Well done! You have some extra hard-earned £££ and you’re thinking long term with it. So what do you do? Put it in an ISA or a Pension. Whilst it’s not totally clear cut, here are the things to consider:
- There are few different types of ISA to choose from. Make sure you get the one that’s most suited to your needs:Cash ISA – just sits in cash – liquid but not really earning you anything
Stocks and shares – listed shares/funds – you can have it earn for you by investing in stocks and funds
Innovative finance ISA – instead of shares and funds, these ISA’s purely contain peer-to-peer loans (not to self, these can be difficult to sell..ie. not liquid).
Junior ISA – these can be in cash or listed shares/funds. Only the child can access the money in these and only after they are 18.
Lifetime ISA – cash or listed shares/funds. They can only be put towards your first home or to save for later life. You must be between 18-40 to get this. Government gives 25% bonus on the savings up to £1,000 per year. But here are penalties if you don’t stay within the rules.
Help to buy ISA – these are now closed for new applicants.
- For all ISAs there is no income tax, and no capital gains tax. But inheritance tax still applies.
- Meanwhile for pensions
- You can contribute up to £40,000 per year (annual allowance for ISA is £20k)
- Up to 45% tax relief , but
- cannot access the money until 55
- there is some tax on withdrawal, which is usually lower than the tax relief, especially if properly managed.
- Can make regular or lump sum contributions.
So in general ISAs can be more flexible (although pensions are now quite flexible), although the tax relief on pensions can be more advantageous. Good luck!
