My partner and I are in our 50s. I have both a workplace and a private pension, while she has only a very small workplace pension (thanks to auto-enrolment). But my partner also has approximately £80,000 in an Isa, and about the same in a fixed-term savings account, which will soon mature.
Would she be better off putting this money into a private pension even at this late stage? She is 55 and hopes to retire within the next couple of years. At present, she works only a few hours a week and earns around £1,000 a month.
The right approach for you and your partner will depend on your circumstances, financial goals and attitude to risk.
You have not said whether your partner’s Isas are Stocks and Shares or Cash Isas. If she is saving for the long term, then she is likely to get a better return from Stocks and Shares Isas.
However, a big advantage of investing in a pension is that your partner will benefit from initial tax relief at her marginal rate, which for her will be at the basic rate of tax. When she takes her benefits, she can also take 25% as a tax-free lump sum, while the rest will be subject to income tax. So investing in a pension would be particularly beneficial if your partner is a non-taxpayer when she draws her pension benefits.
Pensions have become far more flexible since pension freedoms were introduced in April 2015. This effectively means that your partner will be able to access her pension whenever and however she wants from age 55, although she would need to be wary of taking out too much at once as this would lead to a higher tax bill.
So if she invested in a pension she would get an initial tax-relief boost, be able to access 25% of her fund tax-free and have the freedom to access the rest of her pension fund as she saw fit, which could potentially mean having control over the amount of income tax she pays on withdrawals. Plus, if this is a concern for her, money inside a pension can usually be left to future generations without being liable to inheritance tax (IHT) – unlike money in an Isa, which will form part of your estate.
Pension contributions that benefit from tax relief are restricted to somebody’s relevant UK earnings in that particular tax year, meaning you can’t pay more than you earn into your pension and get tax relief. With an annual income of £12,000, the most she could move from her Isas into her pension this tax year – and receive tax relief on – would be £12,000.
So while there is not a definitive answer to the question without knowing more about her circumstances, there is no denying the tax benefits of a pension and, for many people, the best approach to long-term saving is a combination of pensions and Isas.
Patrick Connolly is a certified financial planner at Chase de Vere