How Do I Get Started? (Investing For Beginners 2)
To start investing your money, you need to use an investment platform. This is where you are able to buy and hold investments. Platforms have different types of investment accounts that you can open. Each of these has different advantages and disadvantages. By the end of reading this, you should have a good idea of how to pick an investment platform and the different kinds of accounts you can open to get started with investing.
Choosing an investment platform
If you want to choose your own investments you need to ensure that the platform that you pick allows you to make individual trades. The more options a platform has to buy, the better, but as a beginner having a huge range of funds to choose from isn’t really essential. Lower transaction costs when you buy and sell investments are preferable. However, if you are not buying or selling frequently this shouldn’t make much of a difference. The annual charge is most important. This is normally a small percentage of the amount of assets you hold with them.
Online comparisons like this are a good place to start with looking for the right platform for you. Once you have found the one you want you will have to open a particular type of account with them, you should be able to find the information for how to do so on their website.
The different kinds of investment account
There are a few investment accounts which are tax free or have tax benefits which are appropriate for beginner investors. I will only discuss these for now. Taxes can be a significant burden on the returns you receive on your investments and are likely to increase in the near future. If you are a beginner to investing it is best to use up what you can in your tax-free allocation before you invest anywhere else. Once you use up your tax-free allowances down the line, more sophisticated, but less tax efficient investments could be explored.
Stocks and Shares Individual Savings Account (ISA)
A Stocks and Shares ISA is a basic investment account that is accessible to any UK resident aged 18 or older. You can invest in different shares, bonds or funds depending what your platform has on offer. You are allowed to invest a maximum of £20,000 per tax year into ISA’s so they are a great way to get started with investing. Although you can withdraw your money at any time from an ISA you should remember that investing in stocks and shares is only sensible if you are willing to do so for around 5 years or more.
Lifetime ISA (LISA)
A LISA is a great way to work towards getting on the property ladder or can be used as an alternative to a pension. It is available for 18-40 year olds and you can pay into it until you are 50. A LISA is like a regular ISA and is available in cash or stocks and shares versions. the Government matches 25% of your contributions. The annual allowance for a LISA is £4,000. This means that if you pay your full allowance into a LISA Government will also be contributing £1,000 each year.
However, the LISA has some important caveats that must be understood:
It is only advisable to withdraw the money in your LISA under any of the following circumstances:
- If you are using the money to buy or put a deposit on your first property. The property must be worth £450,000 or less and bought with a mortgage.
- Once you are over the age of 60
- If you are terminally ill
If you use it in any other circumstance, the Government will take 25%2 away from the amount you withdraw. This is likely to be more than their initial contribution. For example, if you pay in your full £4,000 one year, the Government will pay in £1,000, making the amount in your LISA £5,000. If you withdraw this £5,000 the Government will take 25% off your total. 25% of £5,000 is £1,250, £250 more than the initial £1,000.
Other forms of ISA
If you do a search for ISAs online you may find some other results which I have not mentioned here. This is because they are either not for investing (Cash ISA), are more complex and require specialist understanding (Innovative Finance ISA), or are to invest for someone other than yourself (Junior ISA).
Pensions
When you are employed at age 22 or over and earning over £10,000 gross a year (or £192 per week), you should be automatically enrolled in a workplace pension. Both you and your employer will contribute a percentage of your earnings to this.
You can also open a Personal Pension, which has a limited range of investment options, or a Self-Invested Pension Plan (SIPP) which has a virtually limitless range of investment options from many providers. This is ideal if you are self-employed as you will not have a workplace pension. You can use these pensions to save for retirement instead of or alongside any workplace pension you may have. It is normally advisable to ensure you are utilising your options for a workplace pension before you start a SIPP. This is because your employer will pay into a workplace pension as you do. As with a stocks and shares ISA a SIPP can be invested in shares, bonds or funds.
When you pay into to your pension, the Government also contributes ‘tax relief’. This relief works out at 25p for every £1 you pay in. This means if you were to pay £1000 into your pension, the Government would contribute £250. You are eligible for these contributions even if you don’t pay income tax. If you pay a higher tax rate, you can claim tax relief . If the pension contribution has not been deducted via Salary Sacrifice, higher rate taxpayers can claim an additional 20% tax relief back as money off of their next tax bill (21% in Scotland). Additional rate taxpayers can claim 25% tax relief (26% in Scotland)1.
There is no Capital Gains Tax on pensions, meaning any returns you get are not taxed. 25% of your pension fund can be taken out tax free. The remaining withdrawals are treated as income so you will pay income tax, but not national insurance, on them. Pensions are also free from Inheritance Tax in the case of death before 75 as long as they are transferred within 2 years after date of death.
The annual allowance you can put into your pension(s), including government contributions, is 100% of your wage or £40,000 (whichever is lower) in most cases. People earning more than £200,000 may have their personal allowance reduced further. This includes government contributions. If you do not earn, you can pay up to £2,880 into a pension. The government will top this up to £3,600. You are not able to withdraw from your pension until you are over 55 (57 by 2028).
Next up
Now you should hopefully know the kind of accounts it is possible to open, as well as your options for investing once you have opened them. But what kind of account should you open? What should you buy? When should you sell and how long before you can expect a return? I will answer all of these questions and more in my upcoming posts.
Risk warnings
This article is distributed for educational purposes and 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.
Past performance is not indicative of future results and no representation is made that the stated results will be replicated.
1Based on Tax year 2021-2022
2Based on tax year 2020-2021
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