Should you have a pension or an ISA, or both?

Nadia Khan DipPFS Cert CII (MP)

Wren Sterling

Financial Adviser, Mortgage Adviser, Will & Estate Planner, Investment & Wealth Manager, Pension Adviser

Pensions and ISAs are both tax-efficient savings vehicles, with generous savings allowances, which make them ideal for big, long-term, financial goals.

However, there are significant differences between the two products, most notably in terms of access and tax. Here I'll explain how pensions and ISAs work to explore the role both can play in helping you achieve your long-term financial goals.

Pension or ISA?

In an ideal world, you’d be able to save into both a pension and an ISA. Which is better for you, though, will depend on a few factors.

If there’s any chance that you’ll need access to your money before the age of 55, an ISA will almost certainly be the better option of the two. However, if you already have adequate savings that are easily accessible set aside, the fact you can’t generally access a pension until later in life may help if you’re someone easily tempted to spend money that you have.

Saving into a pension is vital if you can afford it, and the tax benefits attached to pension saving are superior to those offered by an ISA as well.

Is a pension or ISA best for me?

You can often get access to the same or very similar investments whether you are investing in a pension or an ISA. The product which works best for you will ultimately depend on your savings goal.

For retirement savings, a pension is usually best. In addition to the tax relief on contributions which can have a massive impact on the eventual value of your pot over the decades the fact that your money is tied up until you are 55 (57 from 2028) means you won’t be tempted to spend it on anything else. Although your pension income will be taxable, when you retire you may pay a lower rate of tax than you did in your working life.

ISAs by contrast may be better for other major savings goals. Investment allowances are generous, allowing you to build a big tax-free pot of cash and unlike a pension, you can access the money whenever you need it.

However, as most people will have a range of savings goals including retirement it usually makes sense to have both a pension and an ISA. You may also find it makes sense to put some later life savings into an ISA to keep your retirement income as tax efficient and flexible as possible.

Taking some money from an ISA in retirement, for example, may mean you need to take less out of your pension and reduce the amount of income tax you pay on your overall income.

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Nadia Khan DipPFS Cert CII (MP)

Wren Sterling

Financial Adviser, Mortgage Adviser, Will & Estate Planner, Investment & Wealth Manager, Pension Adviser

I am an Independent Financial and Mortgage Adviser and have worked in Financial Services for over 12 years. During my career I gained experience in assisting both individual and corporate clients.…