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Investing for retirement; do you choose ISAs or a pension?

The annual ISA investing and saving cap is a generous £15,240 in the 2015/16 tax year, and some people are questioning whether a pension is the right place for their retirement savings, or whether they should opt for the more flexible benefits of investing into ISAs.

Many feel that they can’t afford to lock away their money into a pension until retirement, and that the money has to be versatile enough to support more aspects of their life, such as providing emergency savings or to offset against a mortgage.

Yet it shouldn’t be forgotten that pensions are designed to be investment accounts which help you save for the future. Pension schemes deliberately forbid you from dipping into the fund as you save, so there is enough set aside when you reach retirement. It should also be remembered that thanks to new personal pension freedom rules due at the start of the new tax year mean that you can access some, or all of your pension fund from 55, without having to take a portion as income; So the differences between the two types of accounts continues to narrow.

When it comes to deciding between an ISA and a pension, you should go back to the basics of good wealth management. Life is prone to throw the odd surprise and create situations when you need to access cash quickly. For instance if your car needs expensive repairs, or you are struggling to afford to send your child on an exciting but expensive school trip, or you need another £20,000 to be able to afford the mortgage for a house with a badly needed extra bedroom. There may be many occasions when the temptation to use ISA money – which was invested for retirement – could be justifiably dipped into.

The real question people should be considering when choosing between an ISA or a pension is: can you really afford to have the option to be able to access the money? Or, would your savings be better off being drip fed in a pension scheme and locked away until you are 55, so when you reach your older years the money is there to provide you with an income.

So which way do you go? Pensions or ISAs? There is no easy answer….

It is widely felt by financial adviser that most people should hold both. Having a pension and a series of ISAs offers the most prudent approach for disciplined savings, providing a range of access times and a range of asset classes.

Here are our Sanlam top tips to consider if you are thinking of breaking free from tradition and considering investing into an ISA alongside your pension. 


Why consider a pension?


The upside of pensions still remain in the tax relief offered: at the moment, for every £80 invested into a pension, a further £20 is added in by HMRC (although this stops if you have contributed more than your annual earnings). High rate tax payers can claim an additional £20/£25 back via their tax return, thus continuing to make pensions a highly attractive choice. 

You can contribute up to £3,600 p.a. into a pension, even if you have no annual earnings. There are caps on how much you can contribute into a pension each year without paying tax on your contributions. These are referred to as lifetime or annual pension allowances. The current allowance is £40k in contributions per annum, but this is still significantly higher that the £15,240 ISA limit per tax year (2015/16). 

You can pass on an untouched pension fund to your beneficiaries without it falling into your estate for inheritance tax purposes, making pensions a versatile inheritance tax planning tool for the affluent. ISAs are subject to inheritance tax if the value of your estate exceeds £325,000 (2014/15).

Why consider an ISA?


ISAs are simpler to understand and administer than pensions.

You don’t need any ‘earned income’ to be able to fund an ISA. Whereas for personal pension contributions you have to have ‘relevant earned’ income to be able to pay into a scheme, if you plan to pay in more than £3,600 gross per annum.

100% of the ISA fund is available as a tax-free lump sum, as opposed to only 25% of a pension fund being tax-free, the remainder taxed as income.

There is no upper age limit for someone wanting to fund an ISA.

You can access ISA money whenever you need it, so your retirement investment can provide a financial cushion for other aspects of your life. Currently you can’t access personal pension money until you are 55.


Taking financial advice about your retirement wealth planning is important if you want to ensure you reach the later stages of your life with enough saved to provide a comfortable income. Investing into pensions and ISAs comes with risk to your capital and it is important that your chose investments which match your attitude to risk. Working with a financial adviser to help guide you with your retirement investing strategy will ensure you make the most of the tax advantages available whilst you save and when you come to draw a pension income at retirement.

If you would like to review your investments and next year’s allowances, please do not hesitate to get in touch. We'd love to hear from you, email letstalk@sanlam.co.uk.

Date issued: 26.03.15

Please remember any views or facts expressed above are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness. Any expressions of opinion are subject to change without notice. None of the information should be regarded as advice. Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments and the income from them may fall as well as rise and is not guaranteed. Investors may not get back the original amount invested. Any tax treatment is dependant upon individual client circumstances and may be subject to change.

Sanlam is a trading name of Sanlam Wealth Planning UK Limited (Reg. in England 3879955) and English Mutual Limited (Reg. in England 6685913). English Mutual Limited is an appointed representative of Sanlam Wealth Planning UK Limited which is authorised and regulated by the Financial Conduct Authority.

Registered Office: St. Bartholomew’s House, Lewins Mead, Bristol, BS1 2NH.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.