ASK THE EXPERTS
CAZENOVE CAPITAL’S PETER HILLER JOINS US TO ANSWER A QUESTION ABOUT TAX-EFFICIENT INVESTING
IS IT BETTER TO PUT MY SPARE CASH INTO AN ISA OR A PENSION?
ANSWER: The basic difference between Isas and pensions is that with Isas you get to access your money whenever you want it, and no tax is payable. With pensions you can only access your money after age 55 (for personal pensions – company schemes may be different) and you’re likely to be taxed on most of the money you draw out. Surely that means Isas win hands down? Not quite. The carrot applying uniquely to pensions is that when you save into your pension you get tax relief – effectively a top-up at the government’s expense. This means contributing into a pension is financially attractive, especially for higher earners, because they get tax relief at their top marginal tax rate. Say you pay income tax at 40%. If you put £600 into your pension, you can claim a total £400 extra in the form of tax relief. That gives £1,000 even before any potential investment returns. If you put your £600 into an Isa – that’s it. Nothing gets added. There is no silver bullet answer to this question. The key variables you need to consider are your age, whether or not you might need the money at short notice and the rate of tax you pay. Everyone’s situation differs. Most financial planners would recommend holding your investments in a mix of both Isas and pensions. That should give you some flexibility as you approach or move into retirement, while at the same time enabling you to benefit from the different tax breaks attaching to both Isas and pensions. For better-off investors it’s worth noting that recent changes to the pension rules have provided an opportunity to reduce a potential inheritance tax liability. It’s possible to bequeath unspent pension money to a child, for example, without it attracting 40% death duties. This means that in certain circumstances it might be advantageous for some retirees to spend down their Isa savings before they deplete their pensions. Those people who are likely to be liable to inheritance tax and who are also in the position of owning both pensions and Isas are likely to benefit from professional advice.