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Pensions vs ISAs: what is the right investment?

It depends when you need the money, as well as how you are planning to spend it. The best strategy could be a combination of different products.

When you are saving for retirement, you want to make sure that as much of the money as possible goes into your pot, rather than to HM Revenue and Customs. But which is the best way to save: a pension or an Isa?

Pension pros

One of the best things about pensions is the tax break you get when you pay the money in: HMRC gives you back all of the tax you have already paid on that money, and this can improve the amount that you are able to save.

Another major positive is that you can use pensions to pass money down to your family in a tax-efficient way. Pensions sit outside your estate for tax purposes.

And finally, when you take money out of your pension, the first 25pc is tax-free.

Isa pros

With an Isa, you don’t get the tax you’ve paid back when you put the money in. But your money can grow in an Isa without paying capital gains or income tax. Plus, you are not restricted about when you want to use the money (except with a Lifetime Isa – you can only withdraw it at 60 or to buy a first house).

Caps and limitations

Both Isas and pensions have limitations, such as annual limits. You can pay £40,000 a year into a pension (this could rise with inflation) and the current annual limit with an Isa is £20,000. Pensions also have total limits, including a lifetime allowance of £1.05m. Breach this and you will get a hefty tax bill.

Spending your money

Money from your pension and money from your Isa are treated differently when you withdraw them. With a pension, after the tax-free 25pc, you’ll pay income tax on what you withdraw. Isa money is not taxed, because you’ve already paid the tax on it.

In many cases a mixture of both pensions and Isas and a carefully planned withdrawal strategy will be the best way to save and spend in the long term.

Using a financial adviser, who can consider every facet of your particular situation, could help you decide which is the best product for you – or how best to combine them.

There’s also a useful calculator on the Quilter website (visit quilter.com) that can help you to see how the different options could work together for you.

The value of pensions and investments – as well as the income they produce – can fall as well as rise. You may get back less than you invested. Tax treatment varies according to individual circumstances and is subject to change.

 

By Rosemary Bigmore

To find out more about how Quilter can help you achieve your financial goals, call 0800 599 9249 or speak to your financial adviser, or go to quilter.com

This article first appeared in the Telegraph in partnership with Quilter Plc. Investments may fall as well as rise in value and you may not get back what you put in.

Quilter plc products and services are provided through our two divisions: ‘Advice and Wealth Management’ and ‘Wealth Platforms’. For a list of our companies and their regulatory authorisation details visit our website at quilter.com. Our business is registered in England and Wales. The content of this promotion has been approved by Old Mutual Wealth Limited, part of Quilter plc. Old Mutual Wealth Limited is registered in England & Wales under number 1680071. Authorised and regulated by the Financial Conduct Authority. Financial Services register number 165359. VAT number 386 1301 59.

If any article in this market update has an effect on your finances and you would like professional advice, then please get in touch.

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