The following is a transcript of a bonus episode of The Pension Confident Podcast - Tips for the end of the tax year. You can listen to this bonus episode or scroll on to read the conversation.
PHILIPPA: Hi, welcome to another bonus episode and as the end of the tax year is coming up fast we’re going to be talking pensions, ISAs and tax!
From tax relief to ISA limits, we’ve gathered some top tips and insights from our guests to help you get your finances in order. And before we get going, remember, anything discussed on the podcast shouldn’t be regarded as financial or legal advice, and when investing, your capital is at risk.
OK, first up, you’ve probably heard people talk about tax relief but what is it and how does it work? Here’s Financial Journalist and Founder of Much More With Less, Faith Archer from episode 32 with a great little explainer.
FAITH: One of the good things about pensions is the government wants to bribe us into saving for retirement. You get free money on top of your pension contributions. You automatically get basic rate tax relief. Every pound you pay into a pension, the tax relief added is 25p as a basic rate taxpayer, and you can claim back further tax relief if you’re a higher or additional rate taxpayer. And also, if you’re paying into a workplace pension, then by law, your employer has to contribute to that pension fund as well. There’s certain minimum amounts they’re set to do, but different employers can be more generous. It might be that they’re willing, if you pay in more, they’re willing to match those contributions and put even more money towards your retirement.
PHILIPPA: So much for pensions, what about other savings? Here’s Founder of Boring Money Holly Mackay from episode 29 talking about Individual Savings Accounts - or ISAs, and another way to save your money tax-free that you may not know about.
HOLLY: I love ISAs. They’re like Tupperware pots. You stick your money in, and the taxman can’t get his hands on what’s inside that pot. This is really important because the tax take for all of us is going up and up and up - and is just going to keep going up. So, ISAs are awesome. But, spoiler alert, we also get a certain amount of money every year we can earn in interest and not pay tax on, whether it’s in an ISA or not.
PHILIPPA: And that’s currently?
HOLLY: That’s the Personal Savings Allowance. It depends on how much tax you pay. If you’re a higher rate taxpayer, you can earn £500 a year in interest before you pay any tax on it. If you’re a basic rate taxpayer -
PHILIPPA: Which is most of us.
HOLLY: Yeah, you can earn £1,000 a year in interest. For me, the smart move, I think, is to look at your first lump sum of money, any cash savings, and go for the good rates. And quite often, those aren’t in Cash ISAs. But just make sure that the interest you earn on that every year isn’t going to go above that Personal Savings Allowance. So, £500 if you’re a higher rate taxpayer or £1,000 if you’re a basic rate taxpayer.
PHILIPPA: That’s a lot of interest, isn’t it? Most people aren’t going to be getting that much interest on their savings. So, they’re not going to be paying any tax regardless.
HOLLY: And with current interest rates as they are, to give you an idea, if you’re a basic rate taxpayer, that’d be about £20,000 in a savings account. That’d generate about £1,000 a year. So, it’s quite generous.
PHILIPPA: There’s another type of ISA well worth knowing about and that’s called the LISA. Here’s Holly again.
HOLLY: But I think for people, particularly people in their 20s, 30s who’re thinking about buying a property, you’re cautious about locking your money away into a pension. And this is where I think for people under 40, an alternative is the Lifetime ISA. This is a vehicle where you can pay in up to £4,000 a year if you’re under 40, and the government will match that with up to £1,000 every year. So that’s a total of £5,000 you could save there. There are catches with that. You have to spend that money either on buying a first property, or if you change your mind and decide not to, you can then use that for retirement. If you change your mind and take the money out sooner, you get clobbered with punitive rates. So, you have to be pretty damn sure that you’re either going to buy a property or use it for retirement. But that’s a vehicle that does give people who’re saving for a property a bit of flex. It’s an alternative to a pension. There are pros and cons to both. But particularly, I think for self-employed people who don’t have those workplace contributions it’s an interesting tax wrapper to have a look at.
PHILIPPA: And talking about those pros and cons, let’s hear from PensionBee’s VP Public Affairs Becky O’Connor in episode 17 when she talked about how you can use ISAs and pensions together.
BECKY: My investments are like a wild flower garden. I’ve got bits of money saved everywhere. There’s a bit in a Lifetime ISA, a bit in a Stocks and Shares ISA, some in Junior ISAs for my kids. They’re not all doing well and I’m not contributing to all of them, all the time either, they’re all there - but they’re not pension substitutes. Although with the Lifetime ISA, I do quite like the idea of getting this bit of cash at 60. With a pension you can access it at 55, although that’s going up to 57 from 2028. I just quite like the idea of having this little extra bit [saved], because my boys will then be a certain age, where they might be getting married or buying a house, or something. So that’ll be quite nice.
PHILIPPA: Becky, when we were talking about this podcast a couple of days ago, you raised this point didn’t you - about the Lifetime ISA being closest to a pension. If you’ve already got a home and you have a pension, is there any point in having a Lifetime ISA?
BECKY: Yeah, I think it’s something people come up against as a bit of a dilemma. For the reason I previously gave, it might be quite nice to have a pot that’s coming your way at 60. Obviously with the Lifetime ISA, you have the bonus and with pensions, you have the tax relief. However much you get in tax relief depends on whether you’re a basic, high rate or additional rate taxpayer. So, it depends on your taxpayer status, for one thing, as to which works out better.
There’s an annual allowance on pension contributions. And there’s another kind of loophole, which means you can use a previous year’s allowances on your pension as well, which is worth knowing about, if for some reason you’ve quite a bit of cash coming your way.
CLAER: If you come into an inheritance?
BECKY: Exactly. And that can be quite handy at that point.
PHILIPPA: Let’s wrap this episode up with Financial Expert and Author Peter Komolafe. In episode 17 he shares something to keep in mind if you’re thinking about opening more than one ISA.
PETER: Right, the ISA rules can be very, very confusing sometimes. So if you have a Stocks and Shares ISA, you can have that and you can also have a Lifetime ISA invested in Stocks and Shares as well. That’s completely fine. What you can’t do, is have a Lifetime Stocks and Shares ISA open with X provider and then go open another one with Y provider in the same tax year. So you’ve gotta be sure in terms of who you’re choosing to allocate. You can have a Stocks and Shares ISA, just a normal one, and a Lifetime ISA that’s invested in Stocks and Shares as well. That’s completely fine and within the rules.
PHILIPPA: And that’s a wrap. For more information around pensions and tax, head to the PensionBee website and search for “Pensions Explained“.
Just a last reminder before we go that anything discussed on the podcast shouldn’t be regarded as financial or legal advice. When investing, your capital is at risk.
You can listen back to all those episodes in full wherever you get your podcasts. We’re also on YouTube and in the PensionBee app too! If you subscribe right now you’ll never miss an episode and while you’re doing that, please do leave us a rating and a review. It’ll only take a moment and you know we love to know what you think!
Thanks for listening.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
