How To Save Tax Efficiently Using An ISA And Pension
When it comes to saving for retirement, there is often a debate about the best investment vehicle for your money. Pensions and ISAs (Individual Savings Accounts), offer the opportunity for considerable growth over time. They both offer a wealth of tax benefits that savers can take advantage of. There are differences in how they are taxed, however, and people seeking advice on pensions are often keen to know how to use them to maximise their returns.
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Pensions Are Still The Best Way To Save For Retirement
Dedicated pensions are still the best way for most people to build up a retirement fund. They offer particular benefits if you are a higher rate taxpayer, including tax reliefs at the rate at which you are taxed. If you're a basic rate taxpayer, you will pay 80% of the contribution and receive 20% tax relief, immediately increasing every £100 you invest to £125. If you're taxed at 45%, then that £100 still becomes £125 in your pension, but you can also claim a further 25% tax relief via your self-assessment tax return. It's not difficult to see how the amounts in a pension can soon mount up, even before investment returns are taken into account.
Restrictions also apply as to when you can withdraw the money from your account. Currently, you're not allowed to withdraw money from your pension until you're 55. This will rise to 57 in 2028. You're able to withdraw 25% of your fund tax-free, but the rest will then be taxed as income. If your pension income is likely to be higher than the higher-rate tax threshold, then it can be wise to look at combining your pension with other saving options.
ISAs Offer Different Benefits
With pensions, the tax-relief is enjoyed when the money is paid in, but with ISAs, it's when money is taken out. Currently, savers can put up to £20,000 a year into their ISAs. There's no taxation applied to any money taken out of an ISA, and there are no age restrictions as to when it can be taken.
Combining Pensions & ISAs To Maximise Your Retirement Savings
Private pension advice often suggests combining pensions with ISAs to help maximise the tax benefits. Saving into a pension gives you a range of benefits, securely locking money away until it's needed. To avoid making your pension income reach a higher tax bracket, you can split your retirement savings between an ISA and a pension. Your pension can then be topped up by withdrawing tax-free income from your ISA.
A pension advice service will be able to advise you on how to split your savings, how your investments are performing and what your likely retirement income will be.
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