Pensions vs Isas: what is the right investment?

By Rosemary Bigmore

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. But which is the best way to save: a pension or an Isa?

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 25pc 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 25pc, 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.

Using a 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.

The value of pensions and investments – as well as the income they produce – can fall as well as rise. You may get back less than you invested. Tax treatment varies according to individual circumstances and is subject to change.

To find out more about how we can help you achieve your financial goals, call 01732 617950 

It is important to take professional advice before making any decision relating to your personal finances. Information within this page is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK.

Fill in the form below and one of our experts will be back to you within 24 hours.