‘Attractive’ savings tool over 50s can use to boost returns by up to 40% | Personal Finance | Finance

Millions of people in their 50s and 60s could be missing out on thousands of pounds by continuing to prioritise ISAs over investing in pensions.

Figures from HM Revenue and Customs (HMRC) show that at least 3.9 million people aged between 55 and 64 have ISAs with an average balance of £40,945. While ISAs allow money to be withdrawn at any time tax-free, pensions can be accessed from age 55 (rising to 57 in 2028) and benefit from tax relief that can boost returns by up to 40% for higher-rate taxpayers. Sean McCann, chartered financial planner at NFU Mutual, said: “Unless you’re about to retire, pensions can seem like a dull subject—but if you’re in your 50s or older, they can offer a whole new way of thinking about investment.

“Once you reach 55, you can take money from your pension either as lump sums, income or both. This means they can offer an attractive alternative to ISAs if you’re looking to build up funds for the future.

“Latest figures show 3.9 million people aged between 55 and 64 hold ISAs with an average value of £40,945 – but many of them could be better off topping up their pension and claiming the tax relief.”

ISAs currently have a £20,000 annual limit. In contrast, pensions allow contributions up to £60,000 or 100% of your earnings. Many workplace pensions also include valuable employer contributions, increasing the potential benefit for savers.

For example, a higher-rate taxpayer earning £60,500 who invests £6,000 into a pension could see this grow to £10,000 due to tax relief, not including any additional employer top-ups.

Basic-rate taxpayers automatically receive 20% tax relief on pension contributions, while higher-rate and additional-rate taxpayers can claim extra relief so their total tax relief matches their income tax rate (40% or 45%).

Mr McCann added: “The tax boost you get when you put money into a pension can make a huge difference to returns.”

It’s important for higher and additional-rate taxpayers to remember that they must actively claim their extra pension tax relief through self-assessment. Every year, thousands of people miss out on this valuable benefit simply because they aren’t aware of the process.

However, there are important rules to be aware of when opting to invest and withdraw from a pension. Withdrawals from pensions (beyond the 25% tax-free lump sum) are taxed as income, whereas ISA withdrawals remain tax-free at all times.

Pension schemes may also come with higher charges than some ISAs, so savers should compare fees before deciding where to invest.