Special Report ISAs vs Pensions: The Platform View
- On April 5, 2023
- By GrowthInvest Marketing
We asked Bestinvest managing director Jason Hollands for his take on the ISAs versus Pensions debate. He replied with something of a masterpiece!
ISAs versus pensions is a subject I’m regularly asked about. They’re the two key pillars of long-term tax efficient saving in the UK and both have their respective strengths.
In terms of tax, pensions have the edge – especially for the growing number of people subject to the higher rates of income tax (a record 6.1 million this tax year, forecast to rise to 8.3 million by 2028) as they provide income tax relief at the investor’s marginal rate. That means a 40% taxpayer gets a £10,000 investment at an effective cost of £6k, providing a massive head start to returns.
Pensions are also very tax efficient from an estate planning perspective as they do not count as part of your estate from an inheritance tax (IHT) perspective. If you die before 75 your beneficiaries can inherit your residual pension tax-free. After 75, they will pay income tax at their marginal rate from any assets drawn from an inherited pension.
But there are strings. You can only access your pension pots from age 55 (rising to 57 in 2028) and the amount you can take from a pension as a tax-free lump sum is restricted to 25% of the pot (subject to a maximum amount of £268k from the next year). Once tax-free cash has been taken, withdrawals are subject to income tax depending on your circumstances and tax band.
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