ISA or Pension

Here are a few of the key differentiators which may help you decide:

⭐ Tax Benefits

Contributions to a pension typically receive tax relief, meaning you effectively save from your pre-taxed income. For example, if you pay into a personal pension, the government adds basic rate tax relief at 20% to your contribution.  Higher-rate taxpayers can claim back more tax relief through their tax returns.

Contributions to an ISA are made from your net income, however any interest earned, dividends, and capital gains within the ISA wrapper are tax-free.

⭐ Access to your Money

You can’t normally access your pension funds until you reach minimum pension age which is currently age 55 (but will increase to age 57 in 2028). 

You can withdraw your funds at any time from your ISA (subject to type of ISA held) without incurring penalty, so it serves as a more flexible and easily accessible savings fund for shorter term requirements.  

⭐ Maximum Annual Contributions

There is an annual maximum contribution into your pension scheme which will depend on how much you earn.  In the current tax year (2024/2025), if you earn £60,000 per year or more, you can contribute £60,000 into your pension scheme.  If you earn less than £60,000, you may contribute 100% of your earned income.  Both of these maximum amounts include the tax relief. 

You also have the option of carrying forward any unused allowances from the previous 3 tax years (assuming you ALREADY have a pension scheme in place during that 3-year period). 

In addition, you need to be aware of lifetime allowances. 

The maximum contribution into an ISA is £20,000 in the 2024/2025 tax year.  This can be split across different ISA schemes (eg Lifetime ISA, stocks and shares ISA and cash ISAs).  You can transfer funds between ISAs without affecting your annual allowance. However, if you withdraw money out of any ISA to reinvest into another ISA, this will use your current year’s ISA allowance. 

⭐ Employer Contributions

Employer contributions will count (along with your personal contributions and tax relief) towards your annual pension allowance.  Usually if you are enrolled into a workplace pension scheme, your employer will also make contributions on your behalf. Bear in mind if you opt out of the workplace pension scheme, you are likely to lose your employer contributions.

ISA contributions can only be made by an individual, not by an employer.

⭐ Investment Choices

Pensions may offer a more limited choice of investment options, particularly within workplace pension schemes.

Stocks and shares ISAs offer a wide selection of investment options including shares, bonds and funds. 

⭐ Reasons to Save

Pension schemes are specifically for saving for your retirement so are intended for you to invest long-term towards your retirement.

ISAs give you tax efficient short-term savings for example to buy a home or to help pay for educational costs.

⭐ Potential for Growth

Pension schemes receive the benefit of tax relief and with the possibility of employer contributions plus long term investments, have the possibility of significant growth, in conjunction with compound interest.

Your ISA (cash or stocks and shares) has the possibility of tax free growth but no additional employer contributions or tax relief are available. 

Understanding the differences between the 2 savings vehicles will help you to align your savings to your financial goals.

If you need any further information, please get in touch!

Heide

Tel: 01525 309300

Mobile: 07903 302895

Website : www.heideswiftfinancialplanning.co.uk

Email: heide.swift@sjpp.co.uk

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up.  You may get back less than you invested.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief generally depends on individual circumstances.

Cash and Lifetime ISAs are not available through St. James's Place.

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