Spoilt for choice on how to save with Isas and pensions
CHANCELLOR George Osborne hasn’t just radically overhauled pensions, he has made a string of improvements to individual savings accounts (Isas) as well.
He has dramatically increased the amount that you can save in a tax-efficient Isa and made the scheme more flexible as well.
Savers are now spoiled for choice when it comes to setting aside money tax efficiently for their retirement.
So which is the better option for you: pensions or Isas?
From last July, the Chancellor increased the annual Isa allowance for this financial year to a generous £15,000, which rises again from April 6 to £15,240.
And he also scrapped limits on how you save in a cash Isa each year. Now you are free to put your allowance into any combination of cash or stocks and shares.
And in last week’s Budget, he announced that he will shortly be making Isas fully flexible, so you can withdraw money without losing your tax benefits, provided you pay it back in by the end of the financial year.
The advantage of drip-feeding money into a pension scheme instead is that it is locked away until you are 55, so it will be there for your older years.
One of the reasons Isas have been so popular is that they are more flexible than pensions, as you can withdraw the money whenever you need it. But you have to use this freedom carefully.
Graham Kilkelly, a wealth planner at Sanlam, says the danger is that many people will raid their Isa funds to cover everyday spending.
“There are too many occasions when you may be tempted to use your Isa money because you need cash in a hurry, such as if your car breaks down, or you want to do up the bathroom.”
Although you will soon be able to repay any cash that you withdraw, if you don’t get around to it, then your long-term savings will be depleted.
Kilkelly says: “The advantage of drip-feeding money into a pension scheme instead is that it is locked away until you are 55, so it will be there for your older years.
“Pensions may still be a better way of investing for retirement.”
Sheridan Adnams, investment research manager at The Share Centre, says pensions and Isas offer complementary tax benefits, and a combination of the two would be ideal.
When you pay money into a pension, you can claim tax relief on your contributions at your personal rate of either 20 per cent, 40 per cent or 45 per cent.
When you withdraw money from your pot at retirement, however, you may then be liable to pay income tax.
You cannot claim tax relief on the money you invest in an Isa but any future income and capital gains are free of tax. This allows you to draw tax-free income in retirement, limiting your overall tax bill.
Adnams says: “Easy access and tax-efficient Isas are a very credible alternative to pensions and provide flexibility and access. But for most people, workplace pensions will continue to make up the lion’s share of their retirement savings over time.”
Paying into a workplace pension is particularly valuable if you employer makes matching contributions, Adnams says.“People who can sign up to workplace pensions should absolutel y capitalise on this. Thousands of people across the UK are failing to sign up for what is essentially free money from their employers, so they need to make sure they do this as a priority.”
New research from PWC shows that pensions are the most popular company benefit, ahead of company share schemes, company cars and medical insurance.
