Why you should make use of pensions and ISAs

The easiest way to improve your investment returns is to invest in a tax efficient account like a pension or ISA. These allow you to minimise your tax liabilities so that you get to keep more of the income and capital gains for yourself.

If you are saving for retirement the best option is normally a pension. These entitle you to full tax relief on contributions of up to 100% of your annual earnings or £40,000, whichever is the lower, unless you are a very high earner with income of more than £150,000 per annum.


For employees the most cost-effective option is to join your workplace pension scheme. These tend to offer a fairly limited range of investments to choose from – normally it will just be managed funds, not individual shares – but most employers will make contributions on your behalf.

Every £80 that a basic rate taxpayer contributes to their workplace pension will be increased by £20 tax relief. Your employer will generally top it up even further, with many paying an extra 5% or more. This would mean that a £105 contribution would only actually cost you £80.

Those in the 40% income tax bracket would have to pay even less as they would be entitled to £40 tax relief, so a contribution of £105 would only cost them £60 assuming that their employer paid in 5% on their behalf.

If you are saving for retirement the best option is normally a pension.

If you are self-employed or want more choice over your investments you could open a Self-Invested Personal Pension (SIPP). These normally provide access to a wider range of managed funds as well as individual shares and bonds. A SIPP operates in a similar way to a workplace pension except that you have to claim the higher rate tax relief on your end of year tax return.

Once the money is invested in a pension there is no income tax to pay on the investment income and no Capital Gains Tax on the investment gains. The earliest you can take the benefits is at age 55, rising to 57 from 2028, at which point you can withdraw up to 25% as a tax-free lump sum with all the other withdrawals being taxed as income.

If you are between the ages of 18 and 39 and saving up for the deposit for your first house or for your retirement you could open a Lifetime ISA. These allow you to pay in up to a maximum of £4,000 per tax year with the government topping the annual contributions up by a 25% bonus each year until your fiftieth birthday.


All the gains and income in a Lifetime ISA accrue tax-free, just like in a pension. You can take the money out tax-free and without a government charge to help buy your first home worth up to £450,000 at any time from 12 months after you first save into the account. Otherwise you can wait until you are 60 and use it to provide a tax-free source of retirement income.

The other main option is a Stocks & Shares ISA. You can pay in up to a maximum of £20,000 a year – less whatever you pay into any other type of ISA – and invest it in a wide range of permitted investments. There is no tax to pay on the income or gains and you can take your money out tax-free whenever you want without any government charge, although there is no government bonus or tax relief on the contributions.

Nick Sudbury: