When you are saving for retirement, you want to make sure that your money works as hard as possible for you, and so understanding your options is fundamental.

Both pensions and Individual Savings Accounts (ISAs) are tax efficient savings vehicles which can be used to help fund your retirement, but they each have their own set of rules and you need to consider the full picture when deciding what is best for your particular circumstances.

So, how do you know if one or the other will be right for you and your plans for when you stop working?

ISAs – a flexible tax efficient savings plan

There are many types of ISA available, and each has its own individual rules. However, one of the key benefits of an ISA may be the flexibility they provide in terms of access and investment options.

Unlike pensions, money invested into an ISA can be withdrawn at any time, although Stocks & Shares ISAs are usually taken out with the intention of keeping the investment in place for the medium to long-term (5 years plus).

In contrast an individual must be 55 years old (57 from 2028) to access their personal and occupational pension funds. However, if you don’t need access to your money before you turn 55, the advantage of a pension is that you can receive tax relief on the payments you make into it. There is no tax relief on payments into an ISA.

Pensions - Employer payments may boost your own contributions

If you are employed and meet the eligibility criteria, your employer must enrol you into a pension scheme and, in most cases, will pay into the scheme on your behalf (you can opt out of the scheme if you would prefer to). Employer payments can boost your own contributions and help build your pension pot.

Anyone thinking of opting out of a pension to save into an ISA should consider the fact that they would lose the benefit of tax relief, as well as any employer’s pension contribution.

Some of the features and points to be aware of in relation to ISAs are:

Features:

• Returns are not liable to Income Tax or Capital Gains Tax (CGT).

• Tax-free withdrawals can be made at any time – no minimum holding period.

• There are a wide range of options available, including cash ISAs, Stocks and Shares ISAs and Junior ISAs.

• You can transfer your plan between providers without losing your accrued ISA status (you should be aware of the transfer rules between providers to ensure your savings remain tax-free).

• Income from an ISA is not considered for age-related personal allowances.

• The ISA status can be inherited by a spouse.

• No additional tax is payable (unless Inheritance Tax applies) .

Things to be aware of:

• The annual contribution is limited to £20,000 for the current tax year.

• There is no tax relief on contributions.

• Employers can’t make payments on your behalf.

• Once money is withdrawn from an ISA it cannot be put back (except within the same tax year), so the tax advantages may be lost.

• If you do not use your annual ISA allowance you will lose it, it cannot be carried forward.

.• ISAs are liable to IHT (except when they are given on death to a surviving spouse or civil partner, in which case they will not be subject to IHT because of the spouse exemption)

• There are some investment restrictions.

• You cannot have a joint ISA or put it in trust.

Some of the features and points to be aware of in relation to pensions are:

Features:

• Tax relief on personal payments into your pension for amounts up to £60,000 (Annual Allowance for the current tax year) or 100% of your annual earnings (whichever is less). Please note, this is reduced to £10,000 per year if you withdraw taxable income from your pension(s), which is known as the Money Purchase Annual Allowance (MPAA).

• It is possible to carry forward up to three years of Annual Allowance under certain circumstances.

• 25% of your fund is usually available as a tax-free lump sum after age 55 (57 from 2028).

• Growth within the plan is not liable to Income Tax or Capital Gain Tax.

• There is usually no Inheritance Tax on a pension fund.

Things to be aware of:

• Contributions are limited to the Annual Allowance, plus any Carry Forward.

• You cannot usually access a pension until age 55 (unless you are in a special profession such as Sport).

• After 25% of your pension is taken tax-free from the age of 55 (57 from 2028) Income Tax is charged on the remaining amount taken.

Savings and investments sheltered tax-efficiently

The combination of solutions you decide to use will depend on how much money you have available to save or invest and when you intend to access the money. However, what is clear is that using both of these allowances together may provide the opportunity to shelter more of your money as tax-efficiently as possible.

Please note: This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The content of this article was accurate at the time of writing. Whilst information is considered to be true and correct at the date of publication, changes in circumstances, regulation, and legislation after the time of publication may impact on the accuracy of the article.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by interest rates at the time you take your benefits.

Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means-tested benefits and is not suitable for everyone. You should seek advice to understand your options at retirement.

This information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change and tax implications will be based on your individual circumstances.

FP2023-127