What Is an ISA?

ISAs are an all-purpose savings or investment account, which can be used to put money away, either for retirement or for any other financial goal. They come with great tax benefits. Money in an ISA grows tax free in the same way that money in a pension grows tax free. Except the ISA has the added bonus that money isn’t taxed when you decide to take it out.

The ISA allowance is £20,000-a-year and the great thing is that you can dip in and out of it whenever you want. Unlike a pension your money isn’t locked away until a certain age.

There are a variety of different ISAs available, with all of them offering different perks and benefits, so it’s important to look into them all, to see which suits you best. Helpfully, Investing Reviews has published a list of the “Best ISAs UK”.

What Is a Pension?

Pensions are designed as retirement savings and come with special features to encourage us to save more. When saving into your pension, you get “free money” in the form of tax relief on your contributions. For basic rate taxpayers, that means a 25% top-up. So if you’ve paid £100 into your pension, HMRC immediately adds another £25 bringing the total contribution up to £125.

Pensions are often part of a workplace scheme, and the employer usually contributes to your pot too.

However, with a pension, you can’t access the money until you are approaching retirement. Currently, you can start to access your pension fund from the age of 55, but in 2028, that age will change to 57. At that age you can take 25% as a tax-free lump sum.

Currently you invest 100% of your income into a pension up to a cap of £40,000.

In addition to your workplace pension, you can also set up a personal pension through an investment platform which may give you greater investing choice than the workplace pension.

ISA v Pension

Below is a comparison between an ISA and pension, to help understand which is the better option for you.

Pensions:

·         Access-

You can’t access your pension until you’re 55, which will rise to the age of 57 in 2028.

·         Tax-

You get tax relief on pension contribution and the money grows tax free. When you reach the age where you can access the pot, 25% can be taken as tax free lump sum. The rest is taxed as income at your marginal rate of tax, based on your total taxable income for the year.

·         Allowance-

100% of your income, capped at £40,000 every year.

·         Investment choice-

Contributions can be invested into cash, bonds, shares, funds, with the choice of varying them too.

ISAs:

·         Access-

Money in an ISA can be accessed anytime you want, unless it’s a fixed rate cash ISA.

·         Tax-

Money in an ISA grows tax free; no tax will be payable when you take money out of it either.

·         Allowance-

You can put up to £20,000 a year into an ISA.

·         Investment choice-

Just like a pension, contributions can be invested into cash, bonds, shares and funds.

Which is best?

So, which is the best option for you when it comes to your money and the future?

In many ways, pensions and ISA are similar so it all comes down to your savings goals and when you want to access your money.

If you’re saving purely for retirement, then a pension is usually the best option. Tax relief on contributions creates an instant compounding effect. So it’s a great way to build up money.

On the other hand, ISA pots are easier to access meaning you can spend your money when you want.

Although an ISA comes with many great benefits that a pension doesn’t offer, it is often best to have both. Whilst you’re working, it’s easy to contribute to your pension fund every month from your wages so you won’t even notice the money going out. Then when it comes to retirement age, you have a pot of money ready and waiting. However, it’s also a good idea to have an ISA in place to use a savings pot for anything you want or need in the future too. They’re a great way to save money, which can be accessed whenever needed.