Stakeholder Pension vs. Cash ISA
Which Tax-Free Investment Provides the Best Retirement Income?
Jan 8, 2009
Increasing numbers of people are opting for a cash ISA over a stakeholder pension scheme. Although the stakeholder pension offers tax breaks on contributions, a number of people prefer the flexibility that a cash ISA provides.
What is a Stakeholder Pension Scheme?
A stakeholder pension scheme is a portable plan that allows someone to invest up to £3,600 each financial year, regardless of income. It was designed to improve pension access to lower earners as the state pension is likely to provide an inadequate retirement income in the future.
Management charges are capped at 1.5% per annum which is cheaper than alternative pension plans. As little as £20 can be invested each month. The stakeholder pension is fully transferable and no exit fees can be applied. This allows people to move their pension when they change employers.
The stakeholder pension must be claimed between the age of 55 and 75. It is possible to claim 25% as a tax-free lump sum, but the remainder can only be taken as a taxable income.
After the age of 75, the pension pot is used to purchase an annuity. An annuity ensures that someone gets a life income regardless of whether they live for 40 years or 40 days.
Individual Savings Account - The Cash ISA
Inland Revenue rules permit someone to save up to £7,200 in an Individual Savings Account. Up to £3,600 can be invested in a cash ISA and £3,600 in a stocks and shares ISA. Some long-term investors opt to put the full £7,200 into a stocks and shares ISA, especially when seeking a retirement income.
A cash ISA is often seen as a flexible alternative to the stakeholder pension. Many savers dislike the fact that pensions have a requirement that an annuity has to be purchased at age 75. Whilst an ISA provides a variable income, there is no legal reason for surrendering the capital for a life-long income.
The returns that a cash ISA provides aren't likely to be as good as a stakeholder pension fund invested in equities. This is especially true in the current low interest rate climate where savings barely keep pace with inflation.
Whilst a cash ISA does enjoy a number of advantages, there is a great temptation to use the money early because it is too accessible. A stakeholder pension may not be as flexible, but it does stop people from blowing their retirement fund.
Those who found this article useful may also be interested in finding out more about level term life insurance.
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