This year’s Resolution is to do better at hiding my irritation when people want to know what my New Year’s Resolution is. I’ve never seen the point of setting yourself up for failure and don’t understand why people think January is the only month when it is worth trying something new. But thanks for asking anyway 😄

Welcome back to January

And in that curmudgeonly spirit, I will also not be offering my top ten things you should do in 2023 to achieve financial fitness. I’m not knocking those who do or those who appreciate such tips. But I want to recognise that the people who are responsible for making Christmas happen (naming no genders) have just completed the Mother (oh, there it is) of all marathons and will be welcoming January with all its dullness and back-to-normal-ness like a long-standing friend for whom no special efforts are required. Wholesale changes and new, exhausting routines are not on the to-do list. In fact, to-do lists are not even on the to-do list. Back to work? Pah! Piece of cake!

A morsel of financial therapy

But I am going to offer one small bit of New Year’s helpfulness. It’s not something you need to do, as much as something you need to think. Predictably, it does have to do with investments, pensions, ISAs and all that malarkey but, if it helps to increase the New Year appeal, you can think of it like a tiny morsel of financial therapy.

Disconnecting the accounts from the investments

Essentially, I am encouraging you all to choose 2023 as the year when you truly understand the relationship between investments and the accounts that they sit within. It’s not earth-shattering and I admit it’s hard to get excited about because there’s no immediate reward attached. But I do believe that learning to disconnect these concepts is important in getting us connected to the parts of our finance that we have some level of control over.

Like emotions and the body

I may be going too far here but, if you like the therapy angle, you can think of the investments like our emotions: they go up and down for reasons we don’t always fully understand. The accounts on the other hand – the pensions and ISAs – are the body in which the investments are housed. The two are separate from one another, even though it can feel like they are a single entity.

It’s not the account that performs

As financial advisers, we hear people say things like “My work pension is rubbish” or “My ISA has done well” or “Is it worth investing in an ISA?”. It might sound pedantic, but it’s really worth getting your head around the fact that it is not the pension or the ISA that performs, but the investments within them. And this is where you come in. For there is usually a level of choice about the investments – one that you can exercise either on your own or on the advice of a professional. Remember, the decision about the investments is separate from the decision about the account.

Accounts known as tax wrappers

I’ve included one of my ‘A bit more understanding’ sections at the end of this post where I describe different types of accounts that can hold investments. Choosing the right accounts – known in financial circles as tax wrappers – comes down to what you need that money for, when you will need it and what your overall tax situation is. It is a separate decision to choose which investments go into the tax wrapper. This decision also comes down to what you need that money for and when you will need it but, in addition, how much risk or growth opportunity you are seeking.

In a nutshell, the investments are the performing parts – they determine how much money you have on any given day. The accounts are the admin part – they determine how much tax you do or don’t pay on the money that is invested and how and when you can get your money out.

An important difference to grasp

So why do I think it is important that you grasp this difference? Let’s say you walk into your High Street bank and ask about opening an investment ISA. (I know, I know, who does that? Okay, let’s say you stay in your pyjamas and pick up a handy device on which you do your online banking. Same difference). The likelihood is that you will be offered something that feels very much like it is all packaged up in one neat bundle of investments inside an account. That’s because a bank will offer you investments from its own limited range and – for your convenience – offer it as a single product. If those investments do well, you might not make the distinction between the investments and the Stocks & Shares ISA that they sit within. In fact, in that scenario, you could be very much forgiven for saying that you think ‘ISAs are a good investment’ – because your money has gone up. And, of course, the reverse is true if your money goes down.

Influencing your future decisions

It follows then that you might be influenced in the future about whether or not to use an ISA by the past performance of those particular investments. But, in fact, the amount of money gained or lost had nothing at all to do with the fact that the investments sat within an ISA. In itself, an ISA account is simply one which shields the gains inside from tax and limits the amount you can put in each year.

Levels of investment choice in ISAs…

Different providers of ISAs – e.g. banks, building societies, online platforms – will offer different levels of choice around which investments go inside. In other words, you can choose to open an ISA account that provides a ready-made bundle of investments (like from a bank), or you can choose one that allows you to pick the investments yourself from a huge and dizzying array of shares, funds or portfolios. It’s not the account that performs – all the ISA does is make the tax rules. It’s the investments.

…and in pensions

There’s a similar story with pensions. I have heard people say they are mistrustful of the pension being offered by their employers because a previous pension they held had investments inside that performed badly. Whereas, in fact, the things that make a pension a pension have only to do with the rules around tax and the level of contributions. It is the investments inside that determine the value and – just as with ISAs – there is generally some level of choice about these, even with a pension provided at work (unless you are a public sector worker, where the pension schemes are different).

One-small-thing

If you’re still with me and have well and truly got the message that an account like an ISA or a pension is a separate entity from the investments inside – congratulations! You have achieved a ‘one-small-thing’ already this year. If at any point during 2023 you feel the need to make investments for the long term, remember to ask yourself two distinct questions:

What sort of account will be right for me (think tax and how you want to access the money)?
What sort of investments will be right for me (think risk and how long you want to stay invested for)?

And on that note I will leave you to enjoy January in peace. You know where to find me if you need me (very definitely not in the gym).

carole@talkingfinances.co.uk

www.talkingfinances.co.uk/blog/

A bit more understanding

Types of account/tax wrappers

Different types of account have their own rules about how the investments within them are taxed. And how you, as the owner, are taxed on any money you put in or take out.

Pension: Broadly speaking, you get tax relief on the contributions you make into a pension and these contributions are invested on your behalf (contributions are currently limited to £40,000 a year – or less if you are a very high earner). You can take 25% of the pension at the other end tax free. The other 75% is taxed as normal income. You can start taking money out of your pension at age 55 (due to rise to 57 in 2028).

ISAs: A wide range of savings and investment products can be held in an ISA wrapper free of tax (income or capital gains). The total current annual amount you can put into ISAs is £20,000. This means that if you use the £20,000 limit in a cash ISA, you can’t put any into a Stocks and Shares ISA – or any other kind – in the same tax year. You cannot hold an ISA in joint names.

Cash ISA – A tax-free deposit account. This might be instant access or fixed term, variable or fixed rate.
Stocks & Shares ISA (S&S ISA) – Within this, you might have some individual shares and/or one or more funds that you have picked yourself or that an adviser has picked for you.
Lifetime ISA – A savings account for adults under 40 who can pay in up to £4,000 a year and receive a 25% bonus from the government of up to £1,000 a year until the age of 50. The money can’t be accessed without high penalties until age 60 unless it is for a deposit on a first-time home.
Innovative Finance ISA – Savers can lend money directly to borrowers and earn interest and capital gains on the loan tax-free up to the £20,000 a year limit.
Junior ISA (JISA) – This has the same tax advantages as an adult ISA but a lower annual limit on the amount that can be paid in (£9,000 in 2022/23). The child must be under 18 and living in the UK and NOT have a child trust fund to be able to open a JISA. There are two types – cash and stocks & shares. The annual limit applies to the total put into both types. Worth noting that the money belongs to the child, not the adult who opens or manages the account.

General Investment Account (GIA): If you have more money to invest than the £20,000 a year that can go into ISAs, you might put it into a GIA. This is not a tax wrapper, so it has none of the limits or tax benefits. It is simply an account where you can hold investments. You could hold exactly the same investments in a GIA as in a pension or an ISA – only the tax treatment would be different – and the charges would probably be a bit lower.

Onshore bond: This is a life assurance product (not to be confused with a fixed-rate bond offered by a building society, which is just a deposit account that ties up your money for an agreed time). The investor pays a lump sum ‘premium’, which is invested in their chosen type of fund. You would get your investment out in one of three ways:

Your estate receives a specified amount on your death (this amount would relate to the value of the investments);
You receive the value of the investments at the end of a stated period (maturity); or
You could withdraw some or all of your money (full or part surrender) before the end of the term.

All of these options are subject to some specific tax rules for investments in onshore bonds.

Offshore bond: This is similar to an onshore bond but is offered by subsidiaries of UK life assurance companies operating in places like Luxembourg, the Channel Islands or the Isle of Man. The main difference between offshore and onshore bonds is that, in an offshore bond, the chosen investment fund itself pays little or no tax on gains made within the fund. However, the investor still pays full tax on any gains made on their premium on withdrawal. As with onshore bonds, there are specific tax rules for investments in offshore bonds that would make them suitable only under certain circumstances.

Talking Finances is a trading name of Talking Finances Ltd. Talking Finances Ltd is an appointed representative of Parallel Lines The Advisor Collective Ltd, No.2 Sopwith Court, Slough Road, Datchet, Berks SL3 9AU, which is authorised and regulated by the Financial Conduct Authority. FCA Registration No. 967228

This article represents the personal opinion of Carole Haswell only and does not represent any opinion of Parallel Lines the Advisor Collective Ltd. Financial decisions should not be made on the basis of this article

Past performance is used as a guide only. It is no guarantee of future returns.
Your investment can go down and you may not get back the full amount invested.
All content is based on my understanding of current legislation, which is subject to change.
This blog is for general information only and does not constitute advice.