SWT Wealth Management
Advertising feature: An ISA or a Pension? How should you save for your retirement? There are several things you need to consider before you decide, including what access you are going to need to your money in the future, what your tax status is and any potential inheritance tax liability that your estate my fall into. An ISA is a savings or investment vehicle that allows you to save and receive tax free income or growth. The 2022/231 tax year allowance for an ISA is £20,000 and unless rules change, you can fund this amount each tax year. ISAs can be cash or stocks and shares or a mixture of both, subject to the total annual allowance for contributions. With both types of ISAs, you can generally access your money at anytime without penalty, unless you have a fixed interest rate on your Cash ISA, which would then penalise you interest for early withdrawal. A Pension is a product designed for saving for retirement. Based on this you are not able to access it until you reach age 55 (increasing to 57 in 2028) apart from in very rare instances like poor health. One of the main benefits of investing into a pension is that the government also contributes in the form of generous tax relief. Should you pay into an ISA or a Pension? You would need to consider your own personal situation first. Take into consideration when you are likely to need access to the funds and what your induvial tax relief entitlement would be. Also, its important to point out that if your employer provides a pension scheme, they will also pay into it as well as yourself. This can considerably increase the value of your savings. Most employer schemes are funded through salary sacrifice, meaning not only do you receive full tax relieve at your relevant rate of income tax, but you also save national insurance on the contributions that you make.
For most of us it makes sense to pay into both a pension and an ISA. This way you benefit from the tax relief on your pension contributions but are also saving other monies that receive tax free growth and interest but can be accessed before retirement.
Tax benefits of pensions. When you fund a personal pension not through salary sacrifice you get a refund of income tax on contributions. You receive 25% added into your pension fund. Higher and additional rate taxpayers can claim a further 25% and 31% respectively through Self-Assessment. The maximum you can save into your pension is capped at £40,000 per annum or 100% of earnings, whichever is the lowest. When you do come to retirement and want to take money out of your pension, you can take the first 25% of the fund value as tax-free cash or tax-free income. The remainder of the fund is then liable to income tax on any withdrawals or income taken. Tax benefits of ISAs ISA’s do not receive any tax relief on contributions paid in but any growth or interest on the fund is not liable to income or capital gains tax. If you are a basic rate taxpayer you have a personal savings allowance of £1,000 per year and higher rate taxpayers get a £500 allowance. Any interest you receive from a cash ISA does not count towards your personal savings allowance, thus keeping that intact for any other interest-bearing non-ISA savings you may have. Inheritance tax (IHT) Pensions do not form part of your estate for IHT. If you die before age 75 and you have a personal or workplace money purchase pension, your pension is outside of your estate and can be passed on to your beneficiaries tax-free. If you die after the age of 75, your beneficiaries will have to pay tax at their marginal rate of income tax on any pension that you’ve left them.
ISAs are included in your estate for inheritance tax. Their values are added to all your non pension savings and investment assets, as well as any property you own. IHT is due when your estate exceeds £325,000 and is charged at a rate of 40%. It does not apply if assets are passed to a spouse or civil partner but instead becomes payable on the second death if assets then exceed £650,000. You also have a residence nil rate band of £175,000 for a single person and £350,000 for a married couple or civil partnership on your main residence, if it is left directly to children or grandchildren on second death.
The value of an investment with St James’s Place will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested.
The Level and basis of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is dependent on individual circumstance.
1Source: Update to Gov.UK ONS April 2022
SWT Wealth Management is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/products.
To find out ways we can help visit: www.swtwealth.co.uk or contact us on 029 2252 0168 or 07946183512