Pension vs ISA: Where is best to place your money?

In an effort to achieve your financial goals and benefit from a financially stable future, finding the best way to save your money is crucial. This could therefore have you comparing a pension vs ISA.

It’s important to note that to enjoy a happy and fulfilling retirement, a dependable pension is nearly always essential.

This doesn’t mean that a great ISA can’t be a wonderful help, too, as, in reality, both an ISA and a pension are incredibly effective saving plans, and each have their own unique set of pros.

If you need some direction to help you get started on your savings journey, it’s worth taking a look at this guide that could provide answers to the question “Should I pay into a pension or an ISA?”.

Pension vs ISA: Withdrawals

Perhaps one of the biggest differences between the two is that you can take money from an ISA any time you like, whereas a pension usually has a set minimum withdrawal age of 55, but this can increase depending on the nature of your pension plan. A fixed rate cash ISA will also be unavailable for withdrawal until it’s reached maturity (when your savings reach the end of their fixed rate term).

A minimum withdrawal time is often a blessing in disguise when it comes to pension saving, as you won’t usually be tempted (or allowed) to take money from your pot before a certain time, allowing you to maximise the value of your savings.

For shorter goals or financial milestones you want to achieve before your retirement, an ISA may be preferable in terms of accessibility. In the perfect universe, however, you might be investing in multiple ISAs and a pension pot at the same time.

Pension vs ISA: Tax relief

Another big difference is the prospect of tax relief. While they both offer some interesting tax benefits, the ISA and the pension function in very different ways.

The money you contribute to an ISA is tax detectable, meaning that you get no relief when paying in, but you don’t have to pay any tax on the money you withdraw from an ISA either.

A pension is almost the exact opposite, in that the income you contribute into the pension pot is tax-free, but you pay tax when you withdraw it (although you don’t have to pay tax on the first 25% of your pension).

One of the most important points to note here is that if you’re a basic rate taxpayer, the government pays in a 25% top-up on your contributions to a pension, so every time you contribute, you essentially make money.

Say you put £1000 into your pension, the added tax relief would make it £1250, and this relief would continue up to an annual threshold, which for most people is either 100% of their salary, or £40,000 in contributions, whichever is reached first.

Pension vs ISA: Investments

Ultimately, the way in which your contributions to both an ISA or a pension are invested depends on the provider, or if you wish to do your own investing, the funds you choose yourself.

There isn’t much difference in the way of where or what type of assets the contributions made between the two are invested, and in most cases, you’ll even have access to the exact same investments. It all depends on what kind of investment plan you’ve decided on, which should be whatever is able to help you best meet your savings milestones.

Inheritance/Legacy

It’s important to think about what happens to your savings after you’re gone, as this can help out your loved ones in the future.

Your estate won’t pay inheritance tax on your pension, and you can choose for it to go to whomever you’d like.

ISAs, on the other hand, are liable to inheritance tax unless you leave your estate to your spouse (or a civil partner).

Conclusion

Both the ISA and the pension can be extremely beneficial to your financial situation and can work well together.

In terms of retirement, however, the pension will likely outperform an ISA, provided you want to take the long-term approach to secure a bright financial future.

Disclaimer 

The content of this article is for general information purposes only and should not be construed as legal, financial or taxation advice. You should not rely on the information contained in this article as legal, financial or taxation advice. The content of this article is based on information currently available to us, and the current laws in force in the UK. The content does not take account of individual circumstances and may not reflect recent changes in the law since the date it was created. It is essential that detailed financial and tax advice should be sought in both jurisdictions and any legal advice, if required.

This notice cannot disclose all the risks associated with the products we make available to you. When making your own investment decisions it is important you understand that all investments can fall as well as rise in value and it is possible you may get back less than what you have paid in. You should also be satisfied that any investments you choose are suitable for you in the light of your circumstances and financial position. You should seek financial advice if you are not sure of what’s best for your situation.