Pension v ISA
Since the introduction of the new pension flexibilities, saving into a pension has become a much more attractive option to many people. But how does it stack up against another popular savings vehicle – the individual savings account (ISA)?
The simple answer is that both have their merits. A particular advantage of pensions is that contributions are eligible for income tax relief at the plan holder’s highest marginal rate of income tax whereas no such relief is available for the ISA investor.
However, when the benefits of the pension plan are taken, the pension commencement lump sum aside, these are taxable, whereas all withdrawals from an ISA, be these income or lump sums, are tax free. Moreover, an ISA can be drawn upon at any time while benefits cannot be taken from a pension until the plan holder reaches age 55. Nonetheless the tax relief on contributions make pensions particularly attractive to a higher rate taxpayer, especially if in retirement, when the benefits are taken, the plan holder is a basic rate only income taxpayer.
Upon death, an ISA can be passed on to the investor’s spouse and retain its ISA status. However, this facility is not available to any other beneficiary and the ISA will form part of the deceased’s estate for inheritance tax (IHT) purposes.
Conversely, the fund within a pension plan will not form part of the plan holder’s estate for IHT purposes. It can be passed on to anyone and if the pension plan holder should die before attaining age 75 the fund will be tax free in the beneficiary’s hands. If the plan holder should die having reached the age of 75, the beneficiary will be subject to income tax on the fund – it can, though, be retained within a pension plan in the beneficiary’s name, and drawn upon at any time, so that the impact of any income tax due can be moderated.
So the pension plan has some attractive features, but this does not mitigate the value of the ISA, and both have their part to play in effective financial planning.
The value of an investment and the income from it could go down as well as up. You may not get back what you invest.
If you have any queries concerning these or any other financial issues please get in touch on 01892 664141 or by e-mail to firstname.lastname@example.org.
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This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at December 2018. You are recommended to seek competent professional advice before taking any action.
Budget 2018 – what it means for you
With no significant tax or pension changes in the recent Budget, you can now plan for the tax year ahead with confidence. The key points from the Budget, and from measures already announced, are:
• The personal allowance and higher rate threshold will increase earlier than expected to £12,500 and £50,000 respectively from April 2019. The income tax rates and bands for Scottish taxpayers were announced in Scottish Budget on 12 December.
• There are no other changes to income tax bands or allowances.
• The pension lifetime allowance (LTA) will rise to £1,055,000 from April 2019.
• Reassuringly, there are no changes to pension annual allowances (AA). The standard AA remains at £40,000, the money purchase AA (applicable where pension benefits have already been taken on a flexible access basis) stays at £4,000 (with no carry forward) and there are no changes to the high income AA taper rules.
• Pensions cold calling: the government intends to implement legislation to make pension cold calling illegal.
• Self-employed: the Department of Work & Pensions (DWP) is during the winter to publish a paper setting out the government’s approach to increasing pension participation for the self-employed.
Capital gains tax
• The capital gains tax (CGT) allowance will increase by £300 to £12,000 from April 2019.
• Private residence relief; changes from April 2020 will restrict the reliefs currently available to people who have not lived in their home for the full period of ownership and also to people who let out their homes. There is to be a consultation on the detail of these changes.
• CGT entrepreneurs’ relief: this is the relief that fixes the CGT rate at 10% for individuals selling interests in their businesses and personal companies, for which new qualifying conditions were announced. From 29 October 2019 the relief is being restricted so that it is only available where the individual has an interest of 5% or more in both the business’s distributable profits and its net assets. In effect, this means it is only available to people with a material interest in the business. The qualifying ownership period is also to change for most disposals form 6 April 2019 onwards, increasing from one to two years.
• As expected, the IHT nil rate band will remain frozen at £325,000 until April 2021.
• The residence nil rate band will increase from £125,000 to £150,000 from April 2019, allowing some couples to leave up to £950,000 to future generations free of IHT.
ISAs • Annual ISA limits stay at £20,000 per person, with no reduction in the range of ISA options available to meet different needs.
• From May 2019, existing holders of Index Linked National Savings Certificates who renew for a further term will receive index-linking based on the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI). This change will mean that savers will still have protection from inflation but with the cost to the taxpayer being forecast to reduce by £610 million over the next five years.
• Premium Bonds: from the end of March 2019 the minimum investment is to be reduced from £100 to £25. Another development is that people other than parents or grandparents will be able to purchase Premium Bonds for children under the age of 16,with the date when this will be effective to be announced in due course