Investing in funds outside ISA wrapper...

TDS_2

Hi,

I'm in a position where I have earmarked my full ISA allowance for the current year, but would like to invest further in funds. Ideally I'd like to make regular contributions in the order of £250 per month.

I have a regular saving S&S ISA with Hargreaves Lansdown (which is essentially my retirement savings), and understand it is possible to operate an identical Vantage account outside the ISA wrapper. Is this my best option? What are the tax issues?

I don't currently have a SIPP (I'm a lower rate tax payer - 25 yrs old, and was hoping to have retirement savings in ISAs until I break the higher rate threshold / decide whether I want my money set aside in an 'official' pension). The other option is to start a SIPP for my retirement savings and use the S&S ISA for the shorter term investments...?

Are there any other options?

Thanks in advance

Reaper

If your S&S ISA in intended only for retirement savings then you would be better off with a SIPP because you get tax relief on your contributions.

I would suggest a SIPP for your retirement savings and use your S&S ISA for either extra retirement money or rainy day savings depending on how things pan out.

TDS_2

Thanks for the reply.

I'm not using a SIPP atm, as I'm not convinced that the tax relief is a big enough benefit (given that my eventual pension income will be taxed at some level) to offset the drawback of less flexibility. The way things stand at the moment, I intent to shift from ISA to SIPP when I can do so as a higher rate taxpayer.

Cheers

Lokolo

Yes but if you go for the Vantage thing (the non ISA one) you will lose tax relief that you would get in the SIPP.

However saying that, if you are 20, not retiring for 40 years, putting into a pension could be a bad idea if you want the money say in 15 years.

LongTermLurker

TDS wrote: »

Thanks for the reply.

I'm not using a SIPP atm, as I'm not convinced that the tax relief is a big enough benefit (given that my eventual pension income will be taxed at some level) to offset the drawback of less flexibility. The way things stand at the moment, I intent to shift from ISA to SIPP when I can do so as a higher rate taxpayer.

Cheers

You have flexibility built into your ISA - if you need access sooner, you will have access to some of it. As Lokolo says, in the fund account you have no tax benefit going in, no tax benefit when you switch funds * and no tax benefit when you take money out/sell *

* In the fund account, all "income" will be taxed as income tax and all growth will be subject to Capital Gains Tax. You have a CGT limit of, this year, £9300 - so you can take that much profit each year. If you ever buy a second house you will pay CGT on any profit (less your allowance)

I think a combination of ISA, funds and Pension is the best option, but as you're so young then depending how big your ISA pot is, I would consider throwing some money into a pension alongside it. You don't have to keep paying in forever but you'll get the advantage of growth on your early tax rebates for the rest of your working life. If your ISA pot isn't very big then consider putting some into a pension and some into the fund account.

Try to put the right funds into the fund account as well, eg I believe bonds get full tax relief inside an ISA, whereas you would pay some income tax in the fund account. However you don't get tax relief at all on dividends from equities, even in an ISA.

Finally, consider that in the fund account, if you turn into a high rate taxpayer, you'll have to mess about declaring income etc which you wouldn't have to do in a pension (and could even claim tax relief on pension contributions).

dunstonh

If you dont intend to fully utilise future ISA allowances then you can always "bed & ISA". This will transfer your funds into the ISA.