Post Budget – pensions still more tax efficient than Isas (almost always) says Hargreaves Lansdown

26th March 2014


Hargreaves Lansdown says that pensions remain more tax efficient than Isas except for basic rate taxpayers who want to make big cash withdrawals.

The firm says that pensions win the pure numbers game, which isn’t surprising given the head start they get from up-front tax relief, and the fact 25% can be drawn as tax-free cash.

The exception is basic rate taxpayers who draw their whole pension as a lump sum, and so end up paying 40%, or even 45%, tax. For these savers an ISA works out as more tax-efficient.

The firm says that this illustrates the natural tax barriers that will encourage savers to take their pensions gradually, not to mention the fact that funds left in the pension grow free from UK income and capital gains tax.

From April 2015, the government are legislating to allow everyone to access as much of their pension as they want.

However HL adds: “ISAs are still more flexible than pensions because they can be drawn on at any time, whereas you must wait until age 55 to draw your pension. Furthermore, the government are considering increasing the minimum pension age in line with the State Pension Age, so it could rise to 57 by 2028”.

The firm has also crunched the numbers based on £15,000 portfolio depending on tax status and more.

Pensions and ISAs: in numbers

The following analysis is based on a £15,000 investment, achieving 6% growth each year.

TAX RATE                           VALUE AFTER 25 YEARS*

Tax working             In retirement            ISAs                                                    Pensions

Basic rate taxpayers


20% 0% £34,725 £43,406
20% 20% £34,725 £36,895
20% 40% £34,725 £30,384
20% 45% £34,725 £28,757


Higher rate taxpayers


40% 0% £34,725 £57,875
40% 20% £34,725 £49,194
40% 40% £34,725 £40,512
40% 45% £34,725 £38,342


Additional rate taxpayers


45% 20% £34,725 £53,666
45% 40% £34,725 £44,195
45% 45% £34,725 £41,828

*Adjusted for 2.5% annual inflation

£3,600 non-earners’  pension allowance

The firm adds that one of the perks of the pension system is that non-earners can still pay £2,880 into a pension and they will get £720 added in basic rate tax relief, boosting their pension to £3,600, even though they haven’t paid any tax.

This looks like a very tax-efficient way to save for a non-earning spouse, particularly if they will be a non-taxpayer in retirement.

The note adds: “For example, a non-earning spouse could pay in £2,880 today, and withdraw £3,600 in cash from April 2015 (provided they are over 55), taking the tax relief and staying within the £10,000 personal tax-free allowance

“Once the government realise how generous they are being here, the £3,600 non-earner allowance may become a casualty of the consultation process, which closes in June”.

Laith Khalaf, Head of Corporate Research adds: “There is now huge potential for investors to keep the taxman off their hard-earned savings. Everyone should take a look at their monthly investments in light of the Budget, and think about how they can make them more tax-efficient, as well as easier to manage.”

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