Types of investment and savings accounts
Bank account: where you do your normal day to day business. Get your salary, pay bills. Likely paying you no interest, may even charge you a fee if you’ve got a fancy account with some perks.
Savings account: to segregate cash for short term needs. Emergencies, holidays, presents, large purchases etc. Emergency funds likely don’t need to be more than a couple of months of expenses if you’ve got a steady income and some other assets. Will pay you some interest, which is taxable.
Cash ISA: same as a savings account, but it’s harder to get the money out and it can earn interest tax free. Max £20,000 per year.
Stocks & Shares ISA: tax free account for investing. You can have cash in here, but only a small amount and only short term- this account is for investing. No tax to pay on dividends, interest or capital gains. Max £20,000 per year.
Investment account: normal brokerage account where you can buy shares, bonds etc. No tax protection, no limit on investment size.
SIPP: Self invested personal pension- an account designed to help you save for your own pension. No income or capital gains tax in this account. Max £60,000 per year, and you get 20% tax relief on the amount you pay in. You can’t touch this money until you’re 55. At 55 you can tax 25% out in a lump entirely tax free, the rest you’re going to get taxed on when it comes out. You have complete control over what you invest in (with some assets restricted).
The tax relief is great on the way in, this boost yours investable amount and the whole account can grow tax free which is great, but it’s a big drawback that not only can you not touch your account until you’re 55, you also then get taxed when you take the money back out again.
Defined benefit (DB) pension schemes: not many of these around any more, but they’re the good old fashioned fixed pensions, where you know exactly what you’re going to get each year in retirement. The reason they’re not common any more is because the companies who employed you have set liabilities, and may not be able to make enough money to cover them.
Defined contribution (DC) pension schemes: these were invented to shift the risk of DB schemes onto you and I as the individuals. In a DC scheme, the company will pay a set amount into your pension, but what you get out at the other end is entirely dependent on the performance of the investments. Usually these schemes have limited investment options, often with tons of backhander fees going on between pension providers and fund management companies.