Henry Irving 1 April 2019
In this article we take a look at each product and their tax benefits to help you decide if they’re right for you.
Remember, tax rules can change and benefits depend on individual circumstances.
Stocks and Shares ISA
The Stocks and Shares ISA is a tax-efficient way to hold different types of investments. There’s no UK tax to pay on capital gains or income.
Each adult can contribute up to £20,000 into their ISA this tax year, sheltering the amount of money inside the ISA from the taxman.
One of the main advantages of this type of investment account is its flexibility. Unlike a SIPP, where you can usually only withdraw after 55 (57 from 2028), money can be withdrawn at any time. If you take money out of your HL ISA it will lose ISA status, and putting it back in will count as a new subscription, but you’re not limited in the same way as a pension.
Overall, it’s a great option for those looking to save and invest for the future tax-efficiently, while looking for a little bit more flexibility with their money.
Did you know?
You can also hold cash if you’re not sure where to invest just yet. Investing is for the long-term, so cash is an interim solution while you decide exactly where to invest.
Make the most of your ISA allowance for the 2018/19 tax year by putting your money in an ISA today.
Lifetime ISA (LISA)
Another type of ISA to consider is the Lifetime ISA (LISA), available to those aged 18-39.
With an HL LISA you can invest in the same way as a Stocks and Shares ISA, but it has the added benefit of coming with a 25% top-up from the government on money you put in. You can add money to the LISA and receive the government top-up up until you reach age 50.
The annual allowance for this ISA is £4,000 – meaning you could earn £1,000 per year on top of this.
The 25% bonus makes it an attractive opportunity to consider if you are happy with the risks of investing in the stock market and it fits your needs of purchasing your first home or for retirement planning.
The downside to this ISA is that the money can’t usually be touched otherwise. So not great if these aren’t your goals. If you do take money out before you’re 60 or for anything other than buying your first home there’s a 25% tax charge from the government, so you could get back less than you put in.
The SIPP (Self Invested Personal Pension) is basically what it says on the tin. It lets people to make their own investment decisions in their pension.
Capital gains and income are free of UK tax and most people have an annual SIPP contribution allowance of £40,000.
The tax relief offered on personal contributions to a SIPP will depend on your income tax rate. Basic-rate taxpayers – who pay 20% income tax – will get 20% tax relief on their SIPP contributions. Higher-rate and additional-rate tax payers can potentially reclaim up to another 20% and 25% (income tax rates and bands are different for Scottish taxpayers).
The downside of a SIPP is that you can’t usually take money out until you’re 55 (57 from 2028), so it’s not for short-term savings if you’re a while off that age. But once you hit 55, you can usually access up to 25% of your pension pot tax-free, and the remainder will be taxed at your marginal rate.
A SIPP is a great way of saving for retirement while minimising the tax you pay. It can help you maximise your savings, especially for those on higher incomes.
What about both?
Both SIPPs and ISAs have advantages, and lots of HL clients take the benefits of both. We don’t think it’s a case of one against the other.
You might want to use your SIPP to invest for longer-term goals like your retirement, and your ISA for medium term goals.
It’s important to think about your own objectives and attitude to risk when deciding what’s right for you. The benefits of each account will depend on your personal circumstances.
Investments should be made for at least 5 years, and their value will fall as well as rise so you could get back less than you invest. This article isn’t personal advice. If you’re not sure what to do you can always ask us for advice.
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