Q. I have £12,000 to invest before the end of the tax year. I am 53 years old, and a higher rate taxpayer. Would you suggest an ISA or a Personal Pension contribution?
A. The short answer is “Yes”. Both ISAs and Personal Pensions are tax-efficient ways to invest, and with the changes in April meaning that pensions can be drawn more flexibly, they are arguably more similar than they used to be. They are both a wrapper around your investment giving protection from tax. The longer answer requires more information about your situation, and your objectives for the money. For example when do you want the money back, and is there a specific thing you need it for? ISAs can be accessed at any time, and it is now possible to invest up to £15,000 in a tax year. On the other hand you would not be able to access a pension fund until after age 55, and doing so could affect the amount of contributions allowed in the future. You would receive tax relief at your marginal rate of income tax up to your earnings in the tax year, so a £12,000 contribution would immediately benefit from 20% tax relief to become a £15,000 gross contribution, and you would be able to claim back up to a further £3,000 tax in your tax return, making the net cost £9,000 if all of the contribution attracted 40% tax relief in full. When you draw benefits from the pension, you would be able to draw 25% of the fund tax-free, with the balance at your marginal rate of tax. If you were still a higher rate taxpayer due to your other income, that gives you £10,500 from your £9,000 net cost, without considering any investment growth. The real benefit comes if you are either a basic rate or non-taxpayer when you draw the pension, as the return increases to £12,750 or £15,000 from a net investment of £9,000. There are other considerations and limits to consider, but a Chartered Financial Planner will be able to help decide which is the best option for your specific circumstances.
Q. I am considering transferring my Cash NISA to another provider as the interest rate is not very attractive. However, I have noticed that if I make withdrawals from it I will lose 6 months interest on that amount. Will this apply when I transfer?
A. This would depend upon the small print. You should read that or check with the provider but if still in doubt assume that the penalty will apply. It may not be such a great loss if the interest rate is very low and the 6 month penalty could be made up very quickly if the difference in the rate is substantial enough?
Q. I am an engineer aged 25 and currently saving £80 net per month into a personal pension plan. My hope is to retire at 55. My employer though has just given me information about joining their new scheme from the Peoples Pension. I can’t afford both. What would you suggest?
A. First of all by the time that you get to retirement the minimum age at which you will be allowed to take your pension benefits is going to be age 58. The government are now linking the minimum retirement age to 10 years before the state pension age which they have already announced will be 68 from 6 April 2044. This may well be brought forward as longevity inproves. Secondly, it sounds as if the company has started the process of Auto Enrolling you into a compulsory workplace pension. You will be in it unless you opt out. The advantage of staying in the new scheme your employer is arranging is that you will be able to benefit from a contribution paid by your employer, which I assume you don’t benefit from now.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
0191 217 3340
