Typically people will associate ISAs as the most tax efficient asset that they can invest in.
The reason being is the growth inside and upon withdrawal of the ISA is typically tax-free. A pension on the other hand does not give you tax-free income on withdrawal, only the 25% value of the outstanding pot size at the time of accessing benefits.
So how can a pension be more attractive on a tax saving front. Well let’s assume an example of a higher rate taxpayer this, this is someone with income in Scotland of over £43,430.
For every £60 that this individual pays into a pension the pension provider automatically tops up with an additional 20% of which they can then reclaim another 20% upon the self-assessment tax return and receive a refund from HMRC.
This money can then be reinvested back into the pension (provided the client meets the eligibility to make further contributions) or indeed spent on other areas
We would recommend a pension reinvestment here. A basic rate tax payer can pay £80 into pension, then receive a £20 top up to make it £100.
Now if you went into a bank and you gave them £60 in cash and the bank offered to top that up to £100 for you, guaranteed, is that something you would do? for most, it certainly would be.
The key difference in this scenario is instead of a bank you’re investing it into a pension. Of course you pay tax on the way out as we previously noted however as a higher rate taxpayer you achieve 40% tax relief into a pension and whilst you pay 20% tax on the withdrawal (assuming you are basic rate in retirement which the majority fall into) there is a guaranteed uplift the 20% of the pension fund not taken into account any investment growth.
As financial advisors we cannot offer guaranteed growth but what we can guarantee for the time being at least is tax relief which is guaranteed by the government.
For me this is the best way of using government funds to tax efficiently grow your portfolio without having to make the full contribution and with proper planning on an ongoing basis, ensure that you remain a basic rate taxpayer living within your means
Strategic Wealth Solutions LTD is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/products