We’re a positive bunch here at Fool UK. Although it’s possible markets could head lower in the near-term as the full economic impact of the coronavirus becomes clear, we’re convinced there’s never been a better period to begin investing, if funds allow.
For most, this will involve opening a Stocks and Shares ISA or Self Invested Personal Pension (SIPP).
Which account is best for me?
The ISA and SIPP are similar and yet quite different. Both accounts allow you to protect any profits you make, or income you receive, through investing from the taxman. The fact you retain this money makes them brilliant investment vehicles for the long term because they allow you to benefit from the magic that’s compound interest.
Both accounts also allow you to invest in a range of assets, from stocks and bonds, to commercial property and gold.
What’s the difference?
There are three big ways in which an ISA and SIPP differ. The first is to do with how much you’re able to save into each account. The ISA allowance in the 2019/20 tax year is £20,000. For the SIPP, it’s 100% of your salary up to £40,000 (although the rules for very high-earners and non-earners are different).
Secondly, saving money into a SIPP generates tax relief. Simply put, this means the government will top up whatever you put into your account with extra cash. For basic rate taxpayers, the relief will be 20%. So, put £80 in your SIPP and you’ll get an extra £20 from the government. Again, the more money you have, the greater the effect of compounding over time.
Another difference between an ISA and SIPP is to do with your ability to access the money you’ve put in each account.
Should you really need to, an ISA allows you to sell your investments and withdraw the cash just like a normal savings account. The snag is that reinvesting the money within the same tax year will count towards your £20,000 limit. You can’t access your SIPP before the age of 55 (rising to 57 in 2028).
It’s also worth pointing out you’ll pay no tax on ISA withdrawals. With a SIPP, 25% will be tax free, but the remainder will be subject to income tax at your marginal rate.
Why open an account now?
Aside from the fact that markets haven’t been this cheap for years, opening a Stocks and Shares ISA or SIPP now is ideal since you can take advantage of your 2019/20 allowance before the end of the tax year (5 April).
This is particularly important for ISA holders since that £20,000 allocation can’t be transferred to next year. Use it or lose it. Unused SIPP allowances from the three previous tax years can be carried forward.
A word of caution
As much as we recommend the ISA and SIPP (and you could open both!), it goes without saying the next few months are likely to be difficult for a lot of people.
For this reason, having an emergency cash fund should still take priority. In ‘normal’ times, this would pay for a broken boiler. In 2020, this is more likely to be used for a period of temporary unemployment.
Clearly, the size of the emergency fund will depend on your personal situation but something in the range of 3-6 months of expenses would be ideal.
