That means basic rate taxpayers receive an effective 25% top up from the government. So if you put £1,000 into your pension, the HMRC bonus means your total increases to £1,250 – and further relief is available for additional and higher rate taxpayers.
With essentially ‘free’ money up for grabs, why would anyone consider anything else for retirement planning, such as an individual savings account (ISA). Perhaps it’s better not to think of it as ‘ISAs versus pensions’ but instead why ISAs can also help.
- You can access ISAs at any time
The earliest you can typically access a pension is age 55, when 25% of your pension can be taken tax-free. Stocks & shares ISAs, by contrast, can be a long-term home for your savings (at least five years) – while offering you the flexibility of accessing it at any time and completely tax free. This could make them ideal for when you want to save for particularly large future purchases which you might want to make before retirement.
- You can hold lots of different ISAs at the same time
With stocks & shares ISAs, Junior ISAs, Lifetime ISAs, cash ISAs and more it’s no wonder people are easily confused when it comes to the ISA rules! Thankfully it’s a lot simpler than it first appears – your annual £20,000 ISA allowance is across all the ISAs you might own. Imagine you have a cash ISA for emergency savings and a stocks & shares ISA for long-term saving, such as to boost your retirement income, you could split your 2019/2020 contribution £5,000 into the emergency pot and £15,000 into your retirement fund.
- You can still use your stocks & shares ISA in retirement
One of the biggest worries people have about money in retirement is how to have a steady income now that they’re no longer working. A stocks & shares ISA allows you to invest in the wide range of funds designed exactly for this purpose. Many funds have an ‘income’ objective, holding different types of investments that will pay out cash on a regular basis, often from a wide array of sources, such as company share dividends, the coupons on bonds or property rental income. You can pick and choose the fund that may be right for you, with many specifically targeting different levels of risk like our ‘We do it for you’ range.
Both pensions and ISAs are great ways to save and both benefit from tax breaks in different ways. Pensions are designed to safely lock away your savings to provide an income when you retire. ISAs are great for saving towards long-term purchases like a new home, a trip of a lifetime or just for rainy day money – but, used in combination, we believe they can make a powerful contribution towards a more secure retirement.
Remember, the value of your investment and any income taken from it is not guaranteed and can go down as well as up, you may not get back the amount you originally invested.