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As part of our annual reviews with clients we review their pensions and their ISAs, but if for any reason you have not taken advantage of these tax efficient investments for the tax year 2014/2015 it is well worth remembering the improvements that have been made recently.
Annual allowance increased to £15,000. ISAs can now be held entirely in cash or investment stocks, with complete flexibility to switch between the two.
The tax charge for keeping ISAs in cash or short term bonds has been removed. ISAs can be passed to a spouse on death, allowing the survivor to inherit the entire account and continue benefiting from the tax wrapper.
Alternative Investment Market (AIM) shares can be held within ISAs and many AIM shares are also exempt from inheritance tax in addition to being sheltered from income and capital gains tax.
Pensions have long been recognised for the generous up-front tax relief available on contributions, but declined by some who regard the funds as being locked away. Not any more.
Rules coming into force on 6th April 2015 allow people aged 55 or over to access their pensions in any way that they want. That includes taking the whole lot as a lump sum (although 75% of that sum will be charged to income tax) or passing the money on to descendants with no inheritance tax.
So, to ISA or to Pension?
Given that you can get tax relief on contributions (not available on ISAs) up to £40,000 gross into a pension (subject to your earnings) and then get the money back whenever you wish once you are over 55, does that not look more attractive? The tax treatment of assets within the funds is the same, and pensions - particularly Self Invested Pension Plans, (SIPPs) – have a wider range of investments.
The best solution, if you have the funds available, is to maximise both allowances. If not, then if you might need the money before you are 55, ISAs would be better. If you are over 55 and do not have any earned income on which to claim pension relief, ISAs are the only option.
If you are over 55 and still have earnings on which to claim pension relief, then pensions are likely to be the most suitable, even if you then draw the cash out of the pension to invest in next year’s ISA.
If you are currently a high rate tax payer, will need the cash at some time in the future but are likely to pay tax at a lower rate at some future date (say on retirement) then the pension option certainly looks the best choice – provided that some future government doesn’t change the rules!
As with all things related to Financial Planning the right advice will depend on individual circumstances, but if you want that advice we are here to help.