18 June 2015

Pensions versus ISAs - Where should you put your money?

The playing field is changing - for those over 55 it is now generally possible to withdraw some (or all) of your pension money (since April 2015). That will depend on the details of your pension and what the provider will offer ... although careful thought is needed to make sure you are not shooting yourself in the foot!

It has always been possible to withdraw from an ISA (or NISA), and at any age. So where should you put your savings?

Pensions and ISAs differ on the tax breaks available. Pensions enjoy tax relief on contributions made - that means the pension (and here we are talking "defined contribution") will have the value boosted by having the tax relief added. That also means that there is a higher value to grow.

On the other hand, while there is no tax relief when putting money into an ISA, you do get tax help when you take money out - there is no income tax or capital gains tax to worry about. Whereas with a pension, your income or withdrawals are taxed as though they were earned income - although you do generally get 25% of the pension fund value free of tax.

Standard Life (who, it must be said, have a pensions bias) have crunched the numbers though, and have concluded that in the majority of cases over 55's would be better off putting money into a pension. And that is reinforced if there's a chance you will want to pass the pension on untouched to your beneficiaries on death.

There are limits to what you can contribute though, so taking advice is a wise move to maximise the benefits.

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