Where You Hold Your Investments Matters: A Guide to Asset Location
Why Where You Invest Matters as Much as What You Invest In
When most people think about investing, the focus tends to be on what to invest in – shares, bonds, funds, or property. But equally important, if not more so, is where you hold those investments.
In financial planning, we refer to this as asset location – and it can make a huge difference to long-term post-tax returns.
Wrappers: The Structure Around Your Investments
Think of a wrapper as the “box” that holds your investments. The contents of the box (the investments themselves) might be identical, but the tax rules of each wrapper can vary significantly (and can dramatically affect your returns).
The most common investment wrappers we use are:
Pensions – the most tax-efficient long-term savings vehicle for retirement.
ISAs (Individual Savings Accounts) – flexible and completely tax-free once money is inside.
GIAs (General Investment Accounts) – highly flexible but exposed to income tax and capital gains tax.
Beyond these “usual suspects”, there are more specialist wrappers like:
Lifetime ISAs (LISAs) – designed for those looking to save towards their first property or as additional retirement savings.
Investment bonds – often used for tax deferral and estate planning.
VCTs (Venture Capital Trusts) and EISs (Enterprise Investment Schemes) – higher risk, but with very generous tax breaks for those willing to back smaller, early-stage companies.
When investing, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invested. VCTs and EISs are specialist investment vehicles and typically only suited to high net worth and experienced investors. These schemes typically invest in smaller companies that can have a higher failure rate and values can fluctuate more sharply than your mainstream investments. Furthermore, there may be difficulty in selling the investments and therefore may take some time to realise the investment.
Accessibility vs Tax Efficiency
Every wrapper has trade-offs, most notably:
Accessibility – how easily you can access your money. ISAs and GIAs are liquid (i.e. readily-accessible), whereas pension savings are locked until at least the Minimum Pension Age (currently 55, rising to 57 from April 2028).
Tax Efficiency – how much the tax system helps or hinders you. Pensions usually come out on top here, with upfront tax relief, tax-free growth, and a 25% tax-free lump sum available on retirement, but that must be balanced with the restricted access.
The key is blending these wrappers in a way that balances today’s needs with tomorrow’s.
EET vs TEE: Pensions vs ISAs
Pensions and ISAs consistently rank among the most tax-efficient investment vehicles available, though they differ in how and when that tax efficiency applies.
Advisers often describe their respective tax treatments using the shorthand EET and TEE:
Pensions (EET) – Exempt, Exempt, Taxed:
Contributions receive tax relief on the way in, growth is tax-free, but withdrawals are taxable (after the 25% tax-free lump sum, currently capped at £268,275).ISAs (TEE) – Taxed, Exempt, Exempt:
Contributions are made from after-tax income, but both growth and withdrawals are entirely tax-free.
Put simply, pensions reward you upfront (tax relief at your marginal rate of income tax), while ISAs reward you on the way out (no tax or restrictions on withdrawal). Together, they typically form the cornerstone of a well-balanced, tax-efficient investment strategy.
A Worked Example: £10,000 in Different Wrappers
To demonstrate the importance of structuring your investments in a tax-efficient way, in this worked example, we look at how the same £10,000 might perform within different tax wrappers — a Pension, an ISA, and a General Investment Account (GIA) — assuming the investment doubles in value and is later withdrawn.
Pension (Higher Rate Relief In, Basic Rate Out)
Assume the investor is a 40% taxpayer while working, but a 20% taxpayer in retirement.
A £10,000 personal pension contribution is grossed up to £12,500, as the provider automatically reclaims 20% basic-rate tax relief on your behalf.
As a higher-rate taxpayer, you can claim an additional £2,500 rebate via your tax return — meaning the total £12,500 pension contribution has actually cost you £7,500 net.
If the investment doubles, the pot grows to £25,000.
On withdrawal, 25% (£6,250) can be taken tax-free (assuming sufficient Lump Sum Allowance remains).
The remaining £18,750 is taxable at 20% (assuming now a basic-rate taxpayer in retirement), resulting in a £3,750 tax bill.
That leaves £21,250 post-tax proceeds (£6,250 tax-free + £15,000 after tax income).
This means the £7,500 net initial investment has grown to £21,250 after tax — a net profit of £13,750.
ISA:
ISAs are funded from after-tax income, meaning no upfront tax relief — but in exchange, everything thereafter is completely tax-free.
£10,000 is invested into a Stocks & Shares ISA.
The investment doubles to £20,000.
There’s no tax on growth, dividends, or withdrawals.
The full £20,000 is available to withdraw at any time, with no income or capital gains tax due.
In this case, your £10,000 investment becomes £20,000 — a £10,000 net gain, with complete flexibility and no future tax drag.
GIA:
A General Investment Account is the most flexible investment wrapper — there are no limits on how much you can contribute or withdraw. However, this flexibility comes at the expense of tax efficiency. Unlike pensions or ISAs, returns within a GIA are potentially subject to both Capital Gains Tax (CGT) and dividend tax.
£10,000 is invested within a GIA.
Over time, the investment doubles in value to £20,000, resulting in a £10,000 gain.
For simplicity, we assume that all returns arise from capital growth (i.e. no dividends are paid).
Assuming the full £3,000 annual CGT exemption is available, £7,000 of the gain would be subject to tax.
For a basic-rate taxpayer, CGT is charged at 18%, giving rise to a £1,260 tax liability.
This leaves £18,740 of post-tax proceeds.
In this case, your £10,000 becomes £18,740 after tax — a net gain of £8,740.
Summary
While the numbers are deliberately simple, the differences are striking:
The pension in this example delivers an extra 57% uplift versus the GIA and 38% versus the ISA, purely due to the impact of tax relief and tax-free compounding — even though the underlying investment could have been identical.
In the vast majority of cases, pensions offer the most powerful long-term compounding advantage — but with the trade-off of reduced access before retirement. The best outcomes often come from blending wrappers, using each for its strengths: pensions for long-term growth, ISAs for flexibility, and GIAs for overflow once allowances are used.
Beyond the Basics – Other Wrappers
A brief note on a few of the other investment wrappers and products available:
Investment Bonds: Tax is deferred until encashment, making them useful for investors expecting to pay a lower rate of tax in retirement, or for those seeking additional estate planning flexibility.
Venture Capital Trusts (VCTs): Offer up to 30% income tax relief on investments of up to £200,000 per tax year, along with tax-free dividends.
Enterprise Investment Schemes (EISs): Provide 30% upfront income tax relief, capital gains tax deferral, and inheritance tax benefits — though, like VCTs, they carry (much) higher risk as they invest in early-stage companies.
These options can serve a purpose in specific or more complex situations but are not typically the first port of call for most investors. If you’d like to explore whether any of these might be relevant to your circumstances, please let us know.
Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs) are specialist investments, typically best suited to high-net-worth and experienced investors. They usually invest in smaller, early-stage companies — which can offer strong growth potential, but also carry a higher risk of failure and greater fluctuations in value compared to more mainstream investments. These investments can also be harder to sell, meaning it may take time to access your money. In the case of VCTs, you must hold the investment for at least five years to retain the full tax relief available. It’s also important to note that tax rules — and the qualifying status of a VCT or EIS — can change over time.
Diversification Beyond the Portfolio
Diversification isn’t only about spreading investments across different shares, bonds, and funds – it also means spreading across different tax wrappers.
Liquidity: ISAs and GIAs provide easy access to funds when needed.
Tax Efficiency: Pensions deliver the greatest tax advantage but restrict access until later life.
Special Situations: LISAs, Investment Bonds, VCTs and EISs can add further flexibility for specific goals or planning opportunities.
For most investors, the most effective strategies typically use a blend of wrappers, combining the tax efficiency of pensions with the accessibility of ISAs and other vehicles. This balance helps avoid unnecessary higher-rate tax on pension withdrawals and reduces the risk of running short of liquid funds too early.
The key takeaway: it’s not just what you invest in that matters, but where you invest it.
Happy Thursday!
Kind regards,
George
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Important Disclaimer
This blog is for general information only and is intended for retail clients. It does not constitute financial or tax advice, nor is it an offer to buy or sell any specific investment. Since I don’t know your personal financial situation, you should not rely on this content as tailored advice. While we aim to provide accurate and up-to-date information, we cannot guarantee that all details remain correct over time. We are not responsible for any losses resulting from actions taken based on this blog’s content.
