11 September 2011

Pension or ISA?

Let's say you have a sum of money from a generous aunt to invest. Or perhaps you have simply managed to build up some spare cash from your income. What is the best thing to do with it - add it to a pension plan or put it into this year's ISA?

Both are tax-efficient in their own way: Pensions on the way in - reclaiming the tax you will have already paid on that amount, and ISAs on the way out - being free of Income Tax or Capital Gains Tax on any income or growth.

Both have restrictions, though. There are limits to pension contributions, and you can (in most cases) only take the majority of it out as an income after age 55 (which will be taxable), rather than as a lump sum. The main exception (other than dying!) is if you have other secure pension income of at least £20,000 pa which gives some more options.

ISA restrictions are simply that there is an annual allowance for contributions.

So the answer is that it depends. If you are close to retiring and improving your potential income in retirement is more important than having a lump sum to surrender, then go for a pension contribution. For more flexibility an ISA contribution may be more appropriate for you.

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