Your pension is probably your priority when it comes to investing for your retirement. But it is not the only way to build a nest egg. An ISA could also help you save for the future.
ISA or pension: What’s the best for you?
Pensions lock your money away until you reach at least 55. In return for this you don’t have to pay tax on the money you pay in. You get tax relief at your ‘marginal rate’ of income tax. A basic-rate (20%) taxpayer putting £100 into their pension will actually pay £80, with the extra £20 added automatically through tax relief. Higher-rate (40%) taxpayers can claim back an extra £20 in tax relief through their tax return, while additional-rate (45%) taxpayers claim back an additional £25.
This kind of savings bonus from the Government makes pension savings hard to beat. In fact they are so rewarding, the government sets strict limits on how much you can save. The annual allowance is £40,000 for most people, savers with total earnings above £150,000 could have a lower pensions allowance, with the level gradually reducing to a minimum of £10,000 for those with total earnings of £210,000 or more.
The Lifetime Allowance is the maximum, currently £1,030,000, you are allowed to put in a pension during your life and still qualify for tax relief.
The only real snag is that the taxman will take a slice of the payments you receive from your pension. You can withdraw 25% of your fund tax-free. After that, you will find yourself paying income tax as though you were still working.
An ISA, on the other hand, gives you flexibility. There is no help from the taxman when it comes to saving. You pay in out of your taxed income. The tax advantage comes when you start taking money out and enjoy all the money you have contributed and the profits that it has earned as a tax free income.
Again there are limits on what you can put away, currently £20,000 a year. There are many kinds of ISAs to choose from, which means you can invest in sectors and levels of risk that are right for you.
What about a lifetime ISA?
The Lifetime ISA complicates the choices available. If you are aged 18 to 39, you can open a Lifetime ISA and save up to £4,000 tax-free each year up until you turn 50. The government will pay a 25% bonus on your contributions, up to a maximum of £1,000 a year.
Your Lifetime ISA allowance forms part of your overall £20,000 annual ISA allowance.
Everyone’s financial circumstances and priorities are different, but in an ideal world, it makes sense to use as much of the £40,000 annual tax-free pension allowance and the £20,000 Isa allowance as you can.
So it is not a case of Pension or ISA – it’s a matter of making the best use of both types of saving to build a future that fits your needs. An ISA will be a must if you are close to your pension Lifetime Allowance. You need to see if the LISA with its generous bonuses could have a place in your plans. You want to make the most of your pension tax advantages.
Getting expert advice is essential. At Continuum, we can work with you to find answers to your investment and pensions needs. You can find out more about our services in our downloadable brochure.
The value of your pensions and investments can fall as well as rise and you may get back less than you invested.
moneyfacts.co.uk – tax allowances 2018-19 what you need to know – 12th April 2018