Should you choose an ISA or Pension? It all depends on your perspective


Using an ISA or a pension can be an excellent way of making your savings go the extra mile. but investors are often confused as to which one to invest in, explains Andrea Steel of Church House Investment Management.


Choosing between an ISA or pension for your savings is by no means an either/or discussion – quite the opposite, in fact. Each are tailored to meet different savings requirements, and should nearly always be used together. Rather than trying to decide whether a pension or an ISA is better, the debate should centre on which is better in a given situation – for which savers need to know the differences between the products.

Similarities and differences

At their heart, both pensions and ISAs are designed as tax-efficient savings vehicles. Both allow individuals to hold their savings in cash, shares and bonds, as well as spread their money across a diversified portfolio of assets. Both also allow savings to grow tax free, as no income tax or capital gains tax is incurred as the value grows.

It’s when you get down to the minutiae that the differences between pensions and ISAs become more apparent. For example:

  • Employers are not obliged to make contributions into an employee’s ISA, while they are, in most cases, into an employee’s workplace pension.
  • ISA savers are not charged income tax when they access their money, whereas pension savings are taxable once the 25% tax free pension commencement lump sum has been withdrawn

Other differences exist beyond these, but perhaps the two most important when deciding which to use are tax relief and flexibility.

Tax relief

When one puts money into a pension, the government gives a rebate that is equivalent to one’s marginal rate of tax to top up the pension. In simple terms, this means that a £100 investment will only actually cost £80 for a basic rate taxpayer.

Couple this with the money an employer is obliged to contribute, and it is easy to see how the value of pension savings may grow above investment performance.


Conversely, while this ‘free money’ in the form of tax relief and/or employer contributions is not available to ISA investors, an ISA has far superior flexibility. Savers may usually only access their pension funds from age 55 (57 from 2028), ISA savers can access their funds whenever they like. That being said, it should be noted that some types of ISAs (such as the Lifetime ISA) do impose conditions on withdrawals.

The end goal

It is clear is that neither a pension nor an ISA is “better”– they are different tax-efficient products for different purposes.
For those thinking about saving for their retirement, the pension is the obvious choice.
Not only do investors receive more tax benefits than if they were to use an ISA, but the
fact that they cannot access their money before age 55 also removes the temptation for early withdrawal.
However, for those with more short-term savings requirements – buying a house or a car,
putting a child through school or university, for example – an ISA might be a better solution. Indeed, although contributions will not enjoy government or employer top-ups, ISA savings can still grow without that growth being taxed and has the added benefit of being accessible at any time.

Whatever your stage in life, whatever your priorities, Church House are here to help you invest to achieve your goals. If you would like to find out more about our wealth management services, please contact our Dorset office in Sherborne on 01935 382620 or

Important Information The contents of this article are for information purposes only and do not constitute advice or a personal recommendation. Investors are advised to seek professional advice before entering into any investment decisions. Please also note the value of investments and the income you get from them may fall as well as rise and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.

Church House Investment Management is a trading name of Church House Investments Limited, which is authorised and regulated by the Financial Conduct Authority.


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