To encourage more of us to save and invest, the government gives tax breaks that you can ‘wrap’ around your investments. These are known as tax wrappers. There are two main types of tax wrappers: ISAs (Individual Savings Accounts) and pensions. Here’s an overview of what you can expect with both.
ISAs (for your savings and investments)
- You can deposit up to £20,000 per year in total across your ISA accounts.
- Your money will grow tax-free; you don’t pay tax on the interest, dividends or capital gains.
Which ISA is which?
When should I use each?
- Stocks and shares ISA – For longer-term investors to invest in the stock market.
- Cash ISA – Keep anything you might need in the short-term here.
- Lifetime ISA – For those looking to buy a first home – you get a 25% bonus from the government on everything you deposit up to £1,000 per year. Note there is a withdrawal penalty if the money is invested for less than 12 months and not used towards your first home or retirement.
- Junior ISA – A way to save for your children’s future. The money is theirs when they turn 18 – and it can only be withdrawn by them after this point.
- Innovative finance ISA – Helpful if you want to lend your money via an online crowd-lending platform to borrowers willing to pay you a return on your savings.
Pensions (saving for your retirement)
You can use pensions alongside your ISAs to save for your future.
There are two main types of pensions
1. Workplace pension
Workplace pensions are extremely attractive as the employer contributes free money into your retirement savings. If you have access to a workplace pension you should enrol now to get access to this employer top up.
2. Personal pension
If you’re self-employed, or you want to consolidate your old pension pots, a personal pension can be an effective way to keep all of your retirement investments in one place. Do make sure you understand the advantages and disadvantages of consolidating existing pensions before you transfer these.
Quiz: What is the best tax wrapper to invest for your retirement?
- Workplace pension
- Cash ISA
- Junior ISA
- Join your workplace pension if you haven’t already.
- Find out what you have in your pension now and what this means for your retirement.
Quiz answer: 1
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is not a reliable guide of future performance.