What’s the difference between an ISA and a pension?

There are a number of crucial differences between pensions and ISAs, which are important to be aware of as you’re building a financial plan.

Firstly, you can only get tax relief on pension contributions. But you can’t access your pension savings until you’re aged 55 (increasing to 57 from 2028), whereas with a cash or stocks and shares ISA, you can access the funds any time you like. For Lifetime ISA’s there may be penalties if you access funds before age 60, with limited exceptions such as purchasing your first home.

Let’s look at what this means when you’re choosing which option is best for you?

Well, the fact that there’s no restriction on when you can access money from an ISA means it gives you considerable flexibility, such as the ability to use money to fund hobbies and pastimes, or major projects such as setting up a new business.

So if you have more short-term financial and lifestyle goals in mind, this is an option worth exploring, especially as you can earn a bit of interest on top of your savings.

By contrast, pensions are a more long-term investment, and if you’re in work, you will be auto-enrolled into a workplace pension scheme to which your employer must contribute. That’s effectively free money being put into your pension pot that’s being invested wisely to fund your retirement.

Another issue you might wish to think about is inheritance rules. ISA investments will form part of your estate for Inheritance Tax purposes, unless they’ve been left to an exempt beneficiary such as your spouse or civil partner.

However, personal pensions typically don’t count towards your estate when you die, so you can leave your retirement savings to your chosen beneficiaries, such as family members, without it being subject to Inheritance Tax.

The fact that each offers different advantages means it’s a good idea to make use of both ISAs and pensions when you’re putting together a financial plan.

The amount you invest in each will depend on your personal financial circumstances, but using a combination of both allows you to benefit from a hugely tax-efficient means of saving and investing.

But you should always remember that the value of your investments can go down as well as up, depending on the economic circumstances, which could influence the decisions you take.

That’s why it’s so important to get professional financial advice; a regulated specialist in this field will talk you through all the options open to you.

Please get in touch with us and we’ll be happy to answer any questions you may have.

Workplace pensions are regulated by The Pensions Regulator. Investments carry risk. The tax implications of pension withdrawals, along with the tax benefits will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

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