Personal Pensions Vs. Investment ISAs

Pensions and individual savings accounts (ISAs) both come with significant tax advantages, but what makes ISAs a good alternative to saving into a pension? We take a look at the differences between the two investment products and explain why some people choose to save into an investment ISA instead of a pension plan.

Read on for a comprehensive overview or click a link to jump ahead:

We'll match you with your perfect financial advisor

Save time and money with an expert who specialises in cases like yours

We'll match you with your perfect financial advisor

Save time & money with an expert who specialises in cases like yours.

What are the main differences between pensions and ISAs?

The main differences between saving into a pension and saving into an ISA are the amounts you are allowed to contribute in a year, the tax treatment on your money, and when you can access your money.

The table below gives you an at-a-glance product comparison:

  ISAs Pensions
Annual Allowance (for 2019/20 tax year) £20,000 No annual limit (£1,055,000 Lifetime limit)
Tax Treatment on Contributions No tax relief Tax relief on first £40,000 contribution each year
Employer Contributions Employer cannot contribute Employer contributions permitted
Investment Tax Treatment Fund grows tax-free Fund grows tax-free
Accessibility Access anytime Usually accessible from age 55
Tax Treatment on Withdrawal 100% tax-free 25% tax-free
75% taxed as income

How much you can contribute

The maximum annual ISA allowance for the tax year 2019/20 is £20,000. There is no maximum contribution limits on a pension, but only the first £40,000 will benefit from the 20% government tax relief.    

Annual ISA allowance

The amount you can pay into an ISA is set by the government each tax year. For the current tax year (2019/20), the annual ISA limit is £20,000. This limit can be used in full, or in part, and be paid into a cash ISA or a stocks and shares ISA.

It’s possible to pay into just one type of ISA each tax year or divide your allowance between different types of ISA. You must be careful not to invest, or save, more than the £20,000 allowance or open more than one of each different ISA type in the same tax year.

Pension Contributions

Pension contributions are more complicated than paying into an ISA. If you have a pension, there are no limits to how much you can contribute in any one tax year. However, the maximum gross contribution you can get tax relief on is £40,000 or 100% or your earnings – whichever is lower. Any contribution within these limits will get tax-relief of 20% at source.

It’s possible to use any excess annual allowance from up to three previous tax years. This is called carry forward relief. In order to qualify, your income must be at least equal to the total contribution you want to make. You must also have been a member of your pension scheme for each of the three previous tax years to be able to carry forward your unused allowance.

Carry forward can be particularly useful if you want to make the maximum personal pension contribution and still qualify for tax-relief. If you are self-employed and have fluctuating income, the facility can be very advantageous.

Although the majority of us won’t be fortunate enough to come close to breaching it, the maximum lifetime limit for pension contributions is currently £1,055,000.

ISA Tax treatment

When you pay into an ISA, most of us will do so using taxed income or savings. Any returns you make will be exempt from personal tax. All interest earned on cash ISAs is tax free and if you invest in stocks and shares ISAs any income, dividends or capital gains you make will be 100% tax-free.

With the exception of some fixed-rate ISAs, there are no restrictions on when you are allowed to take your money out of ISAs.

While your money is invested, it will grow tax-free.

Pension tax treatment

When it comes to taking money from your pension, 25% will be tax free. You can take this as a lump sum, the remaining 75% will be taxed as income, at the usual rates. The amount of tax you will pay on the remaining 75% will depend on your income for the year and your personal tax rate.

Most of us won’t be able to access our pension pot until we reach age 55. Unless you are unable to continue working due to ill-health, have a nominated retirement age or work in a profession with a low retirement age, such as professional athlete, model or dancer, cashing in your pension early will bring a 55% tax charge.

While your money is invested, it will grow tax-free.


Are ISAs better than pensions?

The main draw for people who opt for using ISAs over pensions is their simplicity. Pensions come with all kinds of rules and regulations which don’t apply to investing in ISAs. The upside of using pensions over ISAs is the automatic 20% tax relief on contributions. Higher rate, or additional rate, taxpayers can claim additional relief through their tax return.

If you have access to a pension through your employer and you can benefit from employer contributions, then it’s a good idea to sign up to take advantage of this. Your employer can’t make contributions to your ISA account, yet employer contributions are a distinct advantage of being a member of a pension scheme.

On the flipside, the benefits when it comes to taking the money out of your pension or ISAs is where you see the biggest potential differences. 

Although you get tax relief on your pension contributions, you’ll only get 25% of your entire pension pot tax free when it comes to your retirement. If you had the same amount of money invested into ISAs, you would get 100% of your money tax free.


Can ISAs be an eligible pension fund?

In the right circumstances, using ISAs as your pension fund can work well. Whether it is a suitable way for you to save towards your retirement will depend on your own goals, needs and how much money you earn. If you are a higher rate taxpayer, the tax relief on pension contributions may be too valuable to miss out on.

Some people use a combination of ISAs and pensions to build the funds they need for a comfortable retirement income and this may be the right solution if you have access to a company pension scheme.

We work with independent financial advisers who are experts when it comes to all aspects of financial planning. Get in touch and we’ll connect you with an expert. They will be happy to answer all your questions about pensions and ISA investments and advise you which product might best suit your needs based on your current circumstances and long-term goals.

When should I consider using an ISA for a pension?

As the most flexible form of tax-efficient savings, if you think you’ll want to retire and take an income from your savings before age 55 ISA investments may be a better idea than saving into a pension plan.

Ultimately, the way you choose will depend on how much money you can save or invest each year. If you have access to more than £20,000 to save towards your retirement each year, a combination of ISA and pension savings might be appropriate due to the tax relief you can get on your pension contributions.


What happens to my ISAs when I’m a pensioner?

When you reach retirement you can take an income from your ISA investments entirely tax free. You will be able to take your money out in one go or leave money invested and make withdrawals as and when you need to top up your income. 

Depending on how you have invested your ISA savings, how much money you have accumulated and the how the funds have performed over time, you may have the option of leaving your ISAs invested and taking future growth or dividend payments as income. 

If you invest into ISAs with the clear intention that you will use your investments as income in retirement, an experienced investment expert can help with your long-term financial planning.

The experts we work with are all independent financial advisers who can recommend bespoke investment strategies. Recommendations they make will be based on your current circumstances as well as your short, medium and long-term goals.

They will be able to answer your questions and help you get started in making the right investments to provide your long-term future income.


Speak to an expert

Call 0808 189 0463 or make an online enquiry for a free, no-obligation chat. We’ll match you with one of the independent financial advisers we work with. 

Financial advisers rarely have expertise in all areas of financial planning. We’ll make sure that the person we connect you with has a high level of expertise in both pensions and investments.

They will be happy to answer your questions and advise you on the best ways you could consider saving for your retirement.

All the advisors we work with are fully qualified to provide advice and regulated by the Financial Conduct Authority

We'll match you with your perfect financial advisor

Save time and money with an expert who specialises in cases like yours

We'll match you with your perfect financial advisor

Save time & money with an expert who specialises in cases like yours.

We’ll match you with your perfect financial advisor – for free.