What are the steps for opening an investment account and starting investing in the UK?

Question

I want to start investing some money I have saved.

I have investigated about this but I'm still not secure about what to do. I have called to my bank to ask questions but they didn't help too much because I hadn't the intention of buying any product they offer, but another one.

These are the steps I have in mind, I would like to confirm whether or not they are correct.

1 - Go to my bank and open a stocks and share ISA, taking into account that the maximum amount I can put in there yearly with tax relief (*) is £20k and its maintenance costs (**).

2 - Go to the funds company (e.g.: Vanguard) and open a brokerage account (since that will make my life extremely easier with regards to buy/sell stocks or ETFs). I guess I will need to provide my ISA's number to this brokerage account so they know where to deposit the hypothetical benefits, is this correct? (***)

3 - Once 1 and 2 are done, go to the funds manager (Vanguard or whatever) and buy the product I want (ETF, fund, stocks...) through the web page. (****)

4 - From here on, I need to check that the costs of the accounts, operations etc. match what I thought, for being sure that I have understood everything correctly.

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*To get the tax relief I guess I need to put money (for which I have already pay taxes) in the account and then claim for the tax relief at the end of the tax year through an income declaration, is this correct?

** With regards to the maintenance costs of the ISA, I have read that You must pay the Account Fee of 0.25% per annum on the value of Fund Shares you hold. That means that if I have £10000 in the account and I earn nothing during a particular year, I would be losing money. Is this correct?

*** With regards to the brokerage account, I guess I should check what are the maintenance costs and how much will by broker get for each operation, right? Can my broker be a robot or something like that?

**** When buying stocks or ETFs, It might happen (or not) that reinvesting dividends is not for free. Is this correct? Is there any other important consideration I should have with regards to 100% predicatble costs?

Answer 1

You seem to have gotten an idea that things are more complicated than they actually are.

Here's what to do:

1. Choose an online broker from the list at https://monevator.com/compare-uk-cheapest-online-brokers/ . These are generally called "platforms". Which one is better/cheaper for you may depend a bit on whether you anticipate investing more in funds or ETFs/ITs/direct stocks and how often you anticipate trading.

2. Open an ISA account with your platform of choice. They may need some ID verification, and will almost certainly want your National Insurance number.

3. Put some cash (up to £20,000 per tax year, currently) into the account. The normal way to do this would be by debit card. You could either put in a lump sum, or set up regular payments, or a combination of both.

4. Invest that cash in your assets of choice. The platform provides all the tools you need to do this online (and usually access to some basic research tools like Morningstar)... you don't need to talk to some other stockbroker somewhere to buy/sell things. Vanguard's investment products (funds and ETFs) I'd expect to be available on all platforms these days (however, note that Vanguard's own platform only offers Vanguard investments).

5. Sit back and let the markets work their magic. Long-term buy-and-hold works if you invest wisely in the first place. Beware of thinking you need to be making frequent changes or chasing the latest fad or upcoming superstar fund-manager, and also ignore media hysteria implying you need to sell out of everything because of impending market doom. Be an investor, not a trader. Educate yourself; read Monevator, Bogle and Kroijer.

6. If you ever need to withdraw some money, use the platform to sell some investments to raise cash (or some investment dividends might have accumulated in the account) and the platform will have some mechanism for paying it to your bank account. But ideally you want to keep assets in the ISA and to reinvest dividends to benefit from the miracle of compound growth... your future self will thank you.

Next tax year, you'd probably put another £20,000 (unless the limit is changed) into the same ISA account, but it'd also be possible to open another ISA somewhere else (but you can only contribute to one per year). If you decide you don't like the platform you're on, ISAs can be transferred between platforms by filling out transfer forms and in some cases paying fees... but the best platforms are confident enough people will stick with them to have T&Cs stating that transfers out are fee-free.

Good luck!

Answer 2

Sounds like you have a good handle on what to do already.
As for the costs, you will have to discuss that with them.

*Can you also put in pre-tax money (in the US, the employer takes this out of paychecks and deposits directly, sometimes with a matching amount on the first 3,4,5,6% kind of thing), so you don't pay taxes on it until you take out, say for retirement?

** 0.25% is not too bad, there are lower fee funds available. If your account makes 5-10-15% per year or more, then 0.25% is not bad.

*** Depends on the brokerage house. Level of automation varies.

**** Dividend funds I have seen have no fees for DRIP (dividend re-investment program?)