Should you pay into an ISA or a Pension?
Rachael Panteney
Giving you expert financial advice on pensions, mortgages and insurances.
I often get asked, "Should I Pay into an ISA or a Pension?"
?Both have their advantages and disadvantages. First of all, let’s understand the two…
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Pensions
????Pros
?Tax Efficiency: Tax relief on contributions based on your tax band, with contributions being topped up by 20%. (Higher rate taxpayers gain additional benefits. where, a ￡100 contribution effectively costs you just ￡60 after tax relief)
?Higher Contribution Limits: Based on your earnings, capped at ￡60,000pa. Allows for more substantial yearly savings.
?Employer Contributions: These can significantly boost your retirement pot.
?Inheritance Benefits: Pensions are outside of your estate for inheritance tax purposes and can often be passed on tax-free.
?Tax-Free Growth: Investments within a pension grow free from tax.
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???Cons
?Access Restrictions: Funds are generally inaccessible until age 55, rising to 57 by 2028.
?Taxation on Withdrawal: Typically, only 25% of the withdrawal is tax-free; the remainder is taxed as income.
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ISAs (Individual Savings Accounts)
????Pros
?Flexibility: Withdraw funds at any time without facing tax penalties.
?Tax-Free Returns: No taxes on the returns generated within the ISA.
?Lifetime ISA: Offers government bonuses, adhering to specific rules and eligibility.
?
???Cons
?Contribution Limits: Capped at ￡20,000 per year.
?No Employer Contributions: Unlike pensions, ISAs don’t facilitate contributions from employers.
?Limited Government Incentives: Except for the Lifetime ISA, contributions receive no tax relief.
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Which one do you choose?
?If you want to maximise your retirement savings and benefit from employer contributions, then a pension would fit due to the significant tax relief and boost to your overall pot.
?If you need flexibility, and feel you might want to access your savings sooner, then perhaps an ISA would be more suitable.
?Many people combine both, where you can utilise both options and take advance of the benefits of each.
If we can help, please get in touch with us today here or book directly onto my calendar here.
Rachael Panteney
Willow Tree Financial Services are a Financial Adviser based in Polegate, East Sussex, UK. We specialise in Financial Planning, Mortgages, Investments &?Pension Planning, Protection & Insurance Wills, Trusts &?Estate Planning.
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The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.
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You will incur a lifetime ISA government withdrawal charge (currently 25%) if you transfer the funds to a different ISA or withdraw the funds before age 60 and you may therefore get back less than you paid into a lifetime ISA.
By saving in a lifetime ISA instead of enrolling in, or contributing to an auto-enrolment pension scheme, occupational pension scheme, or personal pension scheme:
??????? (i) you may lose the benefit of contributions from your employer (if any) to that scheme; and
??????? (ii) your current and future entitlement to means tested benefits (if any) may be affected.