01 Jan 2024

Should I put my money into an ISA or pension?

The one place we’re all heading for together is the future. And your future self will no doubt appreciate a little financial help when they get there.

That’s why many millions of us save or invest money in ISAs or pensions. According to our most recent figures, across the UK:

  • 22 million adults had a workplace pension in 2020/21
  • 12 million adults had an ISA in 2020/21
  • 6 million adults had a personal pension in 2020/21

That popularity is well deserved.

ISAs and pensions are both tax-efficient ways of saving or investing. Each also has many other benefits. And the longer you can save into both of them, the better!

ISA or pension

Not already saving into a pension?

If you want to learn more about the benefits of saving into a pension, we cover how you can boost your savings with tax relief, money from your employer and how your money can grow over time.

That’s because your money will have more time to grow (though if you invest it, growth isn’t guaranteed – it could lose value). So the sooner you start putting away even just a little every month, the bigger a difference it could make to your future financial health.

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 or Lifetime ISA may be better.
  • If you specifically want to invest for the mid to long-term, then check out our Stocks and Shares ISA. 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 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 every year, though you only get tax relief on either:

  • Up to 100% of your earnings
  • the first £60,000 you pay in

Can take any money you make out of it without having to pay tax on it.

Can take out 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.

Will get employer contributions if it’s a workplace pension.

Won’t get any government tax relief on payments into it, so its long-term growth can be lower than a pension.

For example, if you:

  • put £100 into a stocks & shares ISA every month for 10 years
  • assume a growth rate of 5% for that whole time

you’d end up with £3,528.23 of growth on top of the money you’d invested.

That’s £882.05 less growth than you’d get with a pension over the same period.

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 usually get a 25% government top up on each payment, so its long-term growth can be higher than a stocks & shares ISA.

For example, if you:

  • put £100 into a pension every month for 10 years
  • assume a growth rate of 5% for that whole time

you’d end up with £4,410.28 of growth on top of the money you’d saved.

That’s £882.05 more growth than you’d get with a stocks & shares ISA over the same period.

Remember, after you take your 25% tax-free lump sum you may be taxed on the rest.

Remember, these examples are only intended to show you the potential difference that tax relief can make on pension contributions. Where you choose to invest your money will affect your returns. Pension fees and charges can also affect its growth, and like any investment its value will go up and down so you could get back less than you pay in.

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’ll get contributions of 3%+ from your employer. That’s money on top of your normal salary. And you 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 a 25% top-up 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 on or after 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
  • 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’s 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
  • 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.

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