By Rachel Jefferson, Chartered Financial Planner at Torquil Clark, debates the key retirement question; ISA or Pension?
The debate has always been with us. Should I invest in an ISA or a pension as a means of saving for my retirement? However, the Budget 2014 proposes to change the pension landscape as well as introducing new tax breaks for savers. So, the debate re – opens. An ISA or a pension?
A number crunching exercise can be carried out to consider a potential net return under both options, subject to how investments perform. This will weigh up the tax relief that you get upfront, the tax liability whilst invested, as well as how the benefits are treated on the way out. However, this alone is not enough and other important factors need to be considered including your individual attitude to risk.
From April 2015, subject to approval, it looks as if we will have complete control and flexibility when it comes to our pension pots (from age 55 and applicable to defined contribution savings). After the tax free cash is extracted, the residual is treated as income, even if taken as a lump sum, and taxed accordingly. Contributions to ISAs are set to increase from July 14 to £15,000, removing the cap on how much can be invested in the cash element.
Everyone is different. Building up a retirement pot in a portfolio of ISAs may be more appropriate for Client A. However, for Client B, the pension route may be the answer. An individual’s tax position before retirement, as well as the potential position in retirement is important to assess the level of tax relief on any contributions to a pension. Remember, for some people, tax relief can be as much as 45%. This makes a pension very attractive, especially if basic rate tax will apply when the benefits are crystallised.
But remember, an ISA can be accessed at any age. Pensions, under the current rules mean that benefits cannot be taken until age 55. This may not meet with an individual’s retirement plans. For an ISA saver, discipline is essential. Due to the fact that money can be accessed before age 55, will it be tempting to just ‘dip in’ to the ISA portfolio to fund a holiday or buy a new car, before reaching the selected retirement date.
More food for thought is how important it is to pass on assets to other people on death. ISAs will always form part of the estate (business property relief is an exception) and therefore inheritance tax may apply. For pensions, under the current rules, it will depend on whether benefits have been drawn and how they have been drawn. In some cases a 55% tax charge may apply. This is currently under review and subject to change. Whatever the rate is, it is another important factor to consider.
In summary, it is fair to say that there is a place for both pensions and ISAs and a case can be made for both. The proposed freedom for pensions is welcomed, but still people will need to take advice as they build up a retirement fund to meet their future retirement goals.
For information regarding your pension or to discuss planning for your retirement, please contact Torquil Clark on 01902 576767 or get in touch with us online.
The value of your investments and the income from them can go down as well as up and you may get back less than you originally invested. The tax treatment of any investment depends on your individual circumstances and may be subject to change in the future. The Financial Conduct Authority does not regulate taxation advice. Torquil Clark is authorised and regulated by the Financial Conduct Authority. Adviser charges apply.