FINANCIAL ADVICE CENTRE NEWS
Your Autumn Newsletter 2018
Your Adviser Discusses
ISA, LISA or PENSION?
In this guide our Advisers compare the main features and benefits of ISAs, LISAs and pensions.
When it comes to saving for retirement, which route is best? When helping clients plan for retirement we are often asked what savings options are worth considering and how they compare. In addition to a pension, savers can put money into an Individual Savings Account (ISA), and since 6th April 2017, a Lifetime ISA (LISA). Below we compare the advantages and disadvantages of each option.
Below is a summary table outlining the tax positions of each option.
As shown in the table above, the tax position of all three options is the same while funds are invested, as no tax has to be paid on the funds on any income or gains. The differentiating factor is that pensions receive income tax relief on the contributions, but then pay income tax when funds are taken out, whilst ISAs and LISAs are paid in using taxed income yet receive tax-free withdrawals (note restrictions for withdrawals in LISAs).
How do the numbers compare?
Christine is 32, self-employed and earns £55,000 per annum and expects to be a basic-rate (20%) taxpayer in retirement. She aims to retire at age 63. She pays in £4,000 gross, and her fund grows 4% net every year.
*The contribution is higher because it anticipates higher-rate relief which is received through self-assessment tax returns.
Here, a pension brings the highest returns. If Christine were to be employed by a company, then the pension figure would be significantly higher, as she would be in a workplace pension within which her employer has to contribute at least 3% by 2019 under auto-enrolment rules.