Prudential reveals DIY investors overlook tax and charges at the expense of performance

From: Prudential
Published: Wed Mar 06 2013

Almost a third (31 per cent) of DIY investors aren't aware that the way they buy financial products - direct from a provider or from a platform or fund supermarket - can impact the cost of their investment, according to new research from Prudential*.

The findings suggest that many DIY investors, who self-select the majority of their investments, are failing to consider important taxes and charges when making investment decisions. Almost half (44 per cent) admit they don't know which wrapper product would be most appropriate for their circumstances, a further 37 per cent aren’t sure how to avoid tax traps, and a fifth (19 per cent) aren't confident they'll keep under their annual Capital Gains Tax (CGT) threshold.

When questioned about DIY investments that fail to perform as expected, more than a fifth (21 per cent) cite a lack of clarity around product or fund charges as the main reason for the underperformance.

Using the CGT threshold correctly helps investors maximise returns in a tax-efficient way. However, despite most DIY investors (81 per cent) saying they understand CGT, only 28 per cent know the allowance is £10,600 for 2012/13, with 13 per cent overestimating it.

While wealthy DIY investors, those with over £250,000 invested, are more likely to know the CGT limit, over half (56 per cent) of them still don't know the exact figure, showing they’re unlikely to be maximising the tax-efficiency of their returns. Furthermore, just 7 per cent of DIY investors claim to use their capital gains tax allowance each year, rising to 15 per cent for high net worth investors.

Matthew Stephens, tax expert at Prudential, commented: "Investing in a tax-efficient way is not something that happens automatically. Investors can save substantial amounts by maximising exemptions and limits, using ISAs and the CGT annual exemption, for example, as well as other tax-efficient investments. But this can be complicated and will usually be more successfully achieved with advice from a professional financial adviser.

"Investing without advice from an expert may be cheaper initially. However, without a clear understanding of all the relevant considerations, it could be very costly in the long-run.

"Many DIY investors say they’re confident about making financial decisions on their own, but our research highlights a worrying lack of understanding. We can't stress enough that it's vital to understand clearly the costs/charges, risks and tax implications applying to an investment, before making a commitment."

Prudential's survey reveals that 73 per cent of DIY investors prefer to buy direct from a provider, 12 per cent from fund supermarkets and 10 per cent from platforms. People with smaller investments (less than £10,000 invested in total) are more likely to buy direct, while high net worth investors are twice as likely to buy via a fund platform, with 20 per cent doing this.

Notes to editors
*Survey conducted by Opinium Research amongst 1,074 UK DIY investors from 4-11 February 2013.

About Prudential:
"Prudential" is a trading name of The Prudential Assurance Company Limited, Prudential Unit Trusts Limited and Prudential Distribution Limited. This name is also used by other companies within the Prudential Group which, between them, provide a range of financial services that incorporate retirement planning, investment planning, life assurance, pensions and savings.

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