Pension or ISA for your retirement?

Many people are now opting for ISAs, due to poor annuity rates and flexibility.

Both ISAs and pensions are tax-efficient, so what's the difference? In general, you have more control and easier access with an ISA, whereas pensions offer wider scope for contributions and can be more tax-efficient, especially for higher rate tax payers. For most people, there's room for both in a good retirement strategy, however you might prefer one over the other, depending on your personal circumstances.

Key differences

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ISA
Pension
Tax-free income upon retirement? Y N*
Tax relief on money you pay in (contributions)? N Y
Access to money before age 55? Y N
Employer contributions allowed? N Y
Backdated contributions allowed? N Y
High contribution limits? N Y
Inheritance tax-efficient? N Y

* Optional 25% tax-free lump sum when age 55 - Income tax on remaining pension withdrawals will be applied based on your personal tax rate.


If you are unsure about the differences between ISAs and pensions outlined above (and how they affect you), please seek independent financial advice.

Pension or ISA?

A SIPP (Self-Invested Personal Pension) is the type of pension which is most similar to a Stocks & Shares ISA, since you get more freedom to manage and choose your own investments (stakeholder and personal pensions are run by companies who invest your contributions for you in a limited choice of funds). You can have both, but if you’re choosing between the two, it really comes down to what suits your personal circumstances.

ISA or Savings account?

Savings accounts give you a stated rate of interest in return for money you pay in. Cash ISAs are similar, but you don't pay tax on the interest you receive, therefore they’re very popular with savers.

Stocks & Shares ISAs give you similar tax benefits, but also the opportunity to grow your money faster by investing in the stock market (albeit with more risk). Many people use Cash ISAs for short term goals such as holidays and cars whilst investing in the stock market for the longer term.

ISA or Premium bonds?

Premium bonds are popular in the UK. Instead of receiving interest, you are entered into a monthly prize draw with a range of tax-free prizes. Your money is very safe, since it is backed by the treasury, however you might not win any prizes and the impact of inflation could erode the real value of your holding over time.

If you want guaranteed (albeit relatively small) income, consider a tax-efficient Cash ISA. For the potential to earn more, a Stocks & Shares ISA enables you to invest in the stock market tax-efficiently, albeit with more risk.

Looking for an ISA or SIPP?