It’s not always well-known, but as an investor, you may need to pay tax on your investments. Needless to say, having tax to pay could eat into your potential returns and have a significant impact on the size of your pot. Luckily, there are ways to remove tax from the equation. For instance, with tax wrappers, you can stop the government from taking a portion of your earnings. At Wealthify, we offer two types of wrappers: ISAs, including Stocks and Shares ISAs and Junior Stocks and Shares ISAs, and personal pensions. Here’s how they work.
ISAs and pensions can help your money work harder
If you want to give your finances a tax-friendly boost, ISAs and personal pensions could help. With a Stocks and Shares ISA, your money could get invested in a large range of investments, such as shares and bonds, and you don’t need to pay UK tax on any profits you make. This means you get to keep more of your money. It’s the same with a Junior ISA. The only difference is that the investment is made on behalf of your child.
Similarly, with a personal pension, or a Self-Invested Personal Pension (SIPP), you get to protect your investments from income and capital gains tax. And with a personal pension, you also get a 25% top up every time you contribute – up to the government’s set limit. This means to invest £1,000 in your pension you only need to pay in £800, as the government will add the remaining £200. And if you’re a higher or additional rate taxpayer, you could potentially receive an extra boost, but you’ll need to contact HMRC to claim the extra money.
ISAs and pensions come with different annual allowances
The amount you can put in a Stocks and Shares is limited, and this tax year, your annual ISA allowance is set at £20,000 (subject to change). If you have other ISA types open, you also have the possibility to split up your ISA allowance between your different accounts, but make sure you only pay into one of each ISA type per tax year! If you open a Junior Stocks and Shares ISA for your child, you’ll be able to contribute up to £9,000 per tax year (subject to change).
With a personal pension, it’s a bit different. You can put as much as you want, but you’ll only get tax relief on £40,000, or the totality of your earnings (whichever is lower) – this pension allowance is the combined contributions made by you and the government.
ISAs and pensions have different rules when it comes to accessing your money
If you’re investing in a Stocks and Shares ISA, you’re allowed to withdraw money at any time. However, investing is a long-term game, and unless you really need the money, it’s typically a good idea to remain invested for a number of years. By taking money out of your Stocks and Shares ISA, you could potentially miss out on positive growth, so it’s important to think long-term and try to stick with your investments as long as you can.
With a Junior Stocks and Shares ISA, your child’s money is locked away and nobody can access it, not even you. Everything you put in it belongs to your child, and they’ll gain access to their funds on their 18th birthday. Simultaneously, their account will become an adult Stocks and Shares ISA, and they’ll have the freedom to do what they want with their money.
With a personal pension, or a SIPP, you cannot access your money until you turn 55. So, make sure you’re comfortable leaving your money alone until you retire. But the wait is worth it, as you get rewarded for your patience on your 55th birthday. When you reach this milestone, you’ll be able to take up to 25% of your pension money as a tax-free lump sum.
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ISAs and pensions can be transferred
If you’re disappointed with the service delivered by your ISA or pension and want the best Investment ISA or the best pension plan, or if you have several old ISAs and pensions floating around, it could be worth transferring them to a new provider. If you’re thinking about moving an ISA to another place, make sure you compare the different fees taken by providers. Some ISA products will have exit fees, so do your research! If you want to move an ISA you’ve opened this current tax year, you’ll need to transfer the full balance and it’ll still count towards your annual allowance. On the other hand, if it’s an old ISA that you’re transferring, you can choose to either transfer the balance in full or in part. Also, the transfer will have no impact on this year’s allowance. Say you transfer an old ISA worth £5,000, you’ll still be able to contribute up to £20,000 in a new ISA, if you haven’t funded an ISA already. For every ISA transfer, you’ll need to complete the official ISA transfer form, or your ISA will lose its tax-efficient status.
If your child has a Junior ISA, you could also transfer their account to another provider if you want to. The amount you’re allowed to transfer will vary depending on a number of factors. For example, if you’re transferring between two Junior Stocks and Shares ISAs, you must move the full balance since your child cannot have more than one Junior Stocks and Shares ISA. Alternatively, if you’re transferring from a Junior Cash ISA to a Junior Stocks and Shares ISA, you’ll have the choice between moving the balance in full or in part. Again, whatever the nature of the transfer, you’ll need to use the official transfer form.
If you want to transfer your pension(s), you’ll need to fill in the official Pension Transfer Form. And to speed up the process, it could be a good idea to locate your old pots and dust off your pension documents before starting any transfer.
Starting an ISA or a personal pension is easy
Opening a Stocks and Shares ISA, a Junior ISA, or a personal pension might sound like a big job, but it doesn’t need to be. Thanks to digital investment platforms, like Wealthify, you can get started with just a few taps. All you need to do is choose how much you’d like to invest. If you’re planning on opening an ISA, you’ll be able to start with as little as you want. With a Wealthify Personal Pension, the minimum investment is set to £50. Once you’ve decided how much you want to invest, you’ll need to select the risk level that suits you – you can be cautious adventurous, or somewhere in between. Then we do the rest, from picking your investments to managing your Plan on an ongoing basis. But the journey doesn’t stop there! With Wealthify, you’re in control, being able to check how your investments are doing and topping up if you want, at any time.
Want to know how much money you could have when you retire? Our pension calculator can help give you a good idea of what your yearly or monthly income could be. Why not have a play with the figures to see how much of an impact little changes can make? Try it here: wealthify.com/pension-calculator
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.