Tony asks: “Where do I start to invest in stocks and shares ISA? Where do I go? How do I go about it? Etc. Aim of the ISA is for long-term savings for my pension. I believe it more tax efficient to save in ISA at the moment other than a pension.”
Q&A 71 – Are ISAs or Pensions More Tax Efficient? – Shownotes
Today we have Tony’s second question that he recently got in touch to ask.
Where do I start to invest in stocks and shares ISA? Where do I go? How do I go about it? Etc. Aim of the ISA is for long-term savings for my pension. I believe it more tax efficient to save in ISA at the moment other than a pension.
For your second question Tony, if you haven’t already, I’d recommend you have a good read of our following two articles:
Which Is More Tax Efficient? ISAs or Pensions?
You say in your question that you are leaning to investing in the S&S ISA instead of a pension because it will be more tax efficient. However, in the ISAs vs pensions debate, pensions generally tend to be better from a tax perspective (mainly due to the 25% tax free lump sum on retirement) and are a definite winner if you are getting any form of employer match. However, S&S ISAs are usually more appropriate if you may need the money at any time before you retire (liquidity of investment).
Usually it is the liquidity concern which has more of an impact than the tax efficiency on where you want to store your investments in the long term.
Other Factors To Consider
As I say, you’ll want to consider your employer match as this is a huge game changer for the maths, but you’ll also want to think about other factors, including but not limited to:
- Fees (pension funds often incur higher fees than S&S ISAs)
- Range of investment options in your pension (pension schemes often restrict the investor as to what products they can invest in)
- Diversification of investments (sometimes pension and matching agreements can be dependent on receiving company specific shares as an incentive)
- Administrative burden (it can be a hassle managing several pensions if you move around employers)
What Other Options Do You Have?
If you do decide that a S&S ISA is the way to go, the best account will depend on how you intend to invest. For example, if you are trading frequently, this will be different to if you are investing passively for the long-term – the latter being the approach we recommend at Moneystepper.
The best account will also depend on how much you are investing each time you add to your account.
S&S ISAs usually have a certain fee for trading (usually a fixed trading fee of £5-£10 each time you buy or sell) and/or an annual charge of £y per year. Clearly if you invest once a year and never buy and sell (passive investing), you’ll want an account that charges you per trade, but does not incur an annual charge.
However, if you decide to invest actively (careful), then the annual charge model may work out cheaper. There is an excellent comparison of fees each account charges over at Monevator,
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