Pensions v ISAs: a comparison

Pensions vs ISAs

Pensions

MoneyPlus Features Team

31st March 2015 at 8:21am

Could ISAs fuel inject your finances and pensions add some turbo to your retirement?

We’ve lined them up on the grid just to see how they stack up.

DragSTAR V3

Which is in pole position?

Pensions do pull ahead when it comes to retirement with the major attraction, of course, being that the money you pay in is topped up by tax-relief. However, because pensions are designed specifically for retirement they aren’t quite as agile as an ISA. Pensions are built for the long haul meaning you won’t be able to get your hands on the money until you’re 55 compared to your easier to access ISA. And while ISAs don’t get the upfront tax relief that pensions enjoy, there’s no tax to pay when you do cash them in. With pensions only 25% can be taken as tax-free cash so you’ll have to pay income tax on the remainder.

But pensions are now more flexible than they’ve ever been when you do hit 55, and under new rules from 6 April this year, you’ll have more options on how you take your money in retirement. An annuity is no longer the default option and your pension pot can be used in much the same way as a bank account or ISA. And the way pensions can be passed to beneficiaries makes them particularly useful for sharing wealth inside the family and in a tax-efficient way.

Harness their horse power

Having seen these savings vehicles line up against each other on the grid, it’s clear to see both have something under the bonnet for a tax savvy saver. So it may be worth making room for both in your garage. Your hot hatch ISA for easy access and tax-free cash and your grand tourer pension for tax relief and better overall potential for growth taking you through retirement.

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The information in this blog or any response to comments should not be regarded as financial advice. A Stocks and Shares ISA and a personal pension are investments. Their value can go up or down and may be worth less than you paid in. Laws and tax rules may change in the future. The information here is based on our understanding in March 2015. Your personal circumstances also have an impact on tax treatment.