A tale of two tax shelters by Finance News Bulletin
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Published: 07/12/07
All times are London time look for News in the FTcom siteSearchSearch Quotes in the FTcom siteQuotesYOUR MONEY Your investmentsBreadcrumb follow direction-finding:FT Home > Your money > Your investmentsServicesWhich is the improved investment vehicle for boosting existing retirement saving: a pension or an individual savings account (Isa)In recent existence, for some the answer has in its place been buy-to-let
But for most investors looking to top up their core pension savings, the genuine choice is between these two normal tax sheltersIsas, now held by 17m individuals and worth more than £200bn in sum, are clearly well-liked Tax-free returns and the flexibility of being able to access money at any time have proved an good-looking combinationBut while Isas are often talked of as useful retirement economy top-ups, a pension vehicle will frequently make more financial sense
In fact, there is a rising case for more topping up to be done through pensions, say adviserspopulace have been too listening carefully on ‘pensions bad, Isas good’,” says Michael Owen, financial planning manager of Brooks Macdonald Financial Consulting“Pensions are a distant more attractive investment option than a few years ago,” adds Patrick Connolly of riches managers Towry Law, pointing to the growth of self-invested personal pensions (Sipps), higher payment limits and lower charges “The query is how much flexibility you require
If you don’t require [interim] access to the money and are just saving for a retirement fund, there’s a very strong argument for doing it through a retirement fund”Pensions, unlike Isas, offer income tax relief on aid and also allow 25 per cent of the accumulated finance to be taken tax-free at retirement Isas instead disburse out wholly tax-free, and these tax differences can prove important for investors’ relative returnsAccording to analysis by Hargreaves Lansdown, a low-cost supplier of Sipps and Isas, a pension could give a total payout that is up to 25 per cent higher than that from an identical investment in an Isa
The table above shows that investors ahead the biggest advantage from pensions are those who are higher-rate taxpayers when they pay in – and therefore benefit from 40 per cent income tax relief on aid – but who pay a inferior tax rate when they take their pension in retirementThis is a common occurrence Many higher-rate taxpayers move into the basic-rate group in retirement, and this is set to fall from 22 to 20 per cent from AprilBut this duty gradient” benefit could work out even greater for many pension savers
With the personal payment for over-65s increasing above £9,000 from next year, many higher-rate investors could end up paying an effective speed of just 10 per cent on their pension investments, says HargreavesOn the other give, higher-rate taxpayers who are set to pay 40 per cent tax in retirement might in its place look at investing in the pension of a non-earning spouse to take benefit of their personal allowanceThe allowance increase has created an chance for couples, says Tom McPhail, Hargreaves Lansdown’s head of pensions research“The significant step is to anticipate the future distribution of retirement savings within a pair and to ensure they are as evenly communal as possible,” he says
But the firm’s figures also suggest that pensions may offer only marginal or even non-existent financial compensation compared with Isas for some basic-rate taxpayers and investors whose tax rate does not decrease as much in retirementFor such investors, pensions offer smaller overall tax benefits The comparisons also issue in that Isa investors drawing an income mechanically retain a stake in their fund’s ongoing growth; with pensions, investors more often than not forgo this benefitBut even where the Isa stands to yield a senior overall return, the danger of “living too long” means that it is still the riskier option, says McPhail
Living only about an extra day beyond the assumed standard life expectation could negate any identified Isa advantage, he says “The longer you live, the improved a deal the pension is”Investors should therefore require a substantial best in the form of a higher profits from an Isa to compensate for the option that the income could run out before they die, he saysretirement fund annuities, for all the censure they attract, do give investors a guaranteed income for life
By contrast, Owen of Brooks Macdonald points out that those in poor health or with abridged life expectancy may do better from an equal Isa investmentIsa investors may also want to consider rolling over their funds into pensions at a afterward date – for example if they are a basic-rate taxpayer but move into the higher-rate band They can then gain upfront duty relief Copyright The Financial Times Limited 2007Sipps boost savings by 40 per cent - Sep-15Investors move labor pensions to self-invested schemes - Sep-07Commercial property money win tax concession - Jul-21FSA to keep a close eye on manufacturing regulation - Apr-08There's no point paying for things you put on't use - Mar-31Increased choices in an ever-shifting scenery - Mar-31More in this sectionBlogsBrussels BlogCharles PretzlikClive CrookDear LucyEconomists’ ForumEnergy FilterJohn GapperGideon RachmanTech BlogThe Undercover EconomistWestminster BlogWillem Buiter’s MavereconRegional pagesLatin American agendaChinaIndiaBrusselsInteractivePodcastsDebates & pollsAsk the expertMarkets Q&AJobs and classifiedsBusiness for saleContracts & tendersJobs Search Type your search criteria below:* Minimum holdup 15 minutesAll times are London timeFT HomeSite mapContact usHelpAdvertise with the FTMedia centreStudent offersFT ConferencesFT Research CentreFT SyndicationCorporate subscriptionsFT GroupPartner sites: Chinese FT
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