by Catherine Thomas-Humphreys, The Finfluencer
When we get started with investing, we need to decide where to put our money. In addition to choosing an investing platform, we also need to decide which investing account might be the right fit.
An investment account is sometimes called an investment product or tax wrapper. They include pensions, adult ISAs, Junior ISAs, Lifetime ISAs as well onshore or offshore Bonds and specialist alternative investments.
The key ones to choose between for most investors will most likely be:
- Pensions
- ISAs
- General Investments
These investment accounts work in a similar way to each other. You open your selected type of account with your preferred provider or on your chosen platform, and then top up with cash and select your investments.
They differ mainly in their tax rules (hence the term a tax wrapper) and some of the rules around how much you can invest each year, what age you need to be, when you can access them and for what purpose.
The Purpose of Investing
When selecting an investment account, start by asking ‘What is the purpose?’. This will help you identify which one may be best suited to your needs. Are you looking for something to build up your retirement savings, a house deposit, savings for children or medium term investments growth for a specific project you have in the future?
In this guide we’ve highlighted some of the main features, tax rules and possible purpose of each of the main investment accounts to help you decide which might best suit you.
Pensions
These can be Personal or Self Invested Personal Pensions. They are separate from your workplace pension but have similar rules in place. If you have a workplace pension you could consider simply increasing the contributions you are making into that one, but if you want a separate pension you can also open a new account and save into that at the same time. Here are some of the key features for you:
| Investment Account | PENSION |
| Purpose | Savings to use from age 55 plus (rising to 57 in 2024). |
| Tax Rules | Free from Inheritance Tax and Capital Gains Tax. Can reduce today’s income tax but income tax will be payable on at least 75% when taking in the future. |
| Annual Contributions or Allowance | 100% of your earnings up to £60,000 for your total contributions into ALL your pensions. This could be lower depending on your earnings level (e.g. you are not earning at all or your earnings exceed £200,000). |
| Carry over/forward | If you’ve used your annual allowance in this tax year but not the previous tax years you can carry forward some of that allowance. Seek advice. |
| Age of opening | Birth onwards |
| Conditions for accessing | Currently at age 55, rising to 57 |
ISAs
There are many types of ISAs available, including:
- Cash ISA
- Stocks & Shares ISA
- Lifetime ISA
- Junior ISAs for children
Note: there is also an Innovative Finance ISA but these are high risk peer-to-peer lending ISAs, suitable only for high net wealth and sophisticated investors and not covered by the Financial Services Compensation Scheme, so not covered in any more details here.
All adult ISAs can be mixed and matched, so you could have a Cash ISA, Stocks & Shares ISA and Lifetime ISA, as long as the total amount invested across all of them in one year remains under the £20,000 total allowance. Some of the age and access rules differ so here are the key features of ISAs to help you decide if they might be the right investment account for you:
Cash ISAs
| Investment Account | CASH ISA |
| Purpose | To save in a tax efficient manner, over the short term, in cash. |
| Tax rules | Free from income tax and capital gains tax but will be taxed for inheritance tax. |
| Annual Allowance | £20,000 per year but this includes ALL ISA types so if you also had a Stocks & Shares ISA or Lifetime ISA this £20,000 is the total for all. |
| Carry forward/over | No |
| Age for opening | 16 |
| Conditions for accessing | Instant access |
Stocks & Shares ISA
| Investment Account | STOCKS & SHARES ISA |
| Purpose | To save in a tax efficient manner, over the medium to long term, and benefit from Investing. |
| Tax rules | Free from income tax and capital gains tax but will be taxed for inheritance tax. |
| Annual Allowance | £20,000 per year but this includes ALL ISA types so if you also had a Cash ISA or Lifetime ISA this £20,000 is the total for all. |
| Carry forward/over | No |
| Age for opening | 18 |
| Conditions for accessing | Instant access but allow a couple of weeks for investments to be sold. |
Lifetime ISA
These have the very specific purpose of helping first time buyers boost their deposits, with a secondary purpose that, if not used for first home purchase, they can supplement pension income at retirement. They are unique in that the government pays a 25% bonus on your contributions so you can build up savings quicker. However, they apply a penalty if you need to withdraw it early.
With these, be sure you fit the criteria and even more sure that you wont need to access early.
| Investment Account | LIFETIME ISA |
| Purpose | Specifically to use toward a house deposit if a first time buyer, buying a home under £450,000 with a mortgage. The account can be left in place after this point and used to supplement pension income if not used for a house deposit. |
| Tax rules & penalties | Free from income tax and capital gains tax but will be taxed for inheritance tax. Should you access early for any other reason than it’s intended purpose you will need to pay an early withdrawal penalty of 25% – this means you could lose more than the bonus you earned. |
| Annual Allowance | £4,000 per year but for every £4 the government will give you a bonus of £1. Therefore your £4,000 allowance can become £5,000. This £4,000 is part of your total £20,000 allowance. No further contributions allowed after age 50. |
| Carry forward/over | No |
| Age for opening | Over 18 but under 40. |
| Conditions for accessing | Immediately, but with a penalty of 25%. After 1 year, penalty free for first house deposit. Age 60 if rolled over and used as retirement income. |
Junior ISA
These work in exactly the same way as an adult ISA but with a different annual allowance. Once opened by a parent, anyone can contribute up to that maximum allowance. They are a really handy way for families to invest for their children, but just be mindful that the child will be eligible to receive the full amount on their 18th birthday.
| Investment Account | JUNIOR ISA |
| Purpose | To save in a tax efficient manner for the duration of childhood in cash or investments. |
| Tax rules | Free from income tax and capital gains tax but will be taxed for inheritance tax. |
| Annual Allowance | £9,000 |
| Carry forward/over | No |
| Age for opening | Birth |
| Conditions for accessing | Immediately available in full once the child turns 18. |
General Investments
These are “unwrapped” investments which simply means they are not protected by any of the tax wrappers outlined above and therefore not subject to any annual limits, nor protected from any tax regime.
You can open a general investment on a platform alongside an ISA and or Pension. They are especially useful if you want to invest more than the current annual allowances for those products. Each new tax year, you can then move money from your general investment account and top up your ISA or your pension.
| Investment Account | GENERAL INVESTMENT |
| Purpose | To save excess savings above your ISA and Pension allowance for the medium to long term. |
| Tax rules | Not a tax wrapper so you will pay capital gains, inheritance tax and income tax on interest and dividends. |
| Annual Allowance | Uncapped |
| Carry forward/over | N/A |
| Age for opening | 18, but you can open a designated account for a child with a trustee. |
| Conditions for accessing | Immediately available but allow 2-3 weeks for investments to be sold into cash. |
Financial Services Compensation Scheme
Investments are not protected from investment risk. Your initial investments can fall in value and you may get back less than you put in. This is why it can often be best to think of investments as a long term option (5+ years) and to be confident you can put those savings aside for a medium to long term. If you do not sell or withdraw them when their value has fallen, they have the potential to rise in value again.
Like cash savings, most ISAs and investments are covered by the Financial Services Compensation scheme in the event of the provider going bankrupt. This is £85,000 per person, per institution. Before making an investment, you should check that your money will be protected by this scheme.
Photo by Carlos Muza on Unsplash
This content is for information purposes only, you should not construe any such information or other material as legal, tax, investment, financial or other advice.
