In recent years, ISAs have seen a surge in popularity as an alternative way of saving for retirement. Of course, it doesn’t have to be an either/or decision between a pension or an ISA and a lot people choose to augment their pensions with an ISA to ensure that little bit of extra income during retirement. Both a pension and an ISA are pretty safe ways to ensure a solid income through retirement; the most pertinent action to take is to begin retirement planning as soon as you can. When you do start thinking about your financial future or start to consider investment planning it is good to know exactly how your money can work for you. That’s why the list below has been complied to give a quick guide to the pros and cons of both ISAs and pensions.
1. Instant Access: You can access the money in your ISA whenever you want unlike a pension, where you have to wait ‘til 55. Some people like to have this as security in case of an emergency or if they are in a higher risk financial position, like running their own business or being self-employed.
2. Flexibility: You can get different kinds of ISAs which are really easy to understand including a cash ISA or a stocks and shares ISA.
3. Tax: Once the ISA has been taken out tax will not be an issue. They’ll be no tax on growth or income as you take the money out and this includes during retirement. You won’t have to worry about the tax free thresholds (relevant currently with the new “granny tax”) or even do a tax return. This is one of the key benefits of an ISA.
4. Simplicity: Unlike in a pension where it can be terribly hard to know where you money is going and how it is being invested, an ISA is really easy to understand and simple to use.
1. Instant Access: Instant access is great in times of emergencies but if you end up calling on your ISA too often when it’s meant to be your savings for retirement, you could end up with a lot less income later in life than planned.
2. No Tax Relief: Growth on an ISA is less than a pension because you don’t benefit from tax relief on your contributions.
3. Saving limitations: Unlike a pension where the limit on contributions is very high, you can only put in £10,680 per annum in an ISA. Fine if you start an ISA early, but if you’re late to retirement planning, you might want to be putting in more and seeing it grow at a faster rate.
4. No Employer Contributions: Your employer can’t pay into your ISA.
5. Access to State Benefits: You ISA will influence your eligibility to welfare benefits if you happen to need them at any point.
1. Tax Relief: The government refunds the tax on the income you pay in, so according to your tax rate you’ll get a lot more for your money. Although when you start to withdraw money from your pension, it can be liable to tax, you’re likely to be on a lower income when retired, so the rate will be lower meaning overall you’ll make money.
2. High contribution Limit: You can contribute up to £50,000 a year and £1.5 million over a life time.
3. Employee Benefits: A lot of employers will either match or exceed employee contribution. This doesn’t happen with an ISA.
1. Accessibility: You can only start taking money out of your pension at the age of 55, although some might argue this is an advantage as it protects your money until you are actually retired.
2. Difficult to Understand: Pensions can be difficult to understand and it can be difficult to get hold of information about what your pension is being used for and exactly where your contributions are going.
3. Government Policy: The government (any government) at any time can make significant changes to the workings of a pension which can have huge impacts upon your final income. You could have been working towards a retirement with a certain amount of income expected only to have a government come in a few years before you’re due to retire and significantly change laws with regards to pensions (some people would claim this a familiar experience currently).
Overall, it seems the best bet is to combine a pension and ISA. An ISA in combination with a pension can protect you from the possibility of government intervention in access to pension or tax rates, whilst keeping a pension at the same time means you can reap the benefits of tax relief. If you’re young and on a low income it might be a good idea to set up a small cash ISA and make small monthly contributions, just so you’ve got something in place.