You have just received a surprise £5,000 bonus from work.
You’re financially stable, so you want to put the money away for your children, if you have them, or another beneficiary who will receive it as part of their inheritance. You never intend to spend it yourself.
All other things being equal, where’s the best place to put that money?
Your choices are your pension or an ISA (a tax-free account offered by banks, building societies and other financial institutions).
Which do you pick?
Of course, you would have to consult your financial adviser to receive bespoke advice. But it is likely that they would suggest putting the money into your pension.
The reason is important to understand, if you want to maximise the amount you are going to leave your beneficiaries, including any children and grandchildren, one day.
You see, there will be Inheritance Tax to pay on your estate, provided it is worth more than £325,000 (or double that for a couple).
What assets are liable for Inheritance Tax?
Houses are – that’s why so many home owners are stuck with big IHT bills, even if they are relatively cash-poor. In certain areas of the country, the average house is worth far more than £325,000.
So is your car…. Any land you own… Jewellery…. Shares…. And even pay-outs from insurance policies.
Own any of those, and they will bump up the value of your estate – and the eventual Inheritance Tax bill.
Last (for our purposes…) but not least, ISAs are also included.
So while your ISA can grow free from all tax, if you try to leave the money to the next generation, it will be liable for IHT.
Pensions, on the other hand, fall outside your estate for Inheritance Tax purposes. It doesn’t matter how big your pension grows – even if it’s worth more than your house, it won’t attract Inheritance Tax.