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    Home / Insights / ISAs or Pensions?

    ISAs or Pensions?

    As we navigate through the ever-evolving landscape of financial planning, it’s essential to understand the tools available to secure your financial future.

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    Mattioli Woods

    At Mattioli Woods, we’re committed to empowering you with knowledge and options that best suit your individual needs. Today, we’re exploring two key components of a robust financial plan: Individual Savings Accounts (ISAs) and pensions.

    ISAs offer a flexible way to save and invest without paying income or capital gains tax on the returns. With the ability to contribute up to £20,000 per person annually (2024/25 tax year), an ISA can be a powerful component in your investment portfolio. There are a range of different ISAs including cash ISAs for those who want minimum risk or may need the funds in the short term, and stocks and shares ISAs for those saving for the medium to long term. Having a blend of both is also possible.

    While there is no tax relief on funds paid into an ISA, unlike contributions to a pension, ISAs are accessible. This means you can save with the comfort that you can get hold of the funds if needed (timeframes subject to the underlying investment or term of a cash ISA). Many ISAs are flexible ISAs so if the funds are withdrawn and replaced in the same tax year, no more of the allowance is used.

    With the ISA allowance resetting on 6 April every year, starting early and maximising your ISA allowances can be extremely powerful in the long run, whether making regular payments into an ISA or a lump sum every year. There is currently no limit on how much you can hold in ISAs, which has meant some individuals have now surpassed £1 million of ISA savings.

    Individuals who have built up sizeable ISAs pots over many years are able to enjoy the ability to generate additional streams of tax-free income alongside other income sources. This can work well for clients of all ages, especially those who are drawing a pension income. Having an additional stream of tax-free income can reduce the amount of taxable income drawn from the pension each year and increase the longevity of the pension scheme.

    Pensions are extremely tax-efficient long-term saving pots which offer tax relief on contributions and the potential for employer contributions, making them an efficient way to build a substantial nest egg for retirement. Again, there is no capital gains tax or income tax on returns within the pension scheme. While less accessible than ISAs until you reach retirement age, pensions are pivotal in enhancing your financial security in your golden years. Most pension schemes offer the ability to draw 25% of the pot value entirely tax-free once a client has reached retirement age, currently age 55, increasing to age 57 from April 2028. The remaining 75% can be drawn as a taxable income.

    Individuals can contribute up to £60,000 a year into their pension and receive tax relief subject to their relevant earnings. For those who have not fully used their contribution allowances in the previous three tax years, there is the ability to carry forward an unused allowance, subject to them having been a member of a UK registered pension scheme in those years. This can be powerful for those wishing to give their pension scheme a boost.

    Under current legislation there is no limit on the amount an individual can hold in their pension. However, individuals without any protection or enhanced lump sums are limited to a cap on tax-free cash from pensions equal to the lump sum allowance (LSA), which is set at £268,275, although ongoing advice is recommended to ensure you are best positioned for any potential legislation changes.

    Some pension providers, such as Mattioli Woods, offer pension structures which can hold direct commercial property or land, facilitate borrowings or loan funds in return for capital and interest, as well as the ability to hold a range of investments which would not be able to be held within an ISA.

    Complementary strengths for a comprehensive strategy

    While ISAs offer short-term flexibility and accessibility, pensions provide long-term growth and tax efficiency. Together, they form a comprehensive strategy that caters to both immediate and future financial goals. By leveraging the strengths of both ISAs and pensions, you can enjoy the peace of mind that comes with a well-rounded approach to saving.

    As you can see, while both are quite different, they complement each other extremely well, regardless of your age, which is why having an overriding investment strategy in place can work extremely well.

    Focus on ISAs – a smart move in uncertain times

    In times of uncertainty, the adaptability of ISAs becomes even more valuable. That is why we’re encouraging our clients to consider the role of ISAs in their portfolios. Whether you’re looking to start an ISA or maximise your existing account, our team at Mattioli Woods is here to guide you every step of the way.

    Ready to take the next step? Our financial experts are on hand to discuss how ISAs can complement your existing pension plan and help you achieve your financial aspirations.

    Contact us today to schedule a consultation and take the next step towards a secure and prosperous future.

    As with all investments, your capital is at risk. The value of your investments and the income from them may fall or rise. Past performance is not a guide to future returns. Pensions and ISA rules apply and can change. Tax treatment depends on an individual’s circumstances and can change. 

    This article has been produced for information purposes only and is not intended to be an invitation to buy or act upon the comments made.  All investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances. Any forward-looking statements and forecasted returns represent the current views of Mattioli Woods plc and may be subject to change. The content is correct at the time of writing (July 2024).

    Mattioli Woods plc is authorised and regulated by the Financial Conduct Authority.