There are generous tax benefits to saving into a pension pot, but it’s not the only option – ISAs are also a great financial tool for your nest egg, providing more flexibility and useful tax breaks.
But ISAs are also valuable for retirement savings, providing more flexibility as all withdrawals are tax-free.
There’s also the Lifetime ISA, launched in 2017 which can be used for a retirement pot or to save for a first home.
Most people won’t receive their state pension until they turn 67, while private pensions can only be accessed from the age of 55 (rising to 57). However, an ISA can top up your income when you stop working and before you start receiving your pension.
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Read More“With retirement lasting 30 or more years for many people, investing in stocks and shares ISAs can help protect against inflation, rather than opting for cash. Because the tax-free allowances on dividends and capital gains taxes have been slashed, the tax-free growth in an ISA is more valuable than ever.”
The tax-free allowance is not the only benefit either. ISAs are exempt from income tax, capital gains tax and dividend tax, and the money taken from an ISA is tax-free, too.
There’s also the elusive “ISA millionaire” status – savers who have maxed out their annual allowance every year and now have at least £1million in their ISA accounts.
The average age of an ISA millionaire with an account at Hargreaves Lansdown is 72 and it says the number of these millionaires has risen 14 per cent in the past six months and is more than double the number seen two years ago.
Find out more about ISAs
The number of cash ISAs on offer has risen to the highest figure on record – at the same time the Treasury mulls the possibility of axeing them at the next Budget. Read more here. Many savers with cash ISAs are losing money in real terms as inflation is greater than the interest they are getting, analysis shows. Read more here. There has been an increase in savers pouring their money into cash ISAs amidst concerns they could be scrapped. Read more here. Whether you should get a cash ISA – and the alternatives that could be better. Read more here.Even with a smaller amount, putting away £300 per month from the age of 25 with a 5 per cent growth rate could see them reaching the millionaire status by the age of 70.
“They don’t necessarily take enormous risks: many consistently invest as much as possible of their annual allowance, in a diverse and balanced portfolio, every year, for decades.”
Lifetime ISAs can benefit people in retirement
They allow savers to put away up to £4,000 per tax year and there is a 25 per cent government bonus (which would add £1,000 to the pot if the full allowance was used). You can pay into a LISA until you turn 50 and then withdraw the money from the age of 60.
Brian Byrnes, head of personal finance at Moneybox, said: “A Lifetime ISA can be particularly beneficial for retirement if you have already maximised your employer pension contributions, are self-employed, or fall into the nil-rate or basic-rate tax bracket.
“If using a Lifetime ISA for retirement, it’s worth considering a stocks and shares Lifetime ISA due to the long investment horizon and potential for higher returns.”
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