There’s only a few weeks left of this tax year so now is a good time to decide what and where you should invest from the next tax year. For many years, I’ve put money every month into an Isa and into a pension via a Sipp (self-invested personal pension). But, work being hard to come by, I can’t really afford to put money every month into both. So I’m trying to decide whether my small monthly contribution from 6 April should go into an Isa or a Sipp (self-invested personal pension).
In the past what has put me off about pensions is that once you’ve put the money in, you can’t get at it for years. But as I’m only a few months off being 55, this is no longer a concern. As soon as you reach 55 you can withdraw funds from your personal pension fund (and 25% of this can be taken tax-free). I don’t want to do this but knowing I could get at my pension if I needed to does make it more attractive. But the major attraction of pensions is the tax relief: put £800 into a pension and it is boosted by £200 worth of tax relief to £1,000.
That upfront tax relief is really attractive. According to Bestinvest, if you put £10,000 into a fund which grows at 6% a year then after costs over 20 years you’d have £32,071 if your fund was in an Isa. But if you put the same into a pension then your initial £10,000 would be boosted to £12,500 – and thanks to this, after 20 years you’d have £40,089: much better than the Isa.
Another great thing about pensions: you can have one even if you haven’t got a job and are not a taxpayer.
And you still get tax relief. You can put up to £2,880 a year into a pension and straightaway thanks to tax relief you’ve had £3,600 invested in your pension. And pensions are even better if you are well off. Those paying 40% or 45% tax get that level of relief on their pensions. And the maximum you can contribute to a pension is 100% of your salary or up to £40,000 a year – although this can be tapered down if you’re a very high earner.
The downside of pensions apart from not being able to get at your money until you are 55 is that when you draw an income from your pension then that is potentially taxable (depending on what the tax-free personal allowance is when you take your pension). With Isas, there’s no upfront tax relief – but when you draw the money out there’s no tax to pay. You can put up to £20,000 in an Isa per tax year. I think if I were younger and wealthier, I would split my money between Isa and pension contributions. At my advanced age, I think pension contributions. So that’s where my meagre monthly savings will go from 6 April. And I’m following Jane’s advice on the funds to pick for my pension – the TB Evenlode Income fund she suggests will probably be my choice. Have a look at her suggestions here – and see our guides to investments and pensions here.