When it comes to retirement savings, it’s all about choosing the right strategy. The best solution for you will depend on things like your financial plan, how far along it you are, and what you want for yourself and your loved ones.
With the tax relief on contributions, and being able to take 25% tax-free, a pension will give most of us more to spend than an ISA. Not to mention the advantages it offers for transferring funds to children and family members.
That being said, it’s a good idea to get your head around both options before deciding which to go for.
Getting the most from what you put in
Employed? Chances are your employer will pay into your pension when you do. And with tax relief on your contributions, a pension is normally the most tax-efficient saving method. But keep in mind that nothing’s certain, and the value of your investments can go up and down, so your savings could be worth less than what you put in.
Accessing your money
Tax-free savings. Accessing your money without barriers. There are several benefits to an ISA that makes it ideal for saving for a rainy day. But many of us don’t realise pensions have caught up with ISAs in lots of crucial ways.
Your pension can now come with tax-efficient savings, easy access to your funds and the option to take out 25% tax-free – making it a much more attractive option for serious savers.
You should bear in mind that taking out more than 25% tax-free can trigger the Money Purchase Annual Allowance. This can restrict the future pension payments you or your employer can make without possible tax consequences.
Passing it on
It’s a tough subject, but good inheritance planning can mean giving more to your family and beneficiaries. The rules about ISA inheritability mean that at the time of your death, your spouse or civil partner will get a higher ISA allowance – the same value as your ISA – so they can continue benefiting from tax-free investment returns. But this doesn’t mean your ISA comes with no Inheritance Tax (IHT) consequences. The remaining fund could get hit with a 40% IHT charge if the total is above the IHT nil rate band – potentially leaving your family and beneficiaries with less.
However, in the same scenario, having a pension would mean you could nominate anyone to receive the pot and draw an income from it – even if they’re below retirement age. What’s more, a pension doesn’t go into your beneficiary’s estate and is typically free of IHT. So your children, grandchildren or any other beneficiaries can get the same tax-free investment returns they’d get from an ISA. As expected, there are caveats, depending on how old you are when you die and pass the money on.
If you’re 75 or older at the time of death, there’s a chance your beneficiary will have to pay income tax on funds drawn from your pension. If you’re under 75, your beneficiaries won’t have to pay income tax on any money they withdraw.
We understand this is a lot to think about, and not a decision to take lightly. It’s worth having a good think about your individual circumstances, and looking into how tax laws and rules are changing, as these will all affect how your savings are treated. So at Johnson Legal we’re always here to help explain things and make sure you have all the facts before you decide anything.