A common question amongst investors is ‘should I invest in a pension or an ISA?’ Here we run through the main features of each product. Taxation Both are efficient tax vehicles with pensions offering further generous tax breaks on personal contributions, which effectively means that for every £100 that you pay in, HM Revenue and Customs (HMRC) will add £25. Higher and additional rate taxpayers can also claim further amounts through a tax return. Whilst ISAs do not offer the same tax incentive, the investment, as with pensions, is protected from tax, so you don’t pay tax on any growth that is made. Investments There are a range of funds available to invest in for both, including investing in cash. A suitable, diversified portfolio can be created for all investors to match their aims and objectives. The range of available ISAs has increased over recent times with the five main types being Cash, Help to Buy, Innovative Finance, Stocks and Shares and Lifetime. Each have different risk characteristics with the Lifetime ISA offering a bonus payment from the Government. Access This is the main drawback in pension investing, as you are currently unable to access your fund until you reach age 55. There are a range of options available at age 55 including taking 25% tax free, flexible withdrawals and purchasing an annuity. It should be noted that the remaining 75% of a pension fund is taxable. This age limit is expected to increase in the future. An ISA can usually be accessed whenever funds are required and tax free, although there may be penalties for early access with certain types of ISA. Inheritance On death the proceeds of a pension do not usually form part of the deceased’s estate. If death occurs prior to age 75, the death benefits from a defined contribution pension are paid out tax free. After age 75, the death benefits are taxable at the beneficiaries’ marginal rate. Modern pension contracts also allow the pension to be passed on to beneficiaries and then potentially to their beneficiaries whilst remaining in the pension tax wrapper. ISAs do form part of your estate on death so it is possible that inheritance tax is payable at 40% on estates valued over £325,000. The exception to this is where the ISA is passed onto a spouse or civil partner. There is no right or wrong answer as to which product is best, and for many people it is sensible to have a combination of both as part of a diversified portfolio. Should you wish to discuss the features in further detail please do not hesitate to contact us. Richard, pictured in the centre above, is one of our team of paraplanners here at Lovewell Blake Financial Planning Limited.
