ISA or pension – which helps most for retirement?

ISAs and pensions come with worthwhile tax advantages to help boost your retirement money. There are plenty of good reasons to choose both, depending on what stage you’re at in your retirement journey.

ISA vs pension: when you’re saving for retirement

Here’s a quick comparison for those of you busily squirreling money away.

What a relief
Both ISAs and pensions come with tempting tax relief. 

• With a pension, basic rate taxpayers can get an extra 20% of what they paid in added from HMRC. Additional rate tax payers could get up to 45%.
• With an ISA you won’t have to pay income or capital gains tax on any investment growth. 

If you’re still saving, earning money and paying lots of income tax – pensions often have the edge because they can give you more tax relief.

Reached your limit?

• You can save up to £20,000 each tax year in an ISA.
• You can save up to £60,000 or 100% of your earnings in a pension, with the possibility to carry forward unused allowances.

The government allows you to save more money, with great tax incentives, in a pension.
 
Feeling flexible?
A pension is locked away until you’re 55 (rising to 57 from April 2028). You can take money out of an ISA at any time.

An ISA offers more flexibility than a pension. 

What are you invested in?
The Stocks & Shares ISA and SIPPs we offer give you the opportunity to invest in the same set of four ready-made, risk-ranked investment portfolios. It’s just through a different type of account. 

Our ISAs and SIPPs can invest in the same portfolios, so it’s a tie.

Important: Any money invested in a pension or stocks & shares ISA could rise and fall in value. Returns are not guaranteed – you may get back less than you put in.

Will your employer chip in?
There’s a great tradition of workplace pensions in UK.  Some employers offer workplace ISAs, but this is not as common.

Your employer is more likely to contribute to your pension.

This is the moment to imagine your future retirement. Our Retirement Planner can help you explore how different savings products can affect it. 

ISA vs pension: when you’re getting ready to retire

You’ll need to turn your ISA and pension savings into spending money. Think of it as changing gear.

Planning income – plot a tactical take out

• You can take out up to 25% of your pension account tax free from age 55. After that you’ll pay tax at the usual rate, which may be lower if you’re not working as much. You don’t have to take your tax free lump sum straight away, or all at once. 

One approach is to put as much money as you can into your pension while you’re still earning and paying higher rate tax. Then withdraw it soon after as tax-free cash, or when you’re paying a lower tax rate.  

If you’d like to buy an annuity, factor this into your pension lump-sum withdrawal planning. 

• You won’t have to pay tax on money you take out of an ISA.

By taking money out of your ISAs and pensions in a tactical way, you could reduce your tax bill over the course of your retirement.
 
This is a key moment in your financial life as you prepare to change gear. We suggest you take Retirement Income Advice.

ISA vs pension: when you’re spending your savings

After all the hard work, serious saving and thorough preparation, you’ll be ready to really enjoy the financial rewards. 

Enjoy your savings
Just as during your working life, your tax bill will be based on your total annual income (not including money you take out of ISAs). 

Our Retirement Planner can take into account any sources of income you might have. This will help if you want to review your retirement income plans in line with any life changes like reducing work, downsizing, or needing care.

Both ISA and pension money that’s giving you a better, and more tax-efficient, later life is a winner. Enjoy!

Passing on ISAs and pensions
Your spouse or civil partner can inherit your money and your ISA allowance, without paying tax.

Anyone else you leave assets to, will have to pay inheritance tax on any money from your ISAs. 

At the moment, anyone who inherits your pension pot doesn’t have to pay inheritance tax. And if you die before age 75 they won’t have to pay income tax when they take money out, up to the lump sum and death benefit allowance of £1,073,100. However, the government has announced that pensions will be subject to inheritance tax from 2027.

For the time being, passing on pensions is the winner.