Financial planning

Pension v ISA - retirement savings

Colin Dyer

When retirement savings comes up in conversation (which it does more than you think!) the one question I get asked more than any of the others is “Should I be investing in a pension or an ISA?”


Now, your financial goals and stage of life will have a big impact on the answer – but generally speaking if you’re in or approaching your 50s, your pension is normally the clear winner.

It’s a fact that, like for like, a pension will provide a bigger spendable pot than an ISA for most savers. This is down to the combination of tax relief on contributions and the ability to take a quarter of the fund tax free. And as an added bonus, it offers greater flexibility on passing on wealth to family members.

Pension or ISA for boosting your savings?

Pensions are generally the most tax efficient way of saving for your long term future. By choosing this option you can give your savings an extra boost thanks to tax relief on any contributions that you pay in. And if you’re employed, your employer will usually contribute to your pension on your behalf too. But remember, the value of investments can go down as well as up, and could be worth less than what was paid in.

How easy is it to access your money?

One of the main attractions of an ISA is that savings can accumulate tax free without there being any barriers to access should you need it. Indeed, many people will see their ISA as an ‘emergency’ fund as well as future savings towards specific events. But for the over 55’s, a modern flexible pension can give the same level of instant access.

The combination of tax efficient savings, the ability to access your pot more easily than ever before and the ability to withdraw 25% of your fund tax-free means that for most people (and particularly higher earners), pensions can offer the best long term savings deal.

You should note, however, that if you withdraw more than your 25% tax-free cash you will trigger the Money Purchase Annual Allowance which could restrict the future payments you or an employer can make to any of your pensions without potential tax consequences.

Pension or ISA for passing money on?

Let’s look at ISAs first. The current ISA inheritability rules provide your surviving spouse or civil partner with an increased ISA allowance equal to the value of your ISA at the time of your death. This effectively allows them to benefit from continued tax free investment returns.

However it doesn’t keep the ISA out of the Inheritance Tax (IHT) net on their death. This means the remaining fund could still suffer a 40% IHT charge if their total wealth exceeds the IHT nil rate band, which potentially could reduce the amount left to your children or other beneficiaries.

Your personal circumstances have an impact on tax treatment and laws and tax rules can change so it’s worth bearing these in mind when creating your financial plan.

Pensions on the other hand are typically free of IHT. Plus it’s now possible to nominate anyone to receive your pension pot and for them to carry on taking an income from it. This applies even if they are below the normal pension age of 55, allowing children or grandchildren to have immediate access.

By keeping the money within the pension, your loved ones can benefit from the same tax free investment returns as an inherited ISA. But unlike the ISA, it isn’t limited to your spouse/civil partner as you can pass the money on to anyone. It also means the funds don’t make their way into the beneficiary’s estate for IHT.

Things are slightly different if you die after your 75th birthday as your beneficiary may have to pay income tax on any funds they draw from your pension. However, if you die before that date, your beneficiaries won’t have to pay income tax on any money they withdraw from it.Passing wealth on is often a very important consideration for a lot of the people I talk to, so if you’re unsure where to begin a chat with your financial planner can be a good starting point.

Looking for help to plan your retirement?

When it comes to helping you decide where to save and looking at whether your financial plans still meet your needs, a financial planner can help ensure you get the most out of your money. If you have any questions on anything you’ve read here, your 1825 Financial Planner would be happy to help.

Alternatively, if you don’t currently have an adviser, we’d be delighted to help you look after your finances. Get in touch for a free no-obligation consultationwith one of our financial planners to see what we can do for you.

Laws and tax rules may change in the future and the information here is based on our understanding in November 2018. Personal circumstances also have an impact on tax treatment. Investments can go down as well as up and you could get back less than you put in. The information in this blog should not be regarded as financial advice.