Tax-efficient Options

Tax-efficient Options

Posted on June 16, 2015 at 8pm

As life expectancy in the UK continues to rise, financial planning is becoming increasingly important.  If you are thinking of saving for retirement, then you might consider a pension to be the best way to ensure you have enough to live on when you are older.

However, this is not the only way to achieve your retirement goals, and Individual Savings Accounts (ISAs) can form a useful component of your long-term financial plans.  Pensions and ISAs are taxed differently.  Your pension payments will qualify for tax rebates up-front at your highest rate of income tax (subject to certain limits) after which, once you have taken out your tax-free lump sum, the income you receive will be taxable.  In comparison, ISA contributions are made out of taxed income, although any withdrawals are tax-free.  Nevertheless, it is important to remember your pension income counts towards your personal tax-free allowance whereas your ISA withdrawals do not.  As such, the choice between pensions or ISAs could seem to boil down to the relatively straightforward question of rates.

If someone receives higher-rate tax relief on their pension contributions, but only pays basic rate tax on their income at retirement, pensions appear to make the most sense.  Meanwhile, for those whose income may be greater in retirement, the opposite appears true.  The reality, however, can be less clear-cut.

The tax rebates on pension contributions are important as they add value up-front, and investors welcome the effect of compounding on their portfolios, which helps to influence the size of pension ‘pot’ that can be accumulated.  Equally, if you eventually decide to buy a pension annuity – and the pension rules have changed to allow greater flexibility for savers – those payments are guaranteed for life, whereas withdrawing the equivalent sum from an ISA can be less predictable.

Pensions offer additional attractions: employers can pay into a company or stakeholder pension scheme, and the annual contribution limits for pensions are much higher than for ISAs.  Nevertheless, an ISA offers flexibility – you usually have to wait until you are 55 to make withdrawals from a pension, whereas an ISA can be accessed at any time.

Ultimately, it is not necessarily a question of whether an ISA or pension is better but of how to plan your finances using both.  Your financial adviser can offer further help here.

For further information please click here to request a call back from one of our advisers.

 

Prosser Knowles Associates Limited is Authorised & Regulated by the Financial Conduct Authority. The value of your investment can go down as well as up and you may not get back the full amount invested. The Financial Conduct Authority does not regulate Taxation and Trusts. The information in this document does not constitute advice or a recommendation for any product and you should not make any decisions on the basis of it.  Your home may be repossessed if you do not keep up repayments on your mortgage.

Stay in touch

If you would like to keep up to date with current industry trends or receive details of our product developments, seminars, events and newsletters, just fill in your details below.

News Feed

How your clients can use Business Property Relief to cut their tax bill

If your clients are business owners, Business Property Relief can be a valuable Inheritance Tax relief. Assets...

5 ways that the UK has changed during lockdown

The lockdown due to the coronavirus pandemic has caused our lives to change in many ways, from being unable to...

5 scary financial mistakes to avoid this Halloween

From carving pumpkins to trick-or-treating, Halloween can be a fun experience for all members of the family an...

3 types of business protection all business owners should consider

Your business is something you take great pride in. It’s not just your livelihood, it may also reflect your ac...

Market & Portfolio Update – Quarter to 30/09/2020

MARKET AND PORTFOLIO UPDATE Written by Square Mile Investment Services. This is likely to have been the de...

Managed Portfolio Service Monthly Newsletter

September 2020 Update Provided by Quilter Cheviot August’s feel-good factor, epitomised for many by an escape...

Revealed: The value of financial advice

Financial advice can add real value to your life. Our guide looks at the ways financial advice can help you...

How the Pensions Lifetime Allowance works and what it means for your clients

Any client who makes substantial contributions to their pension, or has held their pension for many years, cou...

10 books with the best plot twists

The events of 2020 so far have been one unexpected turn after the other, as if we’ve collectively stumbled int...

What to do with your Child Trust Fund

Back in 2005, the Labour government were keen to tackle the issue of child poverty by giving every child in th...

10 ways you can spring clean your finances

Each year, the Great British Spring Clean encourages people to organise group clean-ups of local public spaces...

Market Update – September 2020

Written by Square Mile Investment Services. There has been considerable attention recently on the strong ra...

Managed Portfolio Service Monthly Newsletter

August 2020 Update Provided by Quilter Cheviot Despite global equities gaining 5% in July, it was another cha...

3 reasons clients should take financial advice on divorce

Divorce proceedings are challenging for anyone, but the financial implications can be particularly difficult t...

7 tips to increase your physical activity easily

We all know that regular exercise is essential for both physical and mental health. However, since gyms closed...