Ask the Expert- Matthew Baines

The main drawback when looking at pensions is they can't be accessed until age 55 (rising to 57 from April 2028) so if you plan to retire before this age, you will need other accessible funds to see you through. Let's assume though that you are planning to retire at age 60, where is it best to save your £500 per month? You already have £6,000 per year going in through work, but you are able to save up to 100% of your earnings into a pension, up to the annual allowance of £40,000. For example, if you earn £30,000, this is how much you can save into a pension each year. If you were to save £500 per month over 10 years into an ISA and it grew by 3% each year, you would have £70,847. The funds would grow free of capital gains and income tax and can be accessed without any tax liability.

If you were switch your £500 to a pension, you would receive basic rate tax relief within the pension which would gross your contribution up to £625 per month. The pension would grow free of capital gains and income tax, but with the advantage of 3% growth being added to a larger sum each month. The resulting figure at the end of 10 years would be £88,558.

With a pension 25% is tax-free and the remainder is taxable at your marginal rate. Assuming this is 20%, you would still receive £75,275 net if accessed across a couple of tax years and so would be £4,428 better off. If you are either a higher rate tax-payer and so can claim higher rate tax relief via self-assessment or can access some of your pension without paying tax (you draw on it and are within your £12,570 personal allowance) then you will be even better off. In most cases the pension is the clear winner, but please seek advice based on your personal circumstances. 

This article was published in the East Anglian Daily Times on Monday 10th October 2022