As life expectancy in the UK continues to increase, financial planning is becoming even more important. When thinking how best to save for your retirement, you might consider a pension to be the most effective way to ensure you have enough to live on comfortably when you are older. However, a pension is not the only way to achieve your retirement goals and Individual Savings Accounts (ISAs) may provide a particularly useful solution.
Pensions and ISAs are taxed differently. Your pension payments will qualify for tax rebates up front at your highest rate of income tax (subject to certain limits) after which, once you have taken out your tax-free lump sum, the income you receive will be taxable. ISA contributions are made out of taxed income, however, although any withdrawals are tax-free. Also, it is important to remember your pension income counts towards your personal tax-free allowance while your ISA withdrawals do not.
As such, the choice between pensions or ISAs could seem to boil down to the relatively straightforward question of rates, although the reality can be less clear-cut. The tax rebates on pension contributions are important because they add value up front yet an ISA offers much more flexibility. Ultimately, however, it is not necessarily a question of whether an ISA or pension is better but of how to structure a portfolio using both.
As Platinum clients know, we consider a diversified approach essential and encourage everyone to consider all options to maximise their returns. If you want to discuss any area of your savings further then please get in touch.