3 drawbacks of a stocks and shares ISA
In a previous article, I highlighted three advantages of using a stocks and shares ISA to invest in the UK stock market.
However, ISAs are by no means perfect. Using them to invest in shares carries far greater risks than other forms of ISA, such as a cash ISA. Furthermore, unlike an occupational pension scheme they do not include employer contributions. Their tax specifics may also not be viewed as positively as those of a SIPP or occupational pension schemes by some investors.
Tax disadvantages of a stocks and shares ISA
Amounts invested in a stocks and shares ISA are made after tax has been paid. This is different than for other types of pensions, such as a SIPP or a workplace pension. Their contributions are made before tax is paid.
This would normally even itself out in the long run because no tax is charged on withdrawals from an ISA, whereas it is on drawings from a SIPP or workplace scheme. However, there is a 25% tax-free withdrawal available on SIPPs and workplace pension schemes. Therefore, it may be the case that an ISA is not as tax efficient as other types of pensions, depending on an individual’s own circumstances.
Of course, no tax is paid on any amounts while they are invested in a stocks and shares ISA. This is the same as other types of pensions, such as a SIPP or occupational scheme.