Both Pensions and ISAs can be a great way to save money. However, they both have specific benefits which may aid you in different ways depending on your individual circumstances and goals.

It’s also important to remember that you don’t have to choose one or the other as utilising both methods of saving can be beneficial.

If you’re ever in doubt about your savings and investment choices or need advice on what route you should go down, then you should always contact an experienced financial advisor who will be able to give you tailored advice to your situation.

Meanwhile, take a read here as we compare the qualities and benefits of Pensions and ISAs.

Pensions vs ISAs – What’s The Difference?

PENSIONS

A pension is essentially a long-term savings plan which you can access once you retire (currently once you reach the age of 55).

Here are some quick facts:

– You can only withdraw from your pension once you reach the legal retirement age

– The Government adds 20% tax relief to your savings in a pension (which can also increase if you are a higher or additional rate taxpayer (a further 20% or 25% respectively))

– 25% of your funds in a pension can be withdrawn tax-free (and anything above that will be taxed accordingly)

– You can save up to 100% of your UK taxable earnings or £40,000 into a pension (whatever figure is lower)

Tax relief provides a 20-45% boost on your savings and increases how much money you have at retirement.

Like most investments, pensions involve a long-term commitment which you should be sure about before locking your money away. If you do decide to do this, then it can be a great way to save for your retirement as it allows for greater growth and you’re more likely to gain compound interest.

Compound Interest is interest that you earn on the interest that’s already built up on your savings and can accumulate into a great amount over time.

The maximum allowance for a pension is also higher than the allowance for an ISA, which is why some people choose to focus more on pension saving once they reach their ISA threshold.

ISAs

An ISA is an individual savings account that allows you to withdraw money at any time.

– ISAs can be better for pre-retirement goals as you can access the money anytime

– Money that is withdrawn from an ISA is tax-free (including being free from Income Tax and Capital Gains Tax)

– Some accounts allow you to withdraw and add money into your account within the same tax year with no impact on your allowance

– You can save up to £20,000 in an ISA

Unlike pensions, ISAs can be accessed at any time which makes them more beneficial if your savings and investment goals are more short term (such as buying your dream home).

Despite this though, ISAs can still be used to create retirement savings and by combining the two, you could form a tax-efficient way to fund your retirement due to their combined unique tax benefits.

Choosing Between an ISA or a Pension

Choosing what’s better for you will greatly depend on your own circumstances and therefore, splitting your savings between the two could be beneficial as it allows your money to grow in a tax-efficient way and you’re also able to save for your retirement at the same time!

It’s important that you get investments right though as they can make a substantial difference to your long-term financial security.

A financial advisor will always be one of the best ports of call to give you a helping hand when in times of doubt.

For advice on ISAs and Pensions, speak to one of our financial advisors today!

Coffey Brooks are a team of Independent Financial and Mortgage Advisers based in Clacton-On-Sea, Essex and are directly authorised and regulated by the Financial Conduct Authority.