Why higher taxes makes pension and ISA planning crucial

22nd April

As Britons face exponentially high tax bills, Stephen Palmer of Cranwell Wealth Solutions explains why it is more important than ever that financial plans involve both pensions and ISAs to maximise available allowances.

With individuals facing a significant tax burden for the next few years, savers may need to invest more to achieve their financial goals and must make the most of their pension and individual savings account (ISA) options.

Pensions and ISAs together

A pension remains the most tax-efficient vehicle available to UK savers. The government adds basic-rate tax relief to contributions, meaning these taxpayers make an immediate 20% gain on their investment. Members of workplace pension schemes also benefit from employer contributions of at least 3% of their qualifying earnings. Savers into personal pensions can access their pot freely from age 55 onwards, rising to 57 in 2028, and can choose who receives their pension fund after they die.

ISAs offer tax-efficient investing with accessibility and flexibility, which has made them a hugely popular savings option, as you can access them anytime. You also don’t pay tax on interest, income or capital gains with ISAs, and you don’t need to declare them on your tax return.

Personal pension contributions reduce your taxable income, which means you can avoid losing certain benefits and allowances and have more money to save or spend. Payments into an ISA don’t provide those potential benefits as they come from taxed income.

Options for income in retirement

The retirement income you take from a pension is taxable, whereas you can access funds from an ISA anytime without any tax liability, therefore the tax savings on income taken from your ISA can be considerable. But, unlike pensions, the money you put into your ISA has had Income Tax applied before you invest it.

You can take 25% of your pension fund tax-free. Using that carefully together with the personal allowance means you can take pension income tax-efficiently. For most pensioners, the tax relief gained when putting money into a pension is more than the tax rate on the money taken out.

Using your pension together with ISA income gives you even more tax-planning options. Most pensions are not subject to Inheritance Tax when you die. ISAs are subject to IHT, except when left to spouses or civil partners. So, you’ll need to think about whether you want to prioritise income from your ISA savings to leave more of your pension benefits intact for beneficiaries when you die.

Act now

These complementary benefits mean effective tax planning using pensions and ISAs together is increasingly important for all savers. A flexible and tax-efficient retirement plan will normally involve a combination of savings vehicles, which could include other investment types as well.

How to balance your mix of pensions and ISAs depends on your situation and preferences. Creating the optimum mix, while making sure your retirement income and estate plans are the right ones, is not straightforward.

Cranwell Wealth Solutions specialises in Pension and ISA planning. You can book an appointment to discuss your options without any obligation. Simply call to chat to one of the advisors or pop into the Heathfield branch, open Monday – Friday, 9am – 5pm. Both appointments and walk-ins are very welcome.

The value of an investment with St. James’s Place will be linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The tax levels and reliefs can change at any time and depend on individual circumstances.

Cranwell Wealth Solutions, Wealth Management Practice with branches in Heathfield and Uckfield.


01435 866 101