Should I put spare cash in a pension or an ISA?
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I have about £25,000 spare cash sitting in my current account which I’ve built up because we didn’t spend anything on holidays last year. My wife thinks I should put it in my pension fund, but I wonder if I should put it in an ISA instead. What do you think?
Douglas Bridges of Smith & Pinching responds:
Both pensions and ISAs are tax-efficient and can deliver long-term growth. Which is best in this instance depends on you, your financial circumstances and your goals and objectives for the future. I suggest you get independent financial advice at this stage to work out a clear strategy. Both pensions and ISAs are subject to annual contribution limits, so check these before making a decision.
Saving into a pension scheme gets an immediate boost from tax relief on your contributions. This means that the Government will add what you would have paid in tax on your contribution into your pension fund – £2 for every £8 you contribute for a basic rate taxpayer, and more if you are a higher or additional rate taxpayer.
Your pension fund is normally invested for long-term growth, although it will be affected by changing markets. Any growth in your pension fund, through interest or investment gains, won’t be taxed while it’s in the pension wrapper. However, it may be assessed as income when you draw from the fund, although lump sums totalling up to 25pc of your fund may be drawn free of tax.
One important thing to remember about pension savings is that you can’t touch them until you reach the minimum retirement age. This is currently age 55 but is due to go up to age 57 in April 2028.
ISAs also offer tax-free returns: any interest or growth isn’t taxed and any withdrawals you make are free of tax. You can withdraw your money from ISAs at any time, although some ISAs will have a fixed term and you may be charged a penalty if you take your money out early.
The two main types of ISA are Cash and Stocks & Shares ISAs. Interest rates for Cash ISAs are still relatively low, despite rises in the Bank of England Base Rate, so money held there will struggle to keep pace with inflation and may lose value in real terms over time. Stocks & Shares ISAs should achieve higher growth in the long term but returns are subject to rising and falling markets and are therefore not guaranteed.
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Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
For more information, please visit www.smith-pinching.co.uk