Investments, Investment Vehicles, And Investment Platforms

Demystifying stock market return

The world of investing is a confusing one.

Let’s start with the good news: it gets easier with time.

Now for the bad news: when you first start out, the terminology can get so overwhelming that you’ll just want to give up on the whole thing.

Please don’t.

When I had first moved to the UK a decade ago, it has taken me more time to wrap my head around the various investing options than I’d like to admit.

To make matters worse, this is coming from someone who has been living and breathing personal finance for years.

Today, I want to lay out the differences between three related, but distinct terms:

  1. Investments (bonds, equities, real estate)
  2. Investment Vehicles (pensions, 401(k) accounts, ISAs, Lifetime ISAs, etc)
  3. Investment Platforms (Vanguard, Hargreaves Lansdown, and many others)

The issue is that day after day, I hear way too many people say things like:

“I’m investing in my ISA / 401 (k) / workplace pension / Roth IRA / etc”

Let’s use a very simple analogy to explain why this is the wrong way to think about investing.

Gone Fishing Shopping

Assume you go to the grocery store to buy some apples.

It doesn’t matter where you go. Can be the Tesco next door, the Trader Joe’s (my old favourite when I lived stateside), or even online through Amazon.

At the checkout, the cashier packs the apples in a bag for you to take home.

Think of apples as investments. Despite what the store may tell you, you can get pretty much identical apples elsewhere.

The bag, however, can make the world of a difference – because not all bags are equal.

Thus, think of the bag as an investment vehicle.

The “Lifetime ISA” Bag

One day, there’s a government representative hanging out by the register.

Out of the goodness of her heart, she puts 25% more apples into your bag.

There is a catch, though. She also puts a “Lifetime ISA” sticker on your bag.

The sticker means that you can’t open the bag until you turn 60.

And if you do, the government will make you give back more apples than you received.

The “Workplace Pension” Bag

There’s a big giveaway day at the supermarket.

In addition to the government rep, your employer is also there.

They take a look at your bag, and (depending on circumstances), double – or even triple the number of apples in your bag.

In other words, it’s an absolute steal:

Building wealth with pensions

The sticker that goes on the bag says: “workplace pension”.

And yes, this one also has a catch: you can only open the bag once you hit pension age.

Currently the pension age stands at 55 but it will be going up to 57 at the end of the decade.

Once you do open the bag, you get to take 25% of apples out tax-free.

The rest of the apples are taxed at your marginal tax rate in the year you choose to take them out.

Yes, the tax bit is a bummer. That being said, considering the deal you got that day at the supermarket, you still end up way ahead of the game.

TheUS 401(k)” Bag

Very much like the UK workplace pensions in the example above, except that you often need to stay with your employer for a pre-defined period of time for your apples to “vest”.

If you leave early, your employer will reach back into the bag and take a few apples out.

The “ISA (Individual Savings Account)” Bag

There’s a very special bag at the checkout register.

It only fits that many apples (current limit of £20k/year). However, this bag is simply magical because you can use the apples inside to grow an entire apple orchard.

Over time, this apple orchard will start bearing even more apples – and you don’t have to pay a single penny of tax on the apples you take out and consume.

There are no restrictions on when you take the apples out, either. Could be tomorrow. Could be decades from today. It’s up to you – though the longer you wait, the bigger the apple orchard.

The only catch is that once you take the apples out, you can’t put them back in.

Instead, you’ve got to wait until next year for your ISA allowance to reset, at which point you can load up on more apples.

Shopping For Bargains

Hopefully, the difference between investments and investment vehicles (sometimes called “wrappers”) is now more evident.

However, there’s also another aspect to consider: investment platforms.

Regardless what the sticker on your bag says, you still need to pick the supermarket at which you shop.

This is because the government, which legislates all the investment vehicles out there, still needs someone to sell those apples.

Let’s say you went to Tesco. You now have a big Tesco bag, with a “Pension” sticker on it.

A few days later, you realize you no longer like the Tesco bag.

Perhaps it’s not giving your apples enough room to grow. Or perhaps the naughty Tesco people put a little bug in the bag that keeps eating more of your apples than you would like.

Make no mistake – just because you bought apples from Tesco in the first place, doesn’t mean you have to stick with the Tesco bag forever.

You are more than welcome to transfer it to a bag from Waitrose, Sainsbury’s, Whole Foods, or even the local independent shop down the street.

They are your apples. You are free to do whatever you want with them.

In fact, you need to do whatever it takes to let your apple orchard grow and bear as much fruit as possible.

Cue in transfers to self-invested pension plans, consolidating your investments with low-fee platforms, or generally moving your money from any provider that is giving you a crappy deal.

The apples (investments) stay the same. So does the sticker on the bag (investment vehicle). You still hold your money in a pension, or an ISA.

But the bag itself (your investment platform) itself now has a different logo on it – and that’s okay.

Translating finance concepts into everyday language is one of the toughest parts of being a personal finance blogger.

Hopefully, today’s post provides a helpful framework to help cut through some of the jargon out there.

Happy investing!

About Banker On FIRE

Enjoyed this post? Then you may want to sign up to our exclusive updates, delivered straight to your inbox.

You can also follow me on Twitter or Facebook, or share the post using the buttons above.

Banker On FIRE is a London-based M&A (mergers and acquisitions) investment banker.  I am passionate about capital markets, behavioural economics, financial independence and living the best life possible.

Find out more about me and this blog here.

If you are new to investing, this is a good place to start.

For advertising opportunities, please send an email to bankeronfire at gmail dot com

19 Comments

  1. I see people confusing all the time between the investments themselves and the investment vehicles. Seems obvious after so many years in the game but now that I think about it, it was extremely confusing when starting out.

    Hopefully this post helps people out.

    Cheers!

    • Challenge is that folks who’ve been breathing personal finance for 5+ years will find it straighforward.

      Those who just start out – not so much, and it can be a bit of a headscratcher (and a time consuming one at that) to understand the differences.

    • Nice explanations!
      In due course you might view the LTA as an impediment on the maximum size of your “workplace pension” bag and the annual allowance (after carry forward) as an annual constraint – but these are definitely in the weeds too!

      • I’ve got to admit, even my eyes were glazing over when I was reading up on annual allowances and carryovers back in 2012.

        Good thing I crossed that bridge early on and maxed out the contributions while the going was good!

        • I know what you mean.
          US RMD’s take a bit of understanding too – although interestingly the intent of RMD’s seems to be the opposite of what were known (prior to 2015) as GAD limits in the UK. AFAICT, the former specify a minimum annual withdrawal whereas the latter specified a maximum annual withdrawal.
          The former seems to ensure that the US treasury gets some tax take whereas the latter would prevent rapid depletion – but you could, at least in theory, leave it untouched to be inherited.
          Curiouser and curiouser!

  2. Thanks for the article, food for thought as usual 🙂

    This brings to mind a pension question. I have a SIPP with Vanguard and I have an employer pension with Scottish Widows. I would like to transfer the money I currently have in my employer pension to SIPP (but I would still like new money to be added to my employer pension).

    What happens if I request a transfer from my employer pension to my SIPP (Vanguard has this option). Will this:
    a) just move the current balance from employer pension to SIPP, leaving the employer pension “open”
    b) or will this move the balance and somehow “close” my employer pension (preventing further contributions)?

    Thanks again,
    M

    • Cheers Marcin.

      Your employer pension will remain open. The existing funds in it will get transferred to Vanguard and you will continue accumulating your employer pension from scratch.

    • I have exactly the same situation and called SW. They said as long as you leave £2 in your SW account you will be able to continue to keep it open for future monthly amounts.

      My plan is to move an amount across once a year to reduce the administrative burden. I also found SW costs were not too bad (I am purely in their index funds) albeit still slightly higher than Vanguard

      • I am in the exact same situation, although I couldn’t find anything resembling a tracker on SW (maybe we have a different range of funds available). I transfer regularly from SW to my Vanguard SIPP using the transfer form on the Vanguard website – takes 5 mins. My last transfer took under 2 weeks! So don’t be afraid to transfer more often, if you want to.

        • I think some plans (like mine) limit you to one transfer a year. If you can transfer more often, I think it’s worth it – as you say, the process is quite painless.

  3. I agree, it seems obvious if you are very interested in finance and spend a lot of time on it, but it’s really not evident at first and requires a lot of background knowledge. This is a great analogy and I’ll share it with anyone newly starting to take an interest in personal finance.

    • Kind of like fitness, isn’t it? I remember walking into the gym for the first time as a fifteen-year-old and being totally intimidated – and that’s before you get to healthy eating and sleeping habits!

  4. Very good way of explaining, love it! I’ll have to try to remember it when I get the chance to explain to my friends, before their eyes glaze over at the mention of investments and pensions haha!

Leave a Reply