Pensions Or ISAs?

Your Financial Plan
28/03/2023
8 mins

Individual savings accounts (ISAs) and pensions both offer efficient ways of saving for the future, but the money you invest in them is treated very differently by HMRC for tax purposes.

What is an ISA?

An individual savings account (ISA) is a way to reduce taxes on your savings and investments. They’re offered by banks, building societies, asset managers, National Savings & Investments and certain other financial institutions.

Any contributions you make to an ISA are made from net (post-tax) income, so you’ve already paid tax on the money. That means there’s no income tax to pay when you take money out of an ISA. Also, any gains your ISA makes are shielded from capital gains tax and income tax.

There are two main types of ISA:

  • Cash ISAs
    Where the savings are held in cash and not typically facing any investment risk
  • Stocks and shares ISAs
    Where you invest in stocks and share through your ISA, with the funds subject to the ups and downs of markets over time.

You can mix these two types of assets in ISAs if you prefer, providing you don’t exceed the current £20,000 per year contribution limit across both ISAs.

There are also Junior ISAs, which can be either cash ISAs or stocks and shares ISAs and are held by parents / guardians on behalf of children under the age of 18.

Within these broad types of ISA are numerous different ISA options; which one is right for you will depend on your circumstances.

What Is A Pension?

A pension is a way of saving for your retirement to fund you in old age once you’ve stopped working.

With pensions, you receive tax relief at your highest marginal rate on contributions. There’s also no tax to pay on gains your pension pot makes while it remains invested. However, depending on your financial circumstances when you begin drawing your pension, you may have pay income tax at this point.

For the purposes of this page, we’re discussing defined contribution pensions, also known as money purchase pensions. These are pensions where you save into a ‘pot’ throughout your working life and use this pot to generate a retirement income once you’ve stopped working.

Defined contribution pensions are the most common type of pension in the UK, especially since the introduction of auto-enrolment brought employer-sponsored defined contribution pension schemes to the masses by enrolling all eligible workers.

As well as employer-sponsored pension schemes, where both you and your employer typically pay into the pension a proportion of your wages, there are personal pensions which you can pay into yourself without an employer necessarily doing the same.

Here you may pay in from post-tax income and basic rate tax relief is applied, uplifting your contribution by 20%. If you’re a higher or additional rate taxpayer, you have to claim the additional tax back from HMRC in your tax return.

Find > Organise > Simplify

Take Control Of Your Financial Future
See Your Financial Future

Should I Save In An ISA Instead Of A Pension?

ISAs are an excellent way to save as any growth in your investments — either interest or returns on stocks and shares ISAs — is tax-free. The ISA limit for the 2023/24 tax year is £20,000 and you can invest this in either a cash ISA, a stocks and shares ISA, or a combination of the two.

You won’t have to pay income tax or capital gains tax on any of the returns you make from an ISA.

Pensions, on the other hand, are far more geared towards long-term saving as you won’t be able to touch the capital until you’re at least 55. You benefit from tax relief at your highest marginal rate if you invest into a pension — up to 45% — which you don’t get from an ISA. For a basic rate tax payer every £1 you put into a pension the government will make up 20p which gives you an immediate uplift of 20%.

IMPORTANT NOTICE 🧐
As of the Spring budget 2023, the UK chancellor announced the abolition of the pension lifetime allowance (LTA). This came into effect from 6 April 2023.

It’s important to note however, the Labour party has announced that if they were to be elected, the allowance may be reintroduced in the future. If this occurs, we will update our records to reflect any changes. The information on this page is based on the LTA pre 6 April 2023.

Pensions vs ISAs: A Guide

Below are some of the features of pensions and ISAs to provide a better idea of how they compare to each other. This is not intended to be financial advice on which to base your retirement planning decisions; it’s merely a comparison of two different savings vehicles.

Pensions

ISAs

Receive tax relief at your highest marginal rate — see the below Pension Tax Relief Calculator to work this out

No income tax on profits from your investments

Funds in a pension can grow free from capital gains tax

Funds in an ISA can grow free from capital gains tax

You may have to pay income tax on pension withdrawals

No income tax is due on withdrawals from an ISA

You can’t access your pension until you’re 55, unless there are highly exceptional circumstances

Most ISAs allow near-instant access, unless you’ve opted to lock away the funds for a set period to achieve a higher interest rate

Maximum contribution into a pension is 100% of your earnings or £60,000, whichever is lower

Invest up to £20,000 per tax year into an ISA

A lifetime allowance of £1,073,100 limits how much you can save into a pension in your lifetime without paying a 55% charge

No limit on how much you can save into an ISA in total, providing you don’t exceed the annual cap

ISAs form part of your estate when you die and are subject to inheritance tax

Pension funds that remain invested under a pension wrapper are usually free from inheritance tax

Depending on the type of pension you have, you may have access to a wide range of assets, including commercial property

ISA savings are predominantly held in cash or stocks and shares

Cash ISAs rarely charge fees, but a stocks and shares ISA will likely levy charges such as an annual management charge or fees each time you buy or sell investments

Pensions may face a variety of fees and charges both in the accumulation phase (when you’re saving) a deculmulation phase (when you’re drawing benefits), although certain pensions, such as stakeholder pensions, limit these

Workplace pensions offer contributions from your employer as well as your own contributions

From the 2015/16 tax year, if you pass on your ISA to your spouse it will retain its tax-free status, rather than losing it on the account owner’s death as previously.

Pension Tax Relief Calculator

Tax relief on your pension is one of the most valuable tax breaks available. Follow the simple steps below to calculate how much you could get back in tax relief when you pay into your pension.

  • £
  • £
Discuss your results with our experts
Receive our Guide to a Richer Retirement

Which Is Better: ISAs Or Pensions?

Generally speaking, pensions are best suited to long-term investment, and ISAs to short-term requirements. In an ideal world, you would be saving the maximum amount in both an ISA and a pension.

However, lots of people use ISAs as a way of saving for their retirement in a tax-efficient way, and plan to use their ISAs to supplement income in retirement. Both have their place — which one is right for you will depend on your needs and circumstances and ideally you’d have a conversation with an expert adviser before making any decisions.

Your Financial Plan – Build A Better Future

A good financial plan can help you make the right decisions when it comes to your finances. Make the right decisions today to build a more prosperous future.

Good financial planning with clear goals can increase your retirement income by as much as 53%. Old Mutual Redefining Retirement Survey

Why Speak to Us…

We started Drewberry because we were tired of being treated like a number and not getting the service we all deserve when it comes to things as important as planning our finances. Below are just a few reasons why it makes sense to let us help.

  • See your financial future
    We use sophisticated financial modelling technology to visually show you your financial future. A living financial plan where you can clearly see what you can achieve depending on the decisions you make – read more
  • Achieve the retirement you deserve
    Can afford that dream round-the-world trip? Can you help your children onto the property ladder? We’ll model your goals and build your financial plan to help you achieve them.
  • Our expertise saves you time and provides peace of mind
    Organising your pensions, investing your assets, managing risk and making the most of your tax allowances is all taken care of as part of your financial plan.
  • We’ve got bargaining power on our side
    This allows us to negotiate better rates for you than dealing with providers yourself.
  • You’ll speak to a dedicated expert from start to finish
    You will speak to a named expert with a direct telephone and email. No more automated machines and no more being sent from pillar to post – you’ll have someone to speak to who knows you.
  • Benefit from our 5-star service
    We pride ourselves on providing a 5-star service, as can be seen from our 2386 and growing independent client reviews rating us at 4.92 / 5.
  • Gain the protection of regulated advice
    You are protected. Where we provide a regulated advice service we are responsible for the decisions we help you make. Doing it yourself or going direct to a provider won’t provide this protection, so you won’t benefit from these securities.

Our Services & Tools

See Your Financial Future
Find > Organize > Simplify
We exist to improve your financial wellbeing

We use clever technology to bring your financial future to life

  • Find, organise and simplify your Pensions, ISAs and other investments.
  • Plan your financial future and put a strategy in place to achieve this.
  • Regularly review how you are doing to make sure you stay on track.

Contact Us

Head Office & Pensions and Investments
Senator House
85 Queen Victoria Street
London
EC4V 4AB
Personal Insurance & Accounts Payable
Telecom House
125-135 Preston Road
Brighton
BN1 6AF
Drewberry London Office MapDrewberry Brighton Office Map

If you are unhappy with our service, we have a complaints procedure, details of which are available upon request. If you are unhappy with how your complaint has been dealt with, you may be able to refer your complaint to the Financial Ombudsman Service (FOS). The FOS website is www.financial-ombudsman.org.uk.

Drewberry Ltd is registered in England and Wales. Companies House No. 06675912

Drewberry Ltd registered office: Telecom House, Preston Road, Brighton, England, BN1 6AF. Telephone 0208 432 7333

Drewberry Ltd (Financial Conduct Authority No. 505473) is an Appointed Representative of Quilter Wealth Limited and Quilter Mortgage Planning

Limited, which are authorised and regulated by the Financial Conduct Authority.