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Choosing An Isa As A Pension Saver
First things first, what is an ISA? Types of ISA Cash ISA: Acts as a tax free wrapper protecting your savings from the tax man. A cash ISA is broadly similar to a traditional savings account but with added tax benefits. Stocks and shares ISA: Rather than letting your money languish you can use the tax free benefits of an ISA to invest your savings in a variety of different investments including stocks and funds. Stocks and shares ISAs are generally higher risk than a cash ISA due to the investment element, but a stocks and shares ISA will generally come with the potential for greater return. Stocks and shares ISAs can prove to be a good long term savings option. Finding the right ISA for your needs will depend on your own individual circumstances, you may want to speak to an independent financial advisor to help you discover the right option for you. ISA limits There is an overall annual limit to the amount that you can pay into ISAs, the following applies for the 2011-2012 financial year: 1) You can pay up to £5340 into a cash ISA each year and invest up to the full remaining amount into a stocks and shares ISA. 2) You can put up to the full £10,680 into a stocks and shares ISA. 3) There is an overall annual limit to the amount that you can pay into ISAs, for the 2011-2012 financial year. 4) You can pay up to £5340 into a cash ISA each year and invest up to the full remaining amount into a stocks and shares ISA. 5) Alternatively, you can put up to the full £10,680 into a stocks and shares ISA. Because of the limits to the amount you can save through an ISA you may want to consider combining such saving with a more traditional pension fund which will enjoy a much more generous cap on the amount you can save each year, pensions enjoy a lifetime saving limit of £1.5million which is considerably more than many of us manage to save. ISAs as a pension saver One of the major advantages of using ISAs as a pension saving method is that it will allow you greater flexibility. Using ISAs will give you have access to your cash when you need it (within the terms of your ISA), even if you need it before you hit retirement. As well as allowing you to decide when you would like to start drawing from your fund you also have the option of drawing from an ISA directly rather than purchasing an annuity when it comes to retirement. Tax benefits An ISA will protect your money from Capital Gains Tax and UK Income Tax, this means that you will not pay tax on any income you drawn from such a fund or any capital gains. When you cash in a traditional pension fund you can normally opt to take up to 25% as a tax free lump sum but you will usually have to pay Income Tax on any income that you receive. However, choosing an ISA will mean that you will not be eligible for tax relief on contributions as you would be if you paid into a pension fund. By opting to save with an ISA you will also forego employer contributions, which can be very valuable indeed when it comes to pension saving, especially in view of new legislation that will force employers to offer pension contributions to all eligible jobholders. As a result, it can be a good idea to couple traditional pension funds and ISAs together and use a combination of the two to save for your retirement, allowing you to enjoy the respective benefits of both savings options. Pension income If you choose to invest solely in an ISA instead of a more traditional pension fund you can still purchase an annuity but you will also have the option of drawing tax free directly from the ISA. However, it should be noted that, unless carefully planned, by drawing directly from an ISA you run the risk of a prematurely depleted pension fund, whereas an annuity would provide you with a guaranteed income for the rest of your life. Though annuity rates are particularly low at the moment they may pick up again by the time you reach retirement, so it is important to consider all your options and review the situation regularly. If you are unsure about any of your options when it comes to savings for retirement, or if you are thinking of saving through an ISA you may want to speak to an independent financial advisor who can help guide you through your options. Article Directory: http://www.articledashboard.com John T Hughes writes for Savings Bonds, a site dedicated to helping you to find leading Savings or Investment Bonds option. |
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