DIY Investment: ISA or SIPP?
Gone are the days when anyone wanting to buy investment funds or shares had to go directly to a stockbroker, bank or financial adviser. Technology now allows people to buy and sell investments themselves online at the push of a button at a very low cost.
But where should a beginner DIY investor start? The answer is likely the decision about which ‘wrapper’ they should use. The two most popular tax efficient options in the UK are now the Individual Savings Account (ISA) or Self-Invested Personal Pension (SIPP). Both offer tax-free growth of your investments. Which you should use boils down to what is more suitable for you and your needs.
A SIPP is a private pension plan with a maximum annual allowance of £40,000 or, if lower, 100% of your relevant UK earnings. One of its key benefits is that contributions into it receive tax relief at your marginal income tax rate. For example, if you make a personal pension contribution of £10,000 and you are a basic rate tax payer, 20% will be added to the net contribution, which equates to £2,500 in this instance (i.e. 20% of the £12,500 ‘gross’ contribution). When it comes to withdrawing your money, however, the earliest point you can do so is at the age of 55, when you can currently withdraw up to 25% of the accumulated funds tax-free. And then there are strict rules about how much you can take out each year from then on, but following the Chancellor’s budget these rules will largely be removed in April 2015.
ISAs on the other hand currently have an annual limit of £11,880, but this will be increased to £15,000 from 1 July this year. The advantage of ISAs is that you are completely flexible to take out money from your account whenever you wish, therefore it is a tax efficient structure that is fully flexible, however you don’t get the tax relief on contributions as you do with a pension.
By James Priday | Founder and Director of Strawberry Invest
If you’re interested in opening an ISA or a SIPP, why not visit our our opening an account page today or contact us on 0845 873 9994 or by using the form on our contact us page. Following our simple steps, you can open an account within minutes.
You should always remember that the value of your investments and any income from them can go down as well as up and you may get back less than the amount you originally invested. All investments carry an element of risk which may vary significantly. If you are unsure on picking a particular investment fund or product, you should seek professional independent financial advice to understand what the investment funds are available for your budget. Tax rules, rates and reliefs are subject to change without notice in the future and taxation will depend on your personal circumstances.