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Rakhi Vasavada
Rakhi Vasavada, Financial Advisor
Category: Finance
Satisfied Customers: 4546
Experience:  Attorney and Financial Expert. Have specialization in Financial Laws.Practice experience of over 13 years
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My husband has to decide what to do with two small pension

Customer Question

My husband has to decide what to do with two small pension pots that total around £26,000. He is a 40% tax payer and is just turned 60. I understand that he could take 25% of each pot and invest the rest, but the IFA I have conacted all have a minimum investment ot 50K so I don't really know where to go next. I suppose like many my question is where do I go for the best advice? Could we put it into ISA accounts and could these be in either of our names or just in his? Or, should he just put it into his work pension for another few years?
Submitted: 1 year ago.
Category: Finance
Expert:  Rakhi Vasavada replied 1 year ago.

Dear *****,

Hello and welcome. Thank you for providing an opportunity to assist you.

I believe, WORK PENSION should work better for you. Both Work Pensions and ISA have their own pros and cons which we must weigh. However, if we take a holistic view, WORK PENSION should work better for you. Let me explain.

An individual savings account or ISA is a tax free savings account. It's similar to usual savings accounts, but there is no tax to pay on the interest you earn with an ISA. HOWEVER, you’ll see a better return on your investment by paying into a workplace pension scheme when compared to an ISA account. This is because pensions tend to have the edge when it comes to tax relief, leaving your capital to heirs, and has the added benefit that your employer pays in too.

Having said this, it makes sense from tax point of view as well.

When you retire part of your income will fall into lower rates of income tax compared to your earnings when you were employed. Currently for the tax year 2015/2016 the first £10,600 you earn is tax free. What this essentially means is that;
Higher rate tax payers can earn 40% tax relief on pension contributions, but could end up only paying 20% or 0% tax when they retire. A gain of 20% to 40%.
Basic rate tax payers can earn 20% tax relief on pension contributions, but could end up only paying 0% tax for most of their withdrawals (up to the personal allowance of £10,600) and then 20% thereafter. A gain for most of 20%.

These gains are unmatched when compared to ISAs due to the way the tax paid. With ISA’s the tax is already paid. Whereas with your pension you pay the tax later and are able to utilise the fact you’ll likely be earning less and take advantage of your personal allowance and potentially lower tax bands.

Over and above this, 25% tax free withdrawals benefit anyway remains every year which again is unrivalled by ISAs.

If we examine tax implication at the time of death, While pensions and ISAs can be passed onto a spouse tax free, for inheritance tax purposes pensions remain outside your estate. What this means is that it is more tax efficient to leave your pension to your children or grandchildren when compared to ISAs.

So, overall, Work Pension should work better for you.

I am sure this would help.

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Warm Regards,