Should I put my money into an ISA or pension?

ISA vs pension – which is a better investment?

The answer depends on what your financial goals are and how you’d like to achieve them. As a rule:

• If you want to invest to support your ideal lifestyle once you reach later life, a pension will probably be your best first choice. You’ll probably end up with some combination of:
  • workplace pensions, which your employer sets up and then you both contribute in to
  • personal pensions, which you set up and contribute to yourself
  • the State Pension, which you're eligible for by paying National Insurance
• If you’re saving to get on the housing ladder, get married or start a family, an ISA could help.  
• If you’re either saving for your first property or saving for your retirement,  the UK government-backed Lifetime ISA could help. It’s designed for those aged between 18 and 39. There are penalties if you take the money out of it for anything other than purchasing your first home before you’re 60.
• If you specifically want to invest for the mid to long-term, then a stocks and shares ISA might be suitable. It’s an ISA that lets you put your money directly into investments

Before we dig into the details, there’s one very important point to make. You don’t have to make an either / or decision at any point. You can have:

• Both ISAs and pensions running at the same time
• Different kinds of ISAs and pensions running at once

Should I invest in a Stocks and Shares ISA or pension?

The best way to resolve a standard Stocks and Shares ISA vs pension faceoff is to understand the main differences between them.

With stocks and shares ISAs, you:	With pensions, you:
Can get your money out at any time, though it’s usually worth keeping it invested for the medium to long-term.	Can only get your money out once you’re 55, rising to 57 from 6 April 2028.
Have a total annual ISA allowance of £20,000, so you can only pay in that much each tax year, or less if you’re also paying into other ISAs.	Can pay in any amount each tax year, though you only get tax relief on: £3,600, or the lower of: 100% of your earnings £60,000, although this may be lower if your earnings exceed £260,000
Can take any money you’ve saved without having to pay tax on it.	Can usually take up to the first 25% of your pension pot tax-free – it won’t affect your personal tax allowance. If you withdraw any more it’s taxable. It’ll be added to any other income you’re getting, which could push you into a higher tax bracket.
Won’t get any employer contributions. The only ISA you'll get a top-up with is a Lifetime ISA. Every year you invest, the government will give you a 25% bonus up to £1,000.	Will get employer contributions if it’s a workplace pension.
Won’t get any government tax relief on payments into it.	Will get up to 45% tax relief on contributions you make.
Will pay fees and charges based on how much you have invested, as well as a service and fund charge. You may also pay a transaction charge. These are usually deducted straight from your investment. Your provider should make it clear when and how much you'll pay.	Will pay an annual management fee and a fund management charge to your provider on every pension pot you have, even if you don't pay into it any more. This will usually be either a set amount or a percentage of your total savings. Your provider should make it clear what these will be.

 

Will I make more money from an ISA or pension?

We’re back to “it depends” again – the exact answer depends on the ISA or pension investment choices you make. But chances are you might well get more out of investing in a pension.

That’s because:

• With a workplace pension you may get contributions of at least 3% from your employer, depending on how much you earn. That’s money on top of your normal salary. And you normally don’t pay tax on any money you put into your pension – you get to stash all of it away for later.
• With a personal pension you’ll get tax relief from the government. Of all ISAs, only Lifetime ISAs (LISAs) get you a government bonus of 25%, up to £1,000 a year.
• Because you can’t access a pension until you’re 55 plus (or 57 plus from 6 April 2028), the sooner you start paying in the more time your pot has to both grow and ride out any stock market ups and downs.

Can I access my ISA or pension when I need the money?

You can only access your pension once you’re 55 plus (or soon 57 plus). You can usually access most types of ISA at any time, though it’s worth bearing in mind:

• Lifetime ISAs are designed to help you save for your first home or for later life, so you’ll pay a withdrawal charge of 25% if you take money out for any other reason before the age of 60, unless you have a terminal illness
• If you have a fixed-rate cash ISA, you might have to pay a penalty for accessing the money before the time you’ve agreed with your provider
• Although you can usually access your money within at most 30 days, stocks and shares ISAs are medium to long term investments whose value can go down as well as up
  • If you pull your money out suddenly without taking account of what the market’s doing you might not get the best returns and could even lose money

What should I do next?

We haven’t made any recommendations in this article. That’s because whether it’s better for you to put money into an ISA or a pension really depends on who you are, where you’re at financially and what you want to achieve by saving.

So, if you’re not sure which one’s best for you:

• Think through your savings goals
  • Are they short, medium or long term?
  • Are they retirement focused or do you have some other goal in mind?
  • How much can you afford to save?
  • Do you want contributions from your employer and the government?
• Learn more about how pensions work and the different types of ISAs
  • This article is just a starting point. You can learn more in our podcast A Little Bit Richer, which has lots of tips on both these products
• Get some advice from an expert
  • If you’d like to talk to a qualified financial adviser, you can find one at Unbiased. You’ll probably have to pay for their advice