Individual Savings Account (ISA) and Pension Comparison
Recent media coverage has speculated whether a Pension or an Individual Savings Account (ISA) is a better home for your savings.
The table below answers some of our frequently asked questions on the subject and highlights the key differences.
| Frequently Asked Questions | Pension | ISA |
|---|---|---|
| Do my contributions receive Tax relief? | Employees – Yes – 20% basic rate tax relief applies to gross contribution (higher rates to be reclaimed via tax return) Employers – No – all contributions are paid gross | No – contributions are paid from earned income. |
| Who can make contributions? | Employee/Plan holder Employers Third Party (i.e. Grandparent) | Plan holder Third Party – i.e. Family members |
| Are my contributions and funds subject to any limits? | Yes – Annual Allowance for total personal and employer contributions is £40,000 per annum.1 Tax charges apply if the limit is exceeded. Option to carry forward unused allowance from up to 3 previous tax years. Lifetime Allowance of £1.25m (£1m from 6 April 2016) applies to size of fund that can be accrued before further tax charges will apply. | Yes – ISA allowances are £15,240 for NISA and £4,080 for Junior ISA2 for 2015/16 and 2016/17 tax years. No carry forward facility. No limit on value of funds that can be built up. |
| What are my investment options? | Fund availability depends on product. Options include collective funds, direct shares, cash deposits and commercial property. | ISAs have 2 categories – Cash or Investment in shares, collective funds. You can spread the limit across both products and can now transfer freely between Cash and Investment ISAs. |
| Are my funds accessible? | Subject to scheme rules, funds can normally be accessed from age 55 increasing to 57 in 2028.3 | Yes – you may withdraw some or all of the fund at any time. Exceptions include Junior ISAs which must be held until age 18 and Fixed Rate Cash ISAs, which may incur a penalty. |
| Are withdrawals subject to tax? | Yes – Currently able to receive up to 25% of fund as a Tax Free Lump Sum from age 55. Income taken from pension is taxed at your highest marginal rate. | No – Withdrawals are Tax Free. Until April 2016 dividends are subject to non-reclaimable 10% tax charge. |
| What happens when I die? | Nominated beneficiaries can receive the pension as a lump sum or beneficiary drawdown dependent on scheme rules. Funds will be paid tax free if death occurs before the age of 75 and will be subject to tax in the recipient’s hands if death occurs after 75. | Spouse or Civil Partner only will receive an ‘additional permitted subscription limit’ equal to the value of the ISA at the Plan holder’s death.4 |
What is the Inheritance Tax position on death? | Funds held within a Pension Wrapper are not typically subject to Inheritance Tax. Any withdrawals made from the pension and not spent or gifted will form part of the Estate for Inheritance Tax purposes. | Funds held within an ISA Wrapper will form part of the estate and will typically be liable to Inheritance Tax.5 |
- From April 2016 the Annual Allowance will be tapered for higher earners. Total income earned above £110,000 is subject to a test to determine any reduction in annual allowance to a minimum of £10,000 per annum.
- Junior ISAs can be opened by anybody with Parental Responsibility for a child under 16. A child cannot hold both a Child Trust Fund and a Junior ISA. The same investment rules apply as for regular ISAs.
- From 2028 the minimum age will be set as being 10 years below State Pension Age and could therefore increase further if State Pension Age increases.
- This does not affect a Spouse’s or Civil Partner’s personal ISA allowance for that tax year.
- Another type of ISA is an Alternative Investment Market (AIM) ISA. These can be used for Inheritance Tax planning and may be suitable for clients looking for higher risk investment options.
Johnston Carmichael Wealth Limited is authorised and regulated by the Financial Conduct Authority.
The information contained in this article represents Johnston Carmichael Wealth Limited’s interpretation of current legislation and HMRC practice. Please remember the value of investments and income derived from your investments can go down as well as up and you may not get back the amount you originally invested. Past performance is not necessarily a guide to future performance. The Financial Conduct Authority do not regulate tax advice. The value of tax savings and your eligibility to invest in a particular product depends on individual circumstances and all tax rules may be subject to change in the future.
