Find out why Steve decided that an ISA was the right answer for him, at least for the time being.
Steve is in his late 20’s running a reasonably successful Social Media consultancy which he expects to grow. He came to me and said “I think I need to start a pension – can you give me some guidance?”
Where to start?
Well he was already doing quite well because in addition to his personal and business current bank accounts he had separate “emergency” and “tax” savings accounts. Without those I would have suggested that he was not yet ready to start building an “investment” account.
What is an investment account he said? An account which:-
- You will feed regularly from gross turnover.
- You will only invest in something which is likely to grow in value – never in depreciating assets such as a new car.
- You will pop lump sums into whenever you are satisfied that they are available for medium/long term investing.
- You will be disciplined enough not to dip into the account when things start to go wrong.
If that’s agreed the next consideration is – ISA, pension or something else?
Steve convinced me that he had the discipline to leave his fund alone and not dip into it as soon as things went wrong. He may be forced to reduce or suspend his contributions from time to time but, generally, he expects to keep them up. If he hadn’t convinced me, I would have suggested that he needed a pension plan that he could not touch until 10 years before State Pension age.
How disciplined are you?
Steve is not yet a 40% tax payer but expects to be in the future. Once he becomes a 40% tax payer the tax benefits (current rules) probably outweigh the inflexibility of pension plans and become the right answer.
For now an ISA fits the bill well. Yes there is no tax relief but there is tax free growth and the ability to make withdrawals.
Once the ISA fund has grown there is no limit to the alternative investment opportunities Steve might find. Buy to let, commercial property, business opportunities etc. Never forgetting the overriding principle that the funds are to be invested not spent!!
What Steve needed was an Investment Fund. How it is packaged will change over the years. He decided that the ISA was the best starting point. He is intending to contribute 10% of gross turnover (note – turnover not profit) on a monthly basis. He will look again at a pension plan when he starts to pay tax at 40%.
There are two types of people in this world. Those who save first and spend what’s left and those who spend first and save what’s left. Guess who the winners will be.
Steve also decided he didn’t need to pay large fees to a regulated financial adviser but would use the “no advice” Hargreaves Lansdown platform. By paying attention and using their online services he will be growing his investment knowledge and experience rather than paying someone else to look after his money.
The help and guidance of The Investment and Retirement Coach Programme was invaluable in setting him on the right lines. He understood and accepted that the service was “guidance” and not personal “advice”.
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