Pensions vs ISAs

The argument has raged for some time over the preferred savings vehicle – pension or ISA?

The latest stage of the pensions revolution – the scrapping of the “death tax” announced recently by George Osborne has potentially made pensions a much more attractive option.

Is ISA the winner?

If you are thinking what you will leave your family if you die, an ISA can be better than a pension if you have accessed your pension benefits, because the pension fund would currently be taxed at 55% “death tax”, whilst the ISA would be tax free if you are unlikely to pay inheritance tax (IHT).

From April ‘15 when the 55% death tax is scrapped this makes the pension far more competitive.

After the 55% rate is scrapped, this makes matters much better for anyone looking to leave a pension for their descendants. Under proposals, the 55% tax will be scrapped entirely on death before age 75, beneficiaries can spend the money with no tax to pay. If death is after 75, whoever inherits your pension can leave the money in the pension plan and pay no tax, although any money withdrawn will be subject to income tax at their normal rate.

If an inherited pension fund is used carefully, even basic rate income tax could sometimes be avoided. For example, you could take an income when not working. Equally, it could be an emergency fund to fall back on, even at the cost of paying income tax.

The importance of looking at your family’s tax, wealth and debts together when deciding between ISAs and pensions is highlighted by the difference in fund growth between basic, higher and top-rate taxpayers. Ultimately using both ISA’s and pensions offer a good balance to everyone’s savings plans, but the regulation changes have brought Pensions to the fore thought in the financial planning arena.