I'm in my very early 20s, and in the privileged position of earning £60,000/year (excluding bonus). I have no debts or dependants, and am keen to use my money strategically to maximise long-term returns. I already have a Stocks and Shares ISA, and would appreciate your thoughts on the relative pros and cons of a General Investment Account, and opening a Private Pension at this stage of my life. What considerations should I be keeping in mind? Thanks in advance for your help with this!
That’s a great question.
It’s good to hear you have been savvy to date using a Stocks and Shares ISA. The 6th April was the start of the 2019/20 tax year so you will be entitled to a new ISA allowance of £20,000 which could be a good starting point for your savings. Any growth in value or income from the ISA is tax free!
Depending upon your objectives, you could put up to £4,000 of your 2019/20 ISA allowance into a Lifetime ISA (LISA).
A LISA can be opened by a UK resident between the age 18 and 40, and any savings made before age 50 will attract a government bonus of 25% (so £1,000 if you make the maximum £4,000 contribution). However, any savings in your LISA can only be withdrawn without penalty in the following circumstances:
- To help buy a first home worth up to £450,000, at any time from 12 months after you first save into the account.
- If you become terminally ill.
- From the age of 60
Withdrawals in any other circumstances will be subject to a 25% government charge.
Unlike an ISA...
There is no limit to how much you can invest in a General Investment Account (GIA).
However, dividends or interest distributions within a GIA are assessed as income, whether paid out or reinvested within a fund.
You will be entitled to certain allowances which could be offset against this income. You are entitled to an annual tax free dividend allowance of £2,000, any dividends over this amount would be taxable at your marginal rate of tax (32.5% for dividends within the higher rate tax band). As a higher rate tax payer you will also be entitled to a £500 personal savings allowance, any interest over this amount would be subject to income tax at 40%.
There are no restrictions on when you can access funds within your GIA, however any profits on sale could be subject to capital gains tax (CGT). You are entitled to an annual CGT exemption of £12,000 (for 2019/20), any gains over this amount would be subject to CGT at 20% for a higher rate tax payer.
Contributions to personal pensions generate direct tax savings.
Any contributions you pay personally will immediately receive 20% tax relief from the government, meaning that every £100 of contributions only costs you £80. As a higher rate tax payer you can claim an additional 20% tax relief via your self-assessment tax return. Once you have invested into your pension, the funds will grow in an environment where there is no liability to tax on capital gains or investment income. Under current legislation, you would be unable to access any savings within your pension until age 55 (expected to increase to 57 by 2028).
Given the attractive tax relief, there are restrictions on what you can pay into a pension each tax year.
You are able to receive tax relief on personal contributions up to the greater of £3,600 gross or 100% of your annual earnings each tax year subject to a maximum limit called the ‘Annual Allowance’. The annual allowance for 2019/20 is £40,000. In the event your total earnings (including your bonus) exceed £150,000 you will have a reduced annual allowance known as the tapered annual allowance. The rules around this are complex and you should seek regulated financial advice if you are impacted in the future!
General Investment Account vs Pension
The main considerations when reviewing the merits of a GIA versus a pension, will be based upon when you expect to require access to your savings. Given the restrictions on when you can access funds within your pension, this will only be suitable if you can afford to commit these funds to long term savings.
Another big consideration will be the level of pension contributions your employer offers in your workplace pension, and if they are willing to match your contributions.
Under auto-enrolment, all employers must offer a workplace pension scheme and from 6th April 2019 the minimum employer contribution is 3%, of your eligible earnings. However, to be entitled to this, you would have to make contributions of 5%. If you have opted out of your employer pension scheme, you will be missing out on what is effectively free money that your employer would pay into your pension! It may well be that your employer will offer a higher contribution than the minimum level. Assuming it is affordable, you should make pension contributions to maximise the available employer contributions where possible.
The lack of access, tax relief on contributions, and tax efficient environment make pensions a great tool for long term savings, and the effect of compounded growth over 30+ years will have a huge impact on building assets for your future.
The right solution will depend upon your objectives, and when you expect to require access to your capital.
The right solution will depend upon your circumstances and objectives and when you expect to require access to your capital.
It may well be that you decide to use a mix of the above, building funds that you may require access to over the next 10 years or so, within your ISA and GIA in the first instance, whilst also saving what you can afford to commit for the longer term into your pension to maximise your employer contributions and benefit from the attractive tax relief on contributions.
Hope this helps!