Inheritance Tax: Pension versus ISA

That is the question...

IHT planning...pension or ISA?

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.

That’s one of the reasons pensions make such a fantastic, tax-efficient investment.

The wider point here, though, is that if you want to leave loved ones some money one day, you have to be very conscious of the tax implications of your financial decisions.

If you’re not a financial expert, it’s easy to get it wrong. And that’s potentially very costly. So, do speak to a professional adviser.

If you chose to put your £5,000 into the ISA rather than the pension, for example, that could potentially cost your children or other beneficiaries £2,000 in tax down the line.

Unfortunately, it never occurs to most people that ISAs could attract Inheritance Tax.

So when you start thinking about how to organise your money so your loved ones are protected and cared for, if something happens to you…

….take financial advice

A good financial adviser will see things you probably don’t.

They’ll notice mistakes – where you’re investing money in tax-inefficient ways. They will also be able to suggest solutions to minimise your Inheritance Tax liability.

To help you navigate this process, we’ve produced a guide called “Who gets what when I die?”

It walks you through some of the key issues you need to consider, before you write your will or think about how to distribute your assets in the event of your death. 

Issues like: ISA or pension?

It is also extremely useful if you have an elderly parent, and want to talk to them about getting their financial affairs in order, in case the worst happens.

It’s completely free – so check it out now by clicking the link here.