We are often asked the question – “Should I save into a pension or an ISA?”. While there is not a simple one-size-fits-all answer, there are circumstances that could dictate which environment is better.
Pensions and ISAs are often utilised in tandem, whether in accumulation (building wealth) or decumulation (taking an income). To understand whether one might be better to prioritise than the other, it is key to understand the differences and similarities of both.
The primary difference is when you benefit from the tax relief. Pensions provide the tax relief ‘on the way in’ (when you make a contribution) in the form of a top-up. ISAs provide tax relief ‘on the way out’ (when you make a withdrawal) by not levying any tax on the payment. It is therefore important to consider what tax rate might apply to you in retirement. Both pensions and ISAs, however, provide tax relief on capital gains and dividends from investments held within.
It is also key to note that pensions are a vehicle specifically designed for retirement and therefore have restrictions on when you can access them (currently 55, due to rise to 57 by 2028). ISAs on the other hand are a general savings vehicle and have no minimum access age.
With all that in mind – when might one be better than the other? Well, if you are looking to retire considerably earlier than age 55 (or 57) then you might need to look towards building a larger pot within an ISA. Similarly, if you are saving for your first house – there are specific ISA products which would allow you to do that efficiently. Alternatively, you might be looking to bridge the income gap between your desired retirement age and your state pension entitlement – in which case a personal pension might be the better option.
There are many more thing to consider with both solutions. Speak to a financial adviser to determine what might be the most suitable approach for you in your specific situation.
If you have questions on any of these, or need help with your financial plan, get in touch with us. Click here.
Luke Worthy, Chartered Wealth Planner
The above should not be relied upon or construed as advice.