Pros and cons of ISAs, GIAs and SIPPs

Making optimal use of tax allowances is essential for maximising your returns but you also need to take account of other factors such as flexibility if your plans change. In this analysis we show the pros and cons of the three most common types of investment account.

The Individual Saving Account (ISA) is the UK’s top tax shelter – used by more than 23 million people. But if you want to save for retirement, you have to consider pensions as an alternative. Investment accounts also benefit from various tax incentives such as the annual CGT allowance and the tax free dividend income allowance.

Individual Savings Accounts (ISA)

Overview: The ISA is a relatively simple tax wrapper that usually has no extra charges. The benefits accrue over the longer term and are more valuable for those subject to higher rates of Income Tax.

NB: the comments below apply to Stocks & Shares and Cash ISAs. Special rules apply to Help to Buy, Lifetime & Innovative Finance ISAs.

Advantages
Returns are not liable to Income Tax or Capital Gains Tax (CGT)
Tax free withdrawals can be made at any time – no minimum holding period
Wide range of invests including cash and stocks and shares
Can transfer your plan between providers without losing your accrued ISA status
The ISA status can be inherited by a spouse
Income from an ISA is not taken into account for age-related personal allowances
No age restrictions (but Junior ISA rules apply below age 18, or 126 for Cash ISAs)
Usually no charges for the ISA wrapper
Disadvantages
Contributions are limited to the annual allowance (£20,000)
There is no tax relief on contributions
Once money is withdrawn from an ISA it cannot be put back (except within the same tax year), so the tax advantages are lost
If you do not use your annual ISA allowance you will lose it, it cannot be carried forward
ISAs are liable to Inheritance Tax (IHT)
There are some investment restrictions
You cannot have a joint ISA or put it in trust

Self-Invested Personal Pensions (SIPP)

Overview: offers potentially the greatest tax benefits and so has the most restrictions, especially over withdrawals. Currently very attractive for IHT planning.

Advantages
Tax relief is available on contributions up to the Annual Allowance
It is possible to carry forward up to three years of Annual Allowance under certain circumstances
25% of your fund is available as a tax free lump sum after age 55
Growth within the plan is not liable to Income Tax or Capital Gain Tax
There is usually no Inheritance Tax on a pension fund
Disadvantages
Contributions are limited to the Annual Allowance, plus any Carry Forward
You cannot access a pension until age 55 (unless you are in a special profession such as Sport)
Income from a pension is taxable
Additional tax is payable if you breach the Lifetime Allowance
There can often be an extra charge for providing a SIPP, especially if income is being drawn

General Investment Accounts (GIA)

Advantages
You can contribute or withdraw as much as you like, whenever you like
You can use your annual Capital Gains Tax Allowance to realise profits each year
You can make use of the tax free Dividend Allowance
You can have more than one account
Can be held in joint names or in a trust
Disadvantages
When you sell investments at a profit you may have to pay Capital Gains Tax, if you’ve already used your annual allowance
Income Tax may be due on interest or dividend payments
Tax Relief is not available for contributions
GIAs are liable to Inheritance Tax (IHT)
EQ has developed a unique tool for demonstrating the relative attractions of ISAs, SIPPs and Investment Accounts.
EQ has a range of low cost ISAs & SIPPs, all with nil initial charge and nil exit fee.
Facebooktwittergoogle_pluslinkedinmailFacebooktwittergoogle_pluslinkedinmail