Finding places to invest when you’re a pensioner requires you to look at potential investments with a different set of criteria than you would have earlier on in your life. There are several suitable savings accounts for pensioners. Still, the ones most suited for an individual will depend on that person’s appetite for risk as well as the amount of money they have to invest, among other factors.
Here, we investigate the potential pros and cons of Stocks and Shares ISAs for pensioners.
What Exactly is a Stocks and Shares ISA?
While you may have heard of a Cash ISA, you may be less acquainted with what a Stocks and Shares ISA is. A Cash ISA is an account that receives a certain amount of interest each year on the funds invested. In contrast, a Stocks and Shares ISA is an account through which you can purchase different financial products.
In practice, this means that you are allowed to invest in shares, investments funds or bonds. Like Cash ISAs, UK citizens can only open one Stocks and Shares ISA account each year, and it can only be up to a certain amount of money. For 2020/21, the amount is £20,000.
Potential Benefits of Stocks and Shares ISAs For Pensioners
One of the most significant potential advantages of a Stocks and Shares ISA is that the amount of gain your investment can achieve is unlimited. By investing directly in shares or other investment vehicles, your money is not limited to a predetermined interest rate. In comparison, a Cash ISA or a bond, the amount your investment would earn is agreed from the outset.
The main distinguishing characteristic of Stocks and Shares ISAs is that gains made on the original investment are not subject to Capital Gains tax until any profits are realised. Any previous Stocks and Shares ISAs that you opened are not subject to Capital Gains tax each year either.
Additionally, income on dividends is currently not taxed on the first £2,000 earned. This changes from tax year to tax year. However, any money that remains within a Stocks and Shares ISA doesn’t pay dividend tax.
All these tax-efficient savings can be incredibly valuable and helpful to a pensioner who is trying to make the most of the funds they have already saved.
No Upper Age Limit
Unlike some investment vehicles or savings accounts, one of the biggest pros of a Stocks and Shares ISA for pensioners is the fact that there is no upper age limit. If you can withstand the risks a Stocks and Shares ISA can pose, then you can take advantage of its benefits despite being a pensionable age.
One of the most significant advantages of Stocks and Shares ISAs is not only can you invest a lump sum, but its upper limit is also a considerable amount. While this can change from year to year depending on the government’s budget, in the tax year 2019-2020, those that open a Stocks and Shares ISA can invest up to £20,000. You can also pay into a Stocks and Shares ISA via ad hoc contributions throughout the year.
Potential Downsides of Stocks and Shares ISAs For Pensioners
The biggest downside for a pensioner concerning Stocks and Shares ISAs is that the value of your investments can go down as well as up. This may not be a risk that you have the means or desire to take. As a pensioner, you have less time to recoup losses and may need that money to live on at some point in your retirement.
No Tax Relief on Contributions
While the gains on a Stocks and Shares ISA can be a tax-efficient way of saving, your ISA has to use funds that have already been taxed. Unlike some other pension investment vehicles that are taken from pre-tax income, there is no tax relief on contributions into a Stocks and Shares ISA.
Amount Is Limited
While it is true that the amount that a Stocks and Shares ISA allows is much higher than a Cash ISA, it is still capped. That means if you have more than the upper limit to invest, you will have to find other investments and accounts as a suitable place to put your money. Those investments won’t carry the tax-efficient savings that a Stocks and Shares ISA will.
Allowance Amount Can’t Be Carried Over
For some pensioners, income amounts may vary each year. If this is the case with you, in some tax years, you could have the ability to invest all of the Stocks and Shares ISA allowance. However, in other years, you may not. Sadly, in the years that you don’t have the funds to invest the full allowance, the remaining amount cannot be carried forward into the next year.
Are Stocks and Share ISAs a Suitable Investment for Pensioners?
Stocks and Shares ISAs can be suitable investments for pensioners. However, whether it is suitable for you will come down to your circumstances. The main issue to contend with if you are considering a Stocks and Shares ISA is the fact that the value of your investment can go down as well as up. Given that you have a much shorter investment timeline as a pensioner, you may not have the ability to absorb that risk. However, it could well be that you do have the luxury of losing some value on your accounts.
Whether that risk is worth taking is up to you to determine. The plus points of a Stocks and Shares ISA are very advantageous. There is no limit on how much you can earn on the amount you invest, and all that gain is earned in a tax-efficient way. However, whether those advantages outweigh the disadvantages will depend on your own risk appetite.