We all love tax efficient savings and tend to make best use of them. One of the main benefits of pensions is the tax relief that is added to premiums when you invest. In addition, you are able to draw 25% of your funds tax free in retirement. These are benefits that have been around for many years, however this is constantly under threat, with the annual allowance, the amount you can invest each tax year and receive tax relief, to being cut from £255,000 in 2010 to £40,000 in this tax year.

This is a valuable benefit as 20% tax relief is available at source and a further 20% available to eligible higher tax payers via their tax returns. This can increase an initial contribution of £6,000 to £7,500 or £10,000 building a retirement fund faster. When it comes to Chancellors and their budgets and how adding extra duty to things like alcohol, raises lots of money in the short term and let’s face it, not many people will stop buying alcohol because of it, this is an easy win. They even get to do it again next year.

Attacking pensions seems far more serious to me. If the benefit of saving for our retirement reduces then there’s a good chance people will be less inclined to do it. We all like an incentive.
When we consider the issues with the state pension this is all the more serious. I appreciate that reducing the annual allowance saves the government money now but what effect will this have long term.

Earlier in 2018 the governments actuary department (GAD) found that the funds set aside for the provision of the state pension will run out by 2032. That might sound like a way off but it’s only 14 years from here. To maintain the state pension the government will have to pump more national insurance contributions into the pot or increase the state pension age even further. More likely, a combination of both.

So, what can we do over and above saving into a pension. There is an alternative way to save that I find offers many benefits when you come to retirement. By using ISA’s, you are able to save tax efficiently for the future and can currently contribute £20,000 each tax year. Just like pensions any growth on the fund is free from capital gains and income tax. You may not get the tax relief when you invest, but you are able to withdraw the funds tax free when the time comes. Therefore, if you are a tax payer in retirement this is a useful way of taking additional tax-free income.

Kristina Bailey
Dip FA CeMAP

This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case. Based upon our understanding of UK tax law at November 2018. The value of investments can fall as well as rise and you may not get back the full value of your investment