If you’re in a position to be maxing out your ISA and pension every year then this will set you up nicely for retirement.
In terms of options, it’s good to be maxing out your ISA and pension because of the tax incentives offered. More on that in a moment.
But what about when you have maxed out your ISA and pension and you still have more money to invest?
Let’s look at the alternatives.
Maxing out ISA and pension – why it’s good to do
When I talk about maxing out I mean contributing the maximum allowance allowed to an ISA and pension under the current rules (tax year 2021/22).
The government want us all to save for our own futures so we are not reliant on the state. Also, they want to encourage investment into the UK so for these reasons they offer incentives to encourage us to do this.
The main incentive they use is allowing us to pay less in taxes.
For example, an ISA has virtually no taxation on income you earn from the ISA or on the gains you make.
For pensions, every time you contribute you are basically getting tax back that normally you would have to pay.
The government obviously feel these tax incentives are generous so they put a limit on what you can pay into ISAs and pensions.
For adult ISAs the annual limit for contributions is currently £20,000 per person per tax year. For Junior ISAs the limit is £9,000 and for Lifetime ISAs it’s £4,000.
When it comes to pensions it gets a bit more complicated. The annual allowance is £40,000 but you may not be able to pay that much in if your gross salary is lower. You may be able to contribute more if your salary was higher and you have unused allowance from the previous 3 years.
The key thing to remember with ISAs and pensions is that these are what’s known as tax wrappers. They are the product that wraps around the underlying investments you choose.
It’s not the ISA or pension that provide the return you get, it’s the underlying investments that determine how well you do.
You can’t really compare ISA vs ISA or pension vs pension in terms of investment return as it’s not the products that drive the performance. Although they can help enhance the performance through their features e.g. higher costs vs lower costs.
So what to do when you have maxed out your ISA and pension.
Maxing out ISA and pension – where next?
There are a couple of options if you have maxed out your ISA and pension.
The easiest and most simplest solution is to continue with the same investment strategy you are using with your ISA and pension just not inside an ISA or pension.
Hopefully your ISA and pension are invested in a diversified portfolio that is aligned with your retirement objectives and the level of risk you are comfortable with.
You can still use this same portfolio for your new investment, it will just be outside the ISA and pension tax wrapper. Most investment platforms call this a General Investment Account or GIA for short.
A GIA is just a collection of funds or shares that are not inside a tax wrapper like an ISA or pension.
It does unfortunately mean that the tax treatment is not as beneficial as an ISA or pension but remember the government has limits on how generous they will be.
In terms of the tax treatment for a GIA, any interest you earn from investments in things like government gilts or corporate bonds will be subject to Income Tax and any dividends earned from equities will be subject to Income Tax at dividend rates.
Gains you make through investing could be subject to Capital Gains Tax when you sell.
It’s all starting to sound more negative now isn’t it when compared to investing in an ISA or pension?
However don’t despair. With some clever planning there are still some allowances you can take advantage of.
- You can use your savings allowance (£500 or £1,000 depending on your tax rate) against interest earned and your dividend allowance (£2,000) against dividends earned.
- You can use your Capital Gains Tax allowance (£12,300) against gains made and sold.
What’s more, you could in fact use your GIA to feed new investments into your ISA and pension each tax year which means you reduce the amount of money you hold in the tax inefficient account and build up more money in the tax efficient accounts.
There are a few other alternative products to consider using if you have maxed out your ISA and pension including:
- Investment bonds
- Enterprise Investment Schemes (EIS)
- Venture Capital Trusts (VCTs)
- Seed Enterprise Investment Schemes (SEIS)
These types of product will offer more tax incentives but they generally come with higher risks and are more suitable for more experienced investors.
Remember it’s not all about the tax. You don’t want the tax situation to cloud your judgement. It’s the underlying investment choice which is important.
Choose a bad investment and it doesn’t matter how much tax you save you could still lose money. Choose a good investment and it’s like getting a pay rise, you wouldn’t turn it down just because you have to pay more tax.
If you would like to structure your investment portfolio so it takes advantage of all the tax reliefs available and puts you in a position to know how much income you could produce for the rest of your life then please schedule a no obligation free 15-minute call.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.