This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
There are two main reasons to buy shares (e.g. via a fund). The first is to generate dividends from them over time – regular payments, out of company profits. The second is to hold them for a long time, with the intention of eventually selling them at a higher price than you bought them. You can even combine these two approaches.
However, when is it best to sell some of your shares? How long should you wait, and what kinds of situations justify selling? These are challenging questions, and the answers vary depending on your financial goals and circumstances. Below, our team at Elmfield (financial planners in Padiham, Burnley, Lancashire) offer some reflections.
Find our thoughts below, which we hope you find useful. If you’d like to speak to an independent financial adviser then you can reach us via:
T: 01282 772938
Moving shares to an ISA
There are compelling reasons to hold investments in an ISA. Each tax year, you can put up to £20,000 into your ISA(s) and any capital gains, interest and dividends generated within it will be tax-free. However, HMRC rules do not allow you to simply move shares in a general investment account (GIA) straight into an ISA.
Rather, you must sell the shares first, converting the capital to cash, then use it to purchase shares inside your ISA. Normally, this will not incur a capital gains tax (CGT) charge if your total profits during the tax year are below £12,300. Bear in mind that this tax-free allowance cannot be carried over to the following year, so it’s a good idea to talk to your financial adviser about how to get the best out of it before the April deadline.
Making a large pension contribution
Each tax year, you can put up to £40,000 into your pension pot(s) – or, up to 100% of your income (whichever is lower). However, unlike most other allowances, you can also make use of any unused annual pension allowance from the previous three tax years. So, suppose you were allowed to contribute £40,000 in each of these years, but you did not. This means you could, in theory, commit up to £160,000 (including this year’s allowance) into your pension.
A range of scenarios could apply here. For instance, perhaps you inherit shares from your grandparent’s business and wish to sell them – putting the proceeds into your pension. Maybe you recently sold a Buy-to-Let property to release funds for your pension. There are strong reasons for considering pension contributions. First of all, these contributions receive tax relief equivalent to your highest rate of income tax (e.g. a Higher Rate taxpayer gets a 40% “boost” from the government). Secondly, all capital gains generated within your pension are tax-free.
Deteriorating fundamentals
Most people invest in shares via funds. These are “baskets” of shares which you invest in, combining your money with other investors. Investing in funds is typically less risky than buying individual stocks, since your capital is spread across 100s of companies. However, funds can still go awry if they are not managed properly.
The Woodford Equity Income Fund is a famous recent example. This former flagship fund, at its peak, held £10.2bn worth of assets but fell in value over the years – leading to a suspension in 2019. Many analysts concluded that a lack of liquidity in the fund contributed to its collapse. Here, a financial planner can be helpful to keep an eye on your portfolio’s funds. He/she can then make recommendations based on your goals, fund risk factors and fundamentals.
You need the money
Quite simply, selling shares is often appropriate when you finally want to spend the money. For instance, perhaps you wish to withdraw income from your pension to fund your retirement. Most pension pots are invested in non-cash assets (e.g. equities), so this will typically require selling some of them to release capital for your daily spending.
Of course, the questions here include: “Which shares should I sell?” and “How much should I sell?” Again, professional financial planning can help address these. Bear in mind that selling certain shares could affect the asset allocation in your portfolio. Without careful management, this could result in a misalignment with your financial goals and investment risk tolerance.
You will also need to keep any withdrawals inside your “safe withdrawal rate”, which helps ensure that these are sustainable and will not result in you running out of money in retirement. Here, there is no universal rate which applies to everyone. Rather, this will depend on factors such as your desired lifestyle, your investment performance and the size of your portfolio.
For those looking to access a lump sum from their pension (e.g. to help fund an extension), the Pension Freedoms allow individuals to access up to 25% of their pension pots, from age 55, without incurring a tax charge. However, this decision can affect the longevity of your pension and can also trigger the Money Purchase Annual Allowance – limiting your annual contribution allowance. Seek professional advice here, if you are thinking about taking out a large pension sum.
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
