Adrian Murphy

New figures from Murphy Wealth suggest that contributing to a pension could build you a pot twice the size of doing so through an ISA or general investment account. Even for average earners, that could make a six-figure difference.

Post-tax pot after 30 years of contributions on the median UK salary:

Source: Murphy Wealth

The wealth manager’s calculations suggest that someone earning the median UK salary of £39,039 could build a pot of nearly £262,000 over the course of a 30-year career, based on the minimum 8% contribution (5% personal; 3% employer) and annual growth averaging 6%.

But making the equivalent of their personal contribution, minus the employer contribution and 20% tax relief, to a stocks & shares ISA growing at the same rate would build a pot of just under £131,000. This could then be sold and withdrawn as income, without any tax implications.

The same would be the case with a general investment account, but selling the investments would incur capital gains tax (CGT) on the increase in the value of the investments, reducing the pot to around £116,000 unless it was spread out over a number of years. The current CGT allowance is just £3,000 per year.
 
Up to 25% of the pension could be taken as a tax-free lump sum, with the remainder withdrawn as income. However, tax may be due on any amount that exceeds the personal allowance of £12,570 – bearing in mind the state pension currently provides £11,973 per year, which may eat up the vast majority of your tax-free income.
 
Adrian Murphy, CEO of Murphy Wealth said: “Even with the forthcoming changes to their inheritance tax status, pensions are still the best way of building wealth over the long term.

“The tax relief provided by the government – not to mention employer contributions – make a huge difference over time and make it difficult for other savings vehicles to compete, as these figures demonstrate.
 
“A lot of people have an eye on the implications of pensions being brought into estates – and rightly so. The change undoes years of financial advice in one fell swoop, but it shouldn’t stop you from aiming to build up as much wealth as you can over the course of your career.
 
“Instead, what it should call into question is where you start to take income from when you do reach retirement. Pensions would have been the last place to look because they could be passed down to your family free of tax. But now, they might be the first port of call, helping to reduce the potential inheritance tax burden on your loved ones.
 
“If you’re thinking about making major changes ahead of April 2027, speak to a financial adviser before taking any drastic action. Focus on building a long-term plan that will help you achieve your financial goals, while being adaptable to changing circumstances, rather than trying to be as tax-efficient as possible – that can end up being self-defeating and only cost you later in life.”