I am 65, still working and not drawing either a state or personal pension. I’m currently saving around £15,000 a year into an Isa and regular savings account.
I intend to work at least another 18, possibly 30, months. Rather than saving, should I be putting my money into a pension?
The right approach for you will depend on your personal circumstances. However, the pension freedoms introduced in April 2015 mean that pensions are particularly attractive to those aged 55 or older.
Pension contributions receive initial income tax relief on contributions whereas Isas don’t. Both benefit from the same tax efficient returns and both provide equal access for those aged over 55. But pension withdrawals are taxable at somebody’s marginal rate of income tax apart from, typically, 25% which is tax-free, where as all Isa withdrawals are tax-free.
Pensions are free of inheritance tax whereas Isas aren’t, apart from some Isas that invest in alternative investment market listed companies, and there are no death charges on Isas or, where death occurs before age 75, on pensions.
For younger people, the flexibility of Isas is likely to be preferable to the extra tax benefits of pensions, and the upcoming launch of the Lifetime Isa will be of particular interest to those trying to get on the property ladder.
However, in your situation, the implementation of pension freedoms mean that with initial income tax relief, tax efficient growth, better death benefits, inheritance tax advantages and far greater flexibility than before, the case for using pensions is very strong.