Once you have decided to make an investment, you need to consider your objectives and decide where to put your money. There are many options available, but one consideration is whether an ISA or a pension will best suit your financial plans.
For most of my clients, both ISA savings and pensions are suitable but understanding each option helps to agree your investment approach.
Choosing an ISA investment
Some of the key features of ISAs are:
• Annual limit on ISA contributions – £20,000 which can be invested in cash or stocks and shares.
• Any withdrawals are tax free
• ISAs grow free of Income Tax and Capital Gains Tax
• Withdrawals can be made at any age and there are no limits
• On death, the value of existing ISAs can be passed to a spouse or civil partner only.
The Lifetime ISA is available to people aged under 40 and it allows up to £4,000 each year to be saved, from the total £20,000 annual ISA allowance, and the Government will add a 25% bonus if the ISA fund is used for buying a property or at age 60. The Help to Buy ISA is also available until 30 November 2019 for first time property buyers.
Junior ISAs are also available for children under the age of 18 and the annual allowance is £4,368 for tax year 2019/20.
Choosing a pension
Pensions are a popular alternative for clients to consider. Main features include:
• An annual limit on pension contributions of £40,000. This annual limit can be reduced, for example to £4,000 if you are already taking income from a pension fund through drawdown; or if your income is over £110,000.
• Tax relief on contributions –a personal pension contribution of £100 will only cost you £80. Your pension contribution will receive basic rate tax relief, at 20%, which will be automatically added by the pension provider.
• If you are a higher or additional rate tax payer, you can claim additional tax relief, usually through your tax return.
• If you do not make maximum contributions in any tax year, you can carry forward the unused balance for up to three years.
• Withdrawals can be taken from age 55 (although this age is set to increase to 57 in 2028).
• 25% of your pension fund can be taken tax free, with any further withdrawals subject to Income Tax.
• Pension funds generally fall outside of your estate and therefore are not subject to Inheritance Tax.
• On your death funds can be passed to your nominated beneficiaries. If you die before age 75, the fund can be passed on tax free, but if you die after age 75, your beneficiaries will pay Income Tax on the funds they withdraw.
If you are working, your employer will offer access to a workplace pension and make contributions on your behalf. You will also make your own contributions and these will be taken from your gross earnings, so you will not pay any Income Tax on these contributions.
Weighing up the options
Whether an ISA or a pension is best for your financial needs will depend on your personal circumstances. But they can be used together to help you towards achieving your financial goals for income or capital objectives.
ISAs and pensions can be invested in the stockmarket and your adviser can assess the investment options so that your money is only invested with the level of risk that you are comfortable with and in line with your expectations for potential returns.
The investment horizon for an ISA or pension is generally long term and therefore likely to be for at least five years or more. Ask your Origen adviser to guide you through the options available, so that you best understand any tax implications or legislative changes that may affect you,
We encourage our clients to use our ongoing service where we review what you already have in place, manage any changes in your circumstances and check that your investments and financial planning continue to match your financial objectives and aspirations.
Our Guide to Tax Year Planning gives you some useful financial planning tips, including on ISAs and pensions, so that you can be prepared for your next meeting with your adviser.
CA4375 Exp: 05/2020