The simplest way to build up your nest egg

Published by Faith Glasgow on 19 May 2011.
Last updated on 09 June 2011

Golden eggs in nest

Building up a nest egg, whether it's to fund retirement or help the kids through university, is a long-term goal for many of us. Putting a small amount each month into an investment trust is a great way of building up your savings pot.

Cost-effective, simple regular investment schemes, also known as share plans, are typically run by the management group of the relevant trust - or of a whole stable of trusts - so you don't have to go to a stockbroker to buy or sell.

You can make regular monthly payments, plus occasional lump-sum payments if and when you want.

Basically, these investment schemes are wrappers in which your shares are held. It's possible to set them up tax-efficiently as an ISA or, if you've used your ISA allowance for the year, as an ordinary investment plan, where income earned and any capital growth when you sell shares are taxed in the usual way.

So how do regular investment schemes work, and what are the advantages of using one?

Minimum contributions

These schemes have a low monthly minimum contribution - typically £50 a month, though some are lower (for example, Baillie Gifford stipulates £30 a month and Henderson just £20).

Depending on the sector and how long you invest for, a little regular saving goes a long way. The Association of Investment Companies (AIC) found that over 18 years to 31 January 2011, £50 a month invested in the AIC global emerging markets sector would have built up into £44,000.

Less high-octane sectors deliver less spectacular returns, but even they are significant: £50 a month in the UK growth sector would have averaged over £28,000.

Fees and charges

These schemes also have lower costs. If you went to a stockbroker, you would have to pay the dealing fee every time you made an investment.

If you pay into an investment scheme, however, the manager collates all the orders and places a single bulk deal with the stockbroker (typically one a month).

The savings on costs are passed on to you: many investment schemes don't charge for purchases; one or two, such as Fidelity and AXA Investment Managers, don't charge for sales of shares. These days, there's generally no annual administration charge, either.

It's easy to set up a scheme too: you just contact the scheme manager, fill in the form and send a cheque or your direct debit details - and they will do the rest. If you've selected a monthly direct debit option, your investment contribution will leave your bank account each month and you don't have to do a thing.

Saving for children

These investment schemes can also be used as a long-term savings plan for children: 13 managers offer special branded children's schemes with lower minimum contributions.

But if you want to make use of a trust from a management group that doesn't run a children's scheme, it's equally straightforward.

Whichever you choose, however, children under 18 can't hold shares in their own name. So you can either set up the plan in your own name and ‘designate' it for the child by adding their initials as well (in which case you retain control of the fund but will be liable for any tax arising) or you can use a ‘bare trust'.

A bare trust is a very simple structure which is drawn up in the child's name. Once they reach 18, the contents of the trust automatically become their property; in the meantime, you, as trustee, have responsibility for selecting and monitoring the investments but you won't be liable for tax.

Pound cost averaging

Not only does regular investment through these schemes provide a low-cost means of accessing investment trusts, but it's also a very sensible way of approaching stockmarket investment.

By drip-feeding money in each month, you buy shares in your chosen trust at a range of prices - fewer, pricier ones when the market's booming and lots of cheap ones when it's low. So the average price of the shares will be lower than the average market price.

Imagine you invest £50 a month and in the first month the share price is 100p, allowing you to buy 50 shares. The next month the price drops to 80p a share, so you can buy 62 shares for the same amount.

But if the share price rises to 110p in the following month, you'll only be able to buy 45 shares. In total, however, you will have bought 157 shares at an average price of 95p. Known as 'pound cost averaging', this tends to work best in fairly choppy markets with regular opportunities to pick up cheap shares.

Regular investing doesn't just mean you're buying shares relatively cheaply, but it also does away with the uncertainty of market timing, because low markets bring their own benefit of ultra-cheap shares. By contrast, if you invested a lump sum at the top of the market and it lost 40%, you could be severely out of pocket for months or years. 

Potential downsides

But there can be downsides. The main one, according to Justin Modray, founder of Candid Money, is that you won't benefit as fully during rising markets as if you had invested an initial lump sum.
"You may also find that regular schemes have minimums per trust, so you can't spread your investment as widely as you'd like," he adds.

So make sure to check that the investment scheme on offer is the right one for you. "Always focus first and foremost on picking the right investments for your needs," advises Modray.

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