ISAs vs. Pensions (Do you really need to choose?)

Through this period of lock down, it may be the case that your discretionary spending has reduced. You may be in a position where you have been able to review your direct debits and saved some money. For others this may have given you the opportunity to review your plans around saving, investments and your general financial position.

Pensions and ISAs work differently, you may hold neither of these, one or both. Each has their own unique set of rules. Both are tax-efficient ways to save for retirement.

Why choose an ISA?

ISAs are the most flexible form of tax-efficient savings plan available.

Although ISAs can be accessed at any time, including under the age of 55, stocks and shares ISAs are usually taken out with the intention of keeping the investment in place for the medium to long-term (5 years plus).

Why choose a pension?

If you do not need access to your money before you turn 55, the advantage of a pension is that you get tax relief on the payments you make into it. You do not get tax relief when you make payments into an ISA.

If you are employed and eligible, your employer must enrol you into a pension scheme and, in most cases, will pay into the scheme on your behalf.  Employer payments boost your own contributions and could, in a sense, be regarded as free money.

A comparison of ISAs and pensions are detailed below for reference.

ISA Pension
No tax relief is given on payments into an ISA Tax relief on personal payments into your pension for amounts up to £40,000 or 100% of your annual earnings (whichever is less) but even non earners can pay £3,600 per annum (to age 75)
The accumulated savings fund grows tax-free Usually the most that can be added to your pension in a year before you start paying tax on it is £40,000. This limit is reduced in certain circumstances
No Capital Gains Tax or Income Tax is payable when savings are accessed The accumulated savings fund grows tax free  and no Capital Gains Tax is payable when savings are accessed
An ISA forms part of your estate, unless left to an exempt beneficiary such as a spouse or civil partner. If your estate is more than the inheritance tax nil rate band of £325,000, tax at a rate of 40% could be payable on any excess Usually 25% of your pension can be taken tax-free. Income Tax is charged on the remaining amount when it’s taken from the pension
No additional tax is payable (unless inheritance tax applies) Your pension fund is not normally counted when working out the taxable value of your estate for inheritance tax
The earliest you can access your savings is aged 16 for cash ISAs and 18 for stocks and shares ISAs (also called investment ISAs) The earliest you can usually access a pension is age 55, although earlier access is possible in the case of ill health
The earliest age you can make payments is aged 16 for cash ISAs and 18 for stocks and shares ISAs (also called investment ISAs). There is no maximum age limit. Children under the age of 18 can have a junior ISA opened on their behalf from birth There is a lifetime allowance limit on the amount that you save in pensions. For most people, the limit is currently £1,073,100. Only people above this limit have to pay an extra tax charge on their pension savings
The maximum annual allowance is £20,000 for the 2020/21 tax year. Unused annual allowance cannot be carried forward. There is no lifetime allowance or maximum overall saving amount Payments to your pension can be made from birth to age 75
Employers cannot make payments on your behalf If you are employed and earn enough, your employer must enrol you into a pension scheme. In most cases they will also pay into your pension scheme for you


This article is not intended to give advice or a personal recommendation. If you need a personalised recommendation based on your personal circumstances, or would like to talk further about ISA and pensions please feel free to contact us.