Both pensions and ISAs are very tax efficient and the answer for most investors is both, but for different reasons and at different times.
The first issue is time.
Pension savings cannot be accessed until age 55, whereas ISA savings can be accessed at any time.
ISAs are fine for savings which are aimed at pre-retirement expenditure such as house purchase, home improvements, etc but not where retirement income is the primary objective. If it’s easy to dip into your retirement savings for other expenditure most people will give in to temptation and then wonder why their retirement is not as exciting as it should be.
So, have some savings in ISA accounts but make sure they are balanced with a good level of pensions savings.
The second issue is tax.
Pension tax-relief for basic rate taxpayers is useful and should not be ignored. For higher rate taxpayers it is much more exciting. Where else can you get £1,000 invested at a net cost of £600?
For that reason alone, pensions win over ISAs for higher rate taxpayers, particularly as they get closer to age 55 and stop worrying about having no access to the money.
If you are a basic rate taxpayer now but expect to be a higher rate taxpayer in future the answer is to use both accounts. Save in the ISA whilst you are a basic rate taxpayer (20%) and then transfer into a pension plan once you pay higher rate tax (40%) and can claim double the tax relief. Some guidance or advice may be necessary as the contribution rules can be complex.
Whichever account you choose to use, getting the underlying investment strategy right is crucial. I see many people with medium/long term savings in Cash ISA accounts. That may seem safe and secure but the long-term returns will be abysmal and the effect on your retirement lifestyle devastating.
If you are feeling a little lost and would like some guidance text or phone me, Richard, on 07770 575122 and let’s have a no cost chat.
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