A key personal finance deadline is approaching. Savers with Individual Savings Accounts have until April 5 2025, to use their annual tax-free allowance, which shields up to £20,000 of savings in the 2024/25 tax year from tax on interest, capital gains or dividends linked to ISA investments.
Last year, investment platform AJ Bell said that there were 22.2m ISA holders in the UK, equating to 42 per cent of the population. Almost £750bn was held in ISAs owned by UK adults, of which £465bn was invested in stocks and shares ISAs, and £285bn in cash ISAs.
Pensions, meanwhile, can offer a vital source of income in retirement, as well as alternative sources of tax relief.
While some savers may ponder whether to pay into an ISA or a pension, both products have advantages and disadvantages depending on a saver’s needs.
They can be complementary rather than competing products.
ISAs are accessible
The ISA is a popular savings vehicle for savers who want to access their savings before they retire.
Payments into ISAs are tax-free, and – unlike pensions – there are no taxes on withdrawing from an ISA. Savings can also be taken out of an ISA at any age.
Hargreaves Lansdown, AJ Bell and Interactive Investor are reputable platforms offering ISAs.
Pension savings, on the other hand, cannot currently be accessed before age 55, a threshold that will rise to 57 from April 6 2028.
Savers can withdraw the first 25 per cent of their pension pot tax-free, with the remaining 75 per cent of the pot being subject to income tax.
Stuart Gibbs, chartered financial planner at Prydis Wealth, heralds the accessibility offered by ISAs.
“Some younger people perhaps get put off and dissuaded by pensions,” he says, owing to the age threshold for accessing pension pots.
Pensions ‘supercharge every pound you can save’
Once upon a time, pension pots were viewed as a compelling way of passing down wealth, owing to their exclusion from inheritance tax.
This looks set to change, however, after the Labour government announced plans to impose inheritance tax on unspent pensions from April 2027.
In their favour, pensions have a higher annual allowance for contributions than ISAs, sitting at £60,000 on contributions for the 2024/25 tax year – including those paid by your employer – compared to the £20,000 ceiling placed on ISAs.
Pensions are, however, a tax-efficient way of saving for retirement. They offer tax relief on contributions and are viewed as particularly favourable to higher or additional-rate taxpayers. While basic-rate taxpayers receive 20 per cent in tax relief, higher-rate taxpayers can get up to 40 per cent in tax relief, with additional-rate taxpayers receiving up to 45 per cent.
“For long term saving there’s no better option than a pension,” says Rachel Meadows, managing director at IFGL Pensions. “It’s like supercharging every pound you can save.”
Having both ISAs and pensions can be an effective strategy for retirement, in part for the purposes of inheritance tax planning.
“The ISA and pension combination is perfect,” says Daniel Payne, chartered financial planner at Golden Oak Wealth Management, who adds that “they tend to be the foundation of most peoples’ retirement financial planning”.
“It gives you alternative options,” he says. “ISA money is inside your estate for inheritance tax purposes, whereas pensions are outside. Having that combination approach is quite useful.”