24 February 2015

1% or 2% is a typical 'tax free' cash ISA return*, but investing the same ISA cash in a pension can return up to 65%.

"The tax relief and other savings made by contributing into a pension can be eye-watering", explains Nick Fitzgerald, Head of Financial Planning at Brewin Dolphin. "It makes sense to do the calculations and consider how much you might save."

The wealth manager has done a variety of calculations to show the value of pension saving. To reach the 65% figure it considered an individual who earns £50,000 and receives a £10,000 bonus every year. The individual also has two children of school age.

This individual would make his first saving by 'sacrificing' the £10,000 bonus into his pension. That is no real sacrifice, of course, since it will significantly boost their retirement savings, as well as taking him or her below the limit beyond which the Child Benefit clawback kicks in. With two children, that's a saving of £1,771.

The same individual would also save National Insurance by making the payment. The result would be a saving of 2pc on his own NI: £200, and potentially receive 13.8pc* of his employers. Many employers operate schemes whereby this saving is passed onto the employee - a boost of 13.8pc on the £10,000 contribution.

Added to this is the 40% income tax relief - £4000 - that the individual will receive on his pension contribution as a higher rate taxpayer.

£1771 (Child Benefit clawback) + £200 (NI saving) + £4000 (income tax relief) = £5971

Brewin calculates that putting this £10,000 bonus into a pension, the real cost to the investor will be just £4029 and give him a total pension contribution of £11,380 (*including £1380 employer's NIC).

£5971 (reliefs) + £4029 investment + £1380 (employer's NIC) = £11,380.

This is an instant total return of 64.60%.

"The current tax saving on a cash ISA is pennies in real terms right now, but 40/45% tax relief, plus the potential to reinstate child benefit or your personal allowance, and potentially benefit from your employer's 13.8% National Insurance saving, can and often does make the case for saving into your pension compelling" Mr Fitzgerald said.

Pension freedoms
"Now factor in the new access rules from April 2015 that treat us all as grown-ups letting us draw our pension funds the way that best suits us, and it makes ISAs in cash look even weaker. So if you can't do both - do the pension - while such tax incentives remain."

The Budget
In only three weeks this could change - as some MPs and commentators have suggested, not least the Pensions Minister himself, that income tax relief could be equalised for all to 30%.

And so if you are coming up to retirement, put anything you can into your pension now - and you will be able to start drawing it back from age 55.

Compared to pensions, Cash ISAs looks expensive!

Salary

Bonus
invested in pension

Total Pay

National Insurance
Employee & Employer

Income Tax Relief

Child Benefit Restored
(2 kids)

Real Cost to You

Total Pension Contribution
Invested including employer NIC

Effective Relief

£50,000

£10,000

£60,000

15.8%

40%

£1,771

£4029

£11,380

64.60%

*Moneyfacts average cash ISA rate 1.58% 17th June 2014

-ENDs-

Notes to Editors

The Brewin Dolphin Group manages over £28 billion of funds for over 100,000 private clients and of this £21.3 billion is on a discretionary basis. BD has 30 offices throughout the UK, Eire and the Channel Islands.

Brewin Dolphin Limited ("BD") is the principal operating company of Brewin Dolphin Holdings PLC. BD is authorised and regulated by the Financial Conduct Authority and is a member of the London Stock Exchange.

Established in 1762, Brewin Dolphin is one of the UK's largest independently-owned private client wealth managers. The Group provides a wide-ranging investment management and financial planning service for private investors, charities and pension funds. Stocktrade is the Group's Execution-Only telephone and online dealing division.

Please see the Media Centre section on our website: http://www.brewindolphinmedia.co.uk/media.aspx for details and photos of all commentators and analysts throughout the BD Group.

The value of investments can fall and you may get back less than you invested.
No investment is suitable in all cases and if you have any doubts as to an investment's suitability then you should contact us.

Any tax allowances or thresholds mentioned are based on personal circumstances and current legislation which is subject to change.

The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin Ltd. No Director, representative or employee of Brewin Dolphin Ltd accepts liability for any direct or consequential loss arising from the use of this document or its contents.

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