Ask the Expert: What’s the smartest way to save my bonus?
This week, our reader wants to know where the best place is to invest a bonus. Carl Lamb of Almary Green responds.
I’ve had a couple of bonuses from my work and so have a bit of money to spare at the moment so would like to put it into some kind of savings. I’m wondering whether to go for an ISA or whether to put it into my pension.
I’m looking at about £10,000 and I don’t expect to need to use the money anytime soon. I’m age 52 and in my work pension scheme.
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Almary Green response:
This is impossible to answer without knowing all your financial circumstances.
However, I can give you some indication of what each option can deliver. I’m assuming that your pension scheme is a “Defined Contribution” scheme based on contributions from you and your employer.
ISAs are certainly tax-efficient: you can put your money in cash investments or stocks and shares (or both) within an ISA and any returns will get preferential tax treatment for as long as they are held within the ISA framework.
You can access your ISA savings at any time, but with interest rates on cash investments still relatively low and investment returns on stocks and shares subject to the ups and downs of the market, there is no guarantee that growth on your savings will exceed inflation.
Pensions have one big advantage and one potentially big disadvantage.
The advantage is that you get tax relief on any contribution you make, so for every £8 you put into your pension, the Government will add at least £2 (depending on what tax bracket you fall into) – so if you are a basic rate taxpayer and you put your whole £10,000 into your pension scheme, you will get £2,500 in tax relief added to the fund.
The disadvantage is that you cannot access your pension savings until you have reached the minimum pension age – currently age 55 – and once you’ve done so (depending on a number of factors), you may be restricted in how much you can contribute to your fund going forward.
You should also remember that your pension fund will be subject to the same market vulnerabilities as ISA investments so inflation-beating growth cannot be guaranteed.
In order to give you a full answer, I’d need to look at your needs, objectives, risk profile and circumstances as well as your existing pension savings and other investments.