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Pensions v ISAs: which is best for retirement?

We pit ISAs and pensions against each other in a battle for your retirement fund. Which one will be victorious?


by Michelle McGagh on Mar 09, 2012 at 09:00

Pensions v ISAs: which is best for retirement?

Last year, more money was saved into ISAs (individual savings accounts) than pensions, so the question is should the former replace the latter as the main way to save for your retirement?

According to the Office of National Statistics, savers put £14.3 billion into personal pensions in the 2010/11 tax year, compared with £15.8 billion into stocks and shares ISAs.

The previous year, £14.4 billion was invested in personal pensions and £12.5 billion into ISAs.

It could be that ISAs have overtaken pensions because money held in an ISA can be easily accessed, whereas with a pension you can’t get your money out until you are 55 years old. However, this isn't necessarily a bad thing.

Billy Mackay of AJ Bell, a provider of self-invested personal pensions (Sipps), said: ‘Economic and political uncertainty won’t have helped – people concerned about tomorrow’s income won’t tie savings up in pensions when they are concerned that the government will tinker with the rules before they are able to draw their pension.’

But does that tell the whole story? We decided to put pensions and ISAs in a boxing ring and watch them slug it out!

Round One: Tax shelters

Pensions and ISAs are often described as ‘tax shelters’. This is true but which savings plan is better?

The big draw for pensions is the ‘free money’ you get from the government in the form of tax relief. For every contribution you make into a pension the government gives you another 20%, 40% or 50% on top, depending on what top rate of income tax you pay.

In practice that means, if a basic rate taxpayer pays £80 into a pension the taxman adds £20 in tax relief, making the contribution worth £100!

However, when you retire and start to take an income from the money you have saved (either by buying an annuity or ‘drawing down’ an income on your own), that income will be taxed.

With ISAs there is no tax relief on your money going in. For example, the £80 of our basic rate tax payer would go in an ISA as £80 not £100. So far, pensions are ahead.

However, once invested in an ISA your money becomes very tax efficient. The gains and income you receive from your investment roll up completely tax free within the ISA account. There is no need to tell HM Revenue & Customs about the money you either have or take from an ISA.

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30 comments so far. Why not have your say?


Mar 09, 2012 at 10:56

It's the same answer as the Mansion Tax v 50% tax rate arguement...

- Both!

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Marcus Buchan

Mar 09, 2012 at 11:25

You mention tax free roll up of income in both ISA and Pension but I think I am correct in saying that dividends received in either an ISA or Pension are net of a 10% tax coupon ?

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Marcus Buchan

Mar 09, 2012 at 11:40

You mention tax free roll up of income in both ISA and Pension but I think I am correct in saying that dividends received in either an ISA or Pension are net of 10% tax ?

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Ian Hawkes

Mar 09, 2012 at 11:53

Marcus: the 10% tax credit is essentially a notional amount in respect of corporation tax paid by the company prior to distributing the dividend. No tax is actually paid by the investor, but they are treated as having paid basic rate tax if they are required to do so.

The complication comes from the fact that this 10% used to be reclaimable within the pension or ISA wrappers, but this was a personal reclaim from a corporate tax liability rather than from the individual's personal income tax.

Since the tax credit is no longer reclaimable, it would make more sense to think of dividend tax rates as 0% for non- and basic-rate taxpayers, 25% for higher rate taxpayers and around 36% for additional rate taxpayers (not exactly equivalent to the current rates, but a reasonable approximation).

In short, UK company dividend income within an ISA or pension is as tax-free as it gets.

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Matthew Charles Flinders

Mar 09, 2012 at 11:54

Dividends from a S&S ISA get taxed at 10%

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Marcus Buchan

Mar 09, 2012 at 12:13

Ian, Thanks for clearing that up. I receive my divis into my SIPP with a note on how much has been withheld for tax unless the divi has been received from a company outside the UK it seems, hence the query.

What about Coupons on Bonds, is that the same ie a 10% nominal tax ?

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Harold Weaver

Mar 09, 2012 at 12:20

We should never forget the rip off charges (often hidden) imposed by share ISA providers. No doubt the pension charges are similar or more.

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Ian Hawkes

Mar 09, 2012 at 12:23

Bond income is taxed in exactly the same way as bank account income for the most part, which means that the basic rate of tax is 20% on the coupon payments, which is reclaimable (or payable gross for certain pension- specific bond funds) within a SIPP. There's no nominal tax to confuse the issue with bond income.

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william hargreaves

Mar 09, 2012 at 12:27

Can I put an ISA in trust for my children as with the pension?

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Mar 09, 2012 at 12:37

If you have to claim Jobseekers allowance, any pension savings are discounted, whereas ISA's come within the definition of savings

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Matthew Charles Flinders

Mar 09, 2012 at 12:42

William, you can open up a Junior ISA for a child under 18. This has the same tax advantages as a normal ISA. No need for a 'trust' which are being phased out.

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peter hart

Mar 09, 2012 at 12:53

All you can aim for is to beat inflation after tax deductions. Go for NSI index linked. Let the income roll up and start drawing when needed. The income is tax free which makes a huge difference well it does to me. None available now but I guess they will be back soon.

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James Button

Mar 09, 2012 at 12:54

Some considerations:

Cost of government requirements for running a SIPP when the money put in is - say £4000 pa. It has to be 'Managed'

Non-availability of the pension fund if you are unemployed - effect on benefits IF you would qualify

Availability of non-pension based funds for things like paying off your mortgage.

GAD limit set by the government on pension drawdown - seems to be pretty much what you would get from an annuity, or just a tax-free savings account

SO - there would be no reduction of the capital with the on-death 55% tax.

Non-pension based fund - and you can take from the capital while you are alive, avoiding the 55%, or - if you spent it on enjoying living - even the 40% inheritance tax.

So - to my thinking . employer contribution means it's possibly better to accept the Pension route.

No employer contribution, 40% tax payer then maybe non-pension lockin is probably the better option.

No employer contribution, basic rate tax payer then your prospects of unemployment and qualifying for benefits become the only reason to go for a Pension fund.

Maybe pick the right mortgage - very long term - till you are 75 or older, offset, or better - where you can move lump sums into, and back out of the mortgage, may well be the safer 'investment', especially as the home is not considered an asset when calculating your benefits, but you can extract a lump sum if needed - such as for repairing the property.

If the value of your home goes down because of a nationwide drop in property values - why worry, if you were to 'sell' you'd be able to buy the new home at a smilar discounted price.

Drawback - well you are tied to living in your own property.

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Mar 09, 2012 at 14:01

If company contributes - OK - good. If a SIPP, then the 20% upfront allowance is negated by 20% backend, so no benefit over an ISA. If 40% upfront allowance, then SIPP is good. On drawdown your dividend ia taxed a second time , so SIPP not good. Govt tampers, so SIPP not good. With ISA you can remove entire capital instead of it withering away until maybe you reach 90, so ISA good. My advice, invest in ISA over SIPP unless you have company contribution. Even if Govt returned tax credits to SIPP that makes SIPP superior but not likely to happen. SIPP should wither on vine because of taxes back end, GAD reviews, and income is reportable to HMRC whereas ISA is not. That 20% tax relief at front of SIPP is a smokescreen; it looks good but get your spreadsheet out and see the effects.

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Mar 09, 2012 at 14:45

@Harold Weaver - "We should never forget the rip off charges (often hidden) imposed by share ISA providers. No doubt the pension charges are similar or more."

Yes, they will rip you off it you let them - so don't!

I use mostly low-TER trackers (Vanguard) and even with platform fees and a few active funds for certain areas, I'm paying less than 0.5%pa in fees.

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David Harvey

Mar 09, 2012 at 14:47

For working people who are vulnerable to unemployment, especially those over fifty who may a new job hard to come by, ISA's have a flaw which is you will have to live on it. For those certain of staying in work till they retire the argument stands as above.

Rates as they are, you may be better off stuffing it in your mattress.

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Simon Taylor

Mar 09, 2012 at 15:44

The best SIPPS and SASS schemesmake flat rate charges and so present good value for large funds, less so for small funds which perhaps shouldn't be in a SIPP in the first place.

The charges people seem to be happy paying for piss-poor fund performance in managed funds is staggering. Until more people start to take an active interest in this area of finance, these companies will continue to fill their boots with their customer's cash.

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Mar 09, 2012 at 23:16

Look at Argentina, Hungary and Greece.

All or part of private pensions confiscated to pay off government debt.

Do you want to take the risk in the UK when the government has a real debt of 7,000 bn on tax revenues of 550 bn?

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Mar 10, 2012 at 09:15


I did, and wish I could get my hands on it. But its fixed so you cant. You are bled dry on the way in and over the lifetime of the scheme, then bled dry on the way out, then they keep whats left.

Only a stupid person would put money into pensions now.


Pensions are the only Ponzi scheme approved by the government.

Yes in Greece they have ripped off their pensioners, the USA did it in the 30s, the QE is a simple way of devaluing you rpension.

What is needed now is a complete cancellation of public sector pensions, as happening in the private sector.

I dont care what terms and condtions they enjoyed in the past - that has gone - more of my tax is going to pay these freeloaders than goes into defence, education etc.

Its a scary amount - we are now ALL working to give an easy retirement to the cops, the doctors,the civil servants, the teachers.the councillors, the MPS, the MEPs, the pen pushers

Cancel em all I say. From 6th April

The govt are trying bit by bit but they are too afraid to go the whole way. They should not be afraid to renege on past agreements, its the new fashion.

Whilst I can sympathise with the likes of firemen, nurses etc., if the pen pushers and teachers threaten strikes, let them go ahead - the salaries willl be saved and we will quickly notice that the world keeps turning without their work.

You could cap it - the cleaner for example gets his/her pension, the fat cat is capped at max £5000 a year

So thats the answer. gain rapidly lower taxes as we are not feeding the public sector leeches, dont bother with a pension as you are a mug to do so,

Or am I being too soft here?

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Tom Bowett

Mar 10, 2012 at 09:54

Time to get out of SIPPS?

I am 60 years old, have taken early retirement and have a good final salary pension with RPI index link.

I have equity funds held in ISAs and SIPPs and I am currently not in a position to make any further investments. My plan is to use these funds to top up my pension in the future.

I am considering switching from SIPP to ISA to use my up my allowances because the Government is thinking about abolishing the 25% lump sum tax free allowance on pension schemes.

Any comments?

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Mar 10, 2012 at 14:02

@banjofred - It's fairly easy for me to model the effect of eschewing pensions (and thus foregoing tax relief, NI savings due to sal sac, and employer contributions) and putting the money into ISAs. Even if I wasn't already maxed on ISAs, your advice would result in me getting half the income. No thanks.

@tom bowett - I plan to take my 25% lump sum ASAP and will invest iwisely and in a tax efficient way. And IFA will try and steer you into an investment bond, but they are also supposed to compare with the ISA option. Make sure they do!

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Mar 10, 2012 at 14:37

Banjofred, I agree.

If your employer is putting in a reasonable whack as well as you, then a pension scheme may be worthwhile. If its just you, then go for the ISA.

Pensions are bad news because (a) They are so long term that governments keep raiding them (Brown in the early 2000s, Osborne recently by changing drawdown rules) and changing rules and (b) the amount you can take out at the end of the day is subject to market and economic vagaries - Just look at the appalling annuity rates people are getting now.

Its all very well getting tax relief on contributions, but thats not a lot of use if your contributions then return you a pittance at lifes end.

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william Westlake

Mar 11, 2012 at 19:42

"What is needed now is a complete cancellation of public sector pensions..."

Banjo Fred, I'm afraid what you're suggesting is theft, and illegal.

It's probably not what you want to hear, and certainly not what the tabloid press and politicians want you to hear, but I have actually paid, from my own pocket, a great deal of money for my "gold plated public sector rip off the tax payer pension".

The amount I'm paying for it is, from next month, being increased by approximately 15%, whilst I am enjoying a 2 year pay freeze, and the government is proposing that I pay an extra 20% on top of this in a couple of years.

For a reduced pension.

This, I suspect, wont actually happen because I and many of my colleagues are about to go on strike over this, and if you need the services I provide, you'll just have to fly over to Poland or elsewhere and good luck to you.

My pension scheme is ripping off the tax payer so badly that, even before the tax increases, sorry rises in contributions outlined above, the government is enjoying a several hundred million pound SURPLUS from my scheme, which it is wisely investing in speed humps and bureaucrats to think up and implement essential pieces of legislation such as whether gay men should be allowed to marry one another.

I post this, not because I want your sympathy or support, but because I am concerned about your manifest ignorance of the topics that you post on.

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Mar 11, 2012 at 21:42

@william - "The amount I'm paying for it is, from next month, being increased by approximately 15%" - from what and to what? How close to the 25-30% of income that was required for a 2/3rds average salary personal pension (even before latest gilt yield blows) are your contributions?

What happens to your pension if stock markets fall again?

What happens to your pension if gilt yields fall even further?

If you don't like your public sector pension, then leave the scheme and fund your own pension, just as those of us in the real world have to. I can point you at a pension calculator that will show how much you'd have to contribute if you like.

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Mar 11, 2012 at 22:27

"gold plated public sector rip off the tax payer pension".

The amount I'm paying for it is, from next month, being increased by approximately 15%, whilst I am enjoying a 2 year pay freeze, and the government is proposing that I pay an extra 20% on top of this in a couple of years.


How about your money back, 8% contribution from the rest of us, and a 5% return?

Fair deal or not?

Or tell us roughly what you are going to get, and make us an offer as to how much hard cash you need for us to buy you out?

Just to see what your contributions have actually bought.

The problem is that you haven't paid enough for your pension.

The government admits that the civil service pensions are a debt of 1150 bn, all off the books. Government borrowing is 1050 bn. PFI, 180 bn

That's why you won't get what has been promised. They can't afford to pay it.

Blunt I'm sure, but factually.

Immoral? Certainly.

However, its also immoral to impoverish the majority so you as a minority get that gold plated retirement.

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Mar 11, 2012 at 23:13

The "amount you may receive when you retire" from a private pension pot has halved for many people, over the last few years, even though the value of the pot has grown. For some people, it is convenient to ignore i) the 50% cut others have to take and ii) where the money ultimately comes from.

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Simon Taylor

Mar 12, 2012 at 08:10

William is probably somewhere near the truth; believe it or not, some PS pensions, several in local government for example, are actually funded, in that there is a pot of physical money and assets available to meet the obligations. But they are a minority and most are funded with nothing more than promises based on future taxpayers willingness to keep stumping up.

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David Harvey

Mar 12, 2012 at 10:11

This is an old row of course but the fact is a job was applied for conditions agreed to and contracts made. PS workers have already lost the redundancy settlement that was agreed to so that the government can happily dump them like ballast in the country's fiscal hot air balloon and this amounts to a huge sum. As the propaganda machine drips on about the value of older workers, it's the over fifties they are dumping the most. The redundancy may have kept those people off the dole so you will pay it one way or another dumping people on the dole isn't free.

There is now a serious distrust of pensions for our future or anything the government agrees after Brown, and now these two we will never be able to believe anything again.

I don't have one of these pensions but if I had a contract I would expect it to be paid, both when and how much was agreed to. If government can just renege on what ever it pleases while corporations demand lower taxes when they only pay a fraction of those they already owe it's a big disgrace and offers poor security for all our futures.

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James Burn

Mar 13, 2012 at 19:19

There are two other differences between pension savings and ISA savings which are not much talked about:

1. Cash ISAs can take advantage of investing in risky lenders (e.g. buidling societies) backed by the government's guarantee for the first £85k with any lender. Pensions get the choice between investing with the same risky lenders with no government guarantee or else getting a much lower rate of interest in a risk free cash deposits. Since most of us close to and after retirement will want a substantial proportion of assets in cash, investing in a cash ISA is thus more advantageous than cash in a pension.

2. Shares in pensions can be converted to cash in pensions but shares in ISAs cannot be converted to cash ISAs. Therefore people need to plan many years in advance and consider whether building up a substantial amount in a cash ISA will be a better long term place for money than a pension.

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Mar 13, 2012 at 19:40

Do some maths too. How much income will you get from putting all your money in an ISA? Is it enough?

Retirement is far more expensive than lots of people realize.

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