Pension or ISA in retirement?

Pension or ISA in retirement?

It seems with all the changes in legislation over the past couple of years, the full freedoms to pension savers and the launch of the Lifetime ISA (LISA) has opened up the need to consider how funding ISAs fits in with investors longer term objectives.

ISAs are traditionally used for savings in a tax efficient way, free of income tax and capital gains with no tax to pay when cashed in unlike pensions which receive upfront tax relief and up to 25% taken as tax-free cash.

The “LISA” which launched in April is a long term saving product, locking up cash until the saver buys their first home or takes the pot as a pension and contributions being boosted by the government. Eligible for over 18 and under 40 and contributions receive a government bonus on any sum up to £4000 a year.

If you are under 40 maybe its worth opening a LISA, you only need £1 to secure the option in investing and once you’ve passed your 40th birthday you’ll loose the chance to open an account.

According to a MetLife study 34% of savers are looking to the ISAs for the majority of their guaranteed income in retirement. Even over 55’s (more than a quarter 28%) are considering using ISAs. Around 21% of pension savers are making more use of ISAs following pension freedoms.

MetLife UK wealth management director, Simon Massey, said: “The increase in annual ISA subscription limits from £15,240 to £20,000 in April this year highlights how much can be saved tax-free, and makes them a real option for retirement planning.”

The MetLife research shows that financial advisors are welcoming the flexibility that pension freedoms, and the incoming ISA subscription limits are bringing. However, saver should be careful before dismissing pensions as tax benefits are still the clear winner over ISAs especially for the higher-rate taxpayer and a pension can only be drawn on after the age of 55 unlike an ISA where funds can be taken before retirement.

Ultimately a hybrid strategy of pension and ISA funding is probably the best idea giving the investor more flexibility moving forward for retirement.

Professional advice is essential

When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.


The Telegraph
The  Actuary