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How much do I need to start investing?

This is probably the question I get asked more than any other.

There seems to be a perception (especially amongst younger people) that investing is only for well-off people in their 40s or 50s, who have their own dedicated and reassuringly expensive investment manager who wouldn’t take your cash unless you had 6 figures to invest, or you were old school friends.

Whilst this might have been true 30 years ago, times have definitely changed.

In fact, if you’re an employee then you’re probably already investing – through your company’s pension scheme.

The minimum amount you’d need before you can invest depends on the type of investment you want to make, so I’ll go through a few of the most popular ways of investing and how much you’d need to invest in each.

Company pension schemes

 

Increasing pension contributions through an employer’s pension scheme is probably the easiest way for most people to start investing, or increase the amount they’re investing. All you’d need to do is bump up your contributions which come out of your salary each month, and the job is done. Whoever manages the company’s pension scheme will look after the investments for you, and you don’t need to do anything else. Not only is it simple to do, but the employer will likely also match your contributions up to a certain level, and contributions you pay into the pension scheme receive tax relief, so it’s free money and also efficient from a tax perspective.

It’s worth noting that although it’s a simple and tax-efficient option, investing through a pension means locking that money up until you’re old enough to withdraw it – usually around aged 55. So only invest into a pension if you’re sure you don’t need the money until then.

The minimum for increasing your pension contributions vary depending on your company’s policy, but usually it’s in increments of 1% of your monthly salary.

ISAs/SIPPs/GIAs

 

Outside of a company pension scheme, the other tax-efficient investment options available for UK residents are ISAs and SIPPs. I won’t got into too much detail, but an ISA (Individual Savings Account) lets you avoid paying tax on any interest or capital gains you make on investments held within the ISA, and you can put up to £20,000 in the 2018/19 tax year. However, if you aren’t investing very much, these tax benefits won’t make much difference to you, because dividends of less than £2,000 are not taxed anyway, and capital gains that are less than your annual allowance aren’t taxed either. You can withdraw the cash you’ve invested at any time, and don’t need to wait until retirement age.

If you can afford to put your money away for longer, a Self-Invested Personal Pension (SIPP) might be more appropriate. Because it’s a type of pension, when you put money in a SIPP you will get back the income tax you will have paid on it – just like with a company pension scheme. But also like a company pension scheme, you can’t withdraw the cash until you’re 55.

If you have no need of a tax-advantaged account (you’ve maxed out ISAs, or you want to access the investments before retirement so don’t want to use a company pension scheme/SIPP), then you can also open what’s usually called a ‘General Investment Account’ (GIA). This has no tax advantages but also has no limit on how much you can invest.  

To invest in an ISA, a SIPP, or a GIA, the minimum you can invest depends on whether you want to manage your investments yourself, or whether you want to outsource the management to a third-party.

Outsourcing

 

If you want to outsource the management of your investments, a popular choice for investors is to use a ‘robo-advisor’. A robo-advisor is an online investment manager who offers to manage people’s investments in an automated manner. The investor will take a short 10-15 question risk tolerance questionnaire, and then will be recommended a portfolio based on their answers. The portfolio is managed and monitored by the investment team behind the robo-advisor, so you don’t have to worry about buying and selling anything. Robo-advisors are much cheaper than traditional investment managers, as they tend to use passive funds to construct their portfolios, and use new technology to ensure that their processes are as efficient as possible. They all have very slick mobile apps and websites to help you keep track of your investments. Almost all robo-advisors allow you to open ISAs, SIPPs, or GIAs – depending on what you need. The most popular robo-advisors in the UK include the likes of Nutmeg, Wealthify, Moola, and Moneyfarm.

The minimums for robo-advisors vary, but you can sign up to Wealthify with as little as £1, Moola with £50, and Nutmeg or Moneyfarm with £500.

Alternatively, many people still favour the old fashioned route of investing with a traditional investment manager. Investment managers can be accessed either directly or via a financial advisor, and they usually offer a greater range of investments than a robo-advisor. You will usually get a dedicated relationship manager who will serve as your point of contact for investing queries, and your portfolio will be managed actively by the investment manager. Their philosophy differs from that of a robo-advisor, as investment managers use active funds as the core building blocks of their portfolios. They will all offer ISAs, SIPPs, and GIAs. Depending on the level of investment, your portfolio can be customised to meet your needs in a way which robo-advisors don’t offer. Examples of popular UK investment managers include Rathbones, Quilter, and Schroders, but most high-street banks also offer their own in-house investment management services too.   

The minimums for traditional investment managers vary considerably depending on the institution and the strategy you want to invest in. Minimums for some multi-asset portfolios (i.e. fund-of-funds portfolios) start at around £1,000, but minimums for some more esoteric strategies can be over £1m.

Do-it-yourself

 

If you’re confident in selecting and monitoring your own investments, you’ve got a couple of initial choices to make. Firstly, you have to choose which ‘platform’ you want to invest through, and secondly, you have to decide what you want to invest in. The minimum required to invest will depend on the platform, rather the funds you’re investing in.

A platform is a middle-man who sits between you and the funds you invest in. You instruct the platform to buy and sell funds on your behalf, and they execute the trades for you. All the platforms are online, with some UK platforms including Hargreaves Lansdown, Vanguard, and AJ Bell Youinvest. Almost all major platforms allow you to open ISAs, SIPPs, or GIAs.

Pricing for platforms can get quite complicated, as it depends on what kind of wrapper you want (ISA/SIPP/GIA), how much the initial investment is, and how much any ongoing contributions might be. Luckily, there are a couple of excellent comparison websites out there to help you choose, including Monevator and Thisismoney.

The minimums for platforms vary, but you can sign up to Vanguard with as little as £500 per fund, with a £100 minimum per month for monthly investing, Hargreaves Lansdown with £100 lump sum, £25 per month for monthly investing, and AJ Bell with a £500 lump sum and £25 per month for monthly investing.

Conclusion

 

Hopefully it’s clear by now that you don’t need huge amounts of money to get started with investing. Given that the benefits of investing grow exponentially, even investing small amounts early on in life can be incredibly beneficial later on.

I wrote about the benefits of investing early in this post, which should serve as a good introduction to the concept of compounding. One relevant chart from the article shows that someone investing £1,000 per year from age 25-35 (10 years) and then stopping all contributions will end up with a larger portfolio by aged 65 years than someone who invests £1,000 per year from ages 35-65 (30 years):

Investing £1,000 per year

Investing early, even if it’s small amounts, can pay huge dividends later in life as the power of compounding exerts its effects on those initial contributions.

As the Chinese proverb goes, the “The best time to plant a tree was 20 years ago. The second best time is now.”

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