What’s best – ISA or pension?
It is a common dilemma: which is better – an ISA or a pension? In truth, there is a place for both and it is easy to argue the case that we should all have both. But how you choose to invest your money is ultimately your decision, so here are some facts about ISAs and pensions to help make your investment choices easier.
Pensions have some valuable benefits, which makes investing in them even more attractive:
They provide tax relief at your marginal rate on contributions from you as an employee
Employers now have to contribute: the new rate for contributions between April 2018 and April 2019 will be a minimum of 2% for employers.
They lock your money away until at least age 55, which means you can’t have a mad moment and decide to withdraw it all to buy a speedboat.
They are free of inheritance tax when you die.
Depending on when you die, they may be tax free when your beneficiaries take them as income or a lump sum.
They provide a tax-free lump sum, usually a maximum of 25%.
If invested, your pension could make good growth, which is accumulated tax free.
Pensions also have some drawbacks:
Your money is locked away until at least age 55 and you cannot access it in an emergency or when you may really need it.
Although you receive a tax-free lump sum, the rest of the pension is taxable at your marginal rate.
They can be complex to understand and difficult to manage.
If your pension is invested, then it is at the mercy of the stock market.
The Lifetime Allowance and Annual Allowance have reduced considerably over the years and may do so again in the future.
In comparison, ISAs also have valuable benefits:
- You can save up to £20,000 per year (current tax year rate 2018/2019).
- All growth within the ISA is tax free.
- All withdrawals from the ISA will be tax free.
- They are generally easily accessible.
- There are different types for different purposes (LISA/JISA/ISA/Help to Buy ISA …).
- General ISAs can be accessed at any time.
- You can now pass your ISA and its tax-efficient status to your spouse on your death.
- There is no lifetime limit.
- Bonuses are available on some types of ISA.
ISAs also have their drawbacks:
- You can only save a maximum of £20,000 per year – half of what you can currently save per year into a pension (provided you have the relevant net earnings).
- They are easily accessible and therefore not protected from those ‘mad moments’ mentioned above.
- There are so many different types it can be confusing to decide which is best for you.
- Passing your ISA to your spouse on your death can be complicated.
These lists are by no means exhaustive and we are sure you are aware of many more advantages and disadvantages. However, this is enough to be getting on with!
It will depend on your circumstances which investment vehicle is best for you and so it is not possible to recommend one or the other here. However, looking at the good and bad points of each should help you to make that decision and, as always, we are here to support and guide you.
We would advise you not to wait until the end of this tax year (the new one that we have now entered 2018/19) to add to your existing pension or ISA or start a new one. If you have the money available, get it in now and don’t lose a whole year of tax benefits, as many people do!
Please contact the advice team to discuss this or our technical team if you want to add fresh money in to your existing fund now.
Inheritance Tax reaches new highs
HMRC collected £5.3 billion from IHT alone in the last year. Let’s just take a second to think about that. This has been reported as a 13% increase on IHT paid in the 2016/2017 tax year – that’s quite an increase.
There are many reasons why experts think there was such an increase, including the fact that there was quite a property growth spurt over the past few years, as well as the Nil Rate Band being frozen at £325,000.
And this increase includes the introduction of the Residential Nil Rate Band! Imagine if we had not had that? With that allowance increasing by only £25,000 in April this year, it is unlikely to make a huge difference to these figures.
However, all is not lost, read on to the next article to find out how you may be able to keep hold of some of this cash.
5 ways to help you pay less Inheritance Tax
Nobody likes to think that their hard-earned cash is going straight to the taxman when they die, so here are five ways that could help keep your cash in the family. Remember, IHT is 40% – nearly half of the asset’s worth!
1. Make a Will …
- Often neglected but very important. Without a Will your assets will pass according to the Rules of Intestacy, meaning you will have no control over who they go to, and a larger proportion may end up in the taxman’s pocket.
- If you would like to find out what the Rules of Intestacy are, follow this link: https://www.gov.uk/inherits-someone-dies-without-will
2. Give it away …
- There are many ways to gift money during your lifetime that mean the assets are outside of your estate on death.
- You can use annual exemptions, which means there is no waiting period for the asset to leave your estate, it is gone immediately.
- To find out what the gifting allowances are, follow this link: https://www.gov.uk/inheritance-tax/gifts
3. Give even more away …
- If you wish, you could give away more than your annual exemptions allow. Providing you then live for a further seven years or more, the full amount of the gift will be outside of your estate for IHT.
- Make sure you keep a detailed record of your gifts so that HMRC cannot question this after your death.
- Follow this link again for more details: https://www.gov.uk/inheritance-tax/gifts.
4. Use your pension allowances …
- Pensions are free of IHT so make sure you use your annual pension allowance of £40,000 if you can.
- Remember you must have net earnings of at least £40,000, otherwise you can only put in the maximum amount of your net earnings … but that is better than putting in nothing.
5. Set up Trusts …
- Trusts can be very effective in reducing the size of your estate. They work similarly to gifts in that you must live for seven years after you put money into a trust, but they provide much more protection and control over the assets during your lifetime.
- If you want to make a gift but are worried about how the recipient may use the money, or you don’t want them to have access to it just yet, then Trusts are definitely worth considering.
- Obviously there are many more rules and many different types of trust, so come and see us and we can set up the right one for you.
Lifetime Allowance decrease is 2100% better for government
Why do the government keep reducing the pension Lifetime Allowance? They repeatedly ask us to save more for retirement but then keep capping how much can be put into pensions! Sounds bizarre … but is it?
Well, not for them! The reduction in the Lifetime Allowance has led to a 2100% increase in the government’s tax income compared with the same income in the 2006/2007 tax year. As the allowance drops further, more people are being hit by the severe tax charges for exceeding the allowance.
Many of us may feel the £1 million allowance is not something we may ever reach or exceed. However, over many years, and taking into consideration tax-free growth and the reinvestment of interest, this situation is becoming more and more of a reality for many of our clients. This means that it is sneaking up on people, so they may not realise they are close to or over the allowance limit until it is too late.
That is why it is important to plan, to make use of other allowances and to apply for the available protections if you can (details of which can be found here: https://www.gov.uk/guidance/pension-schemes-protect-your-lifetime-allowance).
A retirement plan that incorporates all of your assets and takes into account all of your individual circumstances is something we help people achieve every day, so if you need help then let us know and avoid paying over the odds on your pension income.
Pension schemes asking for their money back …
Defined Benefit pension schemes have been given a deadline of October 2018 to check their records with HMRC to make sure the pension payments they have set up are correct.
In 2016 it was highlighted that people may have been severely underpaid or overpaid on their set annual pension payments, in some cases up to £50,000; and now some of the pension schemes want their money back.
These issues come from errors in calculations in relation to the contracted-out element of the pension (usually called GMP) that would have been made 30–40 years ago when systems were usually manual.
Many schemes have taken the stance that the client cannot be blamed for an error by the scheme itself, and so will not reclaim the money from members who have already received payments. However, if these members do not pay the money back, then it will be those scheme members who are not yet receiving payment who may end up paying for these errors in the long run.
This announcement comes as Defined Benefit pension schemes have been under the microscope for their lack of transparency, underfunded status and complex nature, and this certainly will not do anything to alleviate members’ fears that they will receive less pension than expected when they retire.
Notes on Brexit
With just 12 months to go before exit day we are now in the uncomfortable position of remembering Mrs May’s words from last year’s leg of the negotiations: “Nothing is agreed until everything is agreed”. The new draft agreement published this week comes with a similar ominous addendum and so, despite shining a light on some of the withdrawal darkness, businesses in the UK are struggling to take comfort from the provisions made for the 21-month transitional period. (By the way, if you’re wondering why the transition period is such an odd length of time, it’s because the quotas for industries such as fishing and agriculture are agreed per calendar year and this avoids setting any partial quotas for 2020.)
The transitional arrangements cover application of EU laws, free movement of people, the customs union, and defence and security cooperation. Unfortunately for us and other firms in the Financial Services industry, negotiations around our sector have been relegated to a separate annexe, which has not yet been incorporated in the negotiations or even into the guidelines for this round of talks.
And this is before any of it is even put to a vote! Here in the UK, the government has committed to holding a vote on the resolution before it goes to the European Parliament (EP). At the EP it needs a qualified majority vote to be concluded – i.e. 20 of the other 27 member states, representing at least 65% of the EU’s population; that is a lot of people who need to be satisfied that the arrangements are in their best interests.
Book of the month
Everyone in the UK seems to love Richard Branson and after reading Finding my Virginity, his second biography, we love him too.
His first biography painted a picture of a man who would bend the rules to get things done, a man who put his personal excitement and dreams above his family, and a man who would run over anyone to get his way. In this second book, we see a man who has changed and a man who has, through reflection and maturity, realised that some of what he believed and did in the past was wrong.
The book covers the period 1997–2017 and not only charts his life but also reflects on it. It is in these reflections that we really get to know the man. If you read February’s book of the month, Fire and Fury, about the Trump White House, then you will love chapter 10 about Branson’s dealings with Trump. If ever there was third-party evidence to support the comments in Fire and Fury, this is it.
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Source: Moneyfacts Magazine April 2018 Edition