Should I save in a Pension plan or in ISAs for my retirement?
Well, ideally in a perfect world – both
This is a question we are often asked. I hope that the following information is helpful, basically the sooner you start to save the better!
Generally – when you make a pension contribution, your contribution receives tax relief at your highest marginal rate and your pension fund grows in a tax efficient environment, (although not completely tax free). When you come to take your retirement benefits from your pension fund, 25% of the fund can be taken as a tax free lump sum and the remaining 75% must provide an income which is taxable.
So the advantage of a pension plan is that you receive a significant tax advantage on the contributions, however the fund is tied up until retirement, currently the minimum age is 55.
This may not be such a disadvantage and could be of benefit as you are not allowed to draw money from the account until retirement, so safeguarding your retirement fund – but not very helpful if you need some money to fix the roof in the interim!
On the other hand – An ISA does not receive the tax relief on the amount invested, but it does also grow in a tax efficient environment. When you take your money from your ISA, the whole amount is paid to you without any tax being due. There is no term or age restriction on removing your money from the ISA account, so it is a far more flexible arrangement, but this is not necessarily an advantage and remember, once you have withdrawn money from your ISA account, this tax free allowance is lost.
If you could be easily tempted to re-vamp your kitchen with your ISA fund, then maybe a pension plan would be better for you.
Broadly speaking, the Pension and the ISA have similar tax advantages in monetry terms but completely different structures, so a combination of the two could be a useful retirement planning tool.
Imagine that the pension and the ISA were balanced on the two opposite sides of a set of scales.
And with careful investment planning for retirement you have balanced your savings across the scales.
Under current legislation, this has the potential to allow you to control the flow of your income in retirement from one side or the other in order to minimise the tax that you will pay on this income.
Most importantly – you should always take professional financial advice before making important decisions such as planning and saving for retirement. The legislation relating to pensions in particular, is constantly changing and you need to keep abreast of the changes. The above example is not a recommendation, purely thought provoking – I hope.