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A new way to think about investment

Choosing the right investment option for your hard-earned money can often seem complicated

This is made ever more difficult by these uncertain economic times, so seeking clear financial advice that is tailored towards your specific circumstances has never been more important. 

Expert financial advice from a trusted source can help you to look at investments in a different way.

Pensions vs. ISAs

We take a look at how a pension could prove to be an attractive alternative to an ISA.

Pensions

The subject of pensions may seem dull, particularly if retirement seems a long way off, but if you’re in your mid-40s or older they can offer a new way of thinking about investment. 

Since the ‘pension revolution’ in April 2015, pensions have become much more than just a pot of cash you build up through your working life to live off during retirement. 

Once you reach 55 you can take money from your pension as you see fit, either as lump sums, regular income, or both. This makes pensions an attractive option for those who are looking to invest to provide a lump sum in the future. 

Money put into a pension benefits from a tax boost that can make a huge difference to returns:

  • For every £80 you pay in – we will claim another £20 from HMRC
  • If you pay 40% income tax you can claim up to another £20 direct from HMRC, depending on your level of earnings. 

ISAs

An ISA allows you to invest up to a maximum of £20,000 in each tax year and offers the potential for long term growth.

ISAs don’t attract the same tax boost on your investment as a pension, but any money you take out is tax free. If you take your pension fund as a lump sum, normally 25% is tax free and 75% is taxable. 

Here's an example of how it could work

Tim is 49 years old, earns £60,000 a year and wants to invest £6,000 for 10 years to help fund his child’s future house deposit. He’s confident that he won’t need to take any money out during this time. 

If Tim decides to invest in a pension, as a higher rate tax payer, he could put in £8,000 that would then be boosted by £2,000 claimed directly by us from HMRC. 

On top of this he could then claim a further £2,000 himself from HMRC, meaning that a £10,000 investment would cost him £6,000.

An alternative to this would be to invest the £6,000 into an ISA, the below table compares the two investments options, assuming there is no growth and no charges:

If Tim is still a 40% taxpayer when he takes the money out 

 

Pension

ISA

Fund after 10 years

£10,000

£6,000

25% tax free lump sum

£2,500

 

40% tax on remainder

(£3,000)

 

Cash available

£7,000

£6,000

The pension would give 16.6% more than the ISA 

If Tim is a basic rate taxpayer when he takes the money out

 

Pension 

ISA

Fund after 10 years

£10,000

£6,000

25% tax free lump sum

£2,500

 

20% tax on remainder

(£1,500)

 

Cash available

£8,500

£6,000

The pension would give 41.6% more than the ISA

Which investment option is right for me?

When deciding which investment best suits your circumstances, a good way to weigh up the options available is by speaking to an NFU Mutual Financial Adviser. 

Our Financial Planning Service can help you to create the right financial plan for your needs, to help you achieve your goals.