ISAs vs pensions – which is the best investment product for you?

Individual Savings Account (ISAs) and pensions each have their unique set of rules, and for this reason, they are both very different in how they work. Is there a right or wrong way to fund your savings and investments, and is there an advantage to using one investment product over the other?

In this article, I wanted to look at two different tax-efficient investment products that can be used for long-term savings. Let’s take a look at an overview of each of the products to see how they compare:

ISA Pension
Payments are paid gross with no tax relief. Maximum amount for tax year 21/22 is £20,000. Personal payments attract tax relief for amounts up to £40,000 or 100% of your annual earnings (whichever is the lesser). Certain circumstances can reduce these limits.
The savings fund grows tax free. The savings fund grows tax free.
Capital Gains Tax is not charged when savings are accessed. Capital Gains Tax is not charged when savings are accessed.
Income Tax is not charged when savings are accessed. Usually you are able to take 25% of the fund tax free. When an income is taken from the remaining fund, income tax is chargeable.
An ISA will form part of your estate, subject to IHT exemptions. Pension fund is usually exempt from inheritance tax.
No other taxes are payable. Pensions have a lifetime allowance, currently £1,073,100. Funds in excess of this amount pay an extra charge.
For cash ISAs, payments can be made from aged 16. For stocks and shares ISAs, this rises to 18. There is no maximum age limit, as children under 18 can use a junior ISA. Payments to a pension can be made from birth to age 75.
A cash ISA can be accessed from aged 16, and a stock and shares one from 18 years old. Earliest you can normally access a pension is from age 55.*
Employers cannot made payment on your behalf. If you are employed and meet eligibility criteria, you must be enrolled into a pension scheme by your employer and your employer must contribute.
Investment is allowed in cash, government and corporate bonds and equities. A wide range of funds are available. Investment is allowed in cash, government and corporate bonds and equities. A wide range of funds are available.


Why consider an ISA?

  • ISAs are the most flexible form of tax-efficient savings plan available.
  • ISAs can be accessed at any time. However, stocks and shares ISAs should be looked upon as medium to long-term investments (over five years). 

Why consider a pension?

  • If the investment is being made for retirement (currently over the age of 55), the pension provides the advantageous benefit of tax relief on your payments. Remember you don’t get tax relief for payments to ISAs.
  • If you are employed and meet the eligibility criteria, your employer must enrol you into a pension scheme and pay contributions into the scheme. These contributions will boost your payments and are in effect, free money.

 So, which is best for you?

  • ISAs offer the most flexible tax-efficient products for your savings or investment, as you can access them at any time, with no tax to pay. However, as we have mentioned, if you are using stocks and shares ISA these are usually held for the medium to long term.
  • You should consider a pension for your savings or investment if you are planning to use these funds in later life and won’t need to access the funds before your 55th birthday.
  • Of course, you can use a combination of both ISAs and pensions for your savings and investments. This will depend on how much money you have at your disposal for this purpose. Using both products will allow you to use all the advantages of each and the monies will be sheltered in a very tax-efficient manner.

With both stocks and shares ISAs and pensions, the value of investments can go down as well as up and you may get back less than has been paid in. The value of a cash ISA may not keep pace with inflation.

Should you wish to discuss either of these products or have any other investment queries, please do not hesitate to contact us.

*The minimum age to access your pension will increase to age 57 from April 2028.