The Standard Life overall conclusion is that the pension proves to have the better performance in most scenarios and greater flexibility on passing on wealth to family members. With April’s pension freedoms potentially taking access out of the equation for the over 55’s, it begs the question…. should clients trade in their existing ISA savings for a pension contribution?
Of course, this requires sufficient earnings, annual allowance and lifetime allowance headroom. With all of those things taken as a given though, a move towards pensions is certainly something worth considering over the years leading up to retirement. Carrying forward and spreading contributions across tax years can help and the result could be an increased fund with more tax efficient wealth transfer options.
Standard Life’s evidence concludes that pensions will, like for like, outperform ISAs in the majority of client scenarios. This is down to the combination of tax relief on contributions and the ability to take a quarter of the fund tax free.
As a result, there are very few situations where the firm feel the ISA will have the upper hand. The only common scenarios would be where:
- Access is needed prior to age 55, and
- Anyone receiving tax relief at 20% on contributions but by accessing their pension in one go ends up paying tax at 40% on a large slice of their pension fund.
Anyone who has sufficient allowances and will receive tax relief at 40% on pension contributions will always be in a better position saving in a pension, regardless of how much tax they pay on the way out. Factor in the new pension death benefit rules and the case for pensions is potentially even stronger. It may require a shift in mindset but crunching the numbers suggests that a pension ought to be the default saving choice and moving existing savings into pensions in the run up to retirement should always be considered.
Sources: www.standardlife.co.uk (Advisorzone article: 2015/02/19)
