Pension or ISA or both?

4 min Read Published: 29 Apr 2013
compare apples with apples
ISA or pension?

Okay, we’re all supposed to be saving a fortune into our pensions for what is hopefully going to be a long, happy and healthy retirement. But in reality most peoples’ lives these days are unlikely to run to the textbook standard, and with the economy and individual’s fortunes twisting and turning so much recently is it really sensible to kiss goodbye to your money until you’re at least 55?

In some ways yes- you get upfront ‘tax relief’ on your pension contributions which tops up every £1 paid in to £1.25, which is a great incentive, and higher rate taxpayers get further tax savings. And to my mind this ‘kissing the money away’ is still one of pension’s greatest strengths. We’re likely to need to save hundreds of thousands into a pension by retirement and honestly, who amongst us could resist dipping into that on the way there? By saving into a pension you’re deliberately ‘tying yourself to the mast’ as Odysseus did to resist the Siren’s call of whatever shiny thing it might be that would see you eating gruel in retirement.

A better way to save

But realistically these days I think the best thing to do, especially if you do not have any employer pension contributions or have maxed these out, is to treat a Stocks & Shares ISA as an ‘airlock’ into your pension.

Stocks & Shares ISA accounts have got many of the same characteristics:

  • Largely tax-free investment returns (exactly the same as pensions)
  • Exactly the same underlying investments are normally available
  • Money can be psychologically earmarked for the distant future
  • You can either save and invest monthly or with lump sums

And some serious advantages:

  • They can be chosen, set up and transferred more easily than pensions, often for free
  • You can take the money out should you need it whenever you like
  • Often these days there are no initial charges for investing or withdrawing from a Stocks & Shares ISA

For this reason I, especially as a self-employed person, always save money into my ISA first and then when I feel I’ve got enough there I’ll take a chunk of it out and sling it into my pension to get the tax relief and resist the temptation that might come from feeling falsely wealthy. This is especially handy if you’re not sure if you’re going to be a higher rate taxpayer in a year as you can wait until you’re sure you are before making the contribution, so maximising the tax relief you receive. It also allows me to risk being over-ambitious with my saving, knowing there’s no cost to taking the money back if I need to.

So how do you get started?

There are plenty of excellent Stocks & Shares ISA providers available online these days but I’ll give mine, EZ ISA, a quick plug as it has all the advantages listed like no initial/withdrawal costs and free and easy set up and the added advantage of investment portfolios taken care of for you. Drop me an email or give me a call if you’d like to find out more.

This article was written by Mark Sekree, Partner of 3-S Financial Management, Fellow of the Personal Finance Society and creator of EZ ISA.

(image By Ambro, - freedigitalphotos.net)

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