How to choose the right investment account

Hello, my name is Charlene Young and you’re watching part three of AJ Bell’s video series on investing.

In parts one and two, we discussed why you should consider investing and how having explicit goals can encourage you to make contributions. Now, I’ll run through what you need to think about when considering types of investment account.

It’s really important to establish why you are investing before you choose an investment account. Specific strategies may not work if there are restrictions on when and how you can take money out of a specific type of account.

Don’t panic as there are always suitable accounts for certain investment goals. You aren’t expected to keep jumping through hoops - it’s merely about picking the right account for your goal.

Let’s start with someone who wants to build up a deposit to buy a first home. In this situation, you might want to start with a Lifetime ISA if you’re eligible to open one. The rules state you need to be aged 18 to 39 to get one. Those aged 40 or above would have to consider a Stocks and shares ISA instead, but you certainly haven’t drawn the short straw as that’s a perfectly decent way of sheltering capital gains and dividends from the taxman.

Where a Lifetime ISA has an edge over a Stocks and shares ISA is its ability to give you free money. Yep, you heard right - free money. You can pay in a maximum of £4,000 a year into this type of account, and the Government will pay a 25% bonus on your contributions, up to £1,000 a year.

The catch is that unless you use the account to fund a deposit on your first home or you’re aged 60 or over, you cannot withdraw money without paying a 25% penalty charge.

A SIPP is a Self-invested personal pension and has several differences to a Lifetime ISA if you’re saving explicitly for retirement. In a nutshell, you can pay more into a SIPP but you have to pay income tax on some of your withdrawals, unlike a Lifetime ISA.

Both SIPPs and Lifetime ISAs let you choose all the investments yourself and the money can grow without being taxed on capital gains and dividends while inside the account.

With a SIPP, you’ll pay income tax at your marginal rate for 75% of the pot upon withdrawal, with the remaining 25% being tax-free. You can get money out of a SIPP earlier than a Lifetime ISA - the current minimum age is 55 but this rises to 57 from April 2028.

Another key difference is how much you can put into a SIPP compared to a Lifetime ISA. You can put 100% of your earnings into a SIPP each tax year up to a maximum of £60,000, which includes personal contributions, employer contributions and tax relief. This falls to £10,000 a tear if you trigger the Money Purchase Annual Allowance.

The government gives you 20% in basic rate tax relief when you add money to your pension. For example, put in £800 and the government adds an extra £200 in tax relief. If you’re a higher rate taxpayer, you can get up to 40% tax relief, or 45% for an additional rate taxpayer.

You can see from everything I’ve talked about so far that it is really important to choose the right account for your needs.

If you want full flexibility when it comes to withdrawals and not have to pay any tax on the money coming out of your account, a Stocks and shares ISA might be of interest. While you don’t get any extra money from the government in the form of bonus payments or tax relief for contributions into a Stocks and shares ISA, there are no restrictions on when you can take money out - no penalty charges, no tax due. All the income you receive inside the account and any capital gains are also free from tax.

You can pay in up to £20,000 a year into a Stocks and shares ISA, but remember that allowance covers all ISAs, so if you’ve already paid in £4,000 to a Lifetime ISA, for example, you would only be able to pay in a maximum of £16,000 into a Stocks and shares ISA in that tax year.

On a final note, you may wonder when someone uses a Dealing account. Imagine you’ve used up your ISA allowance in the current tax year and want to put more money into the markets. Those who don’t want to make additional contributions to a pension could instead use a Dealing account. There are no limits to the amount of money you can put into a Dealing account each year, but any capital gains or income on these investments will be subject to tax.

If you’re new to investing, you might be interested in AJ Bell’s low-cost Dodl app which takes a straightforward approach to investing. It does this by giving you a streamlined range of accounts and investment options. Because we’ve made these options simple, it also means we can keep the charges low. Meaning you could pay as little as £1 per month in charges.

So as long as you’re investing for yourself and not a child, you may want to take a look. Those wanting a broader range of investments or planning to invest for their children may not have all the options they’re looking for on Dodl.

It’s just as easy to get up and running with either option, and you can start investing with as little as £25 on both.

As well as a few more account options, AJ Bell will give you access to thousands of stocks, funds and a full bells and whistles platform to manage your portfolio. You’ll also have our friendly customer services team at the end of a phone and available on web chat. There’s lots of in-app support available with Dodl, as it takes a straightforward approach, managing your account is all done through the Dodl app.

In the next investing series video, Dan will discuss the different types of investments available via AJ Bell and Dodl, so make sure you join us again.