DIY Investor Magazine - page 38-39

DIY InvestorMagazine
/March2014
DIY InvestorMagazine
/March2014
38 39
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ISAVS PENSION
ATAGLANCE
PENSION ISA
What is the tax position of my
contributions?
Contributions direct from salary before
tax. Individual pensions claim tax back
on your contributions. Basic rate tax
payers get a £125 benefit from every
£100 contribution. Higher rate tax
payers can reclaim a further 20%.
Generallymore efficient than savings
accounts but you are saving income
that has already been taxed unlike a
pension.
Canmy employer contribute? Yes No
What if I’mmade redundant Assuming no contributions aremade,
your pension pot will remain static. A
large pension pot will not affect your
entitlement to state benefits.
A high amount of savings in an ISA
will affect your entitlement to certain
means-tested state benefits.
What is the investment risk? There is a risk that the value of your
pot could fall, but generally you have
the option to select funds that reflect
your appetite for risk.
Cash ISAs have no investment risk
althoughmany pay less than inflation
so your capital is thereby eroded.
Stocks and shares ISA carry investment
risk and can fall as well as rise in value.
When can I access mymoney? Not until age 55 Anytime although sometimes with a
penalty.
Options at retirement? 25% lump sum tax free. Purchase
annuity or remain invested and draw
down income. From 2015 – potentially
take entire pot and reinvest
Entirely flexible - take an income from
the interest or investment returns Draw
down an income from the ISA pot.
In the event of death? If you have purchased an annuity the
provider keeps the remainder. Any
proceeds left in income drawdown
passes to your beneficiaries after the
deduction of tax at 55%.
ISA savings form part of your estate. If
your total estate exceeds £325,000 you
will be subject to Inheritance Tax.
Will my income run out before I die? An annuity guarantees you an income
for the rest of your life.
It is possible that you could run
out of money under a drawdown
arrangement.
If you only use interest or returns
from your ISA pot, then (depending on
investment performance) your income
should not run out in your lifetime. If
you decide to take a regular portion of
your ISA pot as income, you could use
this up.
How is my income taxed? When you take your pension income, it
will be subject to Income Tax.
Your income will be tax-free.
Dan is a widely published and quotedmarketing professional withmany years’
experience of working in the workplace savings sector