Investors – act now or risk losing your tax-free ISA or pension allowance for the 2013/14 tax year. You have until April 5 to shield £11,520 in an ISA, and the annual pension allowance is £50,000.
The recent Budget revealed great changes due to the way both ISAs and pensions work. This summer the annual ISA allowance jumps to £15,000, and investors will be able to move their accrued lump sum between cash and investment ISA wrappers.
The annual pension allowance falls to £40,000 on April 6 this year, but those retiring after April 2015 will have the freedom to drawdown all of their pension savings to spend as they wish, instead of being forced to purchase an annuity. While some workers may still buy an annuity for the peace of mind afforded by securing a regular annual income, this week the head of one of Britain’s biggest insurers L&G predicted the annuity market will shrink to a quarter of the size it is today – a loss of £9 billion in business for providers.
The tax relief on both products will not change however. Pensions offer savers upfront tax relief on deposits. If you are a basic rate tax payer and put £800 in a pension, the Government will top it up to £1,000. If you are a higher rate tax player a £600 deposit in a pension will be topped up by £400 to £1,000.
Deposits in workplace pensions will also be topped up not just by the Government but by your employer too. Many companies will match contributions, meaning the more you choose to save the more free cash you can benefit from.
ISAs do not offer upfront tax relief, but they are free from income tax and capital gains tax. Any gains you make on an investment held in an ISA wrapper will be tax free – and any dividends or interest rate payments are income tax exempt.
An investment in a pension does have much better growth potential – because of the extra contributions from the state and your employer. But you cannot access pension savings until you retire, which for many households is an impractical way to exercise all your investments.
ISAs offer flexibility, you can access your investment savings at any time during market trading hours, and liquidate holdings easily.
Tax Benefits for Non Workers
You don’t have to be earning, to benefit from upfront pension relief on pension contributions. Non-earners can pay £2,880 into a pension and they will get £720 added in basic rate tax relief, boosting their pension to £3,600, even though they have not paid income tax.
“A non-earning spouse could pay in £2,880 today, and withdraw £3,600 in cash from April 2015 provided they are over 55, taking the tax relief and staying within the £10,000 personal tax-free allowance,” said Adrian Lowcock of stockbrokers Hargreaves Lansdown.