Dreaming of hanging up your work boots and retiring early? Even if you’re not, perhaps because you enjoy what you do and want to carry on doing it, it’s still good to have enough cash to be able to quit if you want — to be able to put yourself in charge of your own destiny.
How can you achieve it? An Individual Savings Account (ISA) can be a great start. There’s something like 1,000 ISA millionaires in the UK today, many of whom started off investing in PEPs before the introduction of ISAs in 1999. And the number is rising every year.
Tax-free profits
There are several types of ISA these days, but I’d always recommend a Stocks & Shares ISA as likely to get you the best returns over the long term — typical Cash ISA interest rates can’t even keep up with inflation.
An ISA is surprisingly straightforward for a government scheme. All you need to do is open an account with a provider (and you’ll find many via a search engine or using a comparison site), and transfer in some money — with many offering regular savings from as little as £20 per month. Then when you have enough for a share purchase, go ahead and buy your shares. It’s as easy as that.
The total you can invest per year is currently limited to £20,000, but most people won’t find that a restriction. As for tax, you get no relief on your contributions, but you pay no tax on any money you take out, no matter how much your investments might grow. And there’s no limit on that — its for life, and even if you reach the magic million, you’ll still not pay a penny in tax.
Tax-free contributions
Where does a Self-Invested Personal Pension (SIPP) come in? The main difference is taxation. You qualify for tax relief on up to £40,000 of contributions per year, but you can’t contribute more than your actual earnings. So if someone paying basic rate tax at 20% contributes £8,000 to their pension, HMRC will add £2,000 — and higher rate tax payers can claim further relief through their self-assessment.
On the other side, all money taken out of a SIPP is treated as taxable income, which might make you wonder what the point is. Well, though you usually can’t take any money out until you’re 55, you can then draw down a tax-free lump sum of 25%. After that, you still have your annual taxation allowances, so you’re likely to be paying proportionally less tax than if you’d paid tax up front on your contributions — and that’s especially beneficial if you were a higher rate tax payer when you were working.
Transfer past pensions
A SIPP also gives you a way to take control of any past company pensions you might have. For a modern scheme with no protected benefits, transferring can be as easy as filling in some forms for your SIPP provider. For some older pensions with protected benefits, you’ll need to get professional financial advice — but many pension providers are making big offers to buy you out these days, and some will even pay for your financial advice too.
Both of these investment vehicles have their advantages, and the judicious use of them really could help bring forward the day you can quit your job for good.
