The tax year end is fast approaching, and the vital deadline means many will be considering their options. When it comes to pension and ISAs there is a “use it or lose it” allowance – meaning action before the next tax year will be needed if people want to make the most of these savings vehicles.
But which one offers the most benefits for Britons who want to save?
Claire Trott, divisional director for retirement and holistic planning at St James’s Place, unpacked the benefits of investing into a pension and ISA.
One strong benefit of an ISA is it can provide a person with instant access to their cash, an option more suited to those who are looking for flexibility.
However, pension savers will have to be slightly more patient, as the rules state no access is permitted before the age of 55 – and this will rise to 57 in 2028.
There are exceptions to the rule, such as severe ill health or a protected retirement age.
ISAs also offer Britons the chance to save tax-free, with the current allowance at £20,000 each tax year.
In comparison, pensions currently offer £3,600 gross savings or 100 percent of net relevant earnings, but have an annual allowance of up to £40,000.
Perhaps the biggest benefit of saving into a pension is the tax relief available – an immediate 20 percent, with further relief available for higher and additional rate taxpayers.
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This is not something available for ISA savers, who do not get tax relief for the sums they put away.
Tax-free withdrawals are allowed for ISAs, and a similar process is in place for pensions – albeit with some rules.
Pension savers can get a 25 percent tax-free lump sum at retirement, however, they will need to pay income tax on the remaining 75 percent at their marginal rate.
When a person dies, pension funds are not currently included in an estate for inheritance tax (IHT) purposes – good news as many people are keen to avoid the levy.
Death benefits are tax free, as long as they are paid before the deceased’s 75th birthday.
However, if the deceased was over 75 at the date of their death, then the benefits will be subject to the marginal rate of tax of the beneficiary.
However, ISA savings cannot benefit in the same way, as the full value of the ISA is included for IHT purposes.
Ms Trott said: “It is that time of year when we need to make sure that we are using all our allowances where possible. We know that for many it won’t be possible to use everything every year, especially when things are tight.
“So, making the right decisions can be hard when you have little to invest.
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“There is no right answer but having a holistic approach to savings can give you the best options when you want to access your funds later in life.
“The different tax treatments can mean that you can efficiently access funds from different sources when it best suits you.”
Fortunately, Britons will not have to pick one savings option or the other, and could instead adopt a blended approach.
It means they will be able to secure the potential benefits from both pension and ISA savings.
Ms Trott concluded the best way to achieve a positive outcome is to seek independent, regulated financial advice to help with one’s own goals-based planning.
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