Alternative retirement savings
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For some individuals, it may be worth considering other means of saving for their retirement – either in addition to, or in place of, pension plans.
Two alternative product types commonly used for this purpose are ISAs and Investment Bonds , each with very different features and pro’s and con’s.
Find out more about:
Individual Savings Accounts (ISAs)
As well as being a generally tax-efficient form of everyday savings, Individual Savings Accounts (ISAs) can also form part of your retirement savings. Each tax year you can invest up to £10,680 (2011/12) in an ISA and pay no UK income tax or capital gains tax on those sums or their growth.
An ISA is not an investment in itself, but a ‘wrapper’ that shields your investments (whether they be shares, funds or cash etc) from tax if operated within the applicable rules.
The tax benefits are on exit, not entry – your income and/or profits from the ISA (rather than the amount you invest) are exempt from both UK Income Tax and Capital Gains Tax. You can usually change the investments you hold within your ISA wrapper if you wish. You can also move your ISA from one product provider to another, so it is possible to consolidate the different ISAs that you hold.
In April 2008 all Personal Equity Plans (PEPs) became ISAs to simplify the tax-efficient savings schemes.
These can now be transferred into existing ISA if you wish to consolidate your holdings with one provider and potentially reduce administration costs.
There are two types of ISA:
- Cash ISA – to which up to £5,100 pa (20010/11) can be contributed
- Stocks & Shares or Investment ISA – to which up to £10,680* pa (2011/12) can be contributed, depending on whether you have also contributed to a Cash ISA in the same tax year.
(Those aged 16 or 17 years of age can only open a Cash ISA.)
Although there is a restriction on the amount you can contribute each tax year, there is no restriction on the growth or income received on those investments, which are both tax-free in an ISA.
In fact, through shrewd investment decisions, some customers of Barclays Stockbrokers have amassed over £1m in their ISAs – all free of UK income tax or capital gains tax.
ISAs allow you to:
- Accumulate funds (including profits on your investment) free of UK income tax and capital gains tax
- Withdraw income from your ISA without it becoming subject to income tax
- Hold cash and/or shares or your choice from a wide range of investment funds
- Trade investments freely within your ISA since there are no taxes payable as a result of crystallising gains.
Whichever type of ISA you choose, you should keep in mind that:
- ISAs count as part of your estate for inheritance tax purposes
- There are limits on the amounts you can contribute to an ISA, as shown above
- The tax rules relating to ISAs may change in the future.
ISAs allow you to build your own personal ‘tax haven’ if you use your allowance every year. However, if you miss the deadline (5 April) for investing in any tax year, you will lose that tax year’s un-invested ISA allowance forever.
 Saving for retirement |
Investment bonds |
