What caught my eye this week.

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Look out of your nearest window, and there’s a good chance you’ll see several expensive tonnes of metal, glass, and plastic sitting idle.

In fact, I am doing that right now.

It wasn’t always this way for me. In the early phases of my investing journey, I managed to avoid the expense and responsibility of owning my own car.

But I could only hold out so long. And between work trips and the need to transport kids quickly and safely, the debate now isn’t whether we need a car – it’s whether we need a second.

Unless you live in a big city with a spiderweb of public transport routes, car ownership can feel mandatory.

But I’m employing every strategy I can think of to avoid ponying up for an extra vehicle.

And with all the app-based doorstep deliveries and on-demand transport options around now, that’s much easier than in the days of the Littlewoods catalogue and the milkman.

A car costs more than the metal

Cars are deeply personal. One person will swear by their 17-year-old Nissan, while another will insist it’s irresponsible to drive something without a top Euro NCAP safety rating.

So to figure out the cost of car ownership, I’ll have to make some broad assumptions.

This won’t match every Monevator reader’s particular needs – or their adeptness with an oil can and socket set. 

But we must start somewhere, so let’s start with the key spending categories:

• Depreciation – The stealthiest cost of all. If you buy a car for £40,000 and sell it two years later for £28,000, you’ve spent £500 per month through depreciation. With leases, the depreciation is baked into the monthly fee
• Opportunity / financing cost – If you put £20,000 into a car in preference to filling your S&S ISA, you’re also missing out on investment growth. Borrow £20,000 to pay for it and you’ll be paying interest on the finance deal
• Running costs – MOTs, servicing, and fresh tyres. (Here’s your reminder to check your tread depth if you haven’t recently!)
• Tax – Vehicle excise duty depends hugely on the age and type of car. Pay-per-mile charges are on the way, too.
• Insurance – Particularly costly if you’re young.
• Fuel – Whether you pump it or plug it, the price of powering your motor adds up.

What’s the price of a Polo, anyway?

Let’s introduce two hypothetical investors. Both want to own a Volkswagen Polo. But they have very different driving habits and financial tolerances.

So how much financial damage can a modest German hatchback actually inflict?

Alice and the new car premium 

Alice has a long commute – 10,000 miles a year – and she can’t afford to be late for work, so she values the reliability of a new car and a warranty.

She decides to buy a brand-new Polo for £20,000 outright.

• Depreciation: £3,000 (new cars shed value like a wet dog sheds water)
• Opportunity / financing cost: £20,000 at 5% is £1,000 per year
• Fuel: £1,500
• Running costs (including tax and insurance): £800
• Alice’s total annual cost: £6,300

Alice’s total commitment to her car is £121 a week. Every week. All for the privilege of driving 10,000 miles a year.

Note that opportunity cost reflects the investment returns you forgo on the money tied up in the car while you own it. Some of that capital can be recovered when you sell.

Gary and his sensible secondhander 

Gary can get the bus to work if necessary, so he’s less worried about a new car warranty. Hence he buys a three-year-old Polo for £10,000.

Gary mostly uses it for errands and weekend trips, and clocks just 7,000 miles a year.

• Depreciation: £1,200
• Opportunity / financing cost: £10,000 at 5% is £500 per year
• Fuel: £1,050
• Running costs (with tax and insurance): £1,000 (older cars need a bit more TLC)
• Gary’s total annual cost: £3,750

Gary is paying £72 a week. Vastly cheaper than Alice’s shiny new motor.

How about skipping the car altogether?

We can do better!

Jess the car avoider

Jess took a close look at the purchases made by her friends Alice and Gary, and she decided she wants to forgo owning a car entirely.

She also realised she doesn’t want to spend a chunky chunk of her day chugging through traffic jams. Getting a job within walking distance of where she lives solved that problem.

Jess earns £25,000 per year. That gives her £21,521 after tax.

And when Alice points out there’s a vacancy paying a much higher £35,000 at her own workplace, Jess runs through the numbers:

Jess would effectively only earn £900 per year more with the new job – albeit she’d also be treated to the joys of being stuck in traffic twice a day, thanks to its commute.

Now let’s acknowledge that Jess could find a cheaper car, just as Gary did. 

But equally, many of the best-selling cars in the UK are more expensive than a Polo!

So clearly there’s a lot of people out there who either don’t do these sums, or who think it’s worth paying a premium for that new car depreciation smell.

Car ownership costs compound

Inspired by Jess and her savvy ways, Alice decides to do better.

Somehow Alice is able to ditch the car without losing her income. (Perhaps she found a different job, or moved to another city. Or she convinced her employer that working from home is trendy again…)

Alice is now spending £6,300 less per year (£525 per month) without a car. The money that previously went on motoring she can now plough into an investment ISA. Over a period of 20 years with a 5% return, she’d end up with £213,915.

Nearly a quarter-of-a-million quid, which could easily be the difference between retiring early or having to continue to slog away at the 9-to-5 for a few more years.

There are downsides

Not everyone can do without a car. You might have medical reasons for needing one, or children that have to get to a distant school. There are myriad other scenarios.

But often car ownership is more of a choice. 

Our family already has one car. Our debate is whether we can manage without a second.

And I’ve found there are lots of options these days that lessen the need to have two Frugalist household vehicles doing the rounds.

Instead of driving to the supermarket, I can get an annual subscription for free grocery deliveries. Most supermarkets offer passes for around £40 per year. Adding on Amazon Prime (including Deliveroo) for £95 per year gives access to still more delivery options.

I could budget for an emergency £20 taxi ride every month. Between the local cab firms and Uber, I’ve found it’s pretty easy to find a ride.

A taxi won’t work for a week-long jaunt to the countryside though. So I could also budget to hire a car for one week a year at £200. There are a couple of traditional car hire places where I live. Turo and Enterprise Car Club are other options, depending on your needs and location.

Added up, these alternatives still only cost £570.

The point isn’t that all of the above are essential if you don’t have a car.

It’s that you can afford to splash out on some apparently extravagant services, because compared to spending several thousand pounds per year on a car, they no longer look so extravagant.

Your mileage may vary

For some people driving is a hobby first, and a mode of transport second. If driving and maintaining your car is something you love, then clearly money won’t come into it.

Or perhaps you have access to an excellent company car scheme. With due consideration of the Benefit In Kind brackets, you can enjoy some very cheap motoring.

But most of us are definitely forking out a pretty penny for every mile travelled and every month of ownership, even if we don’t have to feed coins into a dashboard to stay on the road. So it’s worth working out how much we’re spending and why.

How much would your life change if you didn’t have a car? Would your job become impossible? Could you find another employer closer to home?

Which parts of your life rely on having a vehicle, versus where it’s just nice to have? Could some of the challenges be offset with a bit of targeted spending elsewhere?

If you must own a car (or two)

Obviously staying away from the new car dealerships is the best way to reduce the hit to your future net worth.

Modern cars are so well made that many buyers can realistically keep even a used one on the road for a decade.

Pay cash if you can to avoid financing charges.

Finally, buy the smallest car that’s practical for your situation. It’ll usually be cheaper and it will reduce all the ongoing costs, too.

Buy a fancy pair of shoes if you want to show off. They’ll cost you £20,000 less in the long run.

Every little helps

I was talking to a neighbour recently who bemoaned their frustration at having to drive to the big retail park every time they run out of milk.

Somehow they were completely unaware of a small supermarket that’s within walking distance.

I suppose if I’d been driving myself – rather than walking back from said supermarket – then we’d never have even stopped to chat.

We’re all different. Personally though, I feel a bit richer by reducing my car use.

Not just financially, but physically and mentally, too.

Car ownership is still treated as almost a rite of passage. But if you can swallow your ego and buy a smaller used car, walk around more, and actively try to design your lifestyle around the newer alternatives such as supermarket deliveries, then you might just hit that more important milestone – early retirement – many years sooner than you expected.

The post Counting the cost of car ownership appeared first on Monevator.

Why? Because index trackers provide a low-cost way to build a diversified portfolio that will outperform the average active investor.

Index trackers come highly recommended by some of the biggest names in investing.

Yale’s famed endowment fund manager, David Swenson, neatly summed up the advantages of trackers:

“With all assets, I recommend that people invest in index funds because they’re transparent, understandable, and low cost.”

Even Warren ‘Gazillionaire’ Buffett says index funds are the best investment vehicles for most people.

Safety in numbers

Like other funds, tracker funds enable lots of investors to club together to increase their buying power. They collectively buy shares or other assets across many more companies than any individual could.

For example, index trackers make it possible to invest in all the world’s stock markets via just one global tracker fund.

Trackers are therefore a good way for everyday investors to get into the stock market without exposing themselves to the dangers of individual stock-picking.

Risks and costs are reduced thanks to the scale and diversity of the fund.

And while you’ll never beat the market you’re tracking with an index fund, you won’t lag it by much, either.

Indexes in (just a little) detail

Most funds have an aim. The aim of a tracker fund is to reproduce the returns of a specific market index.

An index is a basket of securities (such as shares or bonds) that is used to represent a particular segment of the market.

Famous indices that you’ll have heard of on the news include the:

• FTSE 100
• Dow Jones Industrial Average
• Nikkei 225

An index is rather like a scoreboard or league table. It provides a systematic way of measuring how a particular market is performing.

There are many weird and wonderful indices out there, from the All-Peru index to the Volatility Arbitrage index.

But virtually all of us only need to concern ourselves with the very biggest ones.

You need to decide:

• The market you want to track (for instance UK domestic equity).

• Which indices track that market, and how the indices differ.

You can then make an informed choice about which tracker to go for.

For example, global equities are covered by a number of indices. Some of the most popular are the MSCI World and the FTSE Global All Cap.

UK equity is similarly covered by a number of indices. The two most popular are the FTSE 100 and the FTSE All-Share:

• The FTSE 100 tracks the 100 largest listed UK firms, and covers nearly 90% of the market ¹.

• The FTSE All-Share covers more than 98% of the market, by bundling together the FTSE 100, FTSE 250 and FTSE Small Cap indices.

If you wanted the most diversified UK index, you’d pick the All-Share.

However we believe that a global index fund should be at the heart of most UK investors’ portfolios. That’s because with this single fund your money is diversified into thousands of companies from across the world.

You can find out which index a tracker mimics by reading its fund factsheet or web page.

Whose indices are they, anyway?

Indices are created and managed by private companies such as FTSE Russell and MSCI.

These outfits define markets slightly differently, which is why their respective ‘global trackers’, for example, won’t own exactly the same companies.

You can even invest in funds that track (supposedly) more ethical versions of their indices, tweaked to reduce exposure to, say, oil and gas companies or cigarette makers.

However because these niche indices differ from the broader markets, you can expect to earn a slightly different return when you go down this route – for better or worse.

Some firms are bigger than others

One thing that surprises new passive investors is that an index typically doesn’t give every company an equal weighting.

Instead, most indices are weighted by market capitalisation – or ‘market cap’.

The bigger a company’s market cap, the larger its place in the index.

Let’s say we have an index containing just three firms. If Company A is worth £700 billion, Company B £200 billion, and Company C £100 billion, then:

• 70% of your tracker would be invested in Company A
• 20% in Company B
• 10% in Company C

As share prices rise and fall, those weightings then change automatically. A company whose value doubles becomes a bigger part of the index. One whose fortunes decline occupies less space.

Market-cap weighting reduces trading, which helps keep costs down. It also reflects where investors have collectively put their money – a wisdom of crowds approach that typically does better than striving to outsmart the market.

The downside is that today’s biggest firms dominate even the broadest trackers.

At the time of writing, a global equity index is heavily weighted to US technology giants, simply because they account for such a large share of the world’s listed stock market.

Not everyone is comfortable with this level of concentration, fretting that it leaves them exposed to the fortunes of a handful of super-sized companies.

It’s worth mentioning though that if tomorrow’s winners emerge from elsewhere in the market, then the index will gradually adjust to reflect that, too.

Gain with less pain

A tracker’s job is to deliver the return of its index.

It usually does this by holding stocks (or other assets) in proportion to their presence in the index.

Some trackers will hold the lot, some only a sample, and yet others will replicate index returns using more complicated financial products.

These differences in methodology help explain tracking error – the extent to which a tracker fails to accurately track its index in any particular year.

Other drivers of index fund performance include the fees they charge investors and the fund provider’s costs of running the fund and buying and selling assets.

Tiny differences can see two funds that track the same index delivering slightly different returns over time – although rarely by enough to sweat the difference.

How trackers win by being average

The key point is that trackers don’t try to pick the winners. They don’t market time.

They just plod along tracking the index, handing over the returns due from the performance of its component securities.

By its very nature, a tracker fund will never hit three cherries on the fruit machine. It will never turn in a stellar index-trouncing result.

Its task is just to replicate the index.

In fact, a tracker will usually undershoot its benchmark, due to fund costs.

But a tracker’s limited ambition makes it cheap to run. And it’s because they are cheap that most trackers outperform expensive active funds in the long run.

Types of trackers

There are two main types of tracker funds:

• Index funds – The majority of these are now structured as Open Ended Investment Companies (OEIC), while a few are unit trusts. The US equivalent is called a mutual fund.
• Exchange Traded Funds (ETFs) – These are basically index funds wrapped up in a product quoted on the stock market, which you buy and sell like other shares. Buying ETFs can therefore incur higher trading costs, though that’s less of an issue these days with low-cost platforms. Also there is a far greater choice of ETFs than index funds. An ETF may be the only way to get exposure to some markets.

You can read more about the different types of tracker in our archives.

We also keep a watching eye on the lowest-cost index funds for UK investors.

Take it steady,

The Accumulator

p.s. This article on index trackers has been updated after ten years hard labour. Comments below are preserved for posterity but may be out-of-date. Check the date!

1. In terms of the total market capitalisation

The post How index trackers work – index funds explained appeared first on Monevator.

Some big ISA rule changes are coming in from 6 April 2027. They mostly impact cash ISAs. But there are downstream consequences for stocks and shares ISAs, too. 

We’ll briefly summarise the stocks and shares ISA changes here, and then press on with the main business after that. 

6 April 2027 stocks and shares ISA rule changes 

The new rules are intended to prevent investors from treating their stocks and shares ISAs as cash ISAs.

The annual allowance remains at £20,000 per year for a stocks and shares ISA. 

From 6 April 2027, however, a 22% flat rate charge will be imposed upon any cash interest earned within a stocks and shares ISA.  The charge is administered by your ISA manager. You do not need to declare it on your tax form. 

The Personal Savings Allowance will not apply. 

The flat-rate charge applies to everyone regardless of age. 

The flat-rate charge does not apply to non-cash interest. It’s not levied on money market fund interest, for example. 

If money market funds are the only investment in your stocks and shares ISA account then they will be deemed non-qualifying. 

A non-qualifying investment must be sold or transferred outside the ISA, by the ISA manager, within 30 calendar days of the date upon which the money market fund became non-qualifying.

This rule applies to everyone regardless of age. 

Hold less than 100% of your stocks and shares investments in money market funds to avoid the status change from qualifying to non-qualifying investment.  

Finally, under 65s won’t be allowed to transfer a non-cash ISA to a cash ISA. This rule does not apply if you’re over 65, or turn 65 in the current tax year. 

2026 to 2027 stocks and shares ISA guide

The joy of a stocks and shares ISA is that it legally protects your investments from tax on growth and income. That’s more important than ever as tax-free allowances are slashed and tax rates go up.

If you hope to build wealth through investing then shielding your gains from unnecessary tax must be a core part of your strategy.

ISAs are tax-efficient ‘wrappers’ created by the UK government to encourage saving. Any investment inside the ISA wrapper can grow tax-free as long as you don’t break the rules.

Stocks and shares ISAs are provided by high street banks, fund managers such as Vanguard, financial advisors, and specialist online brokers or platforms.

You get a new ISA allowance every tax year. You can put the entire amount into a stocks and shares ISA if you wish.

£20,000 is the maximum amount of new money you can pay into a stocks and shares ISA during the tax year 2026-27. (£9,000 in a JISA ¹). The same limit will apply until the tax year: 2031-2032 at the earliest. The tax year runs from 6 April to 5 April.

The ISA deadline is 5 April every year. That’s the last day of the current tax year you can use up your allowance. You get a new allowance from 6 April. But you can’t roll over unused ISA capacity from the previous year.

If you’ve left things late then know it’s enough to have the cash taken off your debit card and inside your ISA by close of business on 5 April. You don’t need to have actually invested the cash for it to qualify for tax-free protection.

Why open a stocks and shares ISA?

A stocks and shares ISA combines three critical features:

• The ability to invest in assets that are expected to grow faster than cash.

• Legally recognised tax protection. You don’t have to worry about HMRC handing you a large bill because you invested in some sketchy offshore caper.

• Instant accessibility. You can invest in liquid holdings that can be sold to meet unforeseen difficulties or other life events that occur before you reach pension age.

In short, ISAs are a private investor’s top tax-protection shield, along with pensions.

• Find out more about the benefits of ISAs vs SIPPs.

Which taxes are not paid in a stocks and shares ISA?

The main taxes that you do not have to pay on investments in a stocks and shares ISA are:

• Income tax on interest – as earned on bonds and bond funds. The rate is going up 2% across the board from 6 April 2027. 

• Dividend income tax – as paid by shares, equity funds, and property funds. UK REITs and PIAFs pay Property Income Distributions (PIDs) with tax already deducted. You need to claim this back if you hold these fund types in an ISA. 

• Property income tax – Will be charged at a basic rate of 22%, higher rate of 42% and additional rate of 47% from 6 April 2027. Income from UK REITs and PIAFs will be liable for these rates instead of dividend income tax from April 2027. 

• Capital gains tax on profits – as paid on the growth in value of taxable assets when you sell them.

• Inheritance tax – although it’s complicated, and depends on the ISA passing to a spouse or civil partner who’s not been estranged from the deceased.

• Interest and dividends paid straight out of your ISA are not taxed.

• ISA withdrawals aren’t taxed, unlike with a pension. (You will pay a penalty if you withdraw from a Lifetime ISA at the wrong time).

Even more reasons to use an ISA

Investing in a stocks and shares ISA is a no-brainer, even if you think your holdings are too small to be caught up in the taxman’s net.

• Many providers charge you no more for holding an ISA than they do for keeping your assets in a taxable account.

• Though most of us start out small, your investments can grow surprisingly rapidly. Over the years you will outstrip your ability to manage everything within your tax allowances.

• Taxes are going up. On top of explicit increases in dividends and capital gains, other UK tax thresholds are frozen until April 2031. This is a stealth tax, so use your tax shelters while you can.

• You don’t even have to tell HMRC about your ISA transactions. (Believe me, if you ever have to fill in a tedious capital gains tax form, you’ll fall to your knees with thanks that all your investments are in an ISA.)

ISAs can be mission critical

If you’re on a mission to achieve financial independence (FI) before your minimum pension age ² then stocks and shares ISAs will accelerate you towards your goal.

The best course for most will be to combine ISAs and SIPPs to achieve the FI dream. ISA investments can bridge the gap between your FIRE ³ date and your minimum pension age.

The minimum pension age for accessing your personal pension is currently 55. But the government has confirmed it will rise to age 57 from 6 April 2028. 

A stocks and shares ISA is also a great place to stash your pension’s 25% tax-free lump sum so that you can expand the amount of income you can take without being pushed into a higher tax bracket.

Investment ISA types

You can hold investments in the following types of ISA:

• Stocks and shares ISA
• Lifetime ISA (choose a stocks and shares version not cash)
• Junior ISA (again, shares not cash)

ISA providers call stocks and shares ISAs by various names including:

• Shares ISA
• Self-Select ISA
• Ready Made ISA
• Share Dealing ISA
• Investment ISA
• Workplace ISA
• AIM ISA

They’re all stocks and shares ISAs. But they are given different marketing labels depending on how the provider is trying to appeal to consumers.

A stocks and shares ISA may also be a flexible ISA. This means you can potentially replenish withdrawals you make without running down your ISA allowance.

You can invest in a stocks and shares ISA from age 18 onwards by opening an account with your chosen platform (bank, fund manager, IFA or similar).

We’ve put together a list of providers in our cheapest online broker table. These providers enable you to invest in a DIY stocks and shares ISA. You can see who offers a flexible stocks and shares ISA in the left-hand column.

Stocks and shares ISA rules

You can:

• Have as many stocks and shares ISAs as you like.

• Split money across a stocks and shares ISA, lifetime ISA (LISA), cash ISA, and innovative finance ISA, provided you don’t put in more than £20,000 of new money per tax year. Your annual LISA contributions are capped at £4,000, and new cash ISA savings will be capped at £12,000 per year from 6 April 2027, if you remain under age 65 during the tax year. 

• Transfer money from ISAs (of any type) into multiple stocks and shares ISAs with any provider. 

Transferring old ISA money or assets does not:

• Use up your ISA allowance for the current tax year (unless you’re transferring to a LISA – see below.)

You can transfer any amount of your ISAs’ value. Either transfer the whole lot into one ISA, transfer a portion of it into several ISAs, or any other combo you desire.

How to transfer an ISA

You can transfer any amount from any of your stocks and shares ISAs. 

You can transfer your money into different types of ISA. 

However you can only transfer into one new LISA per tax year from non-LISAs. You’re limited to a maximum of £4,000 and you do get the government bonus on that. Transferring from old non-LISAs into a new LISA doesn’t use up your overall £20,000 annual allowance but it does reduce your LISA allowance. 

Transfers to cash ISAs from stocks and shares ISAs will be forbidden from 6 April 2027 if you’re under the age of 65 during that tax year.

You can’t transfer more than £4,000 into a LISA per tax year. That transfer will also use up your LISA allowance for the year. 

Always transfer an ISA to retain the tax-free status of its assets. Don’t withdraw cash and plop it in a new ISA – that uses up your ISA allowance!

Transfer assets in specie (this avoids them being sold to cash) if you are given the option. In specie moves are also known as re-registration.

• See our comprehensive guide on the ISA allowance rules.
• How to transfer a stocks and shares ISA.

Other ISA funding rules

If you invest £9,000 per tax year in a JISA for each of your children that does not reduce your own ISA allowance.

Replacing cash withdrawn from a flexible stocks and shares ISA does not use up your ISA allowance. However you can’t replace the value of shares, or other investment types, that you moved out of the account. It’s the value of your cash withdrawals that you’re entitled to put back. 

It’s worth checking your ISA’s T&Cs whenever you choose a product. Not all of the government’s ISA rules are mandatory. ISA managers do not have to support all features.

Best ISA funds

The main investment vehicles you can include in a stocks and shares ISA are:

• Mutual funds such as OEICs and Unit Trusts 
• Exchange Trade Products such as ETFs and ETCs
• Investment trusts
• Individual company shares (including fractional shares – this got sorted!)
• Individual government and corporate bonds
• Treasury bills

The government maintains a comprehensive list of the complete menagerie. 

If you are new to investing then our passive investing HQ can explain more.

Remember that the assets listed above are riskier than cash – you can get back less than you put in.

It’s worth regularly reflecting on how much risk you might be able to handle as you build your investing portfolio.

Index trackers are an investment vehicle that combine simplicity and affordability. They are recommended by some of the best investors in the world – and us.

• See our list of particularly useful low-cost index funds and ETFs. 

The Financial Services Compensation Scheme (FSCS) provides some investor compensation should your ISA or investment manager go belly up. Do take a look at the link. The scheme is convoluted, to say the least.

Stocks and shares ISA costs

You can expect to pay stocks and shares ISA investment fees that cover:

• Your ISA provider’s management costs
• The cost of owning investment funds
• Dealing fees for trading investments in the open market
• Fees for special events such as transferring your ISA

All fees should be transparently laid out by your ISA provider and investment fund managers.

Charges that can be paid from monies held outside of your ISA, if your provider agrees, include:

• ISA provider’s management costs
• Fees for special / one-off events, such as closing your account

Charges that must be paid from funds held within the ISA include:

• Dealing fees
• The cost of owning investment funds

A flexible ISA doesn’t enable you to replace the cost of ISA charges against your allowance.

Beware of transfer fees that can rack up when your provider charges you ‘per line of stock’. For example they might charge you £15 per company stock and investment fund that you own.

Tax efficiency

You can’t transfer most unsheltered assets straight out of a taxable account and into your stocks and shares ISA wrapper.

You generally have to sell the assets first and buy them again inside your ISA. This is colloquially, if not popularly, known as Bed and ISA.

Selling an unsheltered investment can cost you capital gains tax on your profits. But you can duck that by staying within your capital gains tax allowance and defusing your capital gains.

You can transfer employee share save scheme shares directly into an ISA in some circumstances.

If you want to invest more than you can squeeze into your annual ISA allowance, then research tax efficient investing to avoid building up a capital gains tax time bomb.

Inheriting a stocks and shares ISA

Your surviving spouse or civil partner can receive your ISA assets tax-free upon your death. Although do check that the T&Cs of your particular stocks and shares ISA allow for it to remain tax-free and invested after your passing.

++Monevator Minefield Warning ++ The rules below apply equally to spouses and civil partners but we’ll just refer to spouses for brevity’s sake. Unmarried couples do not benefit from these special inheritance rules. See our article on how unmarried couples can protect their finances.

A surviving spouse is given a one-off ISA allowance that equals the value of your ISAs. 

This is called the Additional Permitted Subscription (APS).

A spouse uses the APS to add the value of their deceased partners’ ISAs into ISA accounts held under their own name. 

For example, if you die with ISA assets worth £50,000, then your spouse is entitled to an APS of £50,000.

Plus they get their usual annual ISA allowance on top.

The APS effectively means your spouse benefits from the tax-free status of your ISA assets after your death.

The APS is worth the higher of:

• Your ISA’s value at the date of your death
• Or the value of your assets when the account is closed. (This assumes no part of the APS has been used up to that point)

Surprisingly, your spouse still benefits from the APS even if your ISAs are willed to someone else. 

In this scenario, your partner can fund their APS from their own money or other inherited assets.

That said, under most circumstances, a surviving spouse will fill their APS simply by transferring their deceased partner’s ISA assets. 

The APS must be used no later than:

• Within three years of the date of your death 

OR

• Within 180 days of the completion of the administration of your estate, if that’s later

The surviving spouse does not have to wait until the estate is settled to use the APS though. 

Managing an inherited ISA

Assets within the deceased’s ISA can be managed by their personal representatives before it is closed. However they can’t make new contributions into the account. 

The ISA continues to grow tax-free until the earlier of:

• Completion of the administration of the estate.
• Closure by your executor
• Three years and one day after your death. The account is automatically closed at this point

If you have multiple ISAs with different providers then your spouse’s APS is divided between them according to the value of the ISAs lodged with each firm. 

Your spouse must claim each portion of their APS from each ISA provider involved.

Again, check that the various providers of your ISAs subscribe to these rules as described. Terms can vary.  

More ISA inheritance rules

(Because there isn’t enough to think about already…)

The other main wrinkle is that your spouse can only receive assets in specie from a stocks and shares ISA by transferring them to the same provider that you held them with.

They can then transfer the assets to another manager once held in their own name.

Another clause is that assets transferred in specie must be the ones held on the date you were told of the death of the investor. (Some might see this rule as pretty heartless. However I don’t know about you but the very first thing I want to know after hearing the news of my partner’s death is the list of non-cash assets they’ve got tucked in their ISAs. Let’s cut to the chase! ⁴)

In specie transfer must be made within 180 days of the assets passing into the beneficial ownership of the surviving spouse.

Your ISAs do not pass on their tax-free status to anyone other than your spouse. 

The tax benefits do not apply if you and your surviving partner were not living together on the date of death, or were legally separated, or in the process of becoming legally separated. 

AIM-ing for even more

Some wealth managers and platforms market AIM ISAs that twin the advantages of a stocks and shares ISA’s tax efficiency with the inheritance tax-elusiveness of Alternative Investment Market (AIM) shares.

Some but not all AIM shares qualify for inheritance tax relief under peculiar government rules that are subject to change.

An AIM ISA is:

• Risky
• Not guaranteed to work out
• Subject to high minimum investments, which add a naughty elite frisson to the escapade

Check out the links above if you need ‘em.

Stocks and shares ISAs aren’t just for the rich

Some people think ISAs are a rich person’s concern. That’s because few have experience of paying capital gains tax, or even income tax on share dividends.

However even modest savings can really add up to a big portfolio in a bull market, at which point the tax protection is invaluable.

Shielding your investment returns from tax like this can make a huge difference to your end result from investing.

Finally, if you want to optimise your ISA to the max then take a look at our cheapest stocks and shares ISA hack. 

Take it steady,

The Accumulator

1. Junior ISA for kids.
2. The moment you can first crack open your personal pension.
3. Financial Independence Retire Early.
4. Sarcasm.

The post Stocks and shares ISAs: everything you need to know appeared first on Monevator.

The biggest change in years is coming to ISAs from 6 April 2027: the cash ISA allowance is being cut to £12,000 if you’re under age 65. The cash ISA allowance will remain at £20,000 if you’re over 65.

The new cash ISA contortions have a knock-on effect upon the stocks and shares ISA, too. HMRC has drawn up the so-called anti-circumvention rules to prevent people from treating their stocks and shares ISAs as proxy cash accounts.

Perhaps it would be better to treat people like adults and allow them to make up their own minds about the best way to use their savings?

Be that as it may, we’ll summarise the 6 April 2027 changes here, and then look at making the most of your ISA allowance with the rules as they stand in the tax year 6 April 2026 to 5 April 2027.

6 April 2027 ISA rule changes

The cash ISA allowance will be £12,000 if you’re under 65.

The cash ISA allowance will be £20,000 if you’re over 65, or turn 65 in the current tax year.

Under-65s won’t be allowed to transfer a non-cash ISA to a cash ISA.

Cash can be held in a stocks and shares ISA.

A 22% flat rate charge will be levied on interest paid on cash held in a stocks and shares ISA. This charge applies to everyone, regardless of age.

The charge will be paid directly by your ISA platform. There’s no need to declare anything on your tax form and the Personal Savings Allowance will not apply.

Money market funds will be categorised as a cash-like asset.

If money market funds are the only investment in a non-cash ISA account then they will be deemed to be a non-qualifying investment. This rule applies to everyone, regardless of age.

A non-qualifying investment must be sold or transferred outside the ISA, by the ISA manager, within 30 calendar days of the date upon which the money market fund became non-qualifying.

The 22% charge does not apply to money market fund interest held in stocks and shares ISAs.

Simply hold less than 100% in money market funds in the investment portion of your stocks and shares ISA to avoid them being categorised as non-qualifying.

The total annual ISA allowance is unchanged at £20,000

Your annual ISA allowance ¹ for the current tax year to 5 April is £20,000.

The allowance will remain frozen at £20,000 until 6 April 2031. (Watch this space!)

It is only cash ISAs that are being capped at £12,000 in 2027.

Once the cash ISA cap cap comes into force, you’ll need to split your money between multiple ISA types if you want to max out your overall ISA allowance. So you could put £12,000 into a cash ISA and £8,000 in a stocks and shares ISA, for example.

The government is also consulting on replacing the Lifetime ISA (LISA) with a new product aimed at first time home buyers.

Existing LISAs will apparently be allowed to continue as per the current rules.

Okay, that’s all the major changes for now. On with the guide!

What is an ISA?

ISA stands for Individual Savings Account. It’s the UK’s most important tax-free account for those savings and investments you want to access before retirement age.

ISAs are called tax-free wrappers because they legally protect the assets inside the account from:

• Income tax on interest paid by cash, bonds, and bond funds. (The tax rate on ‘savings income’ outside of ISAs is going up 2% from 6 April 2027.)

• Dividend income tax on dividends paid by shares and equity funds.

• Capital gains tax paid on the growth in value of assets, such as shares, bonds, and funds.

You don’t even have to declare your ISA assets on your self-assessment tax return. This can save you a ton of tax paperwork.

Your assets remain tax-free as long they’re held in an ISA account… so long as you don’t have the cheek to die.

And you don’t lose out if you move abroad. (At least not from the perspective of the UK government.)

Unlike a pension, your ISA funds are typically ² accessible at any time.

You’re also not charged income tax on withdrawals from an ISA – again unlike a pension. So there’s no danger of being pushed into a higher tax bracket by the wealth you accumulate in your ISA.

• Read up on ISAs Vs SIPPs to learn how best to allocate between them.

ISA accounts: what types are there?

The ISA allowances are currently frozen until 6 April 2031.

Help to Buy ISAs are no longer available. If you have one already you can continue to save into it until 30 November 2029.

How much can I put in an ISA in 2026 – 2027?

You can save up to £20,000 of new money into your ISAs during the tax year 6 April 2026 to 5 April 2027.

All £20,000 of your ISA allowance can go into one ISA ⁵ or you can split it across any combination of the following ISA types:

• Cash ISA
• Stocks and shares ISA
• Lifetime ISA (£4,000 annual limit)
• Innovative Finance ISA

You can pay new money into multiple ISAs of the same type. The exceptions are the LISA and JISA. LISAs are restricted to one per year while a JISA allowance can be split between one cash JISA and one stocks and shares JISA.

Aside from the exceptions you can fill your boots. You can open and fund two stocks and shares ISAs in the same year – or seven different cash ISAs if you feel the need – just so long as you don’t pay in more than £20,000 total into all your ISAs within the tax year.

What about money in previous years’ ISAs? That money does not count towards your annual ISA allowance for the current tax year.

For clarity’s sake, we’ll refer to assets in your previous years’ ISAs as old money. Assets in the current tax year’s ISAs we’ll term new money.

Interest, dividends, and capital gains earned on assets already held within an ISA do not count towards your ISA allowance.

Your £20,000 ISA annual allowance is a ‘use it or lose it’ deal. You can’t rollover any of it into the following tax year.

ISA transfers

An ISA transfer enables you to officially switch an ISA’s holdings to another provider. This way you avoid losing the tax exemption on your assets when moving them.

The transfer rules for any ISA opened in the current tax year are straightforward:

• You can transfer any amount of your ISA’s balance from one provider to another. You used to have to transfer the whole balance of your current tax year ISA but that rule has been scrapped.

• You’re free to transfer your ISA at any time to another provider. No buyer’s remorse with ISAs!

• You can currently transfer to any other type of ISA, or even the same type. However, HMRC say that from 6 April 2027 you will no longer be able to transfer from a non-cash ISA into a cash ISA, if you’re under 65.

• You will be able to transfer as you see fit if you’re over 65.

• If you transfer from one type of ISA to another, then you count as subscribing to the receiving ISA type. For example, you transfer from a cash ISA to a LISA.

• If you transfer from a Lifetime ISA to a different ISA type before age 60, you’ll have to pay a nasty penalty charge.

• Beware any transfer fees imposed by your current ISA provider.

• Transfers into a Lifetime ISA must not exceed the £4,000 current tax year limit.

The golden rule with any ISA move is always to transfer your money. Don’t just go “sod it!” and withdraw your cash in a flounce. If you transfer your ISA to another provider, your assets retain their tax-free status. If you just withdraw the money they don’t.

• Find out how to transfer a stocks and shares ISA.

ISA transfer rules for previous years’ ISAs

You can transfer any amount from any of your old ISAs to the same or any other type of ISA.

• Any number of your old ISAs can be consolidated into a new ISA of the same or different type.

• Any of your old ISAs can be split by transferring a portion of the balance into multiple ISAs of the same or different types.

• You can transfer to the same or different providers.

Transferring previous years’ ISAs leaves your current tax year’s allowance untouched.

For example, moving £40,000 from an old ISA into a new ISA still leaves you with a £20,000 ISA allowance for the current tax year.

You could transfer £4,000 into this year’s LISA from an old ISA (of any type), gain the government bonus, and leave your £20,000 allowance entirely intact.

This move maxes out your LISA allowance for the tax year. You must not then exceed that £4,000 LISA limit by transferring more cash into the LISA during the current tax year.

As before, make sure you transfer an ISA. Employ the new provider’s ISA transfer process to maintain your ISA money’s tax-free status. Don’t withdraw cash or re-register assets using any other method.

Withdrawing from an ISA

If you withdraw money from your ISA, can you replace it and not reduce your ISA limit?

Yes, but only if your ISA is designated as ‘flexible’.

If your ISA is not flexible (ask your provider) then a withdrawal reduces your tax-free ISA savings as follows:

• You put £10,000 into your stocks and shares ISA. That reduces your ISA allowance to £10,000.
• Next you withdraw £5,000 from your ISA.
• You can only contribute another £10,000 into your ISAs this tax year.
• Put that money in, and you’ll have added £15,000 to your ISAs in total by the end of the tax year.

Obviously £15,000 is less than £20,000, and so you’ll not have maximised your annual allowance.

Enter Flexible ISAs, which get around this problem.

Flexible ISAs

Flexible ISAs let you withdraw cash and put it back in again later the same tax year without losing any of your current tax year’s ISA allowance or reducing how much you’ve saved tax-free.

The following ISA types can be designated as flexible:

• Stocks and shares ISA
• Cash ISA
• Innovative Finance ISA

Flexibility is not an inalienable right. An ISA provider must decide to offer it and to deal with the administrative faff. Providers may offer flexible and inflexible versions of the same ISA type.

Here’s how the flexible ISA rules work:

• ISA allowance = £20,000
• Contributed so far = £10,000
• Remaining contribution = £10,000
• You choose to withdraw = £5,000

In this case you can still pay £15,000 into your flexible ISA before the ISA deadline at the end of the tax year because:

Remaining ISA allowance = £15,000 (£10,000 remaining contribution + £5,000 replacement of the withdrawal.)

If your ISA was inflexible then your remaining ISA allowance would be just £10,000. In other words, you couldn’t replace the withdrawn amount and it would have lost its tax-free status.

Flexible ISAs: contributing factors

Contributions made to an ISA in the same tax year as withdrawals work in this order:

1. Replace the withdrawal.
2. Reduce your remaining ISA annual allowance.

Withdrawals from an old flexible ISA can be replaced in the same tax year. This won’t reduce your current ISA allowance, provided the ISA is no longer active. ⁶

When flexible ISAs contain assets from previous tax years and the current tax year it works like this:

Withdrawals

1. From money contributed in the current tax year.
2. From money contributed in previous tax years.

Replacement contributions

1. Replace previous tax years’ withdrawals.
2. Replace current tax year withdrawals.
3. Reduce your remaining ISA annual allowance.

All replacement contributions must happen in the same tax year as the withdrawal.

Some providers say the withdrawal has to be replaced in the same ISA account you took it from.

More quirky than an octogenarian British actor

The ISA rules enable you to put your withdrawn money back into different ISA type(s) with the same provider, if they make that facility available.

Check your provider’s T&Cs. Or send them thousands of emails in BLOCK CAPITALS until they respond.

A flexible stocks and shares ISA allows you to replace the value of cash withdrawn. You can’t replace the value of shares, or other investment types that you moved out of the account, should they afterwards change.

You can sell down your assets, withdraw the cash, and then replace that cash later in the tax year, and buy more assets with it.

Dividend income should also be flexible in a flexible ISA scenario.

If you transfer your flexible ISA to another provider, then check its product is also flexible.

You may lose the ability to replace withdrawals if you don’t replace them before you transfer a flexible ISA. Again, this is determined by your provider’s T&Cs rather than the rules. (Subject them to a paid social media campaign to get an answer on this one.)

If your withdrawals result in your account being closed, your provider can allow you to reopen your flexible ISA in the same tax year and replace the money. That applies to old and new ISA accounts.

Again, check with your provider. (Via a billboard installed outside their office if need be.)

Flexible ISA hack to build your tax-free ISA allowance

1. Open a flexible, easy access cash ISA that accepts ISA transfers.
2. Transfer your non-flexible old ISAs into the flexible ISA.
3. Your flexible ISA now accommodates the value of the old ISAs – say £40,000.
4. If your flexible ISA doesn’t pay table-topping interest then withdraw your cash and spread it liberally among the humdinger savings accounts of your choice, or an offset mortgage.
5. Move your cash back into the flexible ISA by 5 April of the current tax year. Fill as much of the current year’s ISA allowance as you can, too. For instance another £20,000.
6. In our example, you now have £40,000 + £20,000 = £60,000 tax-free and flexible.
7. From April 6 of the new tax year: withdraw your cash and liberally spread it.
8. Repeat as required – because this operation will be severely curtailed when the new cash ISA limit comes in.

This method builds up a large and flexible tax-free shelter. One that could prove valuable later in life, when you have more money to tuck away.

For example, perhaps it could become a place to shelter and grow your 25% tax-free pension cash when you take it. This could be instantly transferred into a stocks and shares ISA, come the day.

Or maybe you’ll sell a business, or receive some other windfall.

Watch out for the £120,000 FSCS compensation limit (see below). Open a new flexible ISA with a different authorised firm before you go over that line.

What happens if you exceed the ISA allowance?

HMRC should get in touch if you exceed the ISA allowance. You may be let off for a first offence, but otherwise it will instruct your ISA provider on what action to take.

Action is likely to include your extraordinary rendition to an offshore black site where you will be forced to read HMRC compliance manuals for the rest of your life.

Alternatively, HMRC may require overpayments and excess income to be removed from your account. And also invite you to pay income tax and capital gains (potentially on all assets in the ISA) from the date of the invalid subscription until the problem is fixed.

Eek!

Your ISA provider may also charge you a fee for the hassle.

You can similarly get into hot water for dropping new money into your ISA as a UK non-resident or for breaking the age restrictions.

You can call HMRC on 0300 200 3300 to discuss all this.

Just don’t expect them to admit to the Deep State stuff. Open your eyes sheeple! [Editor’s note: we’re joking.]

FSCS compensation scheme

What if your ISA provider goes bust and your money can’t be recovered? In that case the Financial Services Compensation Scheme (FSCS) waits in the wings.

• Cash – You can claim up to £120,000 compensation on cash held with each authorised firm.

• Stocks and shares – It’s more complicated, quelle surprise. But you can claim up to £85,000 compensation on investments held with each authorised firm.

• Innovative Finance – Not covered by the FSCS. You’re on your own.

Watch out for the definition of an ‘authorised firm’. Often multiple brand names sit under the same authorised firm umbrella.

For example, if you have cash at HSBC and First Direct then you’re only covered for £120,000 across both. They are one and the same authorised firm.

Investments parked at the same bank should be covered for another £85,000. That’s on top of your cash.

• Check the FCA’s Financial Services Register to see what services your provider is authorised for.
• Brands with matching FRN numbers (also known as registration numbers) count as the same authorised firm, not two separate firms. In other words, your accounts with both firms shelter under a compensation limit of £120,000 (cash) / £85,000 (investments).

Inheriting an ISA

The tax-free benefits of an ISA can be passed on to a surviving spouse or civil partner. 

(We’ll refer to a ‘spouse’ in the rest of this section but the ISA inheritance rules apply equally to a civil partner. Unfortunately they do not apply to unmarried partners). 

Upon death, all types of ISA (except a JISA) transform into a ‘continuing account of a deceased investor’. 

This so-called ‘continuing ISA’ can then grow tax-free until the deceased’s affairs are settled. 

The tax benefits of the deceased ISAs transfer to their spouse using an Additional Permitted Subscription (APS). 

The APS is a one-time ISA allowance that enables the surviving spouse to expand their ISA holdings up to the value of the deceased’s ISA accounts. 

By this mechanism, the tax-free status of the deceased’s ISAs are passed on to their spouse. 

Unfortunately, the rules descend into a bureaucratic quagmire from there. 

ISA inheritance rules for the Additional Permitted Subscription

A surviving spouse qualifies for the APS even if the ISAs are actually willed to someone else. 

However, a spouse does not qualify if the couple are not living together at the time of death, or the marriage has broken down, they are legally separated, or in the process of being legally separated. 

The value of the APS is the higher of:

• The ISA’s worth at the date of death
• Its value when the continuing ISA account is finally closed (assuming part of the APS hasn’t already been used)

The APS must be claimed separately from each of the deceased’s ISA providers. 

You can choose which of the two valuation options above apply to each ISA provider. You don’t have to pick one option that applies across the board with every provider

The APS can be used from the date of death. 

Although you’d normally expect an APS to be funded by the inherited ISA assets, this is not necessary. An APS can be fulfilled by any assets the spouse owns. 

The APS must be used within:

• Three years from the date of death
• 180 days after the completion of the administration of the estate, if that’s later. 

The APS does not interfere with the spouse’s own ISA allowance. They get that as normal. 

APS subscriptions count as previous tax year subscriptions.

You should check the terms and conditions of all your ISAs to ensure they adhere to APS provisions. ISA providers aren’t automatically obliged to comply with the APS rules. 

APS rules per ISA provider

One common restriction is that the spouse must use their APS with the same provider that runs the deceased’s ISA account. This leads to extra complications, as we’ll cover below. 

As mentioned, the APS is divided into separate amounts that align to the value of the deceased’s continuing ISA accounts – as held with each of their providers.

For example:

• A continuing ISA worth £100,000 is held with provider A
• A continuing ISA worth £50,000 is held with provider B

The surviving spouse can now fund up to £100,000 of APS in ISAs with provider A, and up to £50,000 with provider B. 

You can’t fill ISAs worth £75,000 with both providers. You can only ‘spend’ up to the limit of each APS per provider. 

However, you can split each APS between any number and type of ISA per provider. (Although there are restrictions on the Lifetime ISA.)

You can fill both new and existing ISAs with each provider. 

Transferring inherited ISA assets

In specie transfers from a continuing stocks and shares ISA must be made within 180 days of the assets passing into the beneficial ownership of the surviving spouse.

The in specie transfer can only be made to a stocks and shares ISA held by the spouse with the continuing ISA’s provider. 

The assets must be the same as those held on the date of death. 

Alternatively you can sell the investments for cash. The money can then be used to fund the APS with slightly fewer restrictions. 

You can always transfer your ISAs to another provider as normal – after you’ve used your APS. 

Lifetime ISA APS restrictions 

You can’t open a new Lifetime ISA unless you’re aged between 18 to 40. 

You can’t pay into an existing Lifetime ISA unless you’re under 50. 

The APS does use up your £4,000 annual Lifetime ISA allowance. 

You can’t pay APS into a Lifetime ISA if you’ve already paid into one in the current tax year. 

A continuing ISA’s tax-free growth limits

Before the deceased assets are transferred via the mechanism we’ve just described, they grow tax-free in continuing ISAs until:

• Completion of the administration of the estate
• The accounts closure by the deceased’s executor
• Three years and one day after the date of death. Then the account can be closed by the ISA provider 

The earliest of these dates applies. 

The value of the deceased’s ISA holdings count towards their estate. The tax-free benefits are only passed to a surviving spouse. 

Inheritance ISAs are a marketing label not an additional type of ISA. Every ISA can be inherited as described above. But please check your provider’s T&Cs for additional restrictions. 

What happens to my ISA if I move abroad?

You can still put new money into your ISA for the remainder of the tax year when you stop being a UK resident. But you can’t contribute new money again until your residential status changes back.

Your ISA assets will continue to grow free of UK tax. But watch out! Your new country of residence may demand a slice.

In addition:

• You should still be able to transfer ISAs without losing your tax exemption.
• Ditto for withdrawing money from a flexible ISA and replacing it.
• You can still inherit an ISA using the APS even if you’re resident abroad.

Check with your provider before doing anything, just to be safe.

You should also tell your ISA provider when you’re no longer a UK resident. The UK means England, Wales, Scotland, and Northern Ireland. The Channel Islands and the Isle of Man are excluded.

If you split your time between the UK and other territories you can do a residency test. This will determine your status. Fun!

You don’t lose your ISA annual allowance if you’re a Crown employee serving overseas, or their spouse or civil partner.

A few final ISA wrinkles

• Each ISA can be held with the same or a different provider.

• Payment into a JISA uses up the child’s allowance, not yours.

• You can now hold fractional shares in a stocks and shares ISAs. They are ‘fractional interests’ in this list of qualifying investments.

• Some providers have all-in-one cash ISAs. With these you can split new money between instant access and fixed-rate options, within a single ISA wrapper.

• A workplace ISA counts as a stocks and shares ISA.

• You can only claim the government bonus when buying your first home from a Help to Buy ISA or a Lifetime ISA. Not both.

Any questions?

Well, we’re sure this brief post has cleared everything up… But do let us know in the comments if we’ve missed a bit.

You can also check out the government’s official ISA pages if you’re a completist!

Take it steady,

The Accumulator

Note: This article on the ISA allowance was updated in July 2026. Reader comments below may refer to older ISA rules. Check the date to be sure.

1. Also known to the government but to nobody else as the ‘subscription limit’.
2. Exceptions: funds in a Junior ISA before the child reaches age 18, Lifetime ISA, Innovative Finance ISA loan lock-ins, and fixed-term/regular saver Cash ISAs where you’ll pay various penalties for early release.
3. Max per year, per person.
4. per child
5. The max contribution into a LISA is £4,000 a year.
6. That is to say you’re no longer filling it with new money.

The post The ISA allowance: how it works and how to use it appeared first on Monevator.

What caught my eye this week.

The post Weekend reading: Alas, Smith and moans appeared first on Monevator.

Back in lesson 3 of this series, we saw how different assets can perform differently at different times.

But what are these assets? And why should they go their own way?

An asset is something you can own, buy, and sell. It’s the opposite of a liability.

• A house that you own is an asset.

• Your mortgage is a liability.

One person’s asset can be another person’s liability.

Your mortgage is a valuable asset for your bank. You’re contractually obliged to pay it back, plus interest.

The main asset classes

The natural world is divided into broad classes like mammals, fish, and fungi – and mammals are then divided into cats, monkeys, and more.

The world of investing works much the same way. Assets fall into broad groups, with subdivisions within each one.

In investing, the big groups are called asset classes.

The main ones are:

• Cash

• Bonds
  • Government bonds (UK Gilts or US Treasuries)
  • Corporate bonds

• Shares – Also known as equities

• Property
  • Commercial property
  • Residential property (your house or a buy-to-let investment)

• Commodities – especially gold, but also stuff like timber, wheat, and oil

• Alternative assets
  • Wine
  • Paintings
  • Stamps

Different asset classes perform differently for two main reasons:

• Economic conditions – Inflation, interest rates, and economic growth affect different asset classes differently, and at different times.

• Emotion – Investors (asset buyers) are by turns fearful and greedy.

More on that below.

Asset classes in (un) reality

Let’s consider a fictitious company: Brixton Unlimited Nappy Services (Stock market symbol: BUNS).

BUNS was founded in 2000 to sell nappies to mums across London.

To raise the money to get started, BUNS floated on the stock market by issuing 100,000 shares at £10 each, raising £1,000,000. These shares can now be freely traded between investors, so the price changes. Each share is a part ownership in BUNS, entitling the owners to a certain share of the company’s fortunes.

Note that only the initial flotation actually invested money into the company.

If you buy ten shares in BUNS from me, a fellow private investor, then no money goes back to BUNS. It’s similar to if you buy a 1930s semi-detached house or a Van Gogh painting – no money goes back to the builder or to the artist from these second-hand purchases.

Only shares issued directly by the company bring money back to its own coffers.

After a while BUNS wants to expand. It could issue more shares to do so – raising more money by dividing itself up to increase the shares in issue to say 200,000 – but that would dilute existing shareholders and reduce the price of existing shares.

Many BUNS directors are also BUNS shareholders, and they don’t like the sound of that!

Instead it issues 100,000 bonds at £1 each. These bonds promise to pay the owner 10% interest every year for 10 years, at which time they will be redeemed by the company (cancelled) and anyone owning the bonds will get £1 back.

The bond issue raises £100,000. The company spends £60,000 of it buying and fitting out a new nappy shop in Chiswick – an investment in commercial property. It keeps the other £40,000 as cash in the bank for future investment. The annual interest due to the bondholders is paid from the company’s earnings.

After a while, the managers get fed up with the price of their nappies going up due to rising raw material costs. They spend £30,000 to buy an exchange-traded fund (ETF) tracking commodities like cotton. They hope that if cotton prices go up, reducing profit margins, this will be partly offset by the ETF price rising.

Business goes well, and soon BUNS is making millions. It can easily pay the interest on its bonds and also pay shareholders an increasing dividend.

Eventually success goes to the directors’ heads, and they decide they deserve to work in classier surroundings. They’re also a bit bored of the boring nappy business. They buy several trendy paintings by the graffiti artist Banksy for the office.

They tell shareholders that the paintings are an investment in alternative assets!

Asset classes and risks and rewards

Different asset classes have their own risk versus reward traits.

We’ve already seen, for example, how cash is the safest asset class. The riskiest mainstream asset class is shares, but the rewards can be higher, too.

As we saw in lesson three, however, a lot depends on when you buy your assets.

Asset classes or sub-classes can become overvalued as a whole – think Spanish property in 2008 or meme stocks in 2021 – as well as undervalued.

But the risk/reward tends to follow this fun graph:

Risk and potential reward rises towards the top right of the graph.

Asset classes and diversification

Note the difference between an asset class, and an asset within that class:

• Tesco and Barclays shares are both assets from within the equities asset class.

• Cash you keep in a Barclays bank account is from an entirely different asset class – cash.

Some investors think they are well-diversified because they have a portfolio of 20 different companies.

But all those holdings are from the same class: shares!

• Vertical diversification – Splits money between several different asset classes.

• Horizontal diversification – Hold different assets within an asset class.

To achieve a well-diversified portfolio, an investor first divides her money between different asset classes, and then further spreads it around by buying different assets with each sub-division.

For example, allocating 20% of your money to equities gives you that exposure to the asset class of shares ¹.

If you put that 20% equity allocation into a UK index-tracking fund, then it’s further spread across the many companies that make up the UK index. Choose a global tracker fund and your investment is spread even more widely.

• Vertical diversification helps protect you from stuff like a stock market crash or a property slump – or from missing gains because all your money is in cash.

•  Horizontal diversification protects you from local troubles, such as a company making a loss, or an individual bond issuer defaulting on the income it owes you.

The philosopher Francis Bacon had all this figured out 400 years ago, writing:

Money is like muck. No good unless spread.

By muck he means animal manure. Great if spread about to fertilize future crops. A potentially stinking liability if left in a pile in one corner!

Why do the asset classes move differently?

I’ve explained how diversification across different assets helps spread your risk.

Put simply: when one asset is zigging there’s a chance another is zagging.

But why is this the case? They’re all investments, after all. So why should bonds ever go up, say, when shares go down?

Well, the first thing to say is they might not. Diversification is not a panacea.

Investors talk about the correlation between different asset classes, which is a way of describing how they tend to move versus one another. And almost all assets are somewhat correlated with the others. There’s no precise formula you can use to create perfectly offsetting combinations of assets in your portfolio.

Okay, so with that said, why aren’t they all perfectly correlated?

Essentially it’s because different asset classes respond differently to changes in the economy – and also to shifts in fear and greed among the investing masses.

Your pain is my gain

For example, imagine that inflation suddenly jumps.

Cash in the bank becomes less attractive because rising prices erode its purchasing power.

Nominal bonds may also suffer, especially if interest rates rise to combat inflation.

However companies might eventually pass the higher costs onto customers, and so their profits can recover. Property rents may increase, helping to support valuations.

Over the long run, these asset classes have generally beaten inflation.

Commodity prices often rise during inflationary periods, too. That’s because they are the raw materials whose prices are increasing in the first place.

Again, none of these reactions is guaranteed. And they certainly don’t run to the same timetable.

Sometimes shares and property rise together. Bonds can go down even in a stock market crash. And one asset class can have a great year while another struggles.

This imperfect relationship is exactly why investors diversify. Rather than trying to predict which asset class will be next year’s winner, you follow Francis Bacon’s advice and spread your muck around!

Asset allocation and you

Owning a diversified portfolio means you’ll never do as well in a particular year as you would if you only owned the best-performing asset.

But you will also avoid having all your money in the worst. And sometimes – such as when stock markets crash – you’ll be very grateful for that.

Over long periods, a diversified portfolio will very likely deliver a smoother journey than betting it all on a single asset.

So should you own a bit of everything, then?

Well, the long answer is a bit beyond the scope of this investing lesson.

But the short answer is: not really.

Most private investors build their portfolios from just one to three asset classes.

A handful of appropriate funds – with a well-diversified equity fund at the heart of the portfolio, typically married with high-quality bonds – has long been seen as the gold standard for set-and-forget investing for the masses.

This sort of diversification – the so-called 60/40 portfolio – is core to very popular fund-of-funds like Vanguard’s LifeStrategy offerings.

Just tweak your equity exposure to match your risk tolerance and then get back to Netflix.

Beyond the beginner stage

There was a time when the 60/40 was central to Monevator thinking, too.

However our take has evolved, and we now have doubts that standard government bonds alone will always provide sufficient diversification:

• Why a diversified portfolio needs more than bonds
• The 60/40 portfolio’s glaring weakness
• How to improve the 60/40 portfolio
• The minimal viable alternative to the 60/40 [Members]

With all that said (and read!) if you’re a beginner, I’d still suggest getting started with a very simple asset allocation.

Leave the complications for a few years down the line when you’ve amassed some capital to think about preserving. Otherwise you risk being overwhelmed and never starting.

Long-term investing success usually depends more on regularly saving, keeping costs low, and maintaining an appropriate balance between shares and safer assets than on owning every asset class that you can muster some enthusiasm for.

Key takeaways

• There are only six main asset classes that you really need to know about: Cash, shares, bonds, property, commodities, alternative assets.

• Different experts classify assets slightly differently, but these six broad groups cover almost everything most investors encounter. (If in doubt – say, Bitcoin – I’d usually call it an alternative asset.)

• Within each asset class are many different specific assets.

• Good diversification is spread between asset classes, as well as assets.

This is one of an occasional series on investing for beginners. You can subscribe to get our articles emailed to you and you’ll never miss a lesson! Why not tell a friend to help them get started?

1. Remember: Equities is just a fancier word for shares.

The post Investing for beginners: All about assets appeared first on Monevator.

We’re on a quest to find the minimum viable alternative to the 60/40 portfolio. (That is, a conventional 60% equities/40% nominal bonds or cash asset allocation.)

What’s wrong with the standard 60/40 portfolio as featured in all your fave multi-asset fund ranges?

The post The minimal viable alternative to the 60/40 portfolio [Members] appeared first on Monevator.

The first Weekend Reading of every month can be read by anyone on the Monevator website. Subscribe for free to our email newsletter or become a member to ensure you get the rest.

A few years ago, my co-blogger The Accumulator argued that fears for the future of the state pension were overblown, writing:

Governments stay in power by racking up achievement points with their supporters, neglecting those they cannot court, winning the spin wars, avoiding catastrophe, appearing more credible than the opposition, and kicking the really toxic cans down the road.

Your pension is protected by that political nutshell.

Perhaps it’s because they’ve grown up in an era of almost continual political upheaval, but Gen Z is not so sure. When you’ve seen your birthrights and much of your prosperity chucked overboard for a handful of famously hard-to-find magic beans, watched six UK prime ministers fall in a decade, and witnessed a cage fight held on the lawn of the White House, your political nutshells no doubt crack different.

In his early 20s, Joel tells the BBC this week that:

“I don’t believe that I’ll be a recipient of a state pension. I know a lot of people my age don’t think they’re going to be… There just won’t be enough money.”

Meanwhile 27-year old Conor rightly noted that “the goal posts keep moving”, adding:

“At the minute I’ll be 68 by the time I can retire, but I do think I’ll be probably closer to 75, if I’m honest.”

The BBC article is an unusually deep dive into how state pensions are seen by those still half a century from – potentially – receiving them.

Never mind the bollocks

We hear far more often from older generations about pensions – typically in uproar when, for instance, the sustainability of the triple-lock on state pensions is even questioned.

Meanwhile Gen Z quietly suspects that it will have to foot the bill.

It’s easy to scoff when a 20-something says they’ll invest in crypto instead of a workplace pension. But there’s a sort of everyday nihilism revealed here, too.

I’m from Generation X, the famously fatalistic mini-generation of slackers that (at the margin) worked McJobs – at least until the 1990s tech boom got going and we too got religion about capitalism.

Until then, those of us who thought about it suspected we’d be left behind.

But looking back – not least from the other side of a two-decade long house price boom that took homes from a doable three-times income to a bonkers ten-times-plus – our economic concerns seem modest.

And at least the doomed youth of the late 1970s had the Sex Pistols making headlines for them.

Gen Z turns to ChatGPT for comfort. And we all know it’s coming for their jobs, too.

Have a great weekend.

From Monevator

Help! My passive fund is aggressively tech focussed – Monevator

The Living Is Yield-y model portfolio: one year update – Monevator [Moguls]

From the archive-ator: Can dogs and FIRE go together? – Monevator

News

Britons see sharpest drop in wealth of any developed nation since pandemic – T.I.M.

Halifax brand to be scrapped after 173 years – BBC

Interest rate cut ‘off the table for now’ says BOE’s Bailey – This Is Money

‘Sh*tloads to come’: London takeover spree set to accelerate – City AM

Three in five homes listed in January have failed to sell… – This Is Money

…as UK house prices stall for second straight month – Guardian

How scam refund rules are reducing fraud – Which

Motorists face further delays to £9.1bn car finance refunds – This Is Money

NHS to reward people who walk 30 minutes a day – BBC

Hedge funds BlueCrest loses £200m tax battle with HMRC – Reuters

Bubbles or regime-shifting in gold and Bitcoin? [Log scale] – Econbrowser

Products and services

^{Disclosure: Links to platforms may be affiliate links, where we may earn a commission. This article is not personal financial advice. When investing, your capital is at risk and you may get back less than invested. With commission-free brokers other fees may apply. See terms and fees. Past performance doesn’t guarantee future results.}

Hargreaves Lansdown launches table-topping 4.5% cash ISA – This Is Money

The cheapest ways to get Wimbledon tickets – Be Clever With Your Cash

Get up to £1,500 cashback when you transfer your cash and/or investments to Charles Stanley Direct through this affiliate link. Terms apply – Charles Stanley

Co-Op Bank slashes fees on spending abroad – This Is Money

Santander switch offer: £180 and a £45 Amazon gift card – B.C.W.Y.C.

The cheapest mortgage lenders in June – Which

Get up to £200 cashback when you open an Interactive Investor SIPP. Terms and fees apply, affiliate link – Interactive Investor

Chip shortages set to push up prices for electronic devices – This Is Money

Does marriage affect your home insurance bill? – Which

Homes for sale with kitchens that open on to gardens, in pictures – Guardian

Comment and opinion

Should a fund manager invest their own money differently? – Behavioural Investment

“We had packed lunches every day for 10 years and retired at 40” – BBC

Chauffeur knowledge – A Wealth of Common Sense

The ins and outs of withdrawing a pension early – Be Clever With Your Cash

The cost of status – Young Money

Alternatives in a portfolio: Role, risk, and realism explained – Vanguard

Retirees need a plan ahead of a potential lost decade – Morningstar

Is $5m in Treasury bills enough to be set for life? – Of Dollars and Data

A dirty dozen – Quietly Saving

Managed futures ‘crisis alpha’ is compelling – Tax Alpha Insider

Wall Street is becoming crypto – All Star Charts

Another AI maybe-bubble mini-special

Yes, this market is all about AI stocks… – Morningstar

…and what history tells us about the AI boom – FA Mag

Scottish Mortgage: Tech run can continue with ‘unreasonable prices’ – Trustnet

Naughty corner: Active antics

Don’t quit drinking, don’t quit value investing – Lee Roach via X

When information is no longer the edge – Enterprising Investor

The case for value over growth is building – Apollo

When PE firms borrow to fund ‘skin in the game’ – PitchBook

Social media causes coincident bubbles across different assets [Research] – SSRN

Embracing business failure mini-special

Failure as a competitive advantage – Investment Masterclass

Winning a game of failure – Vixology

Kindle book bargains

The Trading Game by Gary Stevenson – £0.99 on Kindle

Alchemy by Rory Sutherland – £0.99 on Kindle

What’s Your Dream? by Simon Squibb – £0.99 on Kindle

How to Have an Epic Retirement by Bec Wilson – £0.99 on Kindle

Or pick up one of the all-time great investing classics – Monevator shop

Environmental factors

Are crows really our friends? – Audubon

The corals that shouldn’t exist – Biographic

Lundy Island seabird population soars after rat removal – Independent

Robot overlord roundup

We need a way to prove personhood online – Noema

Ford rehires human engineers after AI fails to match quality checks – BBC

Meta joins SpaceX in selling spare compute – Semafor

AI slop is starting to overwhelm engagement platforms – Bloomberg via MSN

Not everyone is happy to see delivery robots in the UK – BBC

Stiffed twice by the AI bubble – Simple Living in Suffolk

Gen AI creates delicious, sustainable, and nutritious burgers [Research] – Nature

Heavy AI adoption linked to more hiring, new study shows – Big Technology

Not at the dinner table

New ‘No 10 North’ plan will rebalance power in Britain, says Andy Burnham – BBC

Burnham also promises to ease cost of living pressures – Guardian

The wheels are coming off Putin’s war – The Bulwark

Trump’s financial disclosures reveal $1.4 billion in crypto earnings… – NBC

…but the White House sees no conflict of interest – Citation Needed

Florida is executing prisoners at a record pace – ProPublica

Off our beat

The surprising power of simple predictions – Tim Harford

Rips, a ghastly new digital Pokémon gambling game [Clue is in the name?] – Wired

How Amsterdam invented the fire department – Works in Progress

A beginner’s guide to cooking with beans – Guardian

Why Scotland is no longer ‘the murder capital of Europe’ – BBC

A super yacht armada left a marine graveyard in Miami – Bloomberg via MSN

Communion by JD Vance review: a strange, poignant book – Guardian

Couple turn mid-terrace garden into a tropical jungle with poisonous plants – BBC

And finally…

“As you gain more wealth, money solves fewer and fewer of your problems.”
– Nick Maggiulli, The Wealth Ladder

Note this article includes affiliate links, such as from Amazon and Interactive Investor.

The post Weekend reading: No age pensioners appeared first on Monevator.

Wow! Doesn’t time fly when you’re hypothetically living off the notional income from a model portfolio?

The post The Living is Yield-y model portfolio: one year update [Members] appeared first on Monevator.

This article by Monevator contributor Longshore Drift explains how he is recovering from a passive concentration problem.

Passive investing using world trackers has served me pretty well. It quietly told me to set aside both my enthusiasms and fears, find the cheapest fund, and let the world get on with it.

“Don’t try to beat the market – buy the market,” they said.

So I did. I put a blind man at the tiller (well, the MSCI World Index) and I have largely sat back and watched.

And through a combination of favourable sequence of returns and some lockdown-enhanced saving, the last few years of very passive investing has put the foundations in, if not for FIRE, then for a living when the work dries up.

Perhaps this explains why I was slow to realise that the good ship ‘Half Decent Retirement’ had shifted from being fuelled by a well-diversified basket of equities across the markets of the developed world, to what has begun to resemble a tech-driven, US momentum fund.

Tech eats World

Just nine companies account for around 28% of the value of my current MSCI World Tracker (SWLD):

• Nvidia
• Apple
• Microsoft
• Amazon,
• Alphabet (in two share classes)
• Broadcom
• Meta
• Tesla
• Micron

That is pretty much the same percentage as all the non-US equities in the developed world that are in the same index!

What’s more, as I write SpaceX is joining the indices, triggering an automatic allocation of billions to a host of funds, adding to the US tech concentration.

Yet jump back only a decade and you’d still find energy, finance, telecoms, and industrials in the top ten. How quaint…

Around 18% of the fund is just in the ‘Magnificent 7’. And roughly 72% of the allocation is US.

For sure the US remains a phenomenal capital growth engine. But from AI froth through to, let’s just say, declining governance standards, it is beginning to seem a little fragile.

Don’t bet against American exceptionalism, people say. Fine. But I’d rather not bet 70% and more on it, in its current state.

What are my chances, MU/TH/UR?

We can then add to this, that companies representing some 30% of the index are broadly betting on AI.

I don’t pretend to understand the very complex, true, long-term impact of AI on the economy or the individual constituents of the MSCI World Index.

But it seems unlikely to me that in an age of AI that the current winners can guarantee their position in the face of something faster, better – or just cheaper – from a competitor.

The ability to generate profits selling AI will likely continue to be challenged by other AI models as yet emerging.

Disruption is rarely neat or contained.

Weights and measures

This kind of concentration from a World Tracker was not what I had signed up for.

Put it all together and it’s almost enough to make you want to give up the game and run for the comforting polyester blanket of an annuity.

So, seeing myself overweight in both tech and American exposure, I found myself complaining about a tracker doing what it is essentially supposed to do.

“Market Cap Weight’s gonna Market Cap Weight”, right?

But I’ve realised I don’t actually want to own the market as it exists today.

Is then an Equal-Weight global market tracker the answer? All things, but in moderation?

Equal weight is the indexing methodology that loves all its children equally, regardless of how they behave. A diverse mix of companies and no tall poppies. The quantised blind stock picker.

So yes, equal weight does sound like the antidote to my problem. It knocks back the US dependency to around 50% and dramatically reduces the technology concentration.

But, well, it just seems boring.

Equal weight feels like you are leaving money on the table as your team of ever-vigilant fund managers work quietly and diligently, day and night, to carefully rotate your funds away from the most highly-valued businesses as fast as they can.

More inertia investment than momentum.

For me, the answer has neither been to embrace the enforced mediocrity of equal-weight indexes, nor to throw off index investing altogether in favour of stock picking based on my own hunches.

Instead I have sought out other indexes that tilt in another direction – the relative stability of high dividend-yielding companies.

I can’t tech it anymore

The VanEck Morningstar Developed Markets Dividend Leaders ETF (Ticker: TDGB) is now a major holding of mine. It has a tech allocation of less than 1% and is around 75% non-US.

Let’s briefly compare the MSCI World to my dividend-tilted escape plan, using the MSCI World ETF (ticker: SWLD) and TDGB as proxies for the two indices.

In terms of number of holdings, TDGB presents a massive concentration of risk when compared with a MSCI World Tracker. It cuts the number of individual companies down from 1,294 to just 101.

And given that TDGB holds a fraction of the number of businesses that a World Tracker does, it is not surprising that the top ten holdings account for a chunky 36% of its value.

However that top rank of dividend payers comprise a varied mix of energy, pharma, consumer goods, communications, and financials. Exactly the kind of companies that have fallen out of the top ranks of the MSCI World Index.

In terms of total number of investments, the risk is concentrated, but in terms of sectors, geographies and froth exposure, it is more appealing to me.

Return post

It’s perhaps a surprise to see that return from the Dividend Leaders ETF has roughly matched that of the World tracker since late 2019 (the furthest back this data source will chart the two ETFs):

Source: Fiscal AI

Although zooming in on the past year’s returns…:

Source: Fiscal AI

…you can see that TDGB has enjoyed quite a growth spurt in 2026.

My reasons for switching assets to this fund were, however, all about my concerns about having so much exposure to this US market, not chasing returns.

Divvied up differently

My overall portfolio now has sub-30% in the US. I still hold a MSCI World Tracker ETF, but from being my largest investment, dominating my retirement plans, it now represents just 15% of my holdings.

This is very much a personal choice. It’s a response to an increasing sense of discomfort around the composition of world tracker funds.

The original appeal of a cap-weight developed world tracker was growth, with the risk shared across many sectors, markets, and companies.

No wonder the dominance of a single sector made me look again.

I may be wrong. US technology could continue to dominate for another decade. But I’m happier owning a portfolio whose risks I understand and can live with than one that leaves me increasingly uncomfortable.

The post Help! My passive fund is aggressively US tech focused appeared first on Monevator.

What caught my eye this week.

The post Weekend reading: parched country hears more about the cash ISA changes nobody asked for. Oh, and another PM appeared first on Monevator.