Invest money in ISA until change of tax bracket?

Ilya_Ilyich

Hi there,

I'm trying to help my sister with her pension arrangements. She has no company pension scheme and thus my understanding is that she'll be contributing post-tax and post-NI money to a Personal Pension and getting tax relief at her current rate of 20%. However she is likely to move into the 40% bracket in a few years time. It seems to me that the wise thing to do would be to invest in a S&S ISA instead, gain the same tax-free growth in equivalent funds, and then invest into the pension once she's in the 40% bracket to get a ton of extra tax relief. Is there something wrong with this approach?

Would appreciate any advice you could give on the matter!

jem16

Ilya_Ilyich wrote: »

then invest into the pension once she's in the 40% bracket to get a ton of extra tax relief. Is there something wrong with this approach?

As long as you and she realise that she will only get 40% tax relief on the amount that she actually pays 40% tax on, it seems fine.

Loughton_Monkey

Perfectly OK to do, and very sensible. She should very probably invest more than just the 'top slice' of 40%, but on the assumption that her 40% slice will contiue to increase as a proportion, then it makes perfect sense to store it all up in S&S ISA [choose 'equivalent' funds as you would for the pension itslef] and then transfer on the drip to eliminate the 40% tax band for as long as she can.

If S&S ISA limit becomes breached, then no real problem. She can still invest outside ISA as well and all will be exactly the same unless she starts getting (and taking) in excepss of £10K a year.

jamesd

That's the right thing to be doing.

She can also consider whether she might want to retire before state pension age, or try to build up enough in investments so that if she couldn't work she'd still be able to meet her needs. At the younger ages, say under 60, that requires lots of money in a S&S ISA or other non-pension investments so that money can be taken out at a fast enough rate to make up for the absence of the state pensions. It's a good idea to have a mixture of pension and ISA money. The pension ultimately provides a higher income, so if there's no desire to retire before state pension age it's the most efficient way, particularly for higher rate tax payers.

Ilya_Ilyich

Thaks for the responses everybody. It seemed such a no-brainer but isn't a strategy I'd read about before so figured there must be something I was missing!