Pensions vs ISA - which one is best?

Roderick | Greater London| 06/09/2017 | 0

  • Stocks and Shares ISA
  • Junior ISA
  • Lifetime ISA
  • Pension

Roderick's question in full

Pensions vs ISA - which one is best?

Holly Mackay's Response

This is a really tricky question and there is no ‘right’ answer for everyone.

For most people, we would say it isn’t a case of either/or. ISAs (whatever form they take) and pensions meet different needs and both are part of an intelligent financial strategy. If you are able to, saving into both an ISA and a pension will give you the best of both worlds; one is a largely tax-free savings wrapper that allows you to build up your funds towards more immediate goals, such as your first property, while the other is solely for the purpose of making sure you have a fun and secure retirement (with the added benefit of tax relief on your contributions).

Pensions are cool (oh yes!) because you get a free Government handout in the form of tax relief. Basic rate taxpayers get £20 free for every £80 they save. So your stash grows quicker. Great. but you cant get your hands on this till you’re at least 55. Less great.

ISAs are largely tax free savings vehicles and you can plonk up to £15,240 a year into these. But take the money when you want it. So no Government handout in the standard stocks and shares ISAs BUT you can take the money when you want it.

And if you’re a first time buyer, the Help To Buy ISA is a bit of a no brainer with free Government bonuses to enjoy here too.

One thing to consider in the pensions versus ISA question is your pension at work. If you’re enrolled into a workplace pension, you’d generally be mad not to take advantage of this. The government has introduced a system whereby every employee in the country should (by 2018) be automatically enrolled into their company’s pension. This means that you will have been signed up for the workplace pension scheme without you even agreeing to it. You will have a certain amount deducted at source from your pay packet each month (will only be 1% from your pay packet at first) into a pension fund overseen by an investment manager who is expected to invest your money for the long-term so you can have a healthy nest egg in retirement.

You can opt out if you really can’t spare the cash but you’d be giving up free government money and employer contributions on this too. The amount that you are contributing is likely to be extremely small and nowhere near enough to give you the right income in retirement. It is worth thinking about a private pension that will supplement whatever you’re paying into a workplace pension, with the added benefit that you have more choice over how and where the fund is invested as well as a greater opportunity to check up on its progress.

The bottom line is generally that ISAs are more flexible and don’t lock your money away till you’re really old BUT pensions do come with the added Government ‘bonus’ and top up which means you get to turbo-charge your savings.



Just be aware...

We are not regulated to give personal financial advice - This isn’t full-fat regulated financial advice. Boring Money is a publisher and not regulated by the FCA. 

This means we can't help with specific personal circumstances or recommend specific investment products. It also basically means that if we say something daft, you have no recourse to come back and complain.

We’re only allowed to give you a steer or share an opinion or tell you the facts - That said, we promise that our answer to you is an independent unbiased perspective with no commercial gain to make. If you need regulated financial advice, you can find a good adviser via sites such as Unbiased & Vouchedfor.

Our Expert

Holly - 066.JPG

Holly Mackay

Founder and MD of Boring Money, Holly Mackay has been working in the investments space since 1998. She read Modern Languages at Oxford, with a special focus on Mediaeval French which was deeply interesting and arguably utterly useless.

Related Questions

Got a Question?

Got a question? Ask our experts

Ask Our Experts

Sign up for Holly's blog

Stay up to date

Our free weekly blog with Holly's
no-nonsense opinions, tips & food for thought.
If you change your mind, you can unsubscribe at any time. We'll never share your details and you can unsubscribe any time.