Pension or ISA – where should you be putting your money?

11th May 2012

A recent report highlights the continuing lack of faith in an increasingly complex pensions market.

Many are starting to use ISA’s instead of paying into a pensions pot believing they are a viable alternative. The increase of investments into ISA’s is as apparent as the dwindling input into pensions.

But what’s best for your retirement pot: a pension or an ISA?

When an ISA is best

If you may need access to the money before the age of 55, a pension will be no good and an Isa is the better option.
After age 55 there is a limit to the amount of income you can take form the pension pot, which is 25% tax free. If the money is in an ISA you will be able to take as much as you want out whenever you want.

Another key factor is the level of tax you are paying. As a higher-rate tax payer the pension is a clear winner. If you pay standard tax rate then as ISA is a simple and flexible alternative.

Savings plans (ie an ISA) can be taxed in three ways – when you earn the money that you save, when it grows and when you withdraw it. Pensions are tax-exempt at the first two stages but not the last; Isas are taxable at the first stage but exempt thereafter.

When a Pension is best

There are 2 main situations where a pension is a better option than investing in an ISA. The first is where the employer contributes to the pension scheme. In this situation it is simply crazy not to accept it, as it is effectively part of your salary, and you can choose how much you put into the scheme also.

Secondly, if you’re a higher-rate taxpayer pensions are more tax efficient.

There are two further advantages of pensions over ISA’s, pensions are ring-fenced from personal assets and so are protected in the event of bankruptcy; second, they are free from inheritance tax on death of the pension holder.

Clearly in this current environment there is no clear cut answer. Nobody knows how pensions and ISA’s will be affected by the global recession. In the meantime, however, it is worth taking advice to see which option is best for you.

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