Understanding Investments: Wrappers - BOD018

0:00I'm looking at you and then remembering, oh shit, I haven't been listening.

0:04Pete:You're already something out. No, I'd have to be embezzling in order to do that. And you know, I just don't think it's worth it. It's probably not worth it. No, probably not. Massive betrayal of your loving father, given that you work for him. But, you know. Oh yeah, I'd be embezzling from you. You'd be embezzling off me. Hi and welcome to the Bank of Dad podcast. I'm Kate and this is my dad Pete. Hello. And we're here to teach you the money lessons we were never taught at school. There's no judgment, no jargon, just real talk about how to handle your money. Hottest day of the year, we're absolutely cooking.

0:36Pete:Oh, yeah. Now, tomorrow, the day after recording, the air conditioning in this room will be done. Yeah, but we're not going to be able to have it on when we're recording. No, but at least we can give it a blast before we actually press record and start. I think we're starting from about 30 degrees. Yeah, and we've got massive great lights. Massive lights on us. You know, the things we do for you. I mean the intention wasn't to record today but you're off on your olibobs aren't you I am yep looking forward to that off to Prague and Berlin gosh you're very fancy middle class aren't you middle class middle age more like yeah yeah and I've got my legs out try and drum up some business for me only fans yeah so uh you know link not in the description because nobody would want that um that's yeah deeply shocking yeah but you know gotta pay off those bills yeah absolutely yeah Yeah, whatever it does, whatever it takes.

1:24I have an exciting development.

1:26Pete:Oh, yes, you do. Go on then. I've bought a house. Bought a house. Offer accepted. Things progressing. Fingers crossed. Yes, touch wood. It feels like chancing fate to say on here, especially because I've already got to go with a different mortgage lender. Yeah. But it's, yeah, no, it's very exciting. It's a lovely little house. And we thought you might use it as an opportunity for something. Yes. so we're not sure how it's going to be yet but i will be we will be doing a kind of series following me through the process yeah we could either could do on socials potentially so you know yeah we could do a condensed one and we can do a segment yeah potentially maybe how's it going kate starting in a couple weeks obviously because we're recording two yeah this evening so we can yeah i mean yeah i need to have a little think about how i envision it i think it can be done in multiple forms i think there will be like a come completion day oh yeah what was the process podcast sit down chat yeah definitely um but there could be little vlogs or there could be a big video like i don't know i'm already just kind of filming when things happen yeah so we'll see how it goes but that's my exciting development.

2:41Pete:Really exciting. Proud of you. Bye. And yeah, long way to go but it's going to be good. Yes. And it will be, yeah, good to kind of document it in some way. Well, yeah, it just stemmed from you and I were on a dog walk the other day, weren't we? And I was just asking you classic Bank of Dad questions. And you just went, this is Bank of Dad. Why the hell are we not doing this? Bank of Dad? Bank of Dad. Nobody's dead. We should have had the camera with us, shouldn't we? Yeah, we should have but then, you know, our phone's pretty good. Anyway, So that is all to come. It is to come. Today, however, we are carrying on the three-part series that we started last week.

3:17So last week we looked at assets.

3:19Pete:Yes. Because it's an investment series and we're starting little to big. So we did assets. Today we are focusing on wrappers. And then bigger again next week we will be focusing on platforms. Yeah, so that's what we are going to get started with. But before any of that, it's time for no button. Oh no. shocking fail. Terrible. It's been a very busy few weeks. I was going to say, we do need to give you, we will give you some... Well, really it should be next time. Not next week because we're recording that in a minute. So we're about to record that in a minute. Yeah. Yeah, it should... Episode 20 perhaps.

3:51Yeah, you've had a... You've been in London and then you had Cal down. Yeah, it's very... It's been a lot. Anyway.

3:56Pete:It's been a bit busy. Anyway, but it's time for Wanky Word of the Week. It's time for Wanky Word of the Week. I should do a stab like that. No, you should stop doing that because otherwise I have to pause us mid-time and make it so... Okay. What is this week's Wanky Word of the Week, Kate? This week's Wanky Word of the Week, God, I'm hot, is... You feel the sweat dripping down your back. It's compounding. So compounding is related to investment generally, and it describes the process by which money grows. So we've talked, remember, what is an investment or what is investing. It's where you exchange your money for something that either increases in value, produces an income, or does both.

4:42Pete:What compounding does, technically at least, when something produces an income, I'm having weird deja vu as well. We've definitely covered something similar to this. Yeah, yeah. We sort of stopped for a minute and just went back and checked. We don't actually think compounding has been a wanky way of the week. It must have just been covered, but it's important to me. It's important enough. Definitely, right. So if you have an investment, let's say it's a share that throws off an income. If it's a share, that would be in the form of a dividend. If you use that dividend to buy more of the share, you've now got a bigger holding, right?

5:18Pete:So, and if that keeps happening, then we get the snowball effect. Yeah, you get more. It's like, you know how like Instagram influencers say? Yeah. The more reach they have, i.e. the bigger following they have, the bigger their following gets, the quicker it gets because more people, do you know what I mean? It's the most Gen Z analogy I've ever seen. Are you a Gen Z or a millennial? I don't know. 2003. I feel like I'm in the weird middle ground. Yeah, you're all weird. I am, yeah. So, you know, it grows by the addition of, by reinvesting income primarily. So, you know, if you think about it, you then own more shares, which produce slightly more income, which reinvested by slightly more shares next time, which produce slightly more income and it grows and grows and grows.

6:03Pete:Yeah, and you end up with not exponential in the strict sense of the word, but increasing rate of growth. Yes. So like all things, it's hard to get going and it doesn't seem like you're achieving very much. But once you just start gaining that momentum. Once you get momentum, it can grow really, really nuts. So some people sort of talk about compounding just for sort of when they're talking about growth. but technically speaking compounding is that reinvestment of income and using that income to buy more of what you're investing in and it goes nuts. Okay. Yeah, that makes sense. All right. So wrappers.

6:38Yes. So let's start with the most basic of all questions. What is a wrapper?

6:43Pete:What is a wrapper? We use it. MCP. Off you go. MCP. A wrapper. That was not wrapping. You can cut that out. No, no. That was scratching.

6:56Pete:so i'm not gonna leave that in okay i'm not rapping either has the power yeah you're the but anyway i'm certainly not gonna rap that would be infinitely worse um so a rapper is a sort of word that it's a bit of a wanky word that finance advisors use right we talked about assets last week yes so rappers is kind of the next level up it's um another word would just be an account all right but the reason we use the word rappers is because they are wrapped around the underlying assets. It protects them from various things. It holds them. Okay. Yes, can protect from tax. Yes. Can protect from access.

7:31Pete:Are they strictly right to talk about access in your own money is protecting you from that? I don't know. Yeah, I know. But it sort of, it surrounds, it covers, it holds the underlying asset. Yeah. So, yeah, that's what an investment wrapper is. Wrapper slash account. Why have we got them? Why can't we just have the asset? Yeah, good question. For the tax benefits primarily. So examples of wrappers are ISAs, pensions. We sometimes talk of general investment accounts, investment bonds, various things like that. And what differentiates one wrapper from another mostly is tax and access. So an ISA is different from a pension because it's taxed differently and you access it differently.

8:13Pete:So the reason why we have them is to serve different purposes. So a pension has very attractive tax breaks. And the whole point of that, the reason why it has those breaks, is to encourage people to save for retirement. That's good, because I was going to ask you, what's the benefit for the government of having these tax wrappers and stuff? Yeah, if they're going to give tax breaks away, like with a pension, they literally, instead of charging you tax, they put it in your pension for you. So they're doing without tax, aren't they? The government's doing themselves short. I guess the benefit is if they've got a bigger pension pot at the end, they're going to be less relying on state benefits.

8:50Pete:Yes, the individual, definitely. So, you know, there's a sort of, I mean, it's very long term. It's like we give somebody a tax benefit when they're 25. When they're 75, they're less likely to be claiming on the state. 50 years later, though. I mean, most governments can't look past the next sort of election. so um you know i've yet to come across any kind of government anywhere in the world that can look 50 years ahead um i'm happy to be corrected on that if you've got any examples yeah please show and we shall be moving there yeah certainly um but there are also more immediate benefits to the government and to the nation remember the government is the nation it's just you know they're representing us and organizing stuff for us so for example i think i might mention this before, if you invest in an ISA and inside the ISA, as we talked about last week, are some shares, let's say Marks and Spencers.

9:43Pete:Well, that might enable Marks and Spencers to build more stores, make more profit. Marks and Sparks will pay tax on that profit. Marks and Sparks will employ more people. They will pay tax, national insurance. They, because they have good jobs, will go out and buy stuff, they'll pay VAT. So, I mean, people far smarter than me will work out that for every pound of tax relief the government gives us in a pension or tax break they give us in an ISA, the government will get four pounds back or whatever. There is a benefit. Yes, a benefit in the short term as well as the long term. So that's why they exist really.

10:17Interesting. So, do you need them to invest?

10:20Pete:No, you can invest without a wrapper. It's not so easy these days. it used to be the norm, right? So back in the day. Back in my day. In my day. Yeah, it was possible to just complete an application form and buy shares, and you literally held the certificates. Like you were the rapper because they were paper certificates. You kept them in a safe because they had value, right? In this, obviously, digital world we live in. These are the days of, you know, putting it. Your. Yeah, the days of your. Why are you? You know, pre-electricity. Not quite, but it's, I mean, you asked Rog, my sort of best mate and co-host of Meaningful Money, he used to deal with that stuff all the time.

11:00Pete:He's 15 years older than me, so he used to deal with these paper certificates all the time. But I've had clients with them. So you don't have to have a wrapper, but these days pretty much everybody does. Okay. All right, wrappers versus investments. What's the difference between the investment and the wrapper around it? Okay, we need to be careful of terminology then. So investment is kind of the series we're talking about. It's like making your money grow, isn't it? But what you mean is what's the difference between an asset and a wrapper, isn't it? Yes. I think. Yeah. So the asset is the stuff we talked about last week.

11:26Pete:The individual things that you can buy, whether that's a share or a bond or a bit of gold or whatever, that's the thing that will make your money grow. The wrapper then is the box around it or the account that the investment sits in. And so they're doing different jobs. One is to make the money grow. One is to protect it from tax and give you access at the right time. Obviously, by protecting it from tax, it will grow more quickly because you're not paying tax as you go along. but essentially they're two different things and that's why we're breaking this down one week at a time assets last week the rappers this week and next week platforms okay so are rappers mainly about tax or do they have other benefits too mostly about tax that's definitely i think their primary purpose uh obviously they kind of demarcate money you might have one rapper for one like you know you're saving up for a wedding one day or camper van when you retire or whatever So they have sort of purposes just to keep your money neat.

12:27So they can be used as organisation tools. Yes, they can.

12:30Pete:Mostly they're about tax and access. And access. Yes. Well, yeah, choose, you know, a lifetime ISA. The lifetime ISA is the wrapper. It's tax free. That's the tax thing. And the access is you can only get it when you're buying your first house or after age 60. Yeah, exactly. So that, okay. So that's what makes a lifetime ISA a lifetime ISA as opposed to a normal ISA or a pension or whatever. So, yeah, tax and access. That's what they're mainly about. So we've mentioned the word risk a few times. Does having a wrapper impact the level of risk of investing with that asset that it's wrapped around?

13:11Pete:Not really. Not for most of us, right? Because you can hold exactly the same share, for instance, in a pension and an ISA, and the risk will be the same. How can you have one share across two different markets? Sorry, one kind of share. So let's say if you wanted to hold Marks and Spencers, you could hold them in both your ISA and your pension. Not the same share. And they'll grow the same amount. That'd be a weird quantum physics thing. I was going to say, one, one, two up for this. Yes, damn right. I feel like we're skipping through things quite quickly today because we're dying. Dying of heat.

13:43I've been on the beach all afternoon. I'm feeling, I'm looking at you and then remembering, oh shit, I haven't been listening.

13:51Pete:You're already sown down. And refer to the notes. Never mind, we'll do our best, folks. So no, they don't change the level of risk. The risk is down to what's held inside it. And then maybe the weights. If you hold shares and bonds, say, the ratio between the two will affect the risk. We have to do at least about 10 episodes on risk. Not really. Don't unsubscribe. Maybe one episode or two on risk. It's such a massive subject. I feel like it won't be long after this because it kind of will give context. Okay. Yeah, we can do some risk questions. Most people, when they talk about investments, they think about the up and downiness, the likelihood of both making and losing money.

14:36Pete:Yeah, sure. All right, that's way too simplistic, but it serves a purpose. But the wrapper won't be impacting that. Not at all. It's kind of the crux of the question. So it's actually funny. You answered this question almost then. But can two people own the exact same asset but get different outcomes because of their wrapper?

14:57Pete:Yes, at the point that they access the money, potentially. But let's say you and me next to each other went click Marks and Spencer's shares. and then two weeks later or two years later or however at the same time we went click got them out at the same time you shoved yours in your iso and i shoved mine in a gia or something um not in that case so but if just making your cogs turn yeah no it's a good question actually but if let's say because i'm older than you um and six years from now i can access my pension so let's say we well so let's say we both put a thousand quid into martin spark shares mine inside my pension and yours inside your isa um well i would get less out of the pension probably because i would be taxed when i took it out whereas you wouldn't because you've got yours in an isa however other side of that is if i put a thousand quid into my pension it automatically becomes 1250 because of tax relief linked to that pension wrapper So the tax is what will make the difference.

16:06So the wrapper itself hasn't impacted it, but the tax rules around it have. Yes, exactly right. So it's not like there's going to be necessarily a better wrapper.

16:19Pete:Depends on circumstances and time of life. But no, not as far as the investment is concerned. I mean, pensions will always win. There's a video on the main YouTube channel. Of meaningful money. Yes, sorry. on the Meaningful Money YouTube channel called Pension vs ISA. It's one of the most watched of all of the sold-back catalogue. And I do the maths and I show the same amount of money going to both rappers at different times and what you get out. And because of tax relief, pensions always win, even though you're taxed on the other end. Unless you're a higher rate taxpayer when you retire, and even then, you'll be better off putting the same money in a pension than in an ISA.

17:00Pete:But of course, with pensions, you can't get it until 57. I was just about to say that obviously with our audience it's going to be a very, very long time before they can access it. So you might just need to be conscious of when you think. Yeah, very much still put money away in a pension that you want to spend before age 57, probably 58. Because, you know, there's a long old time away. It is a long time, for sure. Although we were just saying we can't quite believe that this episode's going to be going out at the end of May. I know. And that we're nearly at June. I know, flying by. I mean, yeah, that's just...

17:28Pete:We're homing in on episode 20. Which is a Q &A one. More about that later. Yeah. So, therefore, is choosing a wrapper as important as choosing the investment? Yeah, I think so. But I think it's easier because most of us only have two choices. ISA or pension? Yeah, honestly, there are more. GIA. But put it this way. The maximum you can put into a pension is 60 ,000 quid a year, assuming you're earning that much. It's basically 100 % of your salary or 60 grand, whichever is lower. So if you earn 80, you can only put 60. if you earn 40 you can only put 40 only in inverted commas whereas an ISA you're limited to 20 ,000 so if you add those two together potentially your maximum contribution into pension is 80 ,000 quid a year 60 into a pension and 20 to an ISA I don't know many people contributing at that rate particularly not in our audience right no I'd have to be embezzling in order to do that and you know I just don't think it's worth it no probably not I feel like we're putting ourselves out there be good with money like us it would be a bit yeah yeah against the against the brand off brand yeah so it's only a show i have with it of course grossly illegal massive betrayal of your loving father given that you work for him but you know oh yeah i'd be embezzling from you i didn't even get that the continuation continuation of you fleecing me for the last 23 years oh shut up so um really most of us only have that choice so most of us particularly folks that's sort of your generation it's like join your workplace pension, if you're self-employed, open a pension and put 5 % of your earnings in.

19:00Pete:Thereafter, it's ISA because you want to build up shorter term money. And then as you get older... Your pension will look after itself. It will. As you get older, most people come to me for advice. In their late 40s, 50s, they are putting as much as they can into pensions. But that's the time to do it. Okay. So when it comes to choosing the right one, what should people think about? term really so how long it's likely to be before you access that money so just what we said don't put money into a pension that you think you might need yeah or you know if you're saving for your wedding don't put that in a pension because no you won't be able to access it we haven't really talked about not using a wrapper that is keeping money in cash we have talked in the past about if it's money you're going to need in the next year or two don't invest it at all no no that's true so you know we talked about pension and ISA and then of course one option is not to invest at all and I think it's important to get that right but mostly in terms of choosing a wrapper not only is it the wrapper itself the pension or ISA but maybe which provider it's with we're going to talk a bit about platforms next week a lot about platforms next week so we've got a whole episode on platforms indeed um so you know that's a factor.

20:15Pete:But honestly, my general advice is always... Not advice. My general suggestion in this non-regulated world that I temporarily inhabit before returning to my regulated cave is sort of minimum, particularly for young people, this is minimum into pension. Yes. Everything else you want to invest into stocks and shares, ISIS. Keep an emergency funding cash. Or lifetime ISIS if you're saving for your first house. Indeed. Yeah. That's a key thing, choosing between rappers, isn't it? You know, it's the obvious place to save. If your goal is to buy a house in the next few years, Lifetime ISA is a gift.

20:55Oh, my gosh.

20:56Pete:A thousand quid of free money. It's incredible if you put four grand in. If you put the four grand in. Yeah, it is. And it's what's led me to be able to do it, for sure. Well, yeah, you've done, what, four years worth of Lifetime ISA? Maxing, pretty much? How old am I? 23. 23. No, more than that. More like five. because I've basically been putting it in since I was 18. Cool. Yeah, you didn't do it last year because of the time scale. Oh, yeah, that's true, so it would be bad for. But, you know, given that I was on£11 ,000 a year as a TA for the majority of that time. Yes. Thanks to, I mean... And doing some hours in the restaurant, latterly.

21:32Yeah, that's true. But, you know, the majority of the time that I was putting money in, I was on not very much. No, you didn't have many bills either. Exactly, that was, you know... But the point is, I was getting there. But the point is, it just catalyzed my ability to save. And I wanted that thousand pounds. I mean, even if I'd only put in, you know, 500 quid and whatever, I would have still got the benefit. But I wanted that.