Should I pay less into the pension and more into ISAs?
14 November 2022
Question by Chris
Hi, currently between my employer and I are paying in about £36k a year into my defined contribution (DC) pension. This is at a very healthy level but I have little cash savings outside this pot. Should I pay less into the pension and more into ISAs I can draw on flexibly and accept I lose the tax benefits?
Answered by Boring Money
It's a good thing to be thinking about, given ISAs can play an important part in retirement, as they can provide tax-free income and/or lump sums.
Once you've exhausted your DC pension tax-free cash, everything you draw will be taxable, so having a blend with tax-free income from an ISA can work well.
That said, you are correct that you'd have to accept losing tax relief now by funding your ISA instead of pension.
It is worth bearing in mind the level of income tax you pay now vs. what you'll pay in retirement. If you can get higher or additional rate relief (40/45%) now and then pay basic rate (20%) in retirement, it may be worth funding the pension further.
If you can see a scenario in which you may need a lump sum before you retire, then it may be worth funding an ISA despite the tax relief loss.
Basically, lots to consider beyond just the obvious tax differences!
Hope this helps