Invest £20,000 in ISA and the Taxman pays in £4000? Is that correct?

crazyvish

Hi all,

I am a newbie when it comes to investment. I am 40 and self employed with no pension contribution as my accountant suggested its not a good idea but rather invest in properties. I didn't get a chance to tap into the property market yet. I have never used my ISA allowance as I believed the interest it pays is miniscule (especially the Cash ISA). My only liability is my mortgage with a 5yr fixed interest of 1.79%. 

During a discussion about investments with a friend, he mentioned to me that he had invested £20000 in an S&S ISA and the Bank claimed £4000 (20%) from the Taxman and his account now has £24000 as the capital amount! Is that correct? Do the banks topup our ISA accounts by 20%!? I tried finding this information on the banks websites and I couldn't find any. I am confused and hence here to ask the wise men.

My current risk apitite is 20K (idea is to invest in shares) with another 20K for some wise investment (may be to invest in pension?) - not sure where to start or how to invest when it comes to pension. Would anyone suggest investing in SIPP?

Wondering if someone could help point me in the right direction. Any suggestions would be greatly appreciated. Thank you in advance.

Dazed_and_C0nfused

he mentioned to me that he had invested £20000 in an S&S ISA and the Bank claimed £4000 (20%) from the Taxman and his account now has £24000 as the capital amount!

That is so wrong I'm not sure where to start!

20% tax relief would be an addition of £5,000 not £4,000.

S&S ISA's do not get any tax relief top up.  The tax benefit is that whatever growth they generate and income you take is tax free.  So if you invest £20k and it is worth say £200k in 30 years you can withdraw the £200k and have no tax to pay on that withdrawal.

Relief at source pensions (SIPP, stakeholder or personal pension) get the tax relief top up so if you paid in £20k it would get £5k basic rate relief added giving you a fund of £25k.

Eventually when you come to take money out 25% is tax free and the remaining 75% is taxable income.

There are limits to how much you can contribute to a pension - roughly how much do you expect your taxable profits to be in the current tax year?

A lifetime ISA does get a top up but you cannot pay in £20k all in one go.
https://www.gov.uk/lifetime-isa

moneysavinghero

Your friend is not referring to an ISA but to a pension.

HappyHarry

crazyvish said:

Hi all,

I am a newbie when it comes to investment. I am 40 and self employed with no pension contribution as my accountant suggested its not a good idea but rather invest in properties. 

Why on earth is your accountant telling you that making pension contributions is not a good idea? I would be seriously questioning this, and potentially looking for a new accountant, unless there is a very, very good reason for this advice.

grumiofoundation

crazyvish said:

Hi all,

I am a newbie when it comes to investment. I am 40 and self employed with no pension contribution as my accountant suggested its not a good idea but rather invest in properties. I didn't get a chance to tap into the property market yet. I have never used my ISA allowance as I believed the interest it pays is miniscule (especially the Cash ISA). My only liability is my mortgage with a 5yr fixed interest of 1.79%. 

Why is your accountant giving investment advice? (edit: agree with poster above - I would be considering a new accountant...)

Assume this means you are not contributing to a pension at all? 
But also that you currently have no pension provision at all?
What is your plan to fund retirement, if you are investing for retirement pension (possibly look at stocks and shares lifetime ISA as well - edit: missed in OP you are 40 so as below unless opened already too late) will be the most tax efficient pay to do it.

During a discussion about investments with a friend, he mentioned to me that he had invested £20000 in an S&S ISA and the Bank claimed £4000 (20%) from the Taxman and his account now has £24000 as the capital amount! Is that correct? Do the banks topup our ISA accounts by 20%!? I tried finding this information on the banks websites and I couldn't find any. I am confused and hence here to ask the wise men.

No he is not correct.

He either invested in a pension (but as with first poster numbers are off).

Or he invested £4000 (not £20,000) in a lifetime ISA and the government topped up £1000 (25% bonus).

My current risk apitite is 20K (idea is to invest in shares) with another 20K for some wise investment (may be to invest in pension?) - not sure where to start or how to invest when it comes to pension. Would anyone suggest investing in SIPP?

You will have the same choices of investing in stocks and shares ISA as in pension. You won't get a 'different' return on the same investment because it is in a pension. The advantage of a pension is the tax relief. The disadvantage is the lack of accessibility.

xylophone

I am a newbie when it comes to investment. I am 40 and self employed with no pension contribution as my accountant suggested its not a good idea but rather invest in properties. I didn't get a chance to tap into the property market yet.

Re pension tax relief - 

https://www.pensionbee.com/pensions-explained/pension-types/self-employed-pensions

Re Lifetime ISA (but at age 40 you have missed the boat if you have not already opened one)

https://www.hl.co.uk/partners/search/lisa?partners=1&theSource=PCGLO&Override=1&adg=G+ISAN+GEN+E+TCPA1+RSA+CON&gclid=EAIaIQobChMI87C77pOy7wIVCdTtCh1FNAGPEAAYASAAEgICAfD_BwE

Re stocks and shares ISA tax relief

https://www.moneysavingexpert.com/savings/isa-guide-savings-without-tax/

Albermarle

 I am 40 and self employed with no pension contribution as my accountant suggested its not a good idea 

We often see on the forum examples of bad advice from accountants when it comes to personal finance matters, but this is probably about the worst example. 

dunstonh

Why on earth is your accountant telling you that making pension contributions is not a good idea? 

I have several clients with accountants that are negative on pensions.   Both of those accountants are old school and don't understand pensions. Their pension knowledge is back from the 80s when they could set up pensions themselves. Their knowledge is based on those. So, woefully out of date.        I had one accountant write to a client telling them my advice was wrong and it would create a tax bill.  The accountant was out-of-date on most investment class taxation and whilst he accepted he was wrong in the end, he never apologised.       

Thankfully, most accountants understand the tax wrapper advantages of pensions even if they don't know the specifics.  The one on this thread appears to be the low knowledge type.

sevenhills

dunstonh said:

I have several clients with accountants that are negative on pensions.   Both of those accountants are old school and don't understand pensions.

The OP would be better speaking to an IFA, not an accountant? Although property prices have done really well in recent years, its the tax aspect which is important, more so if the OP is a high rate taxpayer.

eskbanker

sevenhills said:

dunstonh said:

I have several clients with accountants that are negative on pensions.   Both of those accountants are old school and don't understand pensions.

The OP would be better speaking to an IFA, not an accountant?

You spotted the subtext in dunstonh's post then?

steampowered

The first thing you should do is check whether you will qualify for the full state pension.

If you do, you might expect to get the state pension from age 67. The state pension is currently £9,100 per year.

Is that enough for you to live off? And are you happy to wait until age 67 before retiring? If the answer to either of those questions is "no", you need to massively up your investments between now and retirement.

The average retirement lasts 20 years. £40k is not that much when spread over 20 years. 

Your mate sounds like he was referring to a pension. A pension is indeed a great idea, due to the tax relief you can get, which does indeed give you an instant free top up from the government, as well as potentially reducing other taxes if you are employed by a company.

You could also consider a Lifetime ISA, invested in stocks and shares, though pensions are better for most. There is an article on the main MSE website comparing Lifetime ISAs vs pensions.