Pensions vs ISAs – which is most tax efficient?

When saving for retirement, a pension will in most cases provide the opportunity for better tax adjusted returns than an ISA, based on the tax savings offered on pension contributions.

The recent abolition of the pension lifetime allowance charge has seen a surge in interest in funding pensions from those who had previously been disincentivised from doing so.

The table below compares the tax savings when making a gross pension contribution of £1,000. The higher the tax rate applying when the contributions are made, the higher the saving.

Tax rate when contributingTax rate in retirementTax saving

By comparison, when investing into an ISA, there is no tax saving on the initial contribution and no income tax on any withdrawal. So, this delivers a neutral (no gain/no loss) tax saving position which is not as good as any of the scenarios detailed above.

However, there are other factors to bear in mind when comparing ISAs to pensions.

Peter Glenton
Peter Glenton

The key factor in favour of ISAs is that they can be accessed at any time and any money withdrawn during the tax year from a Flexible ISA can be replaced before the end of the tax year without losing the ISA allowance. By comparison, pensions can’t be accessed before the age of 55 for those born before 5 April 1973 or before the age 57 for those born after this date.

If you would like to discuss the pros and cons of saving into an ISA vs saving into a pension, please do get in touch with your usual RG contact.

Pensions benefit from a more favourable inheritance tax regime than ISAs. Pensions can generally be transferred free of inheritance tax on death to any chosen beneficiary. By comparison, ISAs can only be transferred to a surviving spouse inheritance tax free.

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