Munro Partnership: Linda Gilbert

Munro Partnership

 

I am often asked the question – should I save to pension or ISA?

Like so many questions in financial planning there is no right and wrong answer. Much depends on what I like to call our ‘age and stage’. With young adults, like my daughters, I tend to favour ISA savings. If I jump a generation and consider my friends, my response may be a little different. Accelerate a generation ahead and I find the response can be different again.

Confused…yes, it’s easy to be. Perhaps the following will help – I have outlined the important differences when it comes to making savings, how those savings are invested, and finally drawing your money back out in due course.

The key benefit of saving to a pension is the tax relief on your contributions. If you are a tax payer, for every £100 that you pay into your pension, it ‘costs’ you £80 if you are a 20% tax payer, or £60 if you are a higher rate tax payer, as HMRC make up the difference through tax relief. ISAs do not enjoy this same privilege.

Saving to a pension fund can be easier as the contributions can be deducted directly from your salary, and your employer is able to make contributions on your behalf. If you are a business owner, the business can make contributions on your behalf with the ‘cost’ deducted as a business expense.

ISAs differ in that only you can make savings to your ISA and the savings you make are from ‘taxed income’. Therefore your employer is unable to contribute and there is no tax relief available unlike pensions.

When it comes to accumulating a pension or ISA fund, there are many similarities. Generally the most familiar type of ISA is the cash account offered by banks and building societies. This easy to access option is not available for pensions, which must be arranged through a pension provider or an employer.

However pension and ISA savings tend to be viewed as long term savings, therefore investing is generally more appropriate. The range of investment options is very similar for each – most tend to save their contributions into ‘collective investment funds’ according to the choice available. In addition, you could opt to purchase individual shares and create a share portfolio using your ISA or pension funds. Business owners might be interested to note that under pension rules, your pension fund can be used to purchase commercial property, such as business premises and effectively release funds to expand the business.

When it comes to drawing the money back out ISAs win hands down, as they are less restrictive. With a pension plan, under current legislation you are unable to draw any benefits until you are at least 55 years old; with an ISA you can draw the funds out at any time – complete flexibility. ISAs are also more favourable because there is no tax to pay on the withdrawals, at any time –essentially tax free withdrawals. In comparison only 25% of your pension fund is available as a tax free lump sum, and the balance which is usually drawn in stages to provide an ‘income’, is subject to income tax at your highest marginal rate.

Arguably ISAs are more user-friendly. It is easy to open a cash ISA for example, as many perceive pensions to be more complex, although that needn’t be the case. Both are simply a means of saving for the future – which one you use will depend on what you are aiming to achieve and benefit from. In conclusion, my suggestion would be to have a little bit of both! n

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