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CAZEN­OVE CAP­I­TAL’S PETER HILLER JOINS US TO AN­SWER A QUES­TION ABOUT TAX-EF­FI­CIENT IN­VEST­ING

Scottish Field - - EXAMINING ECONOMIC OUTPUT - PETER HIL­LIER, PORT­FO­LIO DI­REC­TOR. CAZEN­OVE CAP­I­TAL, TEL: 0131 270 3004, PETER.HIL­[email protected] CAZEN­OVE­CAP­I­TAL.COM, WWW.CAZEN­OVE­CAP­I­TAL.COM

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.

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