How to choose an investment account

Choosing your investments is often talked about as the main step of investing – which bring the greatest returns, are they worth the cost etc – there are countless articles dedicated to this topic. But there is a somewhat-overlooked step that comes before choosing your investments: choosing your investment account. And it should really get a bit more love than it does. So here goes! 

Investment accounts are where you buy, hold and eventually sell your investments (hopefully for a profit) when the time comes. But one size doesn’t fit all. There are several different types of account to choose from and, once you've narrowed down the type you want, multiple providers to potentially open yours with. 

It can feel like a bit of a minefield but we're here to help you navigate it. Let's tackle the types of accounts you can get and how they differ, then we’ll touch on what to look out for when choosing your provider. This should equip you with what you need, compare your options and choose the right account - or accounts - for you. 

Choosing your type of investment account 

Different types of accounts can help you reach different financial goals and have various benefits and risks. The big four, and the ones we’ll be looking at, are stocks and shares ISAs (also called ‘investment ISAs’), stocks and shares lifetime ISAs, pensions and dealing accounts (AKA general investment accounts or GIAs).  

Slight diversion for the parents and grandparents reading this: just as you can get children’s savings accounts, you can get children’s investment accounts too. These include junior stocks & shares ISAs and junior pensions. We won’t focus on children’s accounts today but if they’re of interest, you can explore all the ways you can invest for your children with AJ Bell. 

Which account aligns with your goal? 

Having a clear picture in mind of what you’re saving and investing towards can help when it comes to choosing an investment account. It’s also very useful when deciding if it’s even an account you should be looking at. Remember if you’re aiming to reach your goal in the next five years, it’s important to consider if a cash account may be a better option (these are far lower risk over the short term). 

So, what are you aiming for: a deposit for your first home? Retiring in style? Perhaps something else entirely. Stocks & shares ISAs and dealing accounts are relatively free-form when it comes to which financial goals you use them for. But stocks & shares lifetime ISAs (LISAs) and pensions are very goal-specific so you’ll need to look closely at their limits and risks to check they’ll work for you. 

Lifetime ISAs (LISAs) are the type of ISA brought in by the government a few years ago specifically for future first-time buyers and/or those looking to supplement their retirement savings. You also have to be over 18 and below the age of 40 to open one in the first place, but if you’re eligible and the goal fits, they’re hard to beat, with an impressive 25% government bonus added onto anything you save.

Is a Lifetime ISA right for you?

Meanwhile, pensions help you save towards your retirement ONLY. But, as long as your goal is to set yourself up for retirement, they have specific benefits you can’t get anywhere else that makes them a great investment account option. You may already have a workplace pension invested for you, but the type of pension you can open, manage and invest yourself is a self-invested personal pension (SIPP).  

What are each account’s benefits?  

ISAs are a bit of a gift from the government when it comes to personal finances. Whatever you save or invest within an ISA or Lifetime ISA is protected from capital gains and dividend taxes. Perhaps that’s why around 12 million of us use them for our savings. Though they’ve got their limits, investing within a stocks and shares ISA or Lifetime ISA means you don’t have to worry about a) losing any investment returns to tax or b) talking to HMRC – phew! 

On top of their tax benefits, Lifetime ISAs have that very appealing 25% government bonus applied to whatever you manage to pay in, up to £4,000 a year. For a stocks and shares Lifetime ISA, this means not only investing whatever you save tax-free, but investing that additional 25% tax-free too! These benefits could add up nicely when aiming towards a deposit for your first home. 

ISAs and Lifetime ISAs aren’t the only investment accounts with tax perks – pensions are pretty useful here too. Whatever portion of your earnings you pay into a pension each year, you’ll get the tax back on. This is called pension tax relief and your pension provider will claim the basic rate (20%) for you and pay it straight into your pension. If you’re a higher earner, you can file a tax return with HMRC to claim extra tax relief on your pension contributions. 

As well as that lovely free money (tax relief), just like ISAs and Lifetime ISAs, any returns on your pension investments are protected from tax too. However, tax does make a slightly unwelcomed appearance further down the line when you start taking your retirement income. You’ll get a portion of your pension pot tax-free (usually 25%) but the rest will be taxed according to your income tax rate. 

Unlike ISAs, Lifetime ISAs and pensions, dealing accounts don’t have any tax benefits or bonuses but you do have more flexibility in how you can use it. You can add any amount of money to it, anytime, and withdraw any amount, at any time as well.   

What are the account’s limits and risks? 

Because of their tax benefits and bonuses ISAs and LISAs have rules limiting how much you can pay into them – these are called annual allowances. For ISAs the annual allowance is £20,000, which you can spread across different types of ISAs, including a Lifetime ISA if you have it. But Lifetime ISAs also have their own allowance of £4,000 a year – but if you put in that amount you’ll get a juicy extra £1,000 from the Government on top, and that part doesn’t count towards your overall £20,000 limit.

You’ll also have an annual allowance for your pension. This is usually your earnings for that year or £60,000, whichever is lower, but it can be much less if you’re a higher earner or have already taken some income from a pension.  

Though you can take money out of a stocks and shares ISA anytime, you can only take money out of your Lifetime ISA, charge-free, if it’s going on your first house deposit, you’re over the age of 60, or due to terminal illness. Otherwise, whatever you take out will be whacked with the government’s 25% withdrawal charge. This is sometimes mistaken as just losing the original bonus, but it actually works out as more given it’s 25% of everything – your own savings plus the bonus. 

Similarly, you aren’t able to take money out of your pension just whenever you feel like it. You have to be the minimum pension age before you can access it. The minimum age varies between different pensions and providers but for the AJ Bell SIPP and Dodl pension it’s currently 55. This does gradually go up though and changes to 57 from 2028.   

When considering the limits and risks of different account types just bear in mind that ISA, Lifetime ISA, pension and tax rules apply and can change in future. Also, how you're taxed does depend on your personal circumstances.  

Choosing your provider 

Once you’ve got eyes on the types of investment accounts you want to open, the next thing to do is to choose which provider to open them with. In comes the list of things you may want to compare provider A, provider B and possibly even provider C on. This includes but isn’t limited to charges, investment options, and level of support and resources available. Comparison sites like Boring Money and Money Saving Expert can do much of the heavy lifting for you here.  

Of course, mixing and matching is always an option too. Perhaps a pension with one provider and a stocks and shares ISA with another provider is what works best for you – that is perfectly doable, if one more password to remember!  

Before you open any account with any provider you should always read the T&Cs (boring I know, but necessary) and a handy little document called the key features. The key features summarise all the most important information about the account you’re looking to open.  

And just so you know, it usually isn’t a massive deal if you open an account and later decide it isn't right for you - you can often turn back. Most providers will give you a cancellation period after opening your account (something else to quickly check your choice of provider offers, just in case). 

What’s available with AJ Bell and Dodl? 

If you want to learn a little more about investment accounts and how they work – and even how to open one - have a browse of what’s available with AJ Bell and Dodl. You can open your chosen account for free with both providers and get started investing with as little as £25 per month.  

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