Stocks and shares ISA or pension?
If you’re not in a workplace scheme, or you’re looking to supplement your work pension with further retirement savings, you might consider an ISA or a personal pension.
When comparing pensions and ISAs, we are referring specifically to personal pensionsand stocks and shares ISAs(both standard and lifetime). This is for two reasons:
- Both products are invested and therefore you might get back less than you put in (a cash ISA has a guaranteed return via its interest rate)
- A personal pension doesn’t benefit from the additional contributions an employer has to pay into a workplace pension.
This makes for a fairer comparison.
What are the tax implications?
Both a standard stocks and shares ISA and a personal pension scheme have tax advantages, as detailed below:
- The ISA benefits from a tax-free status. You can contribute up to £20,000 per tax year without having to pay tax on any gains it makes.
- If your scheme is registered for HMRC tax relief, a personal pension is also tax-free as far as potential gains go. The annual limit is £60,000 or 100% of your earnings, whichever is lower. Anything above this amount becomes liable for a tax charge.
- Any withdrawals from an ISA aren’t liable for tax.
- If you take the money from your pension pot as a lump sum, the first 25% is tax-free, anything after that is taxable. If you choose a guaranteed income via a pension annuity, normal income tax is payable, as it would be with your salary.
A personal pension also gets tax relief. This means the government will pay in an additional 20% of your contributions, effectively paying back the income tax you have already paid on your money at the basic rate. If you are a higher-rate taxpayer, it's also possible to claim an extra 20% tax relief, totalling 40% in line with the higher tax band.
Tax treatment depends on individual circ*mstances and may be subject to change in future.
Can you easily withdraw your money?
One of the key deciding factors in choosing between a stocks and shares ISA or a pension is the ease with which you can access your money.
Accessing a stocks and shares ISA
A standard stocks and shares ISA, although intended as a long-term investment, would give you greater freedom than a pension when it comes to taking money out. The amount you needed would be available on request as soon as the corresponding investments were sold.
Of course, this freedom can be counterproductive to your goal of saving enough to enjoy your retirement. Every ISA withdrawal you make will ultimately eat into the amount you eventually have to retire on. This applies not only to the pot your contributions make, but also the potential for returns.
Accessing a pension
In contrast to an ISA, a pension won't give you the same level of freedom. Once you start a pension, your money is locked away and the earliest you can access it is at 55. This age is due to increase to 57 in 2028.
The advantage of the pension age limit is there’s no temptation to dip into your pot early, reducing it and diminishing the potential returns. This gives it time to grow and, if you’ve paid in enough and the investments have been kind, put you on track to the retirement you’ve planned.
