Dentists Who Invest Podcast
Official Podcast of the Dentists Who Invest platform. Talking all things investing, money and finance with a dental spin. Have you ever wondered how you can grow your wealth and protect your hard earned money as a Dentist? We've got you covered. Featuring famous guests such as Andrew Craig, Edward Zuckerberg and Benyamin Ahmed we delve deep into EVERY aspect of finance to educate and empower ALL Dentists.
Dentists Who Invest Podcast
ISAs vs Pensions: Here's What Dentists Need To Know with Anick Sharma
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Ever felt lost in the maze of ISAs and pensions? You’re not alone. Many dentists struggle with deciding where to put their money for the best returns. In this episode, financial expert Anick Sharma breaks down the key differences, helping you make informed choices about your financial future.
We dive into ISAs and how they offer tax-free savings, the different types available, and how they fit into short- and long-term plans. Then, we tackle pensions, unpacking the tax relief benefits that can supercharge your investments over time. So, which should you use? ISAs, pensions, both… or neither?
Tune in for clear, no-nonsense guidance on maximising your savings and making your money work harder for you.
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Disclaimer: All content on this channel is for education purposes only and does not constitute an investment recommendation or individual financial advice. For that, you should speak to a regulated, independent professional. The value of investments and the income from them can go down as well as up, so you may get back less than you invest. The views expressed on this channel may no longer be current. The information provided is not a personal recommendation for any particular investment. Tax treatment depends on individual circumstances and all tax rules may change in the future. If you are unsure about the suitability of an investment, you should speak to a regulated, independent professional.
ISA versus pension, the more information we have whenever it comes to make this decision about which one is best for us or which combination, of course as well, because that can also be true. The more information we have, the better. And how does our profession as a dentist change things as well? How can we make that specific for the dental community? Well, that's why we've got Mr Anick Sharma, specialist Independent Financial Advisor to Dentists, on the Dentists Who Invest podcast. Today we're going to be delving into the nitty-gritty of the key differences between an ISA and a pension. When it is suggestible you might use one, the other, both or neither. Everything is going to be revealed today in this episode, and I'm looking forward to it, as ever. Isa versus pensions let's put this one to bed. When should we consider either both, both or neither? It's all going to be revealed in this podcast today. I guess a good place to start, Anick, is what is an ISA and what is a pension? Yeah, cheers.
Anick:James, I'm going to go through a bit of a technical guide and go through a bit of factual differences between both, just before we do a bit of housekeeping. This is a technical guide only. It's not recommended advice. We're just talking completely factual. So what is an ISA? What's a pension? It's essentially a tax wrapper that allows us to put investments in. What's a tax wrapper? I hear you ask Best way to think about it. You go to the supermarket, you pick up a basket, do your shop. Now, within the world of finance, finance you get different wrappers, different baskets and, depending on the hour you're going down, you might put cornflakes in or alcohol, whatever it could be. Um, now, what goes in the basket is the investments and depending on what basket you pick up, it'll have different tax treatments over how money can go in, how much can go in and I'll come on to that in a moment, but at a very high level depending on the type of tax wrapper in question it will have different treatments.
Dr James:Nice. So that's our ISA. That's just generally. That's just both Okay.
Anick:In terms of an ISA, it's an individual savings account and its purpose is essentially to help incentivize for saving for the future. Now, the main three types of ISA is a cash ISA, stocks and shares and a lifetime ISA. At the moment, there used to be a thing called help to buy ISA, but you can't get new ones anymore. There is another sort of ISA, but that's not really used that often, but for the purpose of this, this, we'll stick with these. So essentially, for a cash and stocks and shares ISA, you can put up to £20,000 in in a tax year and all money within that is tax free. So if you hold it as cash, there's no income tax on the interest, and if you invest it and it grows and if you sell that investment, you don't pay any tax on the profit. You can take as much out as you want, as often, so there's no limits on how you take it out. Really, lifetime ice is slightly different, so it can be used for two uses for the first home purchase or for retirements. We could probably go down a bit of a rabbit hole there, but essentially you can only put £4,000 in per tax year and you get a £1,000 government bonus. So key things to remember with ISAs. Apart from the lifetime ISA is you can access it whenever you need.
Anick:Some people might see it as a short-term vehicle only, but it's not necessarily the case and there's a bit of a myth around that. Particularly with a stocks and shares iso, depending on how it is invested ie what's inside that basket it can be for a very long term. So, moving on to what'sa pension? Again, it's that tax wrapper and essentially it's a savings vehicle for later life. It could be retirement. Now you can get loads of different types of pensions a workplace pension, a personal pension or a self-invested personal pension, commonly known as a SIP but essentially they all they all have the same aim and that is a savings vehicle for later life. Now, to incentivize us for that, there's a mechanism called tax relief, which is a huge benefit. There's a few ways in which this can be achieved. So it essentially makes money going in cheaper for a pension.
Anick:So let's go through an example and I'll walk you through it. Let's say you want to put in £10,000 into your pension okay. Let's say you want to put in ten thousand pounds into your pension okay. Now as a basic rate taxpayer, you, that actually cost you eight thousand pounds. So if you make a personal private contribution, you're going to put eight thousand pounds in and the revenue you're going to top it up to ten thousand pounds. So you're going to your banking app and you will see a two thousand pound inflow from the revenue.
Anick:Now, if you're a higher rate taxpayer or an additional rate taxpayer because you're paying 40% income tax or 45% income tax, you're entitled to higher rate tax relief or additional rate tax relief. Now you've received basic rate tax relief on the way in, so that £2,000 inflow. So in order to reclaim the additional higher rate or additional rate tax relief ie the additional 20 or 25% that has to be reclaimed by a self-assessment and what the revenue will typically do is reduce your tax liability accordingly. Or, if you don't have a tax liability to reduce accordingly, they'll write you a check. Now that essentially means if you're a high rate taxpayer, it costs you £6,000 to put £10,000 into your pension, or if you're an additional rate taxpayer, it's going to cost you five and a half thousand pounds to receive ten thousand pounds in your pension. That's a massive uplift and when we talk about return on investment, that is huge.
Anick:So for those that are purely employed by a PAYE and I appreciate that's probably not all of your listeners and this is likely to be done by a salary sacrifice. So taxable income is reduced by the pension amount and that reduces the amounts you pay tax on. For those with a limited company, they can make employee contributions, so as a higher rate taxpayer they can essentially receive about 58.75% tax relief and additional rate taxpayers can receive 65% tax relief and that's essentially due to the corporation tax saving at 25% and the likely income tax and dividends. If it's taking these drawings, doing it as an employer contribution is so advantageous because of that tax deduction. I'm going to take pause there a moment because I've gone through a few technical bits. Have you got any questions?
Dr James:or would you like me to go through any of that? So far, so good. I mean, the only thing to chuck in would be that it's just worth noting that we're recording this podcast on the 20th of February 2025, so everything that we talk about in this podcast is, of course, relevant and true at the present day, but things might move around in the future yeah absolutely so I suppose when we're thinking about pension, the key tick is the tax advantages which we've just been through.
Anick:Um, but you can't have your cake and eat it, so it can't all be good. And where that comes in is the age restrictions. So under current rules you can't access a private pension until age 57. There is talk about wanting to align it with the state pension, so there's a 10-year gap. So we might see that increase in the future. We don't know Money within private pensions within this context as well.
Anick:It has previously been exempt from inheritance tax, so people would use their pension as a vehicle to pass on to the next generation because it escaped that inheritance tax net. Now, in the recent budget, there are now plans to bring pensions within the inheritance tax scope. There is consultation going on at the moment. Who knows what's going to happen there? But this reiterates the point that without careful planning and the proposed rule changes, people could really end up paying a large amount of tax. So it's important to be aware of what you have and what could potentially happen and have a plan in place accordingly. So being through an ISA, being through a pension now let's look at both In terms of the advantages of both. Let's put three lenses on it. So what happens when money?
Anick:goes in within the wrapper itself and taking it out. So in terms of money going in an ISA £20,000 for cash and stocks and shares For a private pension there are very complicated rules around the annual allowance. That's a bit of a jargon way of saying how much you can put into your pension. For most people that's around £60,000 that can go into the pension. But once you start breaching the £200,000 income mark there are various complicated nuances. So if you fall into that camp, definitely take care.
Anick:Within the wrappers themselves. So within a pension and within the ISA, there's no tax at all. So super tax free, no tax on any interest that might be received or on any potential gain from investments. Taking money out we'll start with the ISA because it's straightforward. There's no tax at all. You can take unlimited withdrawals. You can take it all out in one lump sum if you wanted to. The pension's a bit more complicated. So for most recent pension schemes you can take 25% of the fund value as a tax free lump sum. The remaining 75% is potentially taxable. That will fall into your other income and be assessed accordingly. That can lead to some sort of flexibility and I'll come on to that in a moment. In terms of the investment options as well. They're broadly the same. Most people will want to invest in some sort of investment fund that is appropriate and suitable for them. Pensions, depending on how they are structured, can have commercial property within it.
Anick:And for a certain person if it's suitable for them, a business owner, potentially they can have the business paying rent into the pension because of commercial properties inside it.
Dr James:And just to spell that out for the dental practice owners out there, what that means is you can have the freehold of your dental practice in there potentially as well.
Anick:Yeah so, but this is an incredibly complicated area and it's not as easy as saying let's put the the freehold into the pension, um, because essentially you're selling it to the pension and there's a load of rules in place there good dimension so in terms of when to consider an ISA, a cash ISA can be relatively useful for a short-term savings goal, might be somewhere to park an emergency fund, say, and having an emergency funded is critical.
Anick:It's foundation, any sort of financial plan, just in case fund. Essentially, now, the flexibility in accessing the funds can be a useful way of bridging the gap between retirement and when your pension can actually be drawn down. There are lower annual contributions within the ISA, so it's something to be mindful of Now when to consider the pension. If we're wanting to put more than the £20,000 ISA allowance into some sort of wrapper, that could be something to consider. And tax relief I mentioned it before but tax relief is so important and especially with that example, before an additional rate taxpayer only cost them £5,500 to put £10,000 into their pension. It's massive.
Anick:Some people will look at ISA versus pension within the lens of flexibility. Isa gives you lots of flexibility because you can take the money out whenever you want and you're not restricted by the age. Versus tax relief but I don't think it's as simple as that. Versus tax relief but I don't think it's simple as that. So within a long-term retirement planning, it can be really helpful to have a look into the future or try and have an informed view on whether you're likely to be a low tax rate payer in retirement.
Anick:So let's say someone got 40% tax relief on the way in and over however long this pension fund has grown over whatever time period. Now let's then say in retirement they are a basic rate taxpayer. This is a major, major uplift because it means they had received 40% tax relief on the way in. The investment fund has hopefully grown and they're only paying 20% tax on the way in. The investment fund has hopefully grown and they're only paying 20% tax on the way out. When we compound that over long periods of time, it really does move the needle. Sometimes I do get people say pensions are only for older people, annick.
Dr James:But the earlier we start doing this, the quicker compounding can start doing its thing, and time's the most important component when we think about this can I ask a question, because this is what people sometimes ask me, and I'm pretty sure there's some rules and regulations around this or some exceptions, but I'd be interested to hear your take on it. From your knowledge, when it comes to our pension and when it comes to the money that we have tied up in there, apart from us hitting the age at which we can start to withdraw from it, as expected from the get-go, is there any other ways that we can somehow obtain the money in our pension, or any other criteria that might allow us to be able to have access to it?
Anick:Within a private pension, a defined contribution pension, ie the sort of arrangements where you put money in, you invest, hopefully it grows. Typically that's the only way we can access it. Now there are mechanisms where, if you're really ill and have less than a year to live, you can take it out to spend on whatever you want, essentially but there are other considerations there. But essentially, yeah, and that is the trade-off for some people that you can't access it under current rules until age 57. But is that tax relief worth it for them to lock money away for a long period of time? Which I guess probably brings us nicely on to the next point when should we consider both or none at all?
Anick:And just like you've said there, James, it can be so easy to think it's one or the other, but where I see this working best is a combination of both, and the choice on what to use will ultimately depend on the financial plan. We should be asking ourselves. We shouldn't be asking ourselves should I use a pension or an ISA. We should ask ourselves what is the best tool and by tool I mean what's the best account, tax wrapper and or investment to help us get towards point B? I'm sure your listeners are familiar with my analogy of point B and where we want to get to in the future um financial freedom.
Dr James:Right is another way we can think of point b. What was? That sorry financial freedom, right exactly some sort of future state.
Anick:We're at point a at the moment. We want to get to. Point b might be financial freedom, independence, traveling, traveling the world, whatever it is, but all of our decisions should be geared towards getting us closer to point B. Once we've taken the time to define point B, we can then take a step back and say are the choices we're making getting us closer to point B, does this account selection or does this investment get me closer there?
Anick:Otherwise, we're making choices without the context of where we want to get to, and it's so important to have a guiding plan in place. So then, another key thing as well when we're considering these points what are these funds going to be used for, or who is it going to be used for? This will really help to make an informed view on how best to use them, and that could help decide what wrapper to use, or it might be, depending on the answers to those points, that no wrapper should be used, and it might make sense to retain some money in cash for whatever it is. It all comes down onto personal situations, because everyone is different, so we can't put a blanket approach to this at all. One other point that's really important to make rules change, so it's imperative to stay on top of recent rule amendments. Otherwise it's so easy to get caught out and you could be faced with a massive tax bill.
Dr James:Essentially, can you give us some? How can I say this? I know we obviously don't want to give anybody the impression that we're giving financial advice today on this podcast, but can you give us some high level rules, maybe, or some sort of occasions or situations where one would lead towards one more than the other? Say, if they were younger, for example, say if they wanted to build some flexibility into their plan, maybe they're leaning towards the isa. Or if they really enjoy dentistry and they see themselves doing it for 30 years, they might lean towards a pension.
Anick:I'm sure there's other ones than that let's say dentists limited company and they're facing a big corporation tax bill. Essentially In that situation alone from the tax efficiency perspective it makes sense to put money into a pension by an employee pension contribution Because it's tax deductible. You're essentially reducing corporation tax by moving that risk from within the limited company, which is concentrated, and getting money into your personal balance sheet. So in that situation money into a pension can be useful, whereas if they were to draw a dividend and pay income tax on that dividend, say 34%, and then put it into an ISAA might not necessarily make the most amount of sense from a tax efficiency perspective. But then that needs to be weighed up between that flexibility versus what's the most tax efficient thing to do.
Anick:And it might be people's dreams and hopes and aspirations that don't just live on a spreadsheet for tax efficiency. If they need that flexibility now, for as they're treating the kids to something, then it is what it is. Life has to come first and tax should be optimized around it. So I guess with this sort of thing it can get quite technical. So I would encourage any listeners to assess your financial goals, seek professional help if needed. We only get one shot of life and it's incredibly short. Anyway, we don't want to mess this up and we can't afford to get it wrong if it does get wrong, or dedicate the time to getting up the learning curve. Anyone who wants to reach out, there's a link in the description box or feel free to reach out on LinkedIn Anick Sharma.
