The ease in which people can invest directly with financial product providers has led to a boom in the number of people taking up DIY investment – but their lack of knowledge may cost them dearly.
That’s because many are not considering things like taxes and fees when making their investment decisions, says financial services firm Prudential.
They carried out a survey and found that nearly one-in-three DIY investors were not aware of the implications that came with buying directly from a financial platform, a provider or a fund supermarket.
More surprisingly, 44% said that they didn’t know whether the products they bought were suitable for their current and future circumstances and 37% confessed they didn’t know how they would avoid potential tax traps.
One in five of DIY investors also admitted that they were not sure about keeping under their annual Capital Gains Tax (CGT) threshold.
Lack of understanding
Matthew Stephens, a tax expert at Prudential, said: “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 investment vehicles.”
He acknowledged that this could be a complicated area and those who would be most successful would be those taking professional financial advice.
He added that while DIY investing is initially cheaper than taking expert advice, the lack of understanding of relevant implications could cost more for the investor.
He pointed out that while the Prudential research said that most DIY investors were confident about the financial decisions they were taking, it also highlighted little understanding when it came to the potential tax and costs of the investment.
There is also an issue, he said, that many DIY investors did not fully appreciate the risks they were taking when making their investments.
Tax problems
On top of this, there is also an issue about investments failing and 21% of those undertaking their own investments said the main reason for this was their failure to understand the product or fund charges involved.
The survey showed that most DIY investors (81%) understood that to maximise their investment in a tax-efficient way they would have to use CGT correctly.
However, only 28% knew that their CGT allowance for 2012/13 is £10,600 with another 13% thinking it was worth far more.
Wealthy DIY investors, generally those with more than £250,000 being invested, were most likely to know the CGT limit though 56% of them did not know the exact figure.
Most DIY investors, 73%, prefer to purchase directly with a provider, another 12% opted for money supermarkets and just 10% chose to buy from financial platforms.
