When you are saving for retirement it makes sense to take advantage of all the tax breaks you can in order to maximise the funds available.

Most people when considering retirement savings will join some kind of official pension scheme. If they are lucky, they will be able to join a company scheme, and benefits will either be linked to their final salary, or, if the scheme is a “money-purchase” one, the employer will add to the contributions made during the working years to fund the pension in retirement. Otherwise they will have their own personal pension plan. The advantage of these schemes is that they can provide a guarantees income in later life and they receive generous tax breaks on contributions.

The advantage of these schemes is that they can provide a guarantees income in later life and they receive generous tax breaks on contributions.

However pension schemes can be very inflexible. Not only can the money not be withdrawn at all until the employee reaches retirement – at the earliest aged 55 under new rules – but by the time the saver reaches the age of 75, at least three quarters of the fund must be used to buy an annuity – an income for life. The problem with an annuity is that it “dies” when you do, so you can’t leave any of your savings used to buy an annuity in your will, and money paid out by the annuity as income during your lifetime is fully liable to income tax.

Anyone who has already made some provision for their pension but now has cash to spare might well be looking to put a little extra towards their retirement fund, if they have no more pressing immediate needs. The first option they would probably consider is topping up their existing pension. However because of the restrictions on how pension cash can be used it can be worthwhile for some people to consider a savings scheme outside the pension regime.

The obvious choice for retirement saving outside a pension scheme would be an ISA. Although payments into an ISA do not attract tax relief like a pension scheme does, unlike a pension, any interest or capital gains is totally tax free. Subject to rules on individual accounts from particular providers, ISAs are also totally flexible. You can withdraw the money at any time, at any age and for any reason and you don’t have to buy an annuity with it, so you can leave the money to your heirs in your will if you have not spent it by the time you die.

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