Prudential reveals DIY investors overlook tax and charges at the expense of performance

 

 

Almost a third (31 per cent) of DIY investors aren’t aware that the way they
buy financial products – direct from a provider or from a platform or fund
supermarket – can impact the cost of their investment, according to new
research from Prudential*.

The findings suggest that many DIY investors, who self-select the majority
of their investments, are failing to consider important taxes and charges
when making investment decisions. Almost half (44 per cent) admit they don’t
know which wrapper product would be most appropriate for their
circumstances, a further 37 per cent aren’t sure how to avoid tax traps, and
a fifth (19 per cent) aren’t confident they’ll keep under their annual
Capital Gains Tax (CGT) threshold.

When questioned about DIY investments that fail to perform as expected, more
than a fifth (21 per cent) cite a lack of clarity around product or fund
charges as the main reason for the underperformance.

Using the CGT threshold correctly helps investors maximise returns in a
tax-efficient way. However, despite most DIY investors (81 per cent) saying
they understand CGT, only 28 per cent know the allowance is £10,600 for
2012/13, with 13 per cent overestimating it.

While wealthy DIY investors, those with over £250,000 invested, are more
likely to know the CGT limit, over half (56 per cent) of them still don’t
know the exact figure, showing they’re unlikely to be maximising the
tax-efficiency of their returns. Furthermore, just 7 per cent of DIY
investors claim to use their capital gains tax allowance each year, rising
to 15 per cent for high net worth investors.

Matthew Stephens, tax expert at Prudential, commented: “Investing in a
tax-efficient way is not something that happens automatically. Investors can
save substantial amounts by maximising exemptions and limits, using ISAs and
the CGT annual exemption, for example, as well as other tax-efficient
investments. But this can be complicated and will usually be more
successfully achieved with advice from a professional financial adviser.

“Investing without advice from an expert may be cheaper initially. However,
without a clear understanding of all the relevant considerations, it could
be very costly in the long-run.

“Many DIY investors say they’re confident about making financial decisions
on their own, but our research highlights a worrying lack of understanding.
We can’t stress enough that it’s vital to understand clearly the
costs/charges, risks and tax implications applying to an investment, before
making a commitment.”

Prudential’s survey reveals that 73 per cent of DIY investors prefer to buy
direct from a provider, 12 per cent from fund supermarkets and 10 per cent
from platforms. People with smaller investments (less than £10,000 invested
in total) are more likely to buy direct, while high net worth investors are
twice as likely to buy via a fund platform, with 20 per cent doing this.