What Investment Account Should I Use? (Investing For Beginners 4)

Author: Rachel

My first three articles in this series have covered the different types of investments you can buy, the different types of investment accounts available, and when and how much you should invest. In these next two posts I will now bring everything together. Here you can find out what kind of investment accounts are useful for different situations.

Which kind of account should I open?

My second article discussed three main types of account you can open which have different tax advantages. As a brief reminder, Stocks and shares ISAs, are ‘general use’ tax free investment accounts, Lifetime ISAs (LISA) are similar but only for buying a first home or retirement, and pensions are either provided for you by your employer (workplace pension) or can be opened by individuals (SIPP or personal pension).

Before choosing which account or accounts to open for medium and long-term investing, you need to consider what you are investing for. Putting your money in some types of account can restrict you, so they are not always appropriate to use. For instance, a pension or LISA has more financial benefits than a regular ISA. However, if you lock money up into a SIPP or put money into a LISA that you end up needing, this may hurt you in the present, even if it benefits you in the future.

The way that it is sensible to invest varies depending on the timeframe of your financial goal. The diagram below shows the different options for hold your money depending on how long away your goal may be.

Short-term

As discussed in my last article, you should not buy investments for short term goals. If you need the money soon it will not have time to recover after a market crash. Still, it is never a bad thing to earn interest on your money. If you have a significant amount of cash reserves, it may be worth shopping around for a savings account or cash ISA with a good interest rate. You could even use a NS&I product or a fixed-term deposit. These may give you higher rate of return, as long as your money will be available by the time you need it.

Stocks and shares ISAs do not have some of the bonuses of a LISA or a pension. However, they do enable you to start investing for your goals before retirement. This is because you can take the money out at any time without any penalty. You can fund an ISA by £20,000 each year. All withdrawals are completely free of tax and do not use any tax allowances. For this reason, stocks and shares ISAs are great way to invest for any time frame, although if you are investing for after retirement a pension is probably more appropriate.

If you are investing to buy your first property, then a LISA is designed for that very reason. A Cash LISA would normally be suitable if you intend to buy within 5 years. A stocks and shares LISA might be the best if you won’t need the money for 5 years or more. Remember to start to sell or reduce the risk of any investments you hold as you get closer to the point of the property purchase.

Long-term

Your long-term goals are mainly about preparing for life in retirement. This may seem like a long way off, but it is important not to leave it too late. Life expectancy is increasing, and your retirement could potentially last 30 years or even longer. Clearly, having to survive for three decades without earning anything is going to require a lot of money.

The good thing about saving for retirement is that if you start early enough, you can hugely benefit from compound returns. This means that investing a little early on should be worth a lot by the time retirement comes. If you have the option to have a workplace pension, it is smart to make sure you utilise it. This is because as well as tax relief, your employer should pay in when you contribute. Workplace pension contributions are taken out before you receive your pay. This means it is also easier to ensure contributions are constant.

If you are lucky enough to have spare savings you don’t have any short- or medium-term plans for, it may be worth considering saving for your retirement. This is especially important if you don’t have access to a workplace pension.

The options available for saving for retirement are via workplace pensions, Personal Pensions, and Self Invested Personal Pensions (SIPP).

A LISA is an alternative way to save and invest for retirement. If you only pay the basic rate of tax, it could be more beneficial than a pension. This is because as the government pays 25p in the pound when you contribute for both. However, while you pay income tax on 75% of your pension before it gets to you, withdrawals from a LISA are tax-free. This doesn’t mean a LISA is always better though. Being in a higher tax bracket means you could claim more tax relief from a pension. Also, while you can draw from most kinds of pensions at 55 (57 from 2028), you will have to wait until age 60 to withdraw from a LISA if you don’t want to lose 25% of your withdrawals.

Next Up

My next article will take a closer look at the options you have when looking to invest for the first time. You will learn a little more about what you are actually buying when you make different investments. I will also take you through some evidence for how some of the different options have performed historically. Once you understand a few simple principles to know becomes far easier to make up your mind on what the best option may be for you. So, check back soon for my next article!

Risk warnings

This article is distributed for educational purposes. It should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm. It does not represent a recommendation of any particular security, strategy, platform or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

This article was produced for educational purposes and aimed at UK residents.

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