Pensions or ISAs?

With all the changes that have been announced to both pensions and ISAs in the Budget, which might be considered the best choice for savers?

Both tax wrappers are highly tax efficient but of course, there remain advantages and disadvantages with both types of investment:

Advantages of ISA 

You can access ISA savings and investments at any time – you do not have to wait until age 55 like you do with a pension plan.

It is also worth noting that pension plan benefit ages are increasing to age 57 from 2028.

You are now able switch from stocks and shares ISAs back to cash ISAs in order to reduce the amount of investment risk that you are taking – in the past you could only switch from a cash ISA to a stocks and shares ISA.

The amount that you can contribute each year has now increased to £15,000 which means for many people a substantial amount can be invested in tax privileged savings and investments

There is no tax to pay on withdrawals from your ISA and therefore it can generate tax free income

Disadvantages of ISA

There is no income tax relief on contributions that you pay into your ISA.

The maximum total contribution limit to an ISA is less than that for a for a pension plan.

Death benefits from an ISA normally form part of your estate for inheritance tax purposes, unless your ISA is invested in higher risk AIM shares which are inheritance tax free after you have held them for at least two years.

Advantages of Pensions

When you pay into a pension plan you receive income tax relief at your highest marginal rate on contributions paid.

The new rules will mean greater accessibility; from April 2015 you will able to access your entire pension as a lump sum, although any amount over 25% will be taxed as income.

You are able to contribute a maximum of £40,000 gross per annum into your pension plan, subject to sufficient earnings.

Death benefits from your pension plan are normally outside of your estate for Inheritance Tax purposes.

Disadvantages of Pensions

You are not able to access the monies in your pension plan  until age 55 (this is increasing to age 57 from 2028).

The income, or capital sum in excess of 25% of the plan value, from your pension plan  is taxable which means you could face a very large income tax bill if you needed to access your entire pension fund.

In terms of planning for the future a combination of both ISA and pension plan can often provide the best choice.

Photo credit