April Pension Reforms: Pensions V.S. ISAs

One question that comes up time and time again with our financial advisors is “which performs better: pensions v.s. ISAs?” The question is difficult to answer in the abstract, and with the UK pension reforms on their way expert knowledge is limited. Therefore, we’ve constructed this guide that pits the new 2015 pension with the recently modified NISA against one another to see which comes out on top.

1. Drawing out

Pension holders will have to wait until they are 55 years or over to draw out of their schemes. There is actually no minimum withdrawal age with ISAs, making them a good option for those looking to generate interest on their savings in the medium term.

Pensions, with their minimum draw out age make the task of “leaving your savings alone” more straightforward, simply because there is no way of accessing them until you hit 55.

2. Tax deductible

One of the main benefits of a pension is that it is taken before tax or paid net of basic rate tax, meaning pension holders enjoy tax relief on contributions. This is not the case for ISAs, where contributors receive no tax relief.

Pension tax relief is done through self-assessment (except for on DC schemes), so a £10,000 pension contribution requires an £8,000 payment; somebody who pays a higher tax contribution may claim an extra £2,000 tax relief, equaling a net cost of £6,000.

3. Draw down tax

Upon draw down, 25% of the pension can be withdrawn tax-free. The rest is taxed at the saver’s highest marginal rate of income tax. Unlike pensions, however, ISA withdrawals are completely tax-free, making them a good option for those who are going to be drawing out regularly.

4. Inheritance

New rules around ISAs facilitate the transfer of existing ISA funds to a surviving spouse or civil partner. The amount is equal to the value of the deceased’s ISA at the time of death.

However, The fund could be subjected to a 40% inheritance tax charge on the second death if the total assets exceed the nil rate tax band. On the other hand, pensions are free of inheritance tax. From April, the restrictions on who can inherit a draw down pension are to be lifted, meaning that anybody can be nominated to be the recipient.

5. Pensions have the advantage

It appears that in most circumstances, pensions have the advantage over ISAs. When the reforms are implemented in April, some people could benefit from transferring their cash from ISA to pension, with only a few exceptions:

  • Access is required before 55.
  • Those paying tax relief at 20% on contributions, but by accessing their pension in one go, end up paying tax at 40% on a significant portion of their pension fund.

Everybody’s financial situation is different. If you would like to consult an expert on the issue of pensions verses ISAs, talk to one of our industry-leading financial planners.