This is an audio transcript of the Money Clinic podcast episode: ‘Investment Clinic — the high earner taking stock tips from ChatGPT’
Faye
I’m not gonna lie, I have gone on ChatGPT and said OK, give me some stock suggestions.
Claer Barrett
Have you?
Faye
I have.
Claer Barrett
What did ChatGPT suggest?
Faye
It gave me Palantir, I think it’s AI-related. I bought it about two or three months ago maybe, and it’s up around 100 per cent.
Claer Barrett
Yes, you heard that right. My latest guest takes investing in artificial intelligence so seriously, she actually used AI to try and pick stocks. This risky pick might have worked out for 29-year-old Faye, but she’s here to pick our brains about developing a more serious investment strategy.
Faye
So I guess up until now, I’ve had my fair share of experimenting between commodities, individual stock picks, a bit of crypto, some license plates and other investments, and I think it’d be very interesting to hear from the professionals how to arrange my portfolio.
Claer Barrett
Faye is one of many listeners who got in touch with a problem to discuss in our newly opened Investment Clinic with me, Claer Barrett, the FT’s consumer editor. In this special series of six episodes, I’ll be triaging plenty of different real-life investment dilemmas with the help of our financial experts. From a listener with an inheritance who’s too scared to start investing to guests in their twenties and thirties who need to stay on-strategy, we’ll be sharing real-life stories that we hope will educate and inspire you, no matter what stage of your investment journey you happen to be at.
As for high-earner Faye, investing in cryptocurrencies and car licence plates might sound fun, but as we will reveal, more tax-efficient options are available. Let’s open up the Investment Clinic and examine her portfolio.
Thanks so much for joining us in the Money Clinic studio today, Faye. It’s great to have you here. Tell the listeners a little bit about yourself.
Faye
So I am 29. I work in the insurance industry and I am an actuary. So a specialist mathematician, I guess. I’ve been investing myself for quite a few years. You know, everyone tells you to invest your money in Isas. But then once you kind of use up those allowances that are tax-free, what is the next best options to put it into if you, say, don’t want to lock up all your money until you turn 55. Because obviously, I know you can just shove a lot of your money into your pension, but then it’s locked up. And I think that I can probably do more by having it ready now than in, say, 30-odd years.
Claer Barrett
Well, yeah, a long time away for somebody who’s 29. But you’re investing now, what made you start?
Faye
You know, I’m in quite a fortunate position. I don’t have any kids. I’m quite young. I’m doing quite well. So I just thought, how can I, you know, maximise returns? Went online, read up a little bit. And I always found like, pharma to be quite interesting. So I would see how like their stocks were kind of flat, and then something would just go well . . .
Claer Barrett
Like a vaccine.
Faye
Exactly. And it literally just jumps like crazy. So I thought this is kind of fun, you know. Obviously, if I needed, you know, the money in a secure fashion, I would probably not do this. But I just bought quite a few pharma stocks. And I’m just hoping one day one of them does very well. And then I’m not gonna lie, I have gone on ChatGPT and said, OK, give me some stock suggestions.
Claer Barrett
Have you?
Faye
I have.
Claer Barrett
What did ChatGPT suggest?
Faye
It gave me Palantir.
Claer Barrett
The health data company?
Faye
I think it’s AI-related. I bought it about two or three months ago maybe and it’s up around 100 per cent.
Claer Barrett
Wow. And what did you ask ChatGPT?
Faye
So I said, basically I want a stock similar to Nvidia or other kind of industries that, you know, are likely to jump up quite a lot, but they haven’t yet got hyped. Can you give me some? And it gave me Palantir. And obviously, like I only put small percentages of my portfolio in each of these risky picks because I like to diversify out. Like majority of my portfolio is in Vanguard USA 500, which is really secure. It’s doing beautifully. I mean . . .
Claer Barrett
That’s index fund exposed to American tech stocks predominantly.
Faye
Yeah. Which I know people say are completely overpriced, which goes on to my next theory, which is why I invested in Palantir and some of these stocks. I think everyone right now is just investing emotionally and there’s money to be made there, so I just go for it.
Claer Barrett
So if you had to describe to me in a word or even in a phrase what your investment strategy is, do you think you could do that?
Faye
I’d say just for fun. Honestly, like, I don’t take it too seriously. I mean, I probably should, but for now, I just think I’m young, a little bit dumb, but not too dumb, hopefully. And . . .
Claer Barrett
I would never describe you as dumb.
Faye
You know, I’m just having fun with it and hoping to retire early.
Claer Barrett
Faye invests the maximum in her workplace pension that her employer will match. That’s always smart, but especially if you earn a good wage like she does. Faye also has a Sipp or self-invested personal pension, a stocks and shares Isa, a Lifetime Isa and £50,000 of cash — the maximum allowed in premium bonds. But some of her holdings are a little more unusual.
Faye
I bought some number plates, which was quite a fun little investment.
Claer Barrett
So you’ve got a number plate that says Faye.
Faye
I do, I do.
Claer Barrett
May I impolitely ask, how much did that cost?
Faye
I will say it’s currently on the market if someone wants to buy it for 25k.
Claer Barrett
Goodness me.
Faye
And there’s very similar ones that are 35k. But I bought it and I don’t really want to disclose the amount, but it was not cheap, but definitely lower than that. And it was definitely a very good buy, which is why I treated myself to that (inaudible) . . .
Claer Barrett
OK, and you said number plates — so there are other ones.
Faye
Yeah. So I bought three other ones that resembled not-so-popular names but names, nevertheless. So I bought them and I have them on sale. It’s not very liquid, but it’s quite fun. I should probably be a bit more tactical about how I do it, but I’m just having fun.
Claer Barrett
Faye’s got a fair bit of money in unusual and frankly, risky investments. We haven’t even mentioned her bitcoin holdings yet, but she’s also invested in more traditional picks. She has shares in big-name stocks like Amazon and Coca-Cola, as well as some exposure to gold. Plus, she holds US, UK and global equity tracker funds. But what does she want to ask our experts?
Faye
So I guess the first point is to actually hear, you know, from someone who’s got the knowledge. Second thing is I’m kind of running out of places to put money tax-free that isn’t locked up for a long time. It’s more just about like, where do I go from here and to a more sensible portfolio?
[MUSIC PLAYING]
Claer Barrett
Faye is young, but she’s earning a very good wage. She has much more money to invest than you or I might have. But there are still lessons we could all learn from her successes and failures, even if you’re not a high earner yet. Stay tuned to hear our podcast experts explain how to take tax-efficient investing to the next level, from the Lifetime Isa to venture capital trusts.
Before that, though, a quick disclaimer: we are gonna be talking about how investors might approach making investment decisions, but this is intended as a general discussion and not financial advice or any kind of investment recommendation to Faye or indeed any of you. Everybody’s financial situation is different, and you should always do your own research before you make any decisions. But of course, we hope this episode will provide you with some helpful insights.
So our experts today, Nimesh Shah is the chief executive of Blick Rothenberg, the accountancy firm and what Nimesh doesn’t know about tax, frankly, isn’t worth knowing. And Adam Walkom, the co-founder of financial planning firm Permanent Wealth Partners.
Well, welcome experts. You’ve been sitting outside in the studio listening to me and Faye have a chat and talk about her experiences as an investor. What are your first impressions? Nimesh.
Nimesh Shah
Yeah, I was blown away, to be honest, Faye. You said it’s a bit of fun, but actually it made a lot of sense and Adam and I were outside just nodding along, going, yeah, well, we’ve learned something there as well. So I think you’d be really proud of what you’ve done.
Faye
Thank you.
Claer Barrett
It’s good to see you smiling about this because you are doing fantastically well. But the questions that you really wanted to chew over with Adam and Nimesh did come down to two things, basically. The whole business of investing, what the money is going towards, how you could maybe have a bit more of a strategy going forward about what you’re investing in. And then secondly, on the tax side, how we could potentially think about giving Faye some ideas to go off and look at beyond Isas and pensions. So I mean, should we kick off with Faye’s portfolio? The different approaches that she’s using towards buying equities, individual stocks, ChatGPT — I don’t know what you thought about that Adam. And then her Sipp which is containing much more conventional investment funds.
Adam Walkom
Well, my first thought was looking at Faye’s portfolio and hearing Faye talk and clearly with the passion that she has for it and how she describe it as fun, there is investing for fun, which is fantastic and it’s a hobby and it’s frankly what many, many young people have gone into in the last five or 10 years with crypto. But when it’s fun, it does turn. There is no doubt we have been in a pretty good bull market over the past three or four years. And whilst companies are at all-time highs, investing is fun. But when we get bear markets, things become a lot less fun. And so that’s where taking a step back and actually having a bit more of a strategy, I think actually will stand you in really, really good stead.
Just kind of thinking about, OK, I’m gonna split out some of my investments. There are gonna be some that are gonna be the fun ones and that could be your single stocks, your crypto — include number plates in that as well. And you do that for fun, you do that for a hobby. But at the same time that’s not necessarily your primary wealth-generation portfolio. Your wealth-generation portfolio is the really boring stuff — it’s the index funds, it’s the pension, it’s the Isa. So what I would do, and as a way to think about this, would be just take a step back, think about what you’ve got. Say, all right, this is my long-term, medium-term, house portfolio, things like that. Work out what you actually want to do with the funds. And then what do I need to get there?
What you don’t want is, you know, Palantir, bitcoin, other funds like that. And all of a sudden six months before you buy the house, you get an almighty market crash. It’s just kind of thinking a little more strategically. It’s not stopping you doing what you’re doing. Just read up, get educated, do all that sort of stuff — you’re doing fantastically well, but it’s just kind of splitting out the investment strategy bit.
Faye
Yeah, I 100 per cent agree. And I’d say all of the other risky stocks are only accessible in quite a few years. So any of my house, you know, savings are definitely much safer. And even within the long-term portfolio, I’d say probably like 80 per cent or more of my portfolio is in index funds. And I’ve got to admit it is doing way better than my self-picked funds. So there’s a lot of sense to what you’ve just said.
Claer Barrett
But there’s also value in enjoying investing. But what I would like you to go away from this experience with is a kind of almost like a better sense of organisational priority of where you’re putting your money. So you’ve got the Lifetime Isa, you can max out your Lifetime Isa with £4,000 a year. You get the 25 per cent top-up from the government, will you ever use that though for buying a house if the property cap is £450,000?
So I have to say, Nimesh, it’s a very restrictive product, the Lifetime Isa. But if you have made investments within it, then, of course, you can’t keep plugging away with £4,000 a year, getting that 25 per cent top-up and just accept that you’re only gonna be able to get the money back when you turn 60.
Nimesh Shah
Yeah, if you’re in the right age profile, which you definitely are, Faye, and you’ve been doing this, is you should max out all those allowances, and again, you have been. You mentioned before that the Lifetime Isa feels a bit restrictive. It can be and it can’t be. I mean, think of it just like part of your normal Isa component. So rather than getting 20,000 in a normal Isa, which you think psychologically you can just take out and put in elsewhere, actually think of the Lifetime Isa and the Isa combined is a 21,000 pot, because you’ve got the 1,000 free money from the government — that’s how I think about it. And have it invested for the long term, you can get £32,000 of free money from the government if you max out your Lifetime Isa. And because it is restrictive on using it for your first house purchase, I just think of it like another pension.
[MUSIC PLAYING]
Claer Barrett
Ugh, pensions! Now is a good time to mention the six-figure salary trap. If you earn between £100,000 and £125,000 or so, that proportion of your income gets taxed at a massive 60 per cent. See the linked article in today’s show notes to read more.
Maxing out your pension contribution, thus lowering your salary on paper, can help you dip below that £100,000 threshold. Most people can invest up to £60,000 into a pension each year, but the money will be locked inside until you are at least 57 years old. There’s an argument that high-earning young professionals should make big pension contributions while they still can because once their earnings go north of £200,000 a year, the amount they could save into a pension might start to be restricted.
Nimesh Shah
That annual allowance of 60 starts to come down. So it starts tapering away. And if you earn the mega money — which I expect you will do, given the trajectory you’re on — that annual allowance becomes 10. If you don’t need the money, lock it away in your pension and don’t think about it too much.
Claer Barrett
Nimesh is thinking with an accountant’s brain there. And this is a very tax-efficient way of investing. But as Adam says, that shouldn’t be the only consideration.
Adam Walkom
Investment strategy or the best investment strategy for an individual is really driven by actually what you want to do with the money, when do you want to spend it? Money is the chance to go and do stuff, to buy stuff, to experience stuff, and that is the most important from an individual’s perspective about how you spend the money and what you spend the money on.
So that’s how you should design the investment strategy. So in your case, yes, you are stuck in that potential pension trap and that’s not very pleasant. However, what you have to think about is the priority for you to access that money over the next three or four or five years, I would say it’s probably more important than the extra little bit of tax you’re gonna have to pay.
Nimesh Shah
Yeah, I didn’t put it into my pension. That’s a confession of a tax advisor here that I didn’t do it sooner. I wish I had done it.
Claer Barrett
My jaw is on the floor.
Nimesh Shah
And then my earnings did jump up — getting promoted and being successful, which is great. But then I found that I was restricted on the amount that I could put into my pension. So I wish I had done it a bit sooner.
Adam Walkom
Well, it’s again, it’s a very common thing from high achievers and high earners. And you do run out of pension allowance really quickly. What we’re seeing and what I occasionally see is actually that goes the other side, though, is because at some point, if you are a high achiever and working really, really hard, working your socks off, at some point, you know what, you might not want to work all the way to 65 to earn that.
So what we see sometimes are people in high-earning careers — lawyers, bankers, consultants, people like that — they stop that high-intensity career in their mid-50s, and then they take more of a portfolio career. That comes with a significant, normally a significant drop in their income. What that does is open back up the pension allowance and it opens back up the pension allowance when let’s say they’re in the mid-50s, their earnings, their actual savings are significantly more at that point. So really what we see at that point is the idea of people taking savings and using pension relief and really ploughing their money into their pensions at that point when they can.
Claer Barrett
I’ve got a question for you, Faye. How often do you sit down and review your portfolio? Like, look at how it’s all going. Obviously, you’ve got apps, you’ve got different pots of money in different places. But how kind of strategic is your mathematical brain looking at all this stuff in the round?
Faye
Honestly, it’s due. And I was waiting to see kind of what comes out of this session. I really need to make some decisions now because, you know, I’m no longer at the point of I can’t afford a house that I want, but it’s more about what do I want to do? Then I guess the next decision I’ve got to make is even if I am gonna save it, do I want to do it straight into my pension or do the Lifetime Isa? Which one’s a better decision? I need to start getting my books in order for sure.
Claer Barrett
Well, before you go off and start this, I would like Nimesh to tell you about some other tax-efficient savings options that listeners could also consider. If they filled up enough of their pension allowance, done their £20,000 Isa allowance, what else Nimesh could people who are earning good money, who enjoy investing have a look at?
Nimesh Shah
So within my client base where you are high-earning, so you’re limited on the amount you can put into your pension and you’ve maxed out your Isa, the spouse’s Isa, the children’s Isas, you’ve gone all to town on those simple things. And we look at some other tax-efficient investments that you could make. For a long time in the UK, we’ve got things called the Enterprise Investment Scheme . . .
Claer Barrett
EIS.
Nimesh Shah
And the venture capital trust scheme, VCT. And what these are, these are tax-efficient, government-approved schemes. The government isn’t approving the investment itself, it’s just approving that these things qualify for these tax reliefs. Now for both EIS and VCT you could put in £100 and the government will give you a 30 per cent tax credit on your tax bill. But there are rules.
So with a VCT, if we take each one in turn, with a VCT you get the tax relief up front. So 30 per cent comes off your tax bill in the year that you subscribe for the VCT, any dividends paid on the VCT are exempt. You could go and reinvest those dividends back into the VCT, and you’ll get another 30 per cent on the dividends that you would get. But you have to hold them for five years. If you cash out within five years of the VCT, then that tax relief gets clawed back. So it’s a medium-term type investment.
Again, Adam will have a view on the investments themselves. You need to watch out for the fees. You need to watch out around the type of investment that they’re in. Because of the way that VCTs work, they’re traditionally higher-risk type investments. They do offer liquidity so they are traded on an exchange so you could get out within a reasonable time frame. There might be a discount when you do get out. So there are some penalties if you do want to get out a bit earlier, not least the tax. And they are investments and they will go up and down. That’s VCTs.
EIS is, I suppose, a form of VCT, but rather than a VCT being a portfolio of different individual companies in which you’re invested in so it’s a bit more diversified, EIS is a single investment in a single company. So similar to VCT, you get a 30 per cent credit off your tax bill. You have to hold the investment for three years before the tax gets clawed back. There are some additional benefits to EIS, which is the capital gain on the EIS is exempt, so that’s good news. Unfortunately, I see more loss claims than I do gains. But if you do make an EIS investment that does hit the money, then the capital gain is completely exempt from CGT, provided you’ve held the investment for three years and if you’ve made capital gains on other things. So if you are thinking of selling some cryptocurrency or you’re selling your number plates, then you can defer the gains you’ve made elsewhere. So there’s a cash flow advantage to doing that as well. But these are highly illiquid. They are higher risk. Your money is tied up until the EIS company sells. It’s not like a VCT which is traded on an exchange. So you are locked in and at the whim of when that company will sell.
Claer Barrett
I mean, definitely for 29-year-old you, something worth thinking about in the future. Does it sort of sound like the kind of investment that might appeal to you doing that kind of thing?
Faye
I mean, it actually sounds like a very interesting option. I’ve obviously got quite a few questions on that. I guess what kind of tax can you offset? And then second thing is you talked a little bit about the risks, but can you tell me a bit more about that?
Nimesh Shah
Yeah. So EIS and VCT a pretty straightforward from a tax perspective. If you put in £100 you get £30 just knocked off your tax bill. So at the moment I expect most of your tax is paid through PAYE on your salary. And then you will file a claim through your self-assessment tax return. Or you can do a standalone claim to HMRC and say I put £100 into this EIS or VCT, they will give you a check back for that £30.
There are platforms out there. So you mentioned before you like a bit of fun investing. So there are some retail-type platforms out there. Crowdcube and Seeders are probably the most well-known platforms. You can go on there and have a look at some of the companies that are raising money from crowdfunding.
Claer Barrett
VCT investments are high-risk. That’s why you get a tax break. Many companies end up going bust or falling by the wayside, but the ones that do succeed, such as Graze, Secret Escapes and Zoopla, can make early investors a lot of money. So what’s Adam’s view on VCTs?
Adam Walkom
We use them normally with clients who, like Nimesh said, who have filled out their Isas, filled out their pensions and are just high earners looking for more tax relief. Now the VCT and EIS strategy, if you like, from the government’s perspective, is look, we want to encourage investment into small, unlisted UK companies. And so that’s why they offer tax breaks for wealthier investors or any investor, frankly, to invest in them. So it’s good policy all round. The key part of that sentence is you are investing in small, growing, unlisted UK companies. Yes, you get the tax relief, but ultimately your investment is sitting in these companies. And that’s fine when markets do well or when the companies do well.
The advantage of something like a VCT is it’s a pooled approach. So you might own a VCT which has say, 30 of these particular type of companies. And what that means is you get that diversification coming through. The VCT is a listed share. It goes up and down so you can track performance. One impact we’ve seen over the last few years is because these are smaller companies, the smaller companies have been hit much harder by interest rate rises than say, listed companies on the FTSE or the US markets particularly. Costs are higher still within VCTs that have like 1 per cent dealing charges, it’s 5 per cent to get out, they’ve got annual fees somewhere between 1 and 2 per cent. When you compare those charges to standard index funds, they look horrific.
So there are some things to take into consideration. And typically when we see clients, when we make recommendations around VCTs, we always advise just dip your toe in the water to start with, only put a relatively small amount for the first year and just see how it works, see how it feels, get the tax certificate and then once you’re comfortable with it, then you can potentially put more in over time.
Another strategy which may be of interest that we do see sometimes is something called a VCT ladder. A VCT ladder is when you put money in five years in a row. So you put 10,000 into a VCT in year one, all right. So you get a £3,000 tax credit that year. You do the same thing in year two, year three, year four and year five. In year six, you can take the year one investment and sell it down. That will come to you as cash, any gains you get are tax-free. That cash is in your account. And then you can use that money if you want to and reinvest in a VCT in year six and claim the tax relief again.
In year seven you do the same with year two. Year eight, you do the same with year three. So the ladder is effectively if you’ve done five years in a row, if you don’t need that money every year, you can continue to roll that same money over and over and over again and continue to get the tax relief over and over and over again. So it’s an interesting strategy that we see, you know, some clients in certain situations use.
Claer Barrett
I feel I should point out to listeners of the podcast that Faye’s eyebrows have just gone up.
Faye
I know, absolutely. I’m just trying to do the math. You’re saying you almost get 30 per cent and then another 30 per cent?
Adam Walkom
Correct.
Faye
Wow. That sounds . . .
Adam Walkom
Yeah, It can be very effective.
Nimesh Shah
All I would add with all of these things is paperwork and admin. So you want to have someone very good like Adam helping you with the admin and recording the VCT ladder. Because the HMRC paperwork and your self-assessment of tax returns start to become complicated. I mean, I would love to see your tax return with number plates, cryptocurrency, Palantir shares, it would be my weekend.
So just making sure actually that you’re doing all these things and you’re gonna do some potentially some EISs and VCTs along with the other stuff that you’re doing, Faye, but making sure that your tax return is in order because it can then become expensive if you get an enquiry from HMRC and you’ve forgotten something, you could get a penalty on top of the tax and interest you need to pay. So just watch out, for simplicity is also quite valuable here.
Claer Barrett
But with somebody who is in the lucky position of having extra cash that they could invest, hopefully, you’re going away from the podcast with a lot more ideas about how you could be putting your money to work in other ways that are slightly, perhaps less risky and more tax-efficient than crypto and number plates.
Faye
No, this sounds fabulous. I’d never heard of these options, so I’m really glad to, you know, learn something new.
Claer Barrett
Going away from the studio, what do you think that you’ve learned here today, that you’ll be perhaps the most likely to do some more research on, follow up on in weeks and months to come?
Faye
I think I definitely need to sit down now and, you know, look at my whole portfolio and think about where I want to be in the next couple of years and go forward from there. And then once I’ve got that position, then I can decide where to put the excess money if there is.
I definitely want to look into these two options because I’m no stranger to anything that’s a bit volatile. So I definitely think it’s interesting to take some risks because I am at the age and in the position that I can take the risk. I mean, if it goes wrong, it goes wrong. So be it. But if it goes up, then even better.
[MUSIC PLAYING]
Claer Barrett
Good. Well, thank you, Faye, so much for joining us on Investment Clinic. Stay in touch with us, let us know how you get on with the next phase of your investment journey. And thank you very much to Adam and Nimesh for joining us today.
Adam Walkom
Thank you, Claer.
Nimesh Shah
Thanks very much, Claer, and thank you, Faye, for sharing your story.
Faye
Thank you so much for having me. This is great.
Claer Barrett
So Faye leaves the Investment Clinic vowing to be better organised and research how she could invest more tax efficiently in future. To give you a hand with that research, I’ve included some free links to FT articles I’ve written about — the 60 per cent tax trap and those tax-efficient but risky VCT and EIS schemes.
On our next episode, I’ll be talking to a 45-year-old who works in tech. He goes out of his way to invest ethically, but what about his crypto? And how about you? If you’d like to appear on the next series of my Investment Clinic and have the chance to chew the investment fat with a panel of experts, then get in touch. Our email address is money@ft.com or follow me on TikTok or Instagram, I’m @ClaerB.
And finally, this podcast is intended as a general discussion about investment. It’s not intended as financial advice or any kind of investment recommendation. Everyone’s financial situation is different, and you should always do your own research before you make any investment decisions.
[MUSIC PLAYING]
Investment Clinic is produced by Mischa Frankl-Duval, with sound design and mixing by Breen Turner and Joe Salcedo. Manuela Saragosa is the show’s executive producer and Cheryl Brumley is the FT’s global head of audio.
