Once you have signed up to an investment platform (see episode one), you’ll need to open an account with that platform. In the same way that you can have more than one account with a bank (e.g. current account, easy-access savings account, cash ISA) you can also have more than one account type with an investment platform.
There are four main types of investment account: general investment accounts, stocks and shares ISAs, Lifetime ISAs and self invested personal pensions (SIPPS). They all come with their own uses and advantages, and you can open one or more account types with an investment platform. Margin accounts, a more advanced type of account offered on some commission-free investing platforms, will not be discussed here and will be the subject of a separate article.
General investment account (GIA)
A general investment account is a bog standard investment account. Think of it as the ‘current account’ of the investment platform world. You can invest an unlimited sum of money in one, but you’ll have to pay tax on any capital gains or income you make outside of the tax-free annual limits. Currently the tax-free annual limit on capital gains is £12,300 a year and for dividends it is £2,000 a year. If you’ve used up your annual ISA allowance (see below) and are lucky enough to have money to invest, then a general invsetment account would be the next choice.
Stocks and shares ISA
A stocks and shares ISA is a tax-sheltered investment account. You can contribute up to £20,000 per tax year into one of these and you’ve no tax to pay on any capital gains or dividends, ever! You’re basically locking you investments away from the taxman for good and he knows about it! Your ISA balance stays with you year after year, and so over time, these tax savings really do begin to add up. You can also transfer money into (and out of) a stocks and shares ISA from other ISA providers, making this a great account type to build wealth over time.
There is also a junior variation of the stocks and shares ISA for children, with an annual contribution limit of £9,000. Parents, grandparents and guardians can contribute to one of these making it a great option for birthdays and one-off gifts. A child can manage their money in a junior stocks and shares ISA from age 16, and when they hit 18 the account automatically becomes theirs — there is nothing parents or grandparents can do about it so think carefully before setting up one of these accounts.!
The two principal uses for the Lifetime ISA are as a savings account for first-time buyers, or as a way to save for retirement. The cash Lifetime ISA is well known for the former, but did you know you can open a stocks and shares version of the Lifetime ISA? You need to be between 18-39 to open a stocks and shares Lifetime ISA and you can contribute up to £4,000 per tax year into one. The government will pay a 25% bonus on your contributions until your 50th birthday (max £1,000), and you can access the money at age 60.
The Lifetime ISA can only be used to buy a property for £450,000 or less so with house prices rising rapidly, that might limit your options. you might think the account is pointless, but the stocks and shares Lifetime ISA could therefore be a useful way to save for retirement, for people who are already maxing out their pension contributions elsewhere. Remember though that you have an overall ISA allowance of £20,000 so anything you put in here reduces the amount you can put into other ISAs.
Self invested personal pension (SIPP)
A SIPP is a pension account that you manage yourself. It’s like a stocks and shares ISA in the sense that you can select which investments you put in it, but the key difference is the age of access. You cannot normally access money you’ve invested in a SIPP until you’re 55. You can take the first 25% as a tax-free lump sum, and then the rest as normal taxable income. You get tax relief on the money you put into your SIPP allowing you to build up a sizeable pot, but when you retire and start to draw money from your SIPP, that counts as taxable income.
You can pay up to £40,000 per year into a SIPP, and £1.073 million over the course of your lifetime. This limit applies across all pension accounts you might currently have, so you can pay into a SIPP at the same time as a workplace or personal pension.
There are huge tax advantages to paying into a SIPP. The amount of tax relief you get depends on which tax band you fall into. If you are a basic rate (20%) taxpayer for example and you put £8 from your take home pay into a SIPP, the government will add back the £2 tax you would have paid on the money, resulting in a total contribution of £10.
If you are a higher (40%) or additional rate (45%) tax payer, you can claim even more tax relief on your pension contributions by filling out a self assessment tax return. Lastly, there is a junior version of the SIPP which works much the same as the above, but with an annual tax-free limit of £3,600.
Tune in next week to find out what the actual investments are.
Photo by Tamanna Rumee on Unsplash