ISAS vs Pensions

POSTED ON Wednesday, 18 November, 2020

When saving for the golden years of your life is wise for anyone who wants to make sure that their retirement will be comfortable and financial stable. s are a great way to ensure that you have some money squirreled away to fund your retirement. Another great way to put your pennies in the retirement jar is to have a pension. How do the two measure up?

What is an ISA?

An ISA is an account that allows you to save or invest your pennies in a tax-free wrapper, so that the returns you make on these kinds of accounts are not charged income tax or capital gains tax.

There are a variety of different kinds of ISA, but when it comes to saving long-term for your retirement, the best options available to you are Investment ISAs and Lifetime ISAs.

So, what are these?

An Investment ISA is… also known as a stocks and shares ISA, which allows you to invest money up to a certain amount without paying tax. You can choose to invest your money in various different funds depending on the platform you have chosen. With excellent tax benefits, this is a very popular form of long-term saving. Read more about Investment ISAs here.

A Lifetime ISA is…a specific kind of ISA that focuses on long-term saving. There is a limit imposed on how much you can put in a LISA each year (£4000 this tax year), and when this money is put into the account, the government will put a 25% bonus into the account. So, if you put the total limit into the account each year, you could stand to get £1000 back, which is not to be sniffed at. You can only access the money when you turn 55 (e.g. starting to think about retirement) or when you’re buying your first home. 

What is a Pension?

A Pension is…a pot of money which you contribute to long-term, throughout your working life, which can then be used at the point of retirement. A pension is designed to have very good tax benefits. 

Many people have a pension through their employment, however you are able to set up a self-invested personal pension. 

These can also be known as SIPPs – so if you see this term, you’ll know what it’s about. 

How do they compare? 

First, we’ll look at the benefits of ISA accounts: 

  1. LISAs have a pretty unbeatable return rate which make them a very attractive option. You will struggle to find a 25% return rate anywhere else. 
  2. While investment ISAs may not offer the same high return, the benefit of opening an investment ISA rather than just a standard savings account is that the returns you make on your investments will be kept in a tax-free wrapper, meaning that you will be able to keep the returns safe from the tax man.
  3. Unlike a pension or a LISA, an Investment ISA has a bit more flexibility. You cannot access your pension before you are 55, however you can access some Investment ISAs before then. In general terms, it’s good practice to ensure you have an Investment ISA bond for at least five years to allow for fluctuations in the market.
  4. You can also transfer your fund from an Investment ISA to another kind of ISA account if your needs change – or if you decide that you might need to be able to have access to your funds

And the benefits of Pensions include: 

  1. With many jobs, your employer will automatically enroll you into a pension scheme.
  2. Your employer will also contribute money to your pension pot, so your savings will be padded by this contribution also.
  3. With a standard pension, you won’t have the ability to choose your own investments, however with a SIPP (like a Stocks and Shares ISA) you have more freedom of choice regarding where your money is invested.
  4. If you are a higher-rate tax payer, then you will make more money from a pension than if you are a basic rate tax payer.

Do I have to Choose?

No – you are entitled to have both a pension, a LISA and multiple Investment ISAs. 

You can only open one new Investment ISA each year, and you can only pay into one Investment ISA each year. 

So, if you spread your money across these methods of saving, you can develop a strong financial basis for retirement. 

Read more about Investment ISAs here.

Read more about Lifetime ISAs here.