There’s less than a week left until the end of the tax year, so we’re at the point in the calendar where the calls to sort our finances reach fever pitch.
Our annual tax-friendly allowances are use it or lose affairs, hence why the run up to 5 April involves such incitement to act.
But should you put money in a pension or an Isa? And should that be a cash Isa, stocks and shares Isa or even a Lifetime Isa?
For some of our readers the finer details will be well-trodden ground, but for many others the different rules and perks remain confusing, so here’s my quick guide to the basics and some article links to help you dig deeper.
And remember, the reason to sort this stuff out is that it helps your wealth tax-free and can also earn you valuable boosts from tax relief.
If you want to invest for your future in a tax-friendly way, should you choose a pension, a cash or stocks annd shares Isa or even a Lifetime Isa?
Most people pay into a pension via their work, but you can also have a personal pension that you invest yourself, known as a self-invested personal pension (Sipp).
The simplest way to pay into a Sipp is to open an account with a DIY investing platform, and you can either opt for one where you pick your own investments, use a platform that helps choose them for you, or find a middle ground.
The great benefit of a pension is that money paid in gets tax relief that takes you back to the position you were in before income tax.
Basic rate tax relief is automatically added and gives you a 25% boost (turning £80 paid in back into the £100 it would have been before 20% tax).
Higher rate taxpayers get an even bigger boost but must claim this via a tax return – the extra uplift can be painted as unfair but it’s simple maths, as 40% taxpayers paid more tax in the first place.
You can pay up to £40,000 into a pension each year, as long as you earn under £150,000, but that’s only £32,000 of your money, as the total includes the £8,000 of basic rate tax relief added.
Investment gains and dividends within pensions grow without tax, but you will be taxed on money you eventually withdraw above the first 25 per cent of the pot, which is tax-free.
A pension is there to fund your retirement and the great advantage is that you cannot withdraw money until age 55 (this is due to rise to 57 soon). This is also an obvious drawback of putting money in, you cannot get at it until that age.
An Isa is a tax-free wrapper round your cash savings or investments. Any interest paid on cash Isas is tax-free and there is no capital gains tax on profits or dividend tax for investments within a stocks and shares Isa.
The maximum you can pay in across a cash Isa and stocks and shares Isa in a tax year is £20,000, split however you want over one of each type, but you can transfer old Isas as much as you like.
Any money you withdraw from an Isa is tax-free and you can do that at any time without penalty.
That’s the major advantage of an Isa over a pension, but you don’t get the tax relief on contributions that a pension gets.
An Isa is a good place for money that you might need before the age of 55, whether you choose to opt for cash or stocks and shares.
Cash Isas are savings accounts, so you get paid interest and can’t lose money, as long as you stick to the £85,000 protection limit provided by the Financial Services Compensation Scheme.
Unfortunately, you can’t make much money either. Interest rates are low and the best easy access cash Isa pays 0.85% from Shawbrook Bank.
With CPI inflation at 6.2%, according to the ONS, this means you are losing money in real terms, as the return after inflation is known.
A stocks and shares Isa enables you to invest in the shares, bonds and other assets for the prospect of better returns.
Those better returns are not guaranteed, so you are taking a risk with your money. However, investing in a diversified portfolio has proven over the long-term to be the most consistent way to grow wealth above inflation.
You can pick shares yourself, just follow the stock market, or buy funds or investment trusts that choose for you.
Again, you can invest in a stocks and shares Isa through a DIY investment platform and pick shares or funds yourself or get it to do the job of picking investments for you.
The Lifetime Isa
A final and more niche option is the Lifetime Isa. It’s an odd hybrid of pension and Isa designed to help those who aren’t quite sure if they are saving for a home deposit or retirement.
It can be cash or stocks and shares and opened by those under 40. Contributions up to the age of 50 get a 25% bonus on up to £4,000 per year – so earning a maximum £1,000 uplift.
The pot can be used for a deposit on a first home or drawn on after the age of 60 – any other withdrawals attract a hefty 25% penalty.
As an overall product, I’m not a fan. That’s because for retirement saving I see little advantage over a pension, as you only get a limited maximum 25% boost and you can’t access it without penalty until later in life.
If you are a first-time buyer though, I think it could be a no-brainer. A 25% uplift on any money paid in is well worth taking maximum advantage of.
And if you are the Bank of Mum and Dad and know you will be called on in the future for help with a deposit, it’s worth helping your children fill a Lifetime Isa each year as early as possible.
Compare the best DIY investing platforms and stocks & shares Isa
Investing online is simple, cheap and can be done from your computer, tablet or phone at a time and place that suits you.
When it comes to choosing a DIY investing platform, stocks & shares Isa or a general investing account, the range of options might seem overwhelming.
Every provider has a slightly different offering, charging more or less for trading or holding shares and giving access to a different range of stocks, funds and investment trusts.
When weighing up the right one for you, it’s important to to look at the service that it offers, along with administration charges and dealing fees, plus any other extra costs.
To help you compare investment accounts, we’ve crunched the facts and pulled together a comprehensive guide to choosing the best and cheapest investing account for you.
We highlight the main players in the table below but would advise doing your own research and considering the points in our full guide linked here.
|Admin charge||Charges notes||Fund dealing||Standard share, trust, ETF dealing||Regular investing||Dividend reinvestment|
|AJ Bell YouInvest||0.25%||Max £3.50 per month for shares, trusts, ETFs.||£1.50||£9.95||£1.50||1% (Min £1.50, max £9.95)||More details|
|Bestinvest||0.40%||Account fee cut to 0.2% for ready made investments||Free||£4.95||n/a||n/a||More details|
|Charles Stanley Direct||0.35%||No platform fee on shares if a trade in that month and annual max of £240||Free||£11.50||n/a||n/a||More details|
|Fidelity||0.35% on funds||£45 fee up to £7,500. Max £45 per year for shares, trusts, ETFs||Free||£10||Free funds £1.50 shares, trusts ETFs||£1.50||More details|
|Hargreaves Lansdown||0.45%||Capped at £45 for shares, trusts, ETFs||Free||£11.95||£1.50||1% (£1 min, £10 max)||More details|
|Interactive Investor||£119.88 as £9.99 per month||£7.99 per month back in trading credit||£7.99||£7.99||Free||£0.99||More details|
|iWeb||£100 one-off||£5||£5||n/a||2%, max £5||More details|
|Freetrade||Free for standard account £3 month for Isa||Freetrade Plus with more investments is £9.99/month inc. Isa fee||No funds||Free||n/a||n/a||More details|
Only Vanguard funds
|Free||Free only Vanguard ETFs||Free||n/a||More details|
|(Source: ThisisMoney.co.uk March 2022. Admin charges quoted annually, may be monthly or quarterly)
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