Picking the best option isn’t straightforward, however, particularly if Rachel Reeves chooses to cut the cash ISA limit to £4,000, as has been rumoured, or even scraps it altogether.
A pension is a savings scheme used to put money away for retirement. It offers tax relief at a basic rate of 20 per cent, which can be claimed from the government by your pension provider.
There are three main types of pensions in the UK: the state pension, workplace pensions and private pensions.
What is an ISA?
The two main types include cash ISAs – similar to a regular savings account as you receive interest on the money you save – and stocks and shares ISAs – where your money is invested, and returns are paid courtesy of any gains the investments make.
Currently, it allows savers to protect £20,000 of their money from tax each year. But this could be slashed to just £4,000 – a fifth of its current amount or scrapped altogether.
He added: “Pensions come with benefits that ISAs simply cannot match, specifically the additional boost from government tax relief, and if saving via your workplace, employer contributions too.
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“Furthermore, pensions provide you with much more headroom for saving, with an annual limit of £60,000 compared to £20,000 for ISAs.
If you were to invest a £10,000 lump sum as a basic-rate taxpayer, and you achieved a moderate rate of return on your investments, a pension would leave you nearly £7,000 better off after 20 years, and more than £11,000 after 30 years.
Former pensions minister Sir Steve Webb, a partner at investment company LCP, said workplace pensions offer great benefits.
Another attraction of pensions is the tax-free lump sum, Sir Steve added: “25 per cent of the pot can be taken out completely tax-free, so this is money that is not taxed on the way in or the way out.
While an ISA doesn’t offer the same tax relief boost as a pension, withdrawals are not taxed. Mr Futcher said: “Utilising tax-free products is crucial if you are to grow and protect your wealth over the long-term.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown (HL), agreed that both tools should be used together: “It’s certainly not an either/or decision though. Pensions and ISAs can be used together to build a very tax efficient retirement income.”
Sir Steve said: “ISAs obviously have the advantage of easier access, whereas a pension cannot be touched until you are 55, but if we are talking about retirement savings then this should not matter too much.
“By contrast, with an ISA you are often on your own in terms of making and reviewing investment choices.”
What about lifetime ISAs?
A LISA can be opened by anyone aged between 18 and 39. You can use one to save up to £4,000 per year – towards either a first home costing up to £450,000, or retirement – with the government adding a bonus of up to £1,000 a year on top.
“You need to be under age 40 when you first open the account, and the £4,000 payment limit counts toward your overall ISA allowance.
Withdrawals have a 25 per cent penalty unless you have less than 12 months to live and then you retain the bonus with no penalties.
If you die, any LISA money including interest and bonuses is passed on to your beneficiaries without penalty, though it will no longer be in an ISA “wrapper”, and will form part of the estate for inheritance tax (IHT) purposes.
How can I decide?
Whichever approach you decide to take, make sure to seek professional financial advice before choosing, Oliver Loughead, financial planner at RBC Brewin Dolphin, said.
Here are a few things to consider:
What are you saving for? When will you need the money? How much money will you need when you retire? Have you started saving into a pension? Can you benefit from employer contributions? How is your money invested? Have you maxed out your allowances?Hence then, the article about isa v pension which one should you prioritise was published today ( ) and is available on inews ( Middle East ) The editorial team at PressBee has edited and verified it, and it may have been modified, fully republished, or quoted. You can read and follow the updates of this news or article from its original source.
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