Millions of people in their 50s and 60s could be missing out on thousands of pounds by continuing to prioritise ISAs over investing in pensions.
The latest figures show that 3.8million people aged between 55 and 64 have ISAs worth an average of £38,257.
While money can normally be taken from ISAs at any time, flexible pension rules mean investors can access pensions from 55 years old (57 from 2028), taking the money as lump sums if they wish.
And the impact of pension tax relief means returns could be boosted by up to 41.6% for higher rate taxpayers
Sean McCann, Chartered Financial Planner at NFU Mutual, said: “Unless you’re about to retire, pensions can seem like a bit of a dull subject – but if you’re in your fifties or older, they can offer a whole new way of thinking about investment.
“Once you reach 55 you can take money from your pension either as lump sums, income or both. This means they can offer an attractive alternative to ISAs if you’re looking to build up funds for the future or to potentially pass on wealth free of inheritance tax.
“Latest figures show 3.8million people aged between 55 and 64 hold ISAs with an average value of 38,000 – but many of them could be better off topping up their pension and claiming the tax relief.
“The tax boost you get when you put money into a pension can make a huge difference to returns.”
Higher rate taxpayer example
Over 55, earning £60,500 a year and with £6,000 to invest
As a 40% income tax payer, £8,000 could be invested into a pension – HMRC would then boost with a further £2,000 giving them a fund of £10,000.
Up to an additional £2,000 can then be claimed back direct from HMRC, meaning cost to them to create a £10,000 fund would be £6,000
Assumes no growth and no charges
Still a 40% taxpayer when taking the money out:
The Pension would give 16.6% more than the ISA
A 20% taxpayer – with income of £42,770 or less – when taking the money out:
The Pension would give 41.6% more than the ISA
Another pension advantage
Sean said: “One of the advantages of pensions is that, in most cases, any money left in the fund can be left free of Inheritance Tax.
“If you die before 75, in most cases, the benefits can be paid free of Income Tax, although there are limits if paid as a lump sum. If you die after 75 your beneficiaries will be taxed on the money paid out to them. ISAs will be included in any Inheritance Tax assessments.”
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