News/Events

Pensions and ISAs [3rd July 08]

Saving for retirement is a big talking point with the new personal account on the horizon, or is it? I have a sneaky feeling that the Government in charge will make the plan non mandatory beforehand as trying to administer it is going to be nearly impossible.

One frequent question I get asked is, should I be saving for my retirement by investing into a pension or an Individual Savings Account (ISA)? So, firstly, let's look at what a pension and ISA actually are as clients have different views either from reading articles in the press or from a previous or current bad experience. Most seem to feel that both are heavily charged and performance has not lived up to expectations.

In reality both an ISA and a pension are one of the most tax efficient ways to save money and are simply wrappers that determine the tax position of what is inside the plan. The problems arise when the investment funds held within are not up to scratch or the plan has heavy costs. It is not therefore the plan but the poor selection of investments or contract, and that they have not been regularly reviewed.

In fact, both plans are invested in tax efficient funds and grow virtually tax free, but there are of course, key differences:

·         Your contribution to a pension plan receives immediate tax relief of 20%. This means you only pay 80% of the premium and could get a further 20% if you are a higher rate tax payer. Conversely, there is no tax relief on an ISA payment.  

·         On exit, the pension is taxable, well in most cases. However, you could have 25% of the fund value as a tax free cash sum- whereas the whole of your ISA pot can be paid out completely tax free.

·         An ISA can be cashed-in at any time whereas soon you will have to be 55 to get your hands on your pension benefit.

·         A pension will provide an income that could be guaranteed for life but an ISA doesn't really, as it provides access to capital from which you can take income.

Without doubt the main attraction of a pension is the tax relief on the contribution on entry and, frankly, it is difficult to ignore. You are able to turn an investment of £80 into £100 overnight which is in effect guaranteed growth but you can’t take benefits until you mature the plan; currently 50 but going up to 55.

It's worth remembering that you don't have to have an income to invest up to £2880 with a gift of £720 from the revenue, so take advantage as you don't get too many!  Also, you may be able to invest and mature a pension plan at the same time which can produce a high level of guaranteed income for life. You should consider, if possible, building up pension funds that are roughly equal for both partners so that full advantage of personal allowances are gained in retirement. By 2011/12 the personal allowance for an over 65 year old will be nearly £10,000 and many wives will not be able to take advantage due to the main pension normally being built up on the husband’s life.

So, maybe invest some savings in a pension plan, get a gift from the Inland Revenue and get tax free income, what could be better?  As always this is a complicated area as there could be one or two technical angles so you should seek advice from a qualified Independent Adviser.

This article was written by Langtons - Published in the Western Morning News, Money, 3rd July 2008