-free account like a stocks and shares ISA by the time your child is 5 years old, then you can stop putting money aside and this money will have a reasonable chance of growing to £60,000 by the time your child is 18 years old.
 
How could you save this £4,000 per year? Perhaps you could target saving a round amount like £250 per month (equivalent to just over £30/week each for a two-income family) and because this sums to £3,000 a year, at the end of the financial year you’d hustle to throw that extra £1,000 into the ISA before the financial year closes on 5 April. Or, if you can afford it, you could just save £335/month and you would save just over £4,000/year.
 
Option 2 for university savings
 
£4,000 is likely more than most can afford. The alternative is to save £100/month until age 18 which most people can afford even on the median household disposable income of £29,400 (2019). It’s equivalent to about £12.50/week each for a two-income family).
 
Which option is better?
 
I would say option 1 trumps option 2 because you give the money the best chance of growing. Equity markets are volatile in the short-run so by saving the money early you give the money a better chance of reaching your goal. That said, something is a lot better than nothing: small savings add up to large amounts over time. Your savings may be lower than you would like to target but you will still help your children avoid the full scourge of student debt.
 
These are the results under each option:

​Caveats on saving through a Junior ISA:
 
When you save the money through a Junior ISA, that money will be theirs when they hit 18 and you might not be able to control how they spend it.
 
However, putting it into the Junior ISA means you won’t be tempted to spend it yourself because once the money goes in, it can’t be withdrawn until your child is 18.
 
How can you avoid the Junior ISA so you have more control over the money?

1. If you don’t plan to use the full amount of your own ISA allowance, currently set at £20,000/year, a great option would be to save an additional £4,000 into there.
2. If you are using your full ISA allowance or at least more than £16,000 of your £20,000 allowance then you can save the money into a regular taxable investment account.

 
Plan b. is a good option because you could end up not having to pay tax anyway:
 
The capital gains tax allowance in 2019-20 is £12,000. That is, you have to make a capital gain (the profit on your investment) bigger than this to pay the tax. If you save the £4,000 across two investment accounts - £2,000 in an investment account with your name and £2,000 in an investment account with your spouse’s name then when your child is 18 you can sell enough stock each year to keep the capital gain below the capital gains tax allowance.
 
The risk however is that this threshold could fall or be completely removed in which case you would end up paying more capital gains tax on the sale. It’s still a sensible option, despite this risk.
 
2. RETIREMENT
 
If you followed option 1 for university savings, at age 5 you’ll have stopped doing that and might find that you have some spare money to open a retirement account.
 
Your children will not have access to this money until they are 57 to 60 but if life hasn’t worked this will be a great cushion for them.
 
The beauty of investing in a retirement account is that for every £1 you put in the government puts in an extra 100/80. That is, if you want to save £100/month you only need to put £80 into the account. If you do invest £100 it will be £125/month with the government top up. For kids you can put a maximum of £2,880/year (£240/month) which equals £3,600/year.
 
This is the result if you choose to save £100/month indefinitely into your child’s Self-Invested Pension Plan or SIPP starting from when they are 5-years old:

​You notice that the extra £25 from the government makes a real difference. By saving through the pension, based on a 7% return, on 7-Jan-2025 the investments are worth £9,269 rather than only £7,444 without the government top-up.
 
Don’t save into a child’s retirement account unless you have the cash flow and are meeting your own goals, e.g. paying enough into your own retirement, paying off your mortgage early and ideally, are debt free yourself (apart from the mortgage).
 
Some will be able to afford the full £240/month from birth, the rest of us have to work out what is realistic, that is why I personally opted for the £100/month from age 5. This decision will change with a change in your fortunes.
 
3. HELPING YOUR KIDS BUY A HOME
 
This is where the decisions get a little tricky. Some people will be able to afford funding university, helping their children get ahead with retirement savings and help with a deposit on a home without compromising their lifestyle at all but the rest of us need to make choices.
 
Private school vs. saving for a home
 
What will make the biggest difference to your children: a private education or getting onto the property ladder?
 
If you can afford one or the other but not both, then you might follow the route of private primary school followed by state secondary school (grammar/comprehensive). In this case you’d direct all the money you would have spent on a private secondary school education on saving for a home. In some cases this might mean your child starts life with a mortgage free home.
 
If you save £15,000/year (£1,250/month) from age 11 until age 21 (10 years of saving) and it grows at an average rate of 7%, how much money would your child have at 21? About £220,00 – increasing to £260,000 if the average return over that period is 10%.
 
This is not small money to most of us.
 
You could use every last cent on a private education when at the end of the day the thing that helps your child follow a life of fulfilment is being relatively debt free.
 
If you decide to go for a state education throughout and save £1,000/month (£12,000/year) from age 5 (when you are done with university saving) until age 21 (16 years of saving) and it grows at an average rate of 7%, how much money would your child have at 21? About £355,000 – increasing to £475,000 if the average return over that period is 10%, wow. Forget the children, you could be doing this for yourself!
 
If you have already made the decision to send your children to a private primary school and they are thriving, you are unlikely to reverse that decision. If I you are seeing these numbers before making a decision, you might well make a very different decision…
 
Not thinking about private education, anyway?
 
If private school is not a consideration for you, then the best choice might be to save as much as you can towards your own ISA allowance of £20,000/year (£40,000/year in a two parent home), in addition to whatever you save towards your pension (I recommend 10-15%) and when the time comes you can decide whether you can contribute towards university or a first home or both.
 
The best gift you can give your kids is possibly to be independent in old age so they don’t have to worry about taking care of you. You can boot strap them onto the property ladder by letting them live at home rent free – so that they can save more for their deposit. Even without cash gifts, you will be giving your children a competitive advantage by teaching them how to handle money at an early age.
 
Starting to invest
 
Next, you need to consider what platform to use for investing and what to investing in?

If you have any personal finance questions send them to [ME] – I will answer whatever piques my fancy via a blog post.

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