4 types of Investment Accounts

Finding the right type of investment account is key for long term investing.

Types of Investment Accounts

There are 4 main types of accounts you will come across on your investment journey. Identifying the type of account which can get to your goal the best/fastest is key.

The 4 main types of accounts you will find are the General Invest Account (GIA), the Individual Savings Account (ISA), the Lifetime ISA (LISA) and the Self Invested Personal Pension (SIPP).

Each of these accounts have different purposes, for example:

  1. GIA – General investment account – maybe tax liable.
  2. ISA – A tax efficient investment account.
  3. LISA – Can be used for a deposit on a first time home or retirement.
  4. SIPP – Used as a retriement vehicle.

Before we dive into each account, lets understand what ISA means.

What is an ISA

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An ISA is a tax-free savings account, which stands for an individual savings account (ISA).

Every tax year you have an ISA allowance in the UK which allows you to save or invest up to a certain amount without paying tax in your returns.

Your ISA allowance for the 2020/2021 tax year is £20,000. The tax year runs from the 6th of April to the 5th of April the following year.

When the new tax year starts you will have a brand new ISA allowance, this happens on the first day of every new tax year. You will normally find with these ISA accounts you don’t need to open a new account and the allowance simply resets on the 5th of April.

If you do not use all your ISA allowance before the end of the tax year it will be gone. You cannot carry forward any unused allowance from one year to the next.

When saving and investing into an ISA you will not pay income tax on money saved inside the wrapper, as long as you do not pay more than your allowance each tax year.

Some tips when it comes to the ISA accounts:

  1. Don’t forget to use your whole family’s allowances
  2. Don’t pay into more than one of the same type of ISA in a year
  3. Staying in cash for a long period of time, fear of investing
  4. Not using free government bonuses

Now lets get into these 4 types of investment accounts.

Unlocking Knowledge

General invest account

A general investment account is otherly known as a GIA account.

A GIA account is a simple way of investing and should be considered once you reach your annual ISA allowance. Unlike the ISA or pensions, there are no tax benefits or shelter. With the general investment account, there is no limit on how much you can contribute, compared to the £20,000 limit of the ISA accounts.

Because the GIA isn’t a tax-sheltered account you may have to pay tax depending on your individual circumstance.

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With the GIA you have tax allowances for both capital gains and dividends. 

The capital gains allowance for the year 2021-22 tax year is £12,300. This means you can make a £12,300 profit before having to pay tax.

The dividend allowance for the year 2021-22 tax year is £2000. This means you can earn £2000 before having to pay tax.

If earning above the £2000 allowance inside the GIA account the dividends will be taxed at 7.5% for basic rate taxpayers. Higher and additional rates taxpayers pay 32.5% and 38.1% respectively.

Check that your stocks and shares ISA provider is covered by Financial Services Compensation Scheme (FSCS).

Stocks and Shares ISA

While the cash ISA is simply a tax free savings account, a stocks and shares ISA is a tax efficient investment account which allows you to invest your money across a range of different investments.

Using stocks and shares ISA is a great tax shelter from dividend & capital gains tax. Though an ISA is a tax-sheltered account it dont shield you from inheritance tax.

Stocks and shares ISA carry risk as all investing that you can lose your money and it’s important to note that any ‘guaranteed’ or ‘risk-free’ investment could be a scam.

If investing carries too much risk for your tolerance then cash savings accounts such as a cash ISA, Lifetime cash ISA or a savings account might be more attuned to risk appetite. Remember cash accounts carry their own risk of erosion or purchasing power through inflation.

Check that your stocks and shares ISA provider is covered by Financial Services Compensation Scheme (FSCS).

Lifetime ISA

The lifetime ISA (LISA) is a tax-free savings or investment account designed to help those aged between 18-39 at the time of opening to save for their first home or save for retirement.

This specific type of ISA was launched in April 2017.

In this account, you can put up to £4,000 a year and is eligible for the 25% government bonus. This means for every £4 put into the account you receive £1 from the government. This can be done every year till the age of 50.

You can have both a cash LISA or Stocks and shares LISA. 

Cash ISA – Short term, S&S ISA – Long term.

The £4,000 limit does count towards the overall annual ISA limit of £20,000.

Due to this account is an ISA there is no tax on capital gains or dividends which is brilliant. Though there is a penalty of 25% if you withdraw for anything other than the following 3 reasons:

  • First home (under £450,000)
  • Retirement (as of 2020 age 60)
  • Critically ill with 12 months or less life expectancy.

If you withdraw for any of these 3 reasons you will be charged a 25% penalty and may lose more than you’ve put in.

Check that your stocks and shares ISA provider is covered by Financial Services Compensation Scheme (FSCS).

Curious about a Lifetime ISA? Check to see if you are eligible for a lifetime ISA here.

Who is eligible for a Lifetime ISA? (LISA)

SIPP

A Self-Invested Personal Pension (SIPP) is a pension ‘wrapper’ that holds investments until you retire. It is a type of personal pension and works in a similar way to a standard personal pension. The main difference between a SIPP and a personal pension or workplace pension is that you have more flexibility with the types of investments you can choose. 

SIPPs are designed for people who want to manage their own funds by dealing with and switching investments how they want. 

As of 2021 you can access the SIPP at the age of 55 which is more flexible than the LISA which is age 60.

With the SIPP account, you receive the tax back on any money put into this account. For example, if you invest £80 you will receive a £20 top-up from the government. If you are a higher rate taxpayer or additional taxpayer you can expect higher top ups. To claim more than the 25% from the government you will need to contact HMRC to claim the extra boost if a higher or additional taxpayer.

There is a limit to how much you can put into a SIPP. The current limit as of 2021 is set to £40,000 or 100% of your earnings, whichever one is lower. This allowance is a combination made by both you and the government. 

If you exceed these limits, much like exceeding the ISA allowance, you may need to pay tax on the extra amount and would leave it to HMRC to sort out. Notifying HMRC if there is a mistake never hurts.

Unlike the LISA and other ISA accounts the SIPP can only take up to 25% as a tax free lump sum. Many SIPP providers will allow you to choose how to take your funds. This is known as ‘defined contribution schemes. You’ll be able to either withdraw your whole pension as a lump sum in one go, take out lump sums when needed or get paid a regular income based on pot size.

When looking at how to draw down from pensions, always talk to a specialist and get a professional opinion.

SIPP can exclude Withholding Tax (WHT) (depends on the broker)

Check that your stocks and shares ISA provider is covered by Financial Services Compensation Scheme (FSCS).

FSCS protection

The Financial Services Compensation Scheme (FSCS) is there to help when financial firms fail. They step in to compensate if the firm you use has gone out of business and cannot pay your claim. They operate independently and the service is free to use.

FSCS protection means that if your investment provider collapses and is covered by FSCS your investments will be covered for up to £85,000.

It is likely that your investments will be kept in a separate account (ringfenced) from the ISA provider’s assets which could protect sums above £85,000 but due diligence should be made.

This £85,000 protection doesn’t cover any losses from investments. 

https://www.fscs.org.uk/ 

If you are using one or more types of investment accounts, make sure that they are FSCS protected.

Protection

Summary

These are 4 of the types of investment accounts anyone can use but the key to getting the most out of them is to make sure that they align to your specific investment goal.

For example, if youre goal is to retire early, then there is no point putting most of your capital into a SIPP when that specific account has been created with the purpose for saving for retirement.

For that extra level of security for your investments, make sure the account and brokerage is covered by FSCS.

An ISA account is a brilliant way of protecting long term gains from pesky tax.

If you are curious about taxes or fees check out our article on “What fees and taxes of investing to look out for“.

What Fees and Taxes of investing to look out for

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