ISAs or pensions? Three passengers decide
- Credit: Sonya Duncan
For Peter Sharkey, an informative journey on the East Anglian Express was a good chance for a financial chat.
First, well done Virgin Trains.
Last week, my return train journey from London was over 45 minutes late arriving at its destination. Prior to disembarking, however, a guard announced that everyone should retain their tickets because we were entitled to a refund. One simple online form completion later and hey presto, my account was credited three days later. Great service.
Great passengers (on this journey) too.
Ironically, I'd raced to make the train, jumping on at the last minute before battling through several crowded carriages to my allocated table seat which, amazingly, was still empty.
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Three middle-aged blokes occupied the other places; I must have looked as though I was in need of a drink because one of them pushed an unopened can of beer towards me and said: 'We knew you'd be late.' I'd never seen these guys before, but as a Friday night ice-breaker, it worked. Soon, we were laughing, joking and complaining about the delay.
Turns out I was sat with a trio of financial advisers returning from a conference in London, each loaded with paperwork requiring further reading over the weekend. An hour or so into our journey and a couple of beers later, conversation turned to the comparative attractions of pensions and ISAs. If you had to choose, I asked them, where would you put your hard-earned?
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The great advantage of pensions, said Mark, the oldest of the three, is that when making a pension contribution, most people receive tax relief at the same rate at which they pay income tax. This means their returns are given an immediate boost and, as a consequence, pension returns will appear to be slightly higher than those enjoyed by an investment in an ISA, although this excludes the impact of income tax.
Furthermore, added Mark, the annual savings limit for pensions is double that (£40,000) of an ISA. On top of this, chimed Simon, the guy who had pushed the beer across the table, when pensioners withdraw money from a pension, up to 25pc of the withdrawal is tax-free.
Colin, the 'third man', an obviously bright chap, added that contributing to a pension can be enormously beneficial when it comes to estate planning, 'whereas ISAs are not.'
It looked as though the case for pensions was cut-and-dried. That was until Mark, who had been making notes, referred to the 'T' word: tax. Or income tax to be precise.
Granted, the first 25pc withdrawn from a pension is tax-free, but everything else is liable to income tax. No such tax is payable on money taken out of an ISA.
All three guys noted that following the introduction of the Personal Savings Allowance, which provides basic-rate taxpayers with a £1,000 tax break on savings income, ISAs had become less attractive for some people.
However, Colin suggested that ignoring the benefits of ISAs was a mistake, stressing the need for investors in these hugely popular products to 'think long-term.'
Admittedly, he added, the annual ISA savings limit of £20,000 could be 'a tad restrictive' for some people, though only a tiny minority, but to counter this, ISAs are extremely simple to open and operate. There are no lifetime (or annual) allowances to worry about and, unlike a pension, you may access the money built up in an ISA at any time. By contracts, savers must be at least 55 (soon to be 56) before they can withdraw funds from their pension.
This last point is an important consideration for younger people who may not fancy tying money up in a private pension for decades in the knowledge that they cannot gain access to it, especially as many already have workplace pensions.
Judging from the arguments put forward by my fellow travellers, ISAs are ideal savings products if you believe you may require immediate access to your funds at some point in the future, or you're investing for the longer-term and prefer to eventually withdraw money completely free of tax.
Pensions, of course, boast several serious advantages, though their relatively generous tax breaks remain under scrutiny by the Treasury. In fact, it would be no surprise if several of their more attractive facets were amended further in coming years, thereby enhancing the appeal of ISAs.
Pensions and/or ISAs will appeal to different folks at different stages of their lives, based, as one fellow passenger put it, upon where investors believe they'll get the biggest bang for their buck.
TAM Asset Management Ltd offer investors the opportunity to invest in a variety of ISA portfolios before the end of the 2018-19 tax year – and beyond. For further details, please visit the MoneyMapp website: www. Moneymapp.com
THE WEEK IN NUMBERS
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Of course, although Auntie has been spending other people's money like it's going out of fashion, it 'rejects the notion that there has been any complacency.' It would do, wouldn't it?
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For more financial advice, check out Peter Sharkey's regular column, The Week In Numbers.