Rural insurer NFU Mutual has warned farmers in their 50s and 60s that they could be “missing out on thousands of pounds” by continuing to prioritise individual savings accounts (ISAs) over investing in pensions.
The warning comes as latest figures show that 3.8 million people aged between 55 and 64 have ISAs worth an average of £38,257.
While money can normally be taken from ISAs at any time, flexible pension rules mean investors can access pensions from 55 years old (57 from 2028), taking the money as lump sums if they wish.
As well as this, the impact of pension tax relief means returns could be boosted by up to 41.6% for higher rate taxpayers, NFU Mutual said.
Chartered financial planner at NFU Mutual, Sean McCann, said: “Unless you’re about to retire, pensions can seem like a bit of a dull subject – but if you’re in your fifties or older, they can offer a whole new way of thinking about investment.
“Once you reach 55 you can take money from your pension either as lump sums, income or both. This means they can offer an attractive alternative to ISAs if you’re looking to build up funds for the future or to potentially pass on wealth free of inheritance tax.
“Latest figures show 3.8 million people aged between 55 and 64 hold ISAs with an average value of 38,000 – but many of them could be better off topping up their pension and claiming the tax relief.”
In the rural community, McCann said a lot of farmers will not have an employer paying into a pension scheme, so saving early and utilising pension benefits is a good idea, no matter their age.
“The tax boost you get when you put money into a pension can make a huge difference to returns,” he said.
Examples
NFU Mutual has created the following higher rate taxpayer example:
- Over 55, earning £60,500 a year and with £6,000 to invest;
- As a 40% income tax payer, £8,000 could be invested into a pension – HMRC would then boost with a further £2,000 giving them a fund of £10,000;
- Up to an additional £2,000 can then be claimed back direct from HMRC, meaning cost to them to create a £10,000 fund would be £6,000;
- Assumes no growth and no charges.
Still a 40% taxpayer when taking the money out:
Pension ISA Value of fund £10,000 £6,000 25% tax free £2,500 40% tax on remainder (£3,000) Cash available £7,000 £6,000
The pension would give 16.6% more than the ISA.
A 20% taxpayer – with income of £42,770 or less – when taking the money out:
Pension ISA Value of fund £10,000 £6,000 25% tax free £2,500 20% tax on remainder (£1,500) Cash available £8,500 £6,000
McCann said: “One of the advantages of pensions is that, in most cases, any money left in the fund can be left free of inheritance tax.
“If you die before 75, in most cases, the benefits can be paid free of income tax, although there are limits if paid as a lump sum.
“If you die after 75 your beneficiaries will be taxed on the money paid out to them. ISAs will be included in any inheritance tax assessments.”
