The 2018/2019 tax-year will soon end and see the yearly allowance for you Individual Savings Accounts (ISA) be cut off. ISA is an allowance offered to Britons each tax year and renews every year. The cut off date this year will be on April 5 and is you miss the deadline, the opportunity to save money on this type of account will expire and be gone for good.
Where should you put £10,000?
ISAs and pensions both have their advantages, but the short answer to this question is to put your spare cash into retirement savings, according to Andy James, Head of Retirement Planning at Tilney.
However, ISAs offers some advantages that pension savings lack.
Mr James told The Telegraph: “Pension savers receive tax relief at the same rate they pay income tax, so returns are boosted at the outset, which will lead to higher returns than an ISA on a like-for-like basis.”
Mr James added pensions are the most “tax efficient saving route”.
This means for higher rate taxpayers, a sum of £10,000 will only cost £6,000 after tax relief and for those on the additional rate the same amount would be £5,500.
He added: “In addition to this, you can receive tax free cash on up to 25 percent of the fund available when you are taking benefits.
“The annual saving limit for the majority of savers is also £40,000 – significantly higher than the ISA limit of £20,000.”
However, continuing to use the £10,000 allowance as an example, the difference between the money you can make by putting the cash into ISAs are quite stark.
With a six percent annualised rate of return net of costs for both ISAs and pensions, ISA savers would end up with £18,194 after ten years and £33,102 after 20.
But by putting it into pension, higher rate tax payers would see it get topped up by basic rate tax to £12,500.
In additions, pension savers will be given a £2,500 tax credit.
Mr James said: “Based on the same timescale and return assumptions, the saver would end up with a higher amount of £22,742 after 10 years and £41,378 after 20 years, but for a lower net entry cost of £7,500.
“Essentially, a higher rate tax payer would end up with an extra £8,276 return, for £2,500 less cost, and they could of course choose to invest the £2,500 tax saving outside the pension as well – further boosting returns.”
But on the other hand, he claimed an ISA is the most efficient option.
Taking benefits from this savings account is all tax-free, whereas pension income is taxable.
Mr James added: “The decision between a pension and an ISA will ultimately depend on your individual circumstances, and in many case a combination of ISAs and pensions should be used together as part of a financial plan.”