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Should I save into a pension or an ISA?

By Mike Narouei, Content Producer at Boring Money

15 May, 2017

Annie's about to hit 40 and feels too young to save into a pension. So which is better; saving into ISAs or a pension?

Probably the most important differences are around access to the money, the tax treatment of the money and what happens to the money if you die (cheery thought). There are also limits on how much you can save into both. At the moment, the annual cap on any ISA contributions is £20,000 and it’s up to about £40,000 for a pension, depending on how much you earn.

Let’s have a look at the key difference between ISAs and pensions.

First up, you can take your money out of an ISA whenever you want (although just check the terms and conditions of some of the fixed term cash ISA deals). It’s yours to take. With a pension, it’s pretty much impossible to get your hands on it before you’re 55, even if you make up some wild sob story with the Revenue!

Basic rate taxpayers will get an extra £25 for every £100 you stick in a pension. Higher rate taxpayers get more.

Second – tax. When you pay into an ISA, you don’t get any tax relief or special treatment. But when you pay into a pension, the Government top this up with an extra wodge of cash, as a sort of pat on the head for responsible old you saving up for your future. Basic rate taxpayers will get an extra £25 for every £100 you stick in. Higher rate taxpayers get more. (Although there were mutterings about this in the General Election chest beatings so watch this space).

When you’re taking your cash out, you basically won’t pay tax on the gains in an ISA. When taking money out of a pension, typically 25% will be tax free and the rest is taxed at your marginal rate.

If stuff goes a bit pear-shaped for you before your 55th birthday – tough! You can’t get at this money.

What this basically means is that, if you’re say 20 years off retirement, investing in a stockmarket which is gradually heading North, the extra Government payments into your pension could really turbo charge things for you. It’s a bit like making a snowman. The extra contributions give you a bigger ball of snow to start with which means that your snowman gets bigger, quicker. But look out! If stuff goes a bit pear-shaped for you before your 55th birthday – tough! You can’t get at this money.

Lastly, it’s worth being aware that – under current rules – when you die, you can pass your pension to a spouse or your kids tax free. With an ISA, your partner can inherit the ISA allowance but not your kids.