Three wise investing decisions for Christmas and 2023

Rachel Lacey unwraps three wise investment tips to help you simplify your portfolio and to build wealth in 2023.

Christmas – or at least the bit between Boxing Day and the new year – can be a great time to get a bit of financial admin done.

This year, our gift to you is three nuggets of investment wisdom.

• Read about: Free regular investing | Opening a Stocks & Shares ISA | Cashback Offers

A bit like the Three Wise Men’s gifts to the baby Jesus, these gifts are all about delayed gratification. They might not immediately impress, but as the years go by, you’ll start to appreciate just how much they shine.

1) Ditch your fund manager (and become a passive investor)

The funds that make the most impressive returns will always be run by active managers who aren’t tied to an index. But the problem for investors is that few fund managers can consistently beat their benchmark year in, year out.

According to S&P’s research into active versus passive performance (S&P Indices Versus Active Funds or SPIVA), over the last 10 years 70% of active UK equity funds underperformed their benchmark, rising to 96% of global equity funds. The picture for US equities was even worse, with literally no active funds beating the index.

That’s pretty outrageous when you consider that you pay a premium to have an incredibly well-paid fund manager at the helm.

The research shows, that unless you are lucky enough to pick the ‘right’ active fund, you’ll likely be better off investing in a low-cost passive fund.

With the higher charges levied by active funds also increasing the drag on returns, active funds could frequently underperform trackers too.

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At the moment, you can expect to pay as little as 0.1% for a passive fund that simply replicates the index its tracking. Active funds can cost as much as 1.5%, sometimes more.

On a £100,000 holding – switching from a fund that charges 1.5% to 0.1% could see your annual management charges drop from £1,500 to just £100 a year. Over the years that could make a real difference to your portfolio’s growth.

That’s not to say you should get rid of all your active fund managers straight away. Rather, it’s time to scrap the notion that they are ‘better’ than passive funds and review your portfolio. You might be holding some fantastic performers and, if so, there’s no reason to ditch them. But if returns are comparable to, or worse, below their benchmark, it could be time to switch to a passive.

2) Consolidate your old workplace pensions into one, easy-to-manage pot

If you’ve changed jobs a few times, chances are you’ll now have a handful of workplace pensions that you’re no longer contributing to.

You might even have lost track of some, particularly if you were only paying into them for a short time and have not updated the pension provider with any change of address. Find out how to trace lost pensions with our guide.

Consolidating any number of old workplace pensions into one pot won’t just make your retirement savings easier to manage, it could also save you a serious amount of cash.

• Consolidate your pensions for a £60,000 retirement boost

Fees on older-style pensions from life insurance companies could be around the 0.75% to 1% mark. That might not sound much, but on a sizeable investment like a pension, that can quickly rack up and run into thousands of pounds each year.

By switching into a better-value pension it’s possible to trim those charges right back. In fact, according to research from analysts, The Lang Cat, over 20 years you could save in the region of £20,000 by transferring a £150,000 older-style pension into a low-cost SIPP with flat fees.

The gains to be made by switching to a pension with lower charges are impressive. But pension consolidation isn’t for everyone.

You’ll need to check that by leaving your pension you won’t be missing out on any valuable benefits, such as guaranteed annuity rates. You should check for exit charges too and factor that into your decision.

You’ll also need to open a new pension to consolidate your pension into, if you don’t have one that you’re happy with already.

If you are using a SIPP, you’ll also need to be sufficiently confident deciding how to invest your new, consolidated pot. It doesn’t need to involve building a sophisticated portfolio of shares and funds (although you can, of course, do that) but you need to be able to pick one fund.

There’s often a strong argument for transferring defined contribution pensions, but if you’ve got some defined benefit pensions, you are normally better leaving your money as it is. This is because they will pay you a guaranteed income in retirement.

This is why you’ll be legally required to get independent financial advice before transferring a defined benefit pension, if it’s got a transfer value over £30,000.

3) Set up an ISA for a child or grandchild

OK, so strictly speaking this is a gift for someone else, but you won’t be able to beat the feeling you get when you tell them what their ISA is worth on their 18th birthday. Again, it’s all about delayed gratification.

Each year, you can pay up to £9,000 into a Junior ISA. And, even if you only make one payment into it, over 18 years, your child or grandchild could still end up with an impressive nest egg.

Take a single £3,000 investment into a stocks and shares Junior ISA. Assuming it achieves an average 5% growth a year, after 10 years it will be worth just over £4,941 (before charges) but if you can give it the full 18 years they’ll end up with £7,365.

Ratcheting it up a notch, if you could stretch to £3,000 each year, they’d get £44,821 after 10 years or a staggering £97,048 after 18.

So, while your child or grandchild might be just about as impressed by tax-free growth as baby Jesus was with his gold, frankincense and myrrh, that will all change will they get older. Your investment could help them buy their first car, go to university, see the world or put down a deposit on a house.

Another plus for you is that if you are older and concerned about inheritance tax, giving your money to younger generations will help reduce the bill. Each year you can give away £3,000 to whoever you like tax-free and, if you have a spouse or partner, they can do the same.

• Five tax-efficient ways to pass wealth to your kids

Gifting allowances also allow you to give away as much income as you like  – if you’d prefer making monthly contributions – you just need to be able to prove it doesn’t affect your standard of living.