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Pensions vs ISAs

What is the right investment?

It depends when you need the money, as well as how you are planning to spend it. The best strategy could be a combination of different products.

When you are saving for retirement, you want to make sure that as much of the money as possible goes into your pot, rather than to HM Revenue and Customs. Whether that should be in a pension or an ISA depends on when you need the money, as well as how you are planning to spend it. In fact the best strategy could be a combination of different products.

Pension pros

One of the best things about pensions is the tax break you get when you pay the money in: HMRC gives you back all of the tax you have already paid on that money, and this can improve the amount that you are able to save. Another major positive is that you can use pensions to pass money down to your family in a tax-efficient way. Pensions sit outside your estate for tax purposes. And finally, when you take money out of your pension, the first 25% is tax-free.

ISA pros

With an ISA, you don’t get the tax you’ve paid back when you put the money in. But your money can grow in an ISA without paying capital gains or income tax. Plus, you are not restricted about when you want to use the money (except with a Lifetime ISA – you can only withdraw it at 60 or to buy a first house).

Caps and limitations

Both ISAs and pensions have limitations, such as annual limits. You can pay £40,000 a year into a pension (this could rise with inflation) and the current annual limit with an ISA is £20,000. Pensions also have total limits, including a lifetime allowance of £1.05m. Breach this and you will get a hefty tax bill.

Spending your money

Money from your pension and money from your ISA are treated differently when you withdraw them. With a pension, after the tax-free 25%, ax a tax-payer you’ll pay income tax on what you withdraw. ISA money is not taxed, because you’ve already paid the tax on it. In many cases a mixture of both pensions and ISAs and a carefully planned withdrawal strategy will be the best way to save and spend in the long term.

 

Speak to your financial adviser, who can consider every facet of your particular situation, could help you decide which is the best product for you – or how best to combine them.