ISAs and Pensions compared

In this post, I will compare Pensions and ISAs. And help answer the question Should I invest in an ISA or a Pension? If you do not know what a pension is, click here to read my previous blog “What is a pension?” If you do not know what an ISA is, click here to see my previous blog “What is an ISA?” and here to read “What is a LISA?”




How much can I pay in?

To receive tax relief you can pay:

100% of earnings subject to the annual allowance with is currently £40,000.

If you do not have any earnings you can pay a maximum of £2,880 and receive £720 tax relief*

For people that have an adjusted annual income of £240,000 or over, for every £2 over £240,000, the annual allowance is reduced by £1. Anyone earning over £312,000 will have an annual allowance capped at £4,000

If taking an income from your pension via Flexi-access drawdown, is restricted by the money purchase annual allowance which is £4,000

£20,000 £4,000 which is counted against £20,000 total ISA allowance

Tax Relief/Bonus**

20% basic rate taxpayers, 40% higher rate taxpayers N/A 25% Bonus

Minimum age

N/A * 16 for a cash ISA

18 for a Stocks and Shares ISA

Age 18

Maximum age

Age 75 No maximum 40 to open a LISA

50 to receive bonuses

Age can access the money

Age 55 (57 from 2028) No restrictions No age restriction if used to purchase a property or Age 60 for retirement

Can money be accessed earlier?

Yes, can get a serious ill-health lump sum if have less than 12 months to live. No restrictions If accessed before age 60 and not to purchase a property, Government bonuses will be removed along with any interest that these have accrued

And there will be a 5% penalty on the amount withdrawn.

If you’re terminally ill, provided that you have 12 months or fewer to live.

Who can pay in?

Individual/employer – Auto Enrolment means for the employed, employers have to make minimum contributions into a pension on employees’ behalf.

Businesses that pay into the plan are an allowable business expense.

Pension contributions paid via salary sacrifice into an employer scheme, are not be subject to national insurance for both the employer and the individual.

Individual only Individual only

Subject to Inheritance tax

Pension do not form part form part of the estate therefore no inheritance tax to pay Yes*** Yes***

When is tax relief/are bonuses paid

Immediately N/A At the end of the tax year

Impact of Bankruptcy

Cannot be used to pay creditors Can be used to pay creditors Can be used to pay creditors

Tax on withdrawing money

25% tax-free, the balance is taxed as income Tax-free Tax-free

Other points

Payments into a pension can increase your higher rate tax threshold thus moving you from 40% to 20% taxpayer

* Children also qualify for tax relief on pension contributions therefore, parents/grandparents could pay into a pension on their behalf.

** The way in which the tax relief is applied to pension contributions and the bonus is applied to the LISA means that the amount credited is the same for basic rate taxpayers. For example, a basic rate tax payer pays £80 into a pension, they get £20 tax relief (20% of £100). If £80 is paid into a LISA, the bonus applied is £20 (25% of £80)

*** unless invested in assets that qualify for Business Property Relief at date of death that have been held for longer than 2 years

Both the Pension and ISA have pros and cons and both have their place within clients’ financial plans.  Although this hasn’t directly answered the question Should I invest in an ISA or a Pension? It should give you a better understanding of each tax wrapper and where it could fit depending upon your goals and objectives. If you would like to know more or would like to ensure your financial plans are on track to meet your objectives, please contact me for a complimentary initial meeting.

Tax rules, rates, and allowances are all subject to change and are dependent on individual circumstances. The Financial Conduct Authority does not regulate tax advice and some forms of offshore investments. The value of investments and the income from them can fall as well as rise and you may not get back the full amount you invested.

Leave a Reply

Your email address will not be published. Required fields are marked *