Cashing in PEP’s and ISA’s
The great thing about Individual Savings Accounts (ISA’s) and there forerunner Personal Equity Plans (PEP’s) is their ‘tax free’ status. Put simply, the Treasury can’t get their grubby fingers on your money once it is invested in these vehicles.
If you have or had invested the maximum sums in these annually since they first became available when PEP’s were launched in 1998, you could have well over £100,000 sheltered form tax now.
Most people don’t realise you can invest for income and so never realise the true value of these arrangements. If you pay Income Tax at 20% every £1 of income is actually worth £1.25 form a taxed source such as a bank or building society account. If you pay tax at 40% every £1 of income is worth £1.67.
If you need cash for some short term emergency, your ISA is just about the last place to take it from. Once the money is withdrawn it can never be re-invested. That means it will have to work a lot harder to achieve the same returns. This is the one occasion when borrowing (especially if you can get it interest free) makes sense.
Inside this issue:
“I will in future get Income Tax Relief for my Pension Contributions at what rate?” - some useful advice
Cashing in PEPs and ISAs: Robert explains this tricky decision
Wealth Creation Specialist - July 2009 Newsletter
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Following the 2009 Budget, the Chancellor introduced proposals to
(a) increase higher rates of tax to 50% for those earning in excess of £150,000 with effect from 6 April 2010.
(b) eliminate Personal Allowances for those with earnings totalling in excess of £100,000 by a reduction of £1 for every £2 of income above £100,000
(c) reducing higher rate relief for some pension contributions paid when adjusted taxable income exceed £150,000 with effect from 6 April 2011,
After 6 April 2011 you will obtain basic rate relief up to the basic rate band ceiling (currently £39,840), 40% relief to £100,000, but each £2 paid above £100,000 will save you losing £1 of your personal allowance thereafter, giving an effective rate of 60% until income reaches c. £113,000.
After that - back to 40% relief until £150,000 then you start to lose relief until above £180,000 then you are back to basic rate relief.
I am glad the Chancellor simplified that for us!
Early professional advice is essential on this matter.