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UK Pension Alternatives - ISAs, Endowment Policies

UK Pension Alternatives - ISAs, Endowment Policies
Published:  22 Feb at 6 PM
The most popular alternative to pensions are ISA’s. They are special types of investments provided by ISA managers (basically the usual pension providers and many other investment companies) which are free of income tax on dividends and interest. In addition to this, it is exempt from capital gains tax. You can have an ISA and any form of pension at the same time.

There are two different types of ISA – a Cash ISA for savings in the bank and an investment ISA for stock market based investments. You have an annual allowance of £10,200 and can invest up to half in cash. The balance (or all of it) can go into an investment ISA. Investment ISAs have the potential of a greater reward than cash – but could also lose you some or all of your money. Your ISA could be invested in a wide range of shares and bonds including unit and investment trusts. You can put your money in just about anything, anywhere in the world. The main difference with a pension is that you make your payments into an ISA from your net income ie income that you've already been taxed on. However, after this, ISAs are exempt from income tax and capital gains tax. If, on retirement, you convert the ISA to an annuity you would pay less tax on the income from it than a pension fund annuity. Anyone over 18 can have an ISA providing they are UK residents.

One of the problems with a personal pension is that if you have no earnings, you're probably not benefitting from the tax advantages although those earning nothing can claim basic tax relief on contributions of up to £3,600 a year. You only have to put in £2,880 to get this amount of pension contribution. But you have your annual ISA limit whatever you contribute to a pension and whether you work or not. The other main advantage of ISAs over pensions is flexibility particularly your ability to get to your money at any time. Unlike a pension pot which has to be turned into an annuity, you can take your ISA when and how you like. So you can spend it before you die – or tomorrow if you want!

Another option, although not a very popular one for good reason, is endowment policies. As anyone whose mortgage endowment will fail to pay off their loan knows, endowments have had disastrous effects. An endowment is where you pay a regular sum into an investment policy operated by an insurance/pension company for a fixed period of at least ten years which is also inclusive of your life insurance. This used to be the traditional way to organise regular savings and became a popular method of mortgage repayment. The downside is high charges, disappointing performances and poor surrender values. They're not flexible so don't really compete with the majority of the major other options these days so unless an Independent Financial Adviser recommends one for a very good reason, it’s best to stick with the alternative options.

Endowments are now very unpopular following a string of very bad publicity as a result of warnings from many well known pension and investment product providers about their poor performance - meaning people have had to increase their mortgage payments to ensure they pay off their loan. Otherwise, they could well be dealing with their mortgage well into retirement.

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