Cash ISA vs Pension

dptp1

If you are a BR tax payer when making contributions, and have the same status when drawing the private pension, is the tax relief element on the 25% tax free sum drawn from the pension the only advantage in financial terms of pensions over ISAs (assume the PA is fully utilised)? Despite new pensions legislation ISAs seem to be far more flexible once funded. Will ISAs also now retain their tax free status when inherited?

Linton

There are some other advantages of pensions........

1) Pension pots are inherited outside your estate
2) Money in a pension isnt owned by you and so is safe if you go bankrupt
3) Pensions are safe from any uncontrolable desire to spend you may have when young.

ISAs will retain their tax free status when inherited by a spouse - otherwise there would be no point in making them inheritable. They will of course continue to be part of your estate when you die.

So, as with most A or B questions with investing the answer is both.

SeniorSam

That's an important point on No 1) there Linton.

If ISA's are accumulated to maximums, their value will be added to individual's estate when they die. If that estate will be liable to Inheritance Tax then they may attract 40% tax. Pensions will be protected by a Trust and not part of the estate, so as they grow they will be growing in the Trust.

kidmugsy

ISAs are an IHT trap when you are old. At least temporarily, pensions aren't. As for the future, ask "Krystal" Balls - or maybe Wee Eck.

dunstonh

If you are a BR tax payer when making contributions, and have the same status when drawing the private pension, is the tax relief element on the 25% tax free sum drawn from the pension the only advantage in financial terms of pensions over ISAs (assume the PA is fully utilised)?

No capital gains tax. No inheritance tax. Only 75% of the pension is subject to income tax. 25% is tax free.

Despite new pensions legislation ISAs seem to be far more flexible once funded.

ISA and pensions share the same investment options. So, equally flexible whilst invested. The only difference is the tax handling going in and the tax handling coming out.

Will ISAs also now retain their tax free status when inherited?

Only by spouse. After that they lose their tax free status and become part of the estate of inheritance tax purposes. Unlike pensions.

sav500

With ISA's you can start taking income at any age. Ideal for early retirees.

atush

With pensions you can get a boost with tax relief and yet not pay any tax - if you draw down the taxed portion using your personal allowance. Which means it can be worth more than an ISA.

Truth is, you should have both pensions and Isas. it is NEVER just have one over the other.