The increase in the limit which can be saved into a new ISA from July this year, combined with the changes to the taxation of pension withdrawals effective from next April, raises the debate on which is now more attractive to use. The comparisons look interesting:
So which one is best? As usual, the answer is: ‘it depends’.
For those with no relevant earnings, who have reached the maximum pension lifetime limit or who have made a protection election (which means no further pension payments can be made), an ISA is likely to be the appropriate route for tax free savings.
Of course, pensions remain attractive for those who can get tax relief on contributions at a higher rate than they will pay when they extract the funds, provided they are happy to leave funds invested until age 55 and keep within the limits to avoid any penalty tax charges.
Those with a similar rate of tax when making contributions to that they will pay when withdrawing funds, may still find that the initial tax relief boost given to the fund will provide better growth than an ISA, but the calculations become more complex.
While there is no blanket answer, the new ISA certainly creates some healthy competition to pensions as a method of saving for the future in a relatively safe environment. Other savings options that are generally tax free include enterprise investment schemes, seed enterprise investment schemes, venture capital trusts and social investment relief, but these all typically carry a higher risk than the funds which are available to pension and ISA investors.
As ever, the myriad of investment options and differing tax reliefs means that good advice is needed before deciding upon the appropriate route or routes.
