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ISA vs Pension – battle of the money pots

Updated: Apr 22

Well done! You have some extra hard-earned £££ and you’re thinking long term with it. So what do you do? Put it in an ISA or a Pension. Whilst it’s not totally clear cut, here are the areas to consider:


ISAs

  • There are few different types of ISA to choose from. Make sure you get the one that’s most suited to your needs:

  • Cash ISA your money sits in cash so it is liquid but not really earning you anything.

  • Stocks and shares this ISA enables you to invest the money into listed shares and funds. So it can earn for you by investing in stocks and funds. However you do need to feel comfortable picking the stocks or funds to invest in.

  • Innovative finance ISA instead of shares and funds, these ISA’s purely contain peer-to-peer loans (note these can be difficult to sell..ie. not liquid). Pretty risky..

  • Junior ISA these can be in either cash or listed shares/funds. Only the child can access the money in these and only after they are 18.

  • Lifetime ISA can be in cash or listed shares/funds. They can only be put towards your first home or to save for later life. You must be between 18-40 to get this. Government gives 25% bonus on the savings up to £1,000 per year. But there are penalties if you don’t stay within the rules.

  • Help to buy ISA these are now closed for new applicants.

  • For all ISAs there is no income tax, and no capital gains tax. But inheritance tax still applies.

Pensions

  • You can contribute up to £40,000 per year (annual allowance for ISA is £20k) into a personal pension (or SIPP).

  • You will get up to 45% tax relief , but

  • You cannot access the money until 55

  • There is some tax on withdrawal, which is usually lower than the tax relief, especially if properly managed. Any money you invest in your SIPP will be topped up by 20% by the taxman, and higher or additional-rate taxpayers can claim back a further 20% or 25% respectively.

  • Can make regular or lump sum contributions.

  • You benefit from no capital gains tax or income tax

In conclusion ISAs can be more flexible (although pensions are now quite flexible), whereas the tax relief on pensions can be more advantageous.