There’s been a recount, and it turns out there are three certainties in life: death, taxes, and fees for investing. Let’s see what we can do to reduce our investment costs as far as humanly possible.

Here’s the hypothetical scenario. We’ve got £1,000,000 in our ISA. [Hey, this is a Finumus-branded article – Ed.]

And we want to create a 100% global equity portfolio as cheaply as we can.

We obviously don’t believe in active management, stock picking, factor tilts, home bias, or any of the other nonsense.

We just want to get pure, market cap-weighted, global equity beta at the lowest possible cost.  

What broker / platform are we going to use?

Of course, we’re first going to consult the excellent Monevator broker comparison table.

With £1m to invest, we will want a fixed / capped cost broker. (As opposed to paying a fixed percentage on all that lolly.)

I’ve decided we’re going to use Exchange Traded Funds (ETFs), rather than funds (or Unit Trusts as we used to call them). That’s because many platforms charge extra fees for holding funds, but not for shares. And ETFs – despite their name – count as shares, not funds.

Moreover I’m more comfortable with ETFs than I am with funds, just because of my own biases.

Let’s plump for iWeb. There’s no annual fees to pay, it’s only £5 a trade, and it’s owned by the sizeable Halifax, which is owned by HBOS, which is owned by Lloyds. (iWeb doesn’t charge extra fees for holding funds. Not that it will matter to us with our ETFs.)

Furthermore we’ll need our ETFs to be traded on the London Stock Exchange (to start with) and have a GBP share class (trading currency).

Let the investment costs crunch begin

If you pull up JustETF and apply a few filters, you will see that the cheapest all-in-one world equity ETF is the Amundi Prime Global UCITS ETF DR (D). (Ticker: PRIW.L).

This will be our ‘straw-person’ to benchmark against:

Now, we could stop right there to be honest. With this fund and its tiny Total Expense Ratio (TER), we’d likely outperform 95% of all other investors already.

Pros	Cons
– All-in-one ETF – Very low investment costs	– No emerging markets – No small cap stocks – Distributing  – Suffers US dividend tax

Do any of those cons matter? If you’re investing a small amount, the answer is no.

Go out and enjoy the sunshine. Take your umbrella, just in case.

What about the emerging markets?

It may come as a surprise – especially to those who live there – that poor countries, according to the financial markets, are not considered to be in ‘The World’.

To City professionals, ‘The World’ only includes rich countries (developed markets, or DM). It does not include poor countries (emerging markets, or EM), or even poorer countries (frontier markets, FM).

It is only the ‘All World’ label that includes EM (but still not FM).

The ‘W’ in the ticker PRIW denotes the World, not All-World. We’re therefore missing out on emerging markets.

Sometimes you’ll see descriptions like ‘All Country World Investable Market (ACWI)’ to signify the inclusion of EM. 

Does this matter? Not really. EM is only about 10% of global market capitalization. In truth we could just ignore it.

One would like to think that poorer countries have higher economic growth rates that feed into improved stock market returns. But the evidence for this is scant. Rather, so far they’ve had periods when they did really well (1980s /1990s) and really badly (2000 onwards,) compared to DM.

The best way to think about EM is probably that there are idiosyncratic risks (such as wars and coups) for which one ought to be compensated with some sort of risk premium. Theoretically.

Adding in EM

You say you want a bit of coup and war exposure? Well, the cheapest All-World ETF is 20bps:

That seems like an expensive way of adding a 10% EM allocation. 

But what if we stuck with mostly PRIW and did the EM allocation ourselves? Just ETF throws up a few options around the 15 bps mark, including:

Holy Saint Scrooge! We’ve saved ourselves £1,400 by doing our own EM allocation. 

Do we need small caps?

We could make a similar argument about small caps. (Though usually the only coups here are in the boardroom.) Do you really need them?

The thing about small caps is that, well, their market capitalization is small.

Again, you’d like to think that small companies grow up to be big ones. Whereas larger companies as a class have nowhere to go but down. Small caps should therefore make a better investment than large caps. And in fact in Fama-French’s famous Three Factor Model there is very much a size premium. Albeit one that once widely publicized in the early 1990s promptly disappeared.

Small caps are a lot more expensive to deal with, too. And we can only easily get DM ones. 

But if we must?

Was it worth increasing our costs by 50% just to include a 10% allocation to small caps?

Hmm.

What about emerging markets small caps?

Seriously, you are kidding me, right?

No joke:

Personally I would argue the marginal diversification benefits of including both EM and small caps only truly matter once you’re investing really substantial sums. 

Distributions: sneaky platform FX charges

PRIW is a ‘Distributing’ ETF. This means it distributes its dividends to you, rather than retaining them for re-investment (‘Accumulation’). See our previous deep dive on the difference.

The problem here is that PRIW’s distributions are in US Dollars (USD). And most platforms only allow you to hold Pound Sterling (GBP) as cash. (In ISAs you’re not allowed anything else).

So when the USD dividend comes in from the ETF, your ISA platform is going to convert it from USD to GBP for your convenience. Most platforms charge an FX fee of ~1% to do this.

(Although who knows what actual rate you’re getting? I’m sure they would not specifically use an FX broker that charged an egregious spread and kicked back some of their internalization profits to the platform. Because this is not the sort of behavior you ever see in financial markets. Ever.)

Now 1% of the dividend yield sure doesn’t sound like much, does it?

Let’s see:

Adding in the currency conversion cost is like increasing our TER from 5 to 6.8 bps.

That’s a 36% increase in costs! WTF?

What we’d really like is an accumulating version of this ETF. Luckily, Amundi actually has one…

But it doesn’t have it as a GBP share class.

Dividend withholding tax

PRIW has 63% of its exposure in the US. It’s domiciled in Luxembourg. It will be having 15% of distributions from North American companies withheld at source by the IRS in the US. The dividend yield on US equities is about 2% right now.

• 2% * 63% * 15% * £1,000,000 = £1,890

This represents nearly 19bps of annual investment costs applied to our portfolio. It raises our TER including US Dividend Withholding Tax (or as I like to call it: TERIUSDWHT) to 24bps. 

Which isn’t something that ETF providers are keen to draw your attention to, surprisingly.

But can we do anything about this?

We have two options:

• Use swap-based ETFs
• Make use of our SIPP

Avoiding US WHT with swap-based ETFs

As an ETF, you can avoid US Dividend WHT by employing a financial instrument called a swap.

Exactly how they do this is beyond the scope of this post. (As you should be relieved to hear. Because I used to help structure this sort of thing for a living, and I can be a real bore about it). 

For now let’s just check by comparing two UK-listed ETFs.

They both track exactly the same US index, have similar TERs, and are both accumulating. The only difference is one (from Invesco) uses a swap and the other (Vanguard) doesn’t. 

We’d expect a 2% * 15% = 30 bps annual out-performance from the swap-based one.

What do we see?

The swap one outperforms by about 33bps p.a. after accounting for the fee difference.

Now it would be nice if there was a World ETF that did only the US leg as a swap, and the rest normally. Sadly, there is not. Arguably, if someone came along and created such a thing we could pay 24bps for it to be cost equivalent with Amundi’s PRIW. 

There are, however, ETFs that do the whole (developed) world as a swap.

For example, Invesco MSCI World UCITS ETF (MXWS.L). Which has a 19bps TER.

Let’s just run our comparison on returns again, to make sure that what is happening in the swap is to our benefit, not theirs:

Yeap. Looks reasonable.

Notice that 63% (US Weight) * 33 bps (what the US only swap ETF saved) = 21 bps.

The only WHT saving is on the US leg; the swap trick doesn’t work in the other countries.

If you’re investing less than £1m, you could sensibly just go with this. Because we’re about to get complicated and – for smaller amounts of money saved – why bother? 

An extra 12bps (19 vs 5) seems like a lot to pay to do some stuff in a swap, especially when a swap is actually cheaper for the ETF provider than either full or sampling replication. 

And where is my All-World including small caps done as a swap – or a mix of swap and whatever – for, like 10bps?

There isn’t one.

Swapping that for a DIY jobbie

Can we build one ourselves? Use a swap-based ETF for the US stuff and then other, regional ETFs for the other markets?

In fact could we just add a World-ex-US ETF?

Alas, that would be too easy. There also isn’t one of those.

Instead:

We’ve also accounted for dividend FX costs for those ETFs which aren’t accumulation units. 

A TER of 8bps is pretty good – and that’s also the TERIUSDWHT, because we’ve avoided US WHT.

Notably, it compares well with 24bps, which was where we began with Amundi’s PRIW.

(No, I don’t know why we’re bothering with Canada either.)

Plan B: avoiding US WHT with your SIPP

The US tax authorities recognize UK pensions – including SIPPs – as tax exempt under a tax treaty.

Astonishingly UK platforms also seem to be able to handle this. Such that, if you’ve filled in the right forms and hold US stocks in your SIPP, you’ll receive the dividends tax-free (in the SIPP).

This also applies to US-listed ETFs, like, for example, the BNY Mellon US Large Cap Core Equity ETF (BKLC), which has an expense ratio of 0%.

Yep, you read that right: 0%. 

But in a typical piece of joined-up thinking that will surprise nobody, you likely can’t buy this ETF in your SIPP. Why not? Because under the EU’s PRIIPs regulations, unless you are a ‘professional’ or ‘High Net Worth’ investor you can’t buy a fund that doesn’t issue a PRIIPs Key Information Document (KID), which US ETFs don’t.

Now, you might have thought that having left the EU, the removal of this pointless restriction for Brits might be the one tiny silver lining to the Brexit debacle.

Of course not. 

You might also think that you’re a professional / HNW investor. And you may well be.

Sorry, most platforms don’t support declaring yourself such as part of their business model. At least in my experience Hargreaves Lansdown, AJ Bell, and Interactive Investor don’t. Others do, but in any case you’re going to want to save more than a few hundred quid for it to be worth the hassle.

But let’s say for a minute that you’ve got enough money to make this a worthwhile exercise, and you’ve somehow extricated yourself from PRIIPs.

We might have our US Equity ETF in our SIPP, and all others in our ISAs. Or else some mix of this arrangement and using a swap-based ETF in the ISA.

Either way it’s a little messy:

On a bright note, we’re truly crushing our investment costs.

And since we’re all about marginal gains here, let’s fix Canada:

Ladies and gentlemen, I give you the world – for 3bps.

You might immediately decide to spend some of those gains on adding back emerging markets and small caps. (This is called the ‘bounceback effect’).

For bonus points, if you were including small caps you might observe that the US makes up about 60% of global cap weight.

In my PRIIPs-free SIPP I could buy the Schwab U.S. Small Cap ETF (Ticker: SCHA) with a 4 bps fee, and then roll-my own regional small caps. But we are getting seriously diminishing benefits here.

Rebalancing

The nice thing about having everything in a single ETF like PRIW is you don’t have to worry about rebalancing. Conversely, once we’ve separated everything out we have to do rebalancing ourselves.

But not much. This is because – contrary to what the ‘index investing causes bubbles’ people will tell you – market moves do your rebalancing for you.

If Europe outperforms the US by 10% in a year, then my target Europe weighting will be 10% higher. But the value of my Europe ETF will be 10% higher too. So long as I update my target weights to current market cap weights then no rebalancing is required.

On the other hand if I fix them forever then active rebalancing is required. As does any weighting scheme that is not market-cap weighted.

Distribution units also complicate this somewhat. Over time I’m going to be underweight those and overweight my accumulation units. But we can probably just do one or two trades a year to bring things back into line. Call it £20 of trading costs (and the spread).

Not all platforms carry all ETFs

It’s not clear to me why, but platforms generally don’t carry all London-listed ETFs. Not even the plain vanilla ones.

Indeed as a rule of thumb, once you’ve identified the cheapest ETF for a particular asset class and you log onto your broker to grab a bagful, you’ll find they’ll deny its existence.

Strangely, they’ll be happy to point to the one that costs twice as much. Or they’ll only carry the USD trading currency one.

Whether this is…

• Cock-up: they used the ISIN as the Primary Key in their systems, and so can only support one traded currency listing per underlying ETF.

or

• Conspiracy: If you buy the USD one, you’ll have to pay them a load of FX fees. 

…I’m not sure. In general their excuse is that they only carry ‘the most liquid one’. 

High investment costs are optional

Summing up, let’s run through what we’ve learned, Rain Man style:

• We can track global equities for 5 bps p.a. (but add in paying our platform FX fees on distributions, which brings it up to 6.8 bps)
• If we add a small EM allocation ourselves it’s 6 bps. That’s a lot cheaper than using the ‘All-World’ ETF (20 bps)
• US dividend withholding tax is a (19 bps) problem that we can get round:
  • It requires us to get a bit messy rolling our own. 
  • But can save up to 10 bps (without SIPP)
• If you’re not investing a lot of money buy PRIW.L or MXWS.L and go play outside
• The perfect global equity ETF doesn’t exist (in Europe). If it did it would:
  • Do US equity exposure as a swap to avoid US dividend WHT
  • Have appropriately weighted EM and small cap exposure
  • Have an accumulating / GBP traded share class 
  • Cost about 10 bps, to be competitive with rolling our own
  • (Over to you, Blackrock!)
• If you’re only using your SIPP and can avoid PRIIPs, you could just buy Vanguard Total World Stock Index Fund ETF (VT) – which both avoids US WHT and includes EM, for 7 bps.
• If we hyper-optimize using a SIPP and somehow bypass PRIIPS, we can actually get the full global+EM+small-caps down to 7 bps and avoid US WHT
• Some things we didn’t mention:
  • Risks of swap-based ETFs (low, but not zero)
  • Bonds

Finally, it’s worth noting how cheap all this is compared to other investments.

For example, the managing agent for my London buy-to-let charges me what amounts to 1.34% of its capital value per annum. That’s about 20 times more than this fully-diversified global equity portfolio.

If you enjoyed this, follow Finumus on Twitter or read his other articles on Monevator.

Here’s some handy data on historical asset class returns for the UK. The chart below shows UK asset class returns – with income reinvested – since 1870:

Data in this article from JST Macrohistory1, FTSE Russell, and JP Morgan Asset Management.

As you can see, over the long-term equities (shares) have done much better than gilts (UK government bonds) and cash (here the return on UK treasury bills).

Gilts meanwhile beat cash. But the lead has changed hands a few times – most recently during the 1970s inflation outbreak towards the end of the UK’s biggest bond crash.

A few other things to note:

• The chart shows real historical asset class returns. So the returns strip out inflation, which gives us a more realistic understanding of capital growth in relation to purchasing power.

• The huge 2008/9 bear market and others seem irrelevant on such a long-term graph, yet such corrections are painful at the time and can last for years.

• The lines include divots when all three asset classes trended down simultaneously. Most obviously during the catastrophe of World War One, the 1972-1974 crash, and just last year in 2022. You can deal with this possibility by using an even more diversified portfolio.

• The returns are total returns. That is, you got them so long as you reinvested dividends and interest. If you don’t reinvest income – perhaps because you’re understandably spending it to support a modestly lavish income in your old age – then those stupendous returns come down a lot.

Incidentally, if you’re wondering whether UK historical asset class returns have much relevance to global portfolios, I’d argue that they do.

Firstly, long-run returns of the main UK asset classes are correlated with their global counterparts.

Secondly, few other financial markets can offer such a rich a seam of historical data as the UK’s. Global data is particularly scant before 1970 for equities.

Finally, paying attention to UK historical returns is more pragmatic than relying on US data biased towards the century that the Americans won.

A number of analysts warn that even the US market may struggle to deliver such outstanding results in the future. UK historical asset class returns still rank highly, but are perhaps more reflective of a world in which it’s impossible to pick the winners and losers in advance.

Historical asset class returns: annualised results

Few of us are going to live a century or more (though Gen Z-ers who eat their greens have a decent chance), so let’s break down those historical asset class returns into more manageable chunks:

Historical asset class returns (% annualised)

	2022	10 years	20 years	50 years	152 years
Equities (shares)	-8.1	4.0	4.9	5.3	5.3
Government bonds (Gilts)	-30.2	-2.2	0.9	3.2	1.4
Index-linked bonds	-15.8	-0.8	1.7
Cash (Treasury bills)	-6.4	-1.8	-0.8	1.1	0.9

Note: the longest annualised return available for index-linked bonds is 2.9% over 40 years.

Again, the table shows real total returns – the annual rate at which the asset class grows (or shrinks) over any particular period after inflation – and with income reinvested.

Equities had a poor 2022. But they typically deliver superior long-term returns as the timeline stretches beyond a decade.

However, nothing is guaranteed.

The longest period of negative annualised returns suffered by UK equities was 25 years.

A combination of World War One, Spanish Flu, overhanging war debt – and the financial and social trauma that followed – kept the stock market suppressed for quarter of a century.

Which is why every investor should be diversified, despite 2022’s harrowing fixed income returns that turned the last ten year’s returns negative for gilts and index-linked bonds.

Gilt returns across the decades seem particularly variable, given this is meant to be a relatively stable asset class.

A glance back at the orange line in the first chart shows that government bond returns seem to be subject to long-term super-cycles that correspond to eras of falling or rising bond yields.

For example, gilt yields peaked in 1975 and drifted down thereafter until 2021. That trend of falling yields – and hence rising prices – pepped up bond returns with capital gains adrenaline shots, until 2022’s rapid interest rate hikes ended the party.

Thus, while the historical 50-year return for equities doesn’t look unachievable in the years ahead, we should be probably be much less hopeful about equalling that 3.2% 50-year return for bonds.

Our post on expected returns offers a realistic perspective on the potential of bonds right now.

Finally, cash is often thought of as a safe haven, but it’s delivered the worst long-term returns of all.

Notice that cash has a negative return for the past 20 years after inflation. The end of the low interest rate era has prompted many Monevator readers to switch out bonds for cash. But there can be significant long-term consequences if you take this too far.

Treasury bills as cash proxy – Treasury bills are ultra short-term UK government debt. Academics use the total return of bills as a stand-in for cash interest rates. One reason being that treasury bills are often a big component of cash-like holdings such as money market funds.

Historical asset class returns: the long and short of it

It can be misleading to look at just the last couple of years of asset class returns when you’re deciding how to invest over the long-term.

Returns from asset classes are volatile, so a few years of history gives you no useful information.

Shares may do very well one year and bonds do poorly. The next year the returns may be different, or it may take years before their relative performance changes.

Equally, looking at the long-run, historical asset class return averages can leave you unprepared for the wild swings in fortune regularly inflicted by equities, sometimes by bonds, and once in a blue moon by cash.

But we can get a sense of how tempestuous each asset class is by looking at the distribution of its annual returns. That is, how widely dispersed returns are and how violently they skew towards large gains or losses.

Equities

Annual UK equity returns range widely and wildly – anywhere from -57% to 103%. The positive, overall return of equities is revealed by the right-ward bias of the columns. But low and negative returns are still a frequent occurrence. (Statistically-speaking, we can expect equity returns to be negative every one year in three on average.)

Bonds

The dispersion of gilt returns is much tighter than equities. Lower, positive returns are common, and negative returns quite frequent. But left-tail / right-tail outlier events are fewer and less extreme than in the stock market.

Treasury bills / cash

Finally, here’s why we all love cash. Those steady, if low, returns keep trickling in. Additionally, the chance of a hideous car-crash is minimal.

Different strokes

The historical asset class return distribution charts help illustrate that different assets are good for different purposes:

• Cash is king for short-term requirements. Think paying bills or saving up a house deposit.

• Government bonds are most useful for planning outgoings in 5-10 years. That’s because you can know the return you’ll get in advance, so long as you hold them until they are redeemed. Bonds are also used to dampen down the volatility of your portfolio, according to your risk tolerance. A young and brave investor might hold no bonds. A 65-year old might be advised to have 50% of their money in bonds.

• Shares are best for long-term investing, since they deliver the highest real returns over longer periods. Adding new money regularly, holding for many years, and reinvesting the income can help you manage the volatility.

By owning a simple portfolio of different assets you can benefit from diversification. When one asset class has a bad year another will likely have a good one. As a result you dampen the ups and downs of your portfolio’s value.

Moreover rebalancing can help smooth out the zigging and zagging of the different asset classes.

The price you pay for this reduced volatility is a potentially lower overall long-term return. That’s because your holdings of lower-risk assets like bonds and cash will typically deliver less in the way of gains than shares.

If you’re investing for the long-term into a pension, say, it may make sense when you’re young to pound-cost average into shares alone. Try to ride out the volatility to maximise your returns.

But whatever you do, never take more risk than you’re comfortable with. Always think about your personal risk tolerance.

And remember that a stock market crash can hit you hard if it strikes as you approach retirement.

Returns and tactical asset allocation

A final – and riskiest – option in deciding how to allocate your money is to take a view on what assets look cheap and expensive at any point in time.

You then tilt your portfolio to try to capture a reversion to the mean. That is, you invest presuming that asset classes will tend towards the average historical returns we saw above.

I do this to some extent. But I wouldn’t recommend it unless you’re sure you can avoid following the crowd – and you understand your poor calls could cost you by actually reducing your returns.

Wealth warning: There’s no proven method for forecasting long-term stock market returns. Studies show even the best predictive metric (the longer-term CAPE ratio) only explains about 40% of future returns.

Anyone can see that different asset classes have good and bad years. It’s obvious from tables of discrete annual returns.

But timing when reversion to the mean will happen is very different from just predicting it will happen someday.

Historical asset class returns: a brief history

These things do tend to sort themselves out over time – even if such a reversion feels unthinkable at any given moment.

Just look at the following table from the 2010 edition of the Barclays asset class report:

1899-2009: UK real asset class returns (% per annum)

	2009	10 years	20 years	50 years	110 years
Equities (shares)	25.9	-1.2	4.6	5.2	5.0
Government bonds (Gilts)	-3.3	2.6	5.4	2.3	1.2
Index-linked bonds	3.1	1.9	3.8
Cash (treasury bills)	-1.7	1.8	3.1	1.9	1.0

Source: Barclays Capital Equity Gilt Study 2010

From this table, it’s again pretty clear that different asset classes can deviate from their long-run returns for substantial periods of time.

Moreover equities were showing a very unusual negative real return over the decade to 2009.

As I wrote in the 2010 version of this very article:

UK shares have struggled to advance over the past 10 years, as the markets have been felled by the dotcom crash and the financial crisis.

• You wouldn’t normally expect shares to deliver a negative (-1.2% per year) real return over a decade, or for them to be beaten so handsomely by safe and secure Government bonds.

Over the long term such periods even themselves out, which is one reason why a strong decade for shares may follow the terrible 2000-2010 period.

The FTSE did indeed go on to rally nicely for several years. You did even better with dividends.

Yet in 2009, in the midst of the greatest buying opportunity for a generation – and with the table above showing how badly shares had done for a decade – buying them was not easy.

Take comfort from history

Many people said they had sworn off shares for good by 2009.

But you should never say never again if you want to be a successful investor.

• You might also like my article on US asset class returns.

Remember if you’re using an investment return or compound interest calculator then it’s legitimate to use long-term historical returns as a proxy for the interest rate function in the calculator.

Note: Comments below may refer to a previous version of this article, so please check their date.

1. Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298. [↩]

What caught my eye this week.

One of my least favourite articles on Monevator is the stab I had at explaining Lifetime ISAs.

In fact it was my second stab. I’d updated an even flimsier first effort just a couple of years later.

But I’d left a 2,500 word version 3.0 unpublished. Mostly because I felt it needed another 2,000 words to be comprehensive. And did anyone want to read that?

My published take is not a terrible article. But it doesn’t do a truly great job at explaining why the Lifetime ISA is a terribly confused addition to the ISA lineup.

And there are now better articles out there explaining exactly who might want to use a Lifetime ISA. Complete with the couple of dozen or more caveats and complications that such an article requires.

Fleas on fleas

My Lifetime ISA excursions triggered a bit of a crisis of confidence at Monevator Towers.

How comprehensive could or should we try to be?

We have perhaps the best reader comments on any financial site in the UK. And I knew that regulars would (constructively and rightly) point out the gaps in my explanation.

I didn’t mind that – indeed I welcomed it – but I also knew I’d be a bit miffed by some of them. That’s because it’s hard to explain how one-size-fits-nobody once you get beyond the basics of personal finance and investing to someone who hasn’t tried giving the complete picture themselves.

You need to write about something – whether ISAs or particle physics – to see that very often, the one thing you believe is of most importance is very often somebody else’s superfluous detail.

The Lifetime ISA experience ultimately nudged us towards doing fewer and deeper articles – especially for my co-blogger – and I feel we lost some of the breezy accessibility of an earlier Monevator in the transition.

But that’s the trouble with knowledge. The more you know about something, the more you’re aware of all the edge cases, contradictions – and everything you don’t know.

It was easier to write Monevator 15 years ago when we had less to share but didn’t really appreciate that. Knowledge is labyrinthine.

For whom the bell tolls

Anyway this isn’t all just me getting the tiny violins out about the hard lot of being a blogger.

It’s more a rambling Bank Holiday prelude to say I have sympathy with Andy Bell’s views on ISAs, which he’s been floating in the media recently.

Bell – the founder of the SIPP platform that carries his name – told the Financial Times this week that his company proposed:

…scrapping separate cash and stocks and shares Isas to create a single new offering.

It also wants to reform the Help to Buy and Lifetime Isas, which offer a tax-free bonus to people aged under 40 saving for a home. The platform is also urging the abolition of the Innovative Finance Isa, a type of peer-to-peer loan.

Bell said plans had been presented to chancellor Jeremy Hunt and reflected an ambition to simplify Isas to motivate savings and investment.

While he acknowledged the plans could narrow consumer choice, he insisted that the range of products currently on offer were too complicated.

“The proliferation of Isa products worries me. If you’ve got six Isa products to choose from, you almost give up,” said Bell. “If you were starting with a blank sheet of paper you wouldn’t design what we’ve got today.”

As somebody who did my time in the trenches on the ins and outs of various ISA products, I agree.

It’s true that a Monevator maven – someone who reads every article and pulls us up on our errors and omissions – no doubt enjoys nothing more than shifting from optimal savings product to tax-efficient vehicle to tax defusing like a freestyle skateboarder doing tricks.

I’m one of those too.

But in the profusion of ISA types, the average person just sees more jargon layered on top of the already murky world of saving and investing. And they have a point.

Ideally we’d have just one kind of savings account. Flat tax relief at 30%. With some curbs or outright restrictions on withdrawing and replacing all the money, to incentivize saving for old age. But those guardrails as clear as possible too.

The complexity we have today in ISAs and pensions1 is more a result of politicians looking for rabbits to whip out of hats – or sneaky opportunities to take back what they gave us before – rather than joined-up thinking.

True, simplified ISAs would do Monevator out of a few opportunities for articles. But after my experience with the myriad (don’t-) use cases for the Lifetime ISA, I’ll live with that.

Have a great long weekend!

[continue reading…]

1. Especially with the recently abolished Lifetime Allowance. [↩]