Pensions and ISAs

Benefits, drawbacks and characteristics

Rob Barnett, Paraplanner

Pensions and ISAs are both valuable tools for tax-efficient investing, each offering unique benefits. While they share some similarities, they also have distinct differences. In this article, we will delve into the pros and cons of each option and discuss how they can be strategically used to meet various financial objectives throughout your lifetime.

Accessibility

Pensions

Unless you have a protected retirement age, you can access your pension savings from age 55, rising to 57 from 2028.

ISAs

You can access your Stocks & Shares and Cash ISA savings as and when required (albeit there could be exit penalties if in a fixed-term arrangement).
Different rules apply to Lifetime ISAs, Help to Buy ISAs, Junior ISAs and Innovative Finance ISAs.

Tax Relief

Pensions

You can receive tax relief on contributions made into your pension, which can play an important part in boosting your retirement savings. The amount of tax relief you can claim depends on the method your contributions are being paid and the rate of Income Tax you pay. For example, if you are a basic rate tax-payer (20%) you will get tax-relief on your contributions of 20%. If you are a higher rate tax-payer (40%) you will get tax-relief of 40% on the amount of contribution in the higher rate. The same theory applies for an additional rate taxpayer (45%).
Scenario – Peter, a basic rate taxpayer, pays £100 into his pension plan. Peter will receive tax relief of £25 on this contribution, resulting in a total pension input of £125.

ISAs

You do not receive tax relief on contributions into an ISA arrangement.

Tax Implications

Pensions

Under normal pension rules, you can receive 25% of the value of your pot as tax-free cash, albeit there are scenarios where enhanced tax-free cash may be applicable. It is of utmost importance to check scheme specifics when accessing benefits. From the 2024/25 tax year, the introduction of the Lump Sum Allowance (LSA) and Lump Sum and Death Benefit Allowance (LSDBA) will also be relevant.
The remaining 75% of the value of the pot will usually be taken as income payments and taxed at your marginal rate of Income Tax, although a lump sum may be payable.
At death, your pension savings are not usually part of your estate, so your chosen beneficiaries won’t pay any Inheritance Tax on the money received. This, however, may change under new proposals following the 2024 Autumn budget. Whilst consultation on the draft legislation is still ongoing, it is possible that from April 2027, pensions will no longer be exempt from Inheritance Tax, and therefore included within your estate. Please note, until such time as the consultation has concluded and final rules issued, the draft legislation remains subject to change.
In the case of an annuity, the pension dies with the annuity holder, or on occasions the surviving spouse may inherit a portion of the annuity value. Capital protection and guarantees may be included.
Should someone die before age 75, the pension can be paid as a lump sum or drawdown to the beneficiary tax-free. From the 2024/25 tax year, lump sums will be tested against the LSDBA which will be reduced by any Tax Free Cash previously taken. On death after 75, the benefits can be paid as a lump sum or drawdown taxed at the beneficiary’s marginal rate.

ISAs

The total value of your ISA can be withdrawn without any tax implications.
At death, your ISA is included as part of your estate, so your chosen beneficiaries may need to pay inheritance tax. In the case of a married couple, the surviving spouse can inherit the deceased’s ISA and this sum does not count towards their own personal ISA annual allowance.

Investment Options

Pensions

Pensions can be invested in a wide array of holdings including cash, funds and shares. It is important to ensure that you are invested in a manner which aligns to your attitude to risk, capacity for loss and any ethical, social and governance preferences that you may have.

ISAs

ISAs can be invested in a wide array of funds and shares. It is important to ensure that you are invested in a manner which aligns to your attitude to risk, capacity for loss and any ethical, social and governance preferences that you may have.
You can also hold a Cash ISA, which as the title infers, is held as cash.

Annual Allowances

Pensions

The limit for Pensions in the 2023/24 tax year is £60,000 or 100% of your earnings, whichever is lower. Your allowance may be lower if you’re a high earner or if you’ve already started taking money from your pension savings.
If you are a non-earner, the maximum you can contribute into a pension each tax year is £3,600 gross.

ISAs

The limit for ISAs in the 2024/25 tax year is £20,000. It is important to note that £20,000 is the limit regardless of how many ISA’s you may have. For example, if you hold a Cash ISA and a Stocks & Shares ISA, you could contribute £10,000 into each, totalling £20,000. You could not put £20,000 into each in the same tax year.

Timeframes

Pensions

Pensions are designed for the long-term, helping you save for retirement. If it is likely you will need to access your money in the short term, then placing money into a Pension is not preferable.

ISAs

ISAs can be used for the short, medium and long term. If you require money in a short period of time, a Cash ISA can be useful to hold this sum. For investment horizons of five years or longer, it can be beneficial to use a Stocks & Shares ISA with the aim of benefitting from investment growth on the funds within.

As you can see, pensions and ISAs are both very powerful and valuable tools when it comes to financial planning. Each have similar characteristics, but also important differences and how you choose to invest your money will be specific to your individual circumstances and requirements.

There are, of course, other variables that should be considered, and pensions in particular can be of a complex nature that require technical planning.

It is always recommended that you seek Regulated Independent Financial Advice when deciding when or how to invest your money to ensure it is suitable for your requirements and meets your objectives over the short, medium and long term.

The value of your investment and any income from it can go down as well as up and you may get back less than you originally invested, especially in the early years. The Financial Conduct Authority does not regulate tax or estate planning.

The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

Meet our Financial Planning team

Helping secure your future financial objectives.

Learn more about our team

Disclaimers

Crowe Financial Planning UK Limited is authorised and regulated by the Financial Conduct Authority (‘FCA’) to provide independent financial advice.

The information set out on this page is for information purposes only and is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. It does not constitute advice to undertake a particular transaction. Appropriate professional advice should be taken on specific issues before any course of action is pursued. Any advice provided by a Crowe Consultant will follow only after consideration of all aspects of our internal advice guidance.

Past performance is not a guide to future performance, nor a reliable indicator of future results or performance. The value of investments, and the income or capital entitlement which may derive from them, if any, may go down as well as up and is not guaranteed; therefore, investors may not get back the amount originally invested.

The Financial Conduct Authority does not regulate Trusts, Tax or Estate Planning.

Please be aware that by clicking onto any links to third party websites you will be leaving the Crowe Financial Planning website. Please note that Crowe Financial Planning is not responsible for the accuracy of the information contained within the linked sites.

Related insights

View all our insights

Pension contributions: act now to maximise tax efficiency

Understand the benefit of pension contributions and how as a Partner you can maximise the amount you save.

Pension contribution opportunities for partners in professional practices

Understand the benefit of pension contributions and how as a partner you can maximise the amount you save.

Pensions and ISAs

In this article, we will examine the benefits of each, potential drawbacks and how both can be used effectively.

Preparing for Retirement: Are you ready?

We provide some questions you should ask yourself to help you prepare for retirement.

Making your cash work harder

Optimise your cash with cash management platforms designed to maximise returns for individuals and businesses.

Income protection

Income protection ensures financial stability if you can't work due to injury or illness. Can you afford to lack protection?

Transitional Tax Certificate

Following the abolishment of the lifetime allowance, you might benefit from higher levels of tax-free cash from your pension.

How AI is Revolutionising the Financial Services Industry?

We highlight four key areas where AI has the potential to support how we operate as a business and further elevate our service.

The Gift of Gifting

Gifting cash can reduce IHT liabilities. We highlight the various gifts allowed for the purposes of tax-free gifting

Financial advice outlook for 2025

We emphasise the significance of proactive financial planning in adapting to new legislation to ensure long-term financial stability.

Tax year end housekeeping

With the tax year end rapidly approaching we provide our key points to ensure where possible you are making most of the allowances available to you.

The Value of Financial Planning

We look at some of the expected and unexpected outcomes from engaging with a Financial Planner through ‘structural benefits’ and ‘wellbeing benefits’.

Pension contributions: act now to maximise tax efficiency

Understand the benefit of pension contributions and how as a Partner you can maximise the amount you save.

Pension contribution opportunities for partners in professional practices

Understand the benefit of pension contributions and how as a partner you can maximise the amount you save.

Pensions and ISAs

In this article, we will examine the benefits of each, potential drawbacks and how both can be used effectively.

Preparing for Retirement: Are you ready?

We provide some questions you should ask yourself to help you prepare for retirement.

Making your cash work harder

Optimise your cash with cash management platforms designed to maximise returns for individuals and businesses.

Income protection

Income protection ensures financial stability if you can't work due to injury or illness. Can you afford to lack protection?

Transitional Tax Certificate

Following the abolishment of the lifetime allowance, you might benefit from higher levels of tax-free cash from your pension.

How AI is Revolutionising the Financial Services Industry?

We highlight four key areas where AI has the potential to support how we operate as a business and further elevate our service.

The Gift of Gifting

Gifting cash can reduce IHT liabilities. We highlight the various gifts allowed for the purposes of tax-free gifting

Financial advice outlook for 2025

We emphasise the significance of proactive financial planning in adapting to new legislation to ensure long-term financial stability.

Tax year end housekeeping

With the tax year end rapidly approaching we provide our key points to ensure where possible you are making most of the allowances available to you.

The Value of Financial Planning

We look at some of the expected and unexpected outcomes from engaging with a Financial Planner through ‘structural benefits’ and ‘wellbeing benefits’.

1 2 3 4