This is for financial adviser use only and shouldn’t be relied upon by any other person.

MAKING THE MOST OF PENSION AND ISA CONTRIBUTIONS Individual Savings Accounts (ISA) are a popular way to save. The ISA allowance for the 2016/17 tax year is £15,240. This leaflet tells you more about how your client’s ISA savings could complement their pension plan.

COULD YOUR CLIENT’S PENSION AND ISA WORK TOGETHER? Not all of your clients will be at the same point in their lives. Some may be further from their retirement age and happy to continue paying into their ISA. Whilst others may be closer to their retirement age, or in the final phase of their working life, and want to think about maximising their retirement savings. These clients could use some of their ISA savings to make regular/single contributions into their pension plan. PENSION & ISA KEY POINTS:

• During the 2014/15 tax year, around 13 million people saved into an ISA, with nearly 80% going into cash1. • ISAs are tax efficient and often offer easy access to savings. • Pensions are a longer term savings vehicle that provide financial support during retirement.

Pension Portfolio

• Pensions allow greater opportunities for those wanting to access their retirement savings from age 55.

1 HMRC Individual Savings Account (ISA) Statistics, August 2015.

Before we look at a couple of examples, we need to highlight some important points. • This information is based on our understanding of the current legislation and it could change in the future.

• If you’re recommending your client moves money from their ISA into a pension plan, they need to understand that they can’t access this money until they retire. If they need to access this money sooner, it may not be in their best interests.

• If they’re moving money from a cash ISA, they’ll be taking on additional risks which must suit their attitude to risk and capacity for loss.

Example 1 – Regular contributions To see how pension and ISAs compare, we’ve produced the following example for a basic rate tax payer. We’ve assumed a 50 year old pays £100 a month until age 65 and we’ve ignored any fund growth and have assumed it’s the same for both. £25,000 £20,000

£10,000 £5,000

Taxable

• If £100 is paid into a pension plan and an ISA, and they’re on a like for like basis, the pension plan fund would out project the ISA.

• Pension contributions paid by basic rate tax payers will receive 20% tax relief from HM Revenue & Customs (HMRC). Higher rate tax payers can receive a further 20% tax relief but it will need to be claimed via their tax return. • Any time after age 55, 25% of the plan value can be taken from a pension plan tax-free, the remainder will be taxed at the client’s marginal rate.

£15,000

0

Key points

Pension Plan Tax-free

ISA

• A client’s tax position can change from when they started paying into their plan to when they’re ready to retire. It is possible contributions paid into the plan receive higher rate tax relief but when they’re paid out they’re only taxed at the basic rate. • The tax-free benefits make ISAs appealing, however the money used to pay the contribution has already been taxed as earned income.

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Example 2 – Regular and single contributions

Key points

David is 50 years old. He’s self-employed, earns £30,000 a year and is a basic rate taxpayer. He currently pays £400 a month into an ISA and over the years has built up ISA savings worth £60,000. He already has provisions in place to pay off his mortgage in a few years time and has an additional £10,000 in savings for emergencies.

• Regardless of whether David chose option 1 or 2, the total contributions being paid into his pension plan are within his earnings for 2016/17 and the £40,000 annual allowance entitlement. This means his contributions will receive tax relief and he won’t incur any additional tax charges.

Although there are a variety of options available to David, we’ll look at a couple of PP and ISA options that could help him make the most of his opportunities. We’re assuming David retires at age 65, agrees a 1% annual management charge, no adviser charge and the figures are projecting at a rate of 5%. Neither of these options will affect David’s monthly outgoings;

• These figures demonstrate the additional tax relief David will benefit from by paying into a pension plan.

• David could reduce his ISA contribution and pay the difference into a pension plan, or

• As David’s total pension contributions are within the annual allowance, he doesn’t need to carry forward part of any unused annual allowance. However some of your clients may be different so you’ll need to take this into account when speaking to them. • It’s important to point out that the figures contained within this example are not inflation adjusted and the amount David builds up in his pension savings would be taxable when the time comes for him to take them.

• he could reduce his ISA contribution, pay the difference into a pension plan and use £15,240 from his ISA savings to make a single contribution into a pension plan. Option 1

If David reduced his ISA contribution down to £200 and paid £200 into a pension plan at the same time, he could build up ISA and/or pension savings of;

Option 2

If David paid £200 into a pension plan along with a £15,240 single contribution, he could build up ISA and/or pension savings of;

Monthly contribution ISA £400 Monthly contribution ISA £200 Pension plan £200

£97,794

£110,018

Difference

£12,224

ISA contributions

£76,146

Monthly £200 Single £15,240 Pension contributions Monthly £200 Single £15,240

£95,182

Difference

£19,036

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WHAT’S THE DIFFERENCE BETWEEN PENSIONS AND ISAs? Let’s have a look at some of the differences between our Pension Portfolio Plan and ISAs Features

Pension Portfolio

Min/Max age

• None/74.

Tax relief on contributions

• Basic rate tax relief of 20% is automatically

Access

• Cannot be accessed until age 55.

added to the contributions when they’re applied to the plan.

ISA

• 16 for an adult ISA/None. • Often instant access. • No tax relief.

• Any higher rate tax relief due should be Tax on withdrawals

claimed via the client’s tax return.

• Tax will be applied at the client’s marginal

• Growth/income is tax-free and free from

• 25% tax-free cash (TFC) can be taken

• No need to declare to the HMRC.

rate on retirement income. at retirement.

capital gains tax.

• Can take one or more lump sum payments, Allowances/contribution limits

25% will be paid tax-free and 75% will be taxed at the emergency rate.

• Tax relief will be paid on contributions of up

to 100% of earnings, or £3,600 if more, within the same tax year.

• Pension contributions above the annual

allowance entitlement of £40,000 within a pension input period may be subject to a tax charge at the individual’s marginal rate of tax. It may be possible to carry forward unused annual allowance to remove or reduce the tax charge.

• ISA limit for the 2016/17 tax year is £15,240.

• Savings can be split across cash and stock/ shares ISAs without any maximums invested within each.

• If the money purchase annual allowance

(MPAA) has been triggered the £40,000 is reduced to £10,000 for contributions paid to all defined contribution plans. Carry forward is not available on defined contributions if the MPAA has been triggered.

• Employers can pay contributions. • £1 million Lifetime Allowance and any Withdrawals

benefits taken above this value are liable to a tax charge.

• 25% can be taken as TFC at retirement age. The minimum retirement age is 55.

• The remainder can be taken as a lump sum Death

which will be taxed at the client’s marginal rate.

• The tax treatment of death benefits will

depend on the age of the client when the death occurs. If the client is:

• below age 75, their pension fund can be paid tax-free.

• aged 75 or over, pension benefits can be

paid as a lump sum which will be taxed at the beneficiary’s marginal rate. Benefits can also be paid to any beneficiary as a pension or via income drawdown which will be taxed at their marginal rate.

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• All withdrawals are tax-free and without restriction.

• At the time of death, all savings will form part of the estate for inheritance tax purposes.

• Any surviving spouse or civil partner will be able to use the additional allowance and invest as much of the ISA benefits they inherit into their own ISA. They’ll be able to invest as much as they want up to their own ISA limit and they’ll be able to invest as much as their spouse or civil partner used to.

WHY ROYAL LONDON CAN HELP As pensions experts, we understand the importance of your clients saving for their retirement. Here are just a few reasons why we can help you find the right solution for your clients: • We’re the UK’s largest mutual life, pensions and investment company. We have a good financial strength and a stable outlook which provides confidence that you’re dealing with a secure company. As at 31 December 2015 our total group funds under management was £84.5 billion2. • Our Pension Portfolio plan, which includes our Income Release offering, is flexible and can adapt to your client’s needs and objectives. Our tiered charging structure will reward your client’s with lower charges the more they save, and we’ll only charge for the functionality they use.

• Through our Sales Consultants who are some of the best in the industry, and our dedicated team of New Business Consultants, we’re on hand to support you through the whole process. • We have an extensive investment range that covers a wide range of different attitudes to risks, that can help meet the needs and objectives of your client’s and also arm you with the information you need to meet your investment obligations. • We’ve won some great awards we’re really proud of, including: Financial Adviser Service Awards 2015

• 5 Star award for Excellent Sevice in the life and pensions category for the seventh year in a row. Financial Adviser Life & Pensions Awards 2015

FURTHER INFORMATION

• Pensions Provider of the Year.

If you’d like to find out more information about this or any of our other products, you can speak to your usual Royal London contact or visit our website adviser.royallondon.com.

Money Marketing Financial Services Awards 2015

• Individual Pensions Provider of the Year. • Company of the Year.

• Best Pension Provider for the fifth year in a row. FT Adviser.com Online Service Awards 2015

• 5 Star Award Winner for the ninth year in a row. Continually winning this award shows our customers are satisfied with the high standard of online service we provide.

2 Based upon the 2015 Royal London and Association of British Insurers figures. 5

Royal London 1 Thistle Street, Edinburgh EH2 1DG royallondon.com All literature about products that carry the Royal London brand is available in large print format on request to the Marketing Department at Royal London, 1 Thistle Street, Edinburgh EH2 1DG. All of our printed products are produced on stock which is from FSC® certified forests. The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL. Royal London Marketing Limited is authorised and regulated by the Financial Conduct Authority and introduces Royal London’s customers to other insurance companies. The firm is on the Financial Services Register, registration number 302391. Registered in England and Wales number 4414137. Registered office: 55 Gracechurch Street, London, EC3V 0RL. Royal London Corporate Pension Services Limited is authorised and regulated by the Financial Conduct Authority and provides pension services. The firm is on the Financial Services Register, registration number 460304. Registered in England and Wales number 5817049. Registered office: 55 Gracechurch Street, London, EC3V 0RL. April 2016

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