Pension or ISA?

The nation’s two most popular savings vehicles – the pension and the ISA – have undergone momentous changes in recent years as successive governments change the rules.

Millions of people have both.  The amount you can save into a pension has fallen to £40,000 a year while the ISA allowance will be £20,000 from April 2017. 

But these limits only tell half of the story.  Reforms to pensions have redrawn the rules on what you can do with your pot in life, and also on how it is treated on your death 

The result of all these changes is that the “ISA or pension” questions have become more pressing – and more difficult to answer.  The best place for your cash when you are saving it, and again when you draw on it, is not the same for everyone.

Having both limits your exposure to the risk of future reform. 

Under current rules, you can save £40,000 a year into a pension until you earn more than £150,000 a year, when it will gradually reduce the more you earn.  If you don’t use the full allowance, the unused allowance from the past three tax years can be carried forward.  A lifetime limit to the size of your pension pot applies and is currently set at £1m.  Like ISA’s, the returns within your pension savings are tax free.

Stocks and shares ISA’s can help reduce the taxman’s cut of your investment returns.

Your £15,240 ISA allowance can be split across both cash and stocks and shares ISA’s.  This is handy for those approaching retirement who may have a declining appetite for risk.  Where ISA’s do have the edge over pensions is in their accessibility.  Pension savings cannot be withdrawn until the age of 55 whereas ISA’s can be instantly withdrawn, fixed-term versions aside.