What’s best – ISA or pension?

By Paul Warren
In May 14, 2018
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It’s a common question people ask: which is better for me – an ISA or a pension? In truth, there is a place for both and there is an argument to say we should all have both. Ultimately, choosing how to invest your money is your decision, so here are some facts about ISAs and pensions to help make your investment choices easier. Its not an exhaustive list, however it’s a great starting point to help you understand the benefits and drawbacks.

Pensions have some valuable benefits, which makes investing in them even more attractive:

  • They provide tax relief at your marginal rate on contributions from you as an employee
  • Employers now have to contribute: the new rate for contributions between April 2018 and April 2019 will be a minimum of 2% for employers
  • You won’t be able to access your pension fund until you are 55, so the temptation to dip into your funds is removed
  • If you die, your pension will be free of inheritance tax
  • Your pension may be tax-free when your beneficiaries take them as income or a lump sum. (This is dependent on when you die)
  • A tax-free lump sum, usually to a maximum of 25% of the funds value can be taken from 55
  • If invested, your pension could make good growth, which is accumulated tax free

Pensions also have some watch-outs to be aware of:

  • You won’t be able to access your money until you are 55 and so you cannot rely on it to help you in an emergency
  • While the lump sum is tax-free, the rest of the pension is taxable at your marginal rate
  • They can be complex to understand and difficult to manage
  • Invested pensions are subject to stock market performance, good and bad!
  • The Lifetime Allowance and Annual Allowance have reduced considerably over the years and may do so again in the future

In comparison, ISAs also have some valuable benefits:

  • You can save up to £20,000 per year (current tax year rate 2017/2018)
  • All growth within the ISA is tax free
  • All withdrawals from the ISA will be tax free, with bonuses available on some ISA types
  • They are generally easily accessible and can be accessed at anytime
  • There are different types of ISA for different purposes that best fit your needs
  • Your ISA and its tax-efficient status can be passed upon your death to your spouse
  • There is no lifetime limit

ISAs also have their drawbacks:

  • The maximum saving per year is £20,000, half of what you can save into a pension
  • Easy access means you can be tempted to dip into your savings when perhaps you shouldn’t
  • Multiple ISA types can make selecting the best for you quit confusing
  • Passing your ISA to your spouse on your death can be complicated

It will depend on your circumstances which investment vehicle is best for you and so it is not possible to recommend one or the other here. However, looking at the good and bad points of each should help you to make that decision and, as always, we are here to support and guide you.

 

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