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Pensions vs. ISAs for Retirement & IHT Planning

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This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham.

Whilst we at Castlegate would not necessarily agree, there are streams of thought within the financial services industry which argue against relying on pensions for a retirement income. Rather, certain investors emphasise other income-generating assets such as property, dividend income or drawdown from ISAs (Individual Saving Accounts). One letting agent called James Davis, for instance, in 2018 had a portfolio of 20 Buy To Let properties and argued that the rental income would eventually support his retirement lifestyle.

Most people, however, will not have the necessary capital or investment risk appetite to build up a property portfolio such as this. More interesting to our Grantham financial advisers, however, is the debate about ISAs and pensions; which one is better for retirement planning purposes? Moreover, does one offer more estate planning opportunities (i.e. IHT mitigation) than the other?

In this short article, our financial advisers here in the Midlands will be sharing some thoughts on these very questions. We hope you find this content helpful, and invite you to get in touch if you’d like to arrange a free consultation regarding your own retirement plan:

01476 591022


Tax efficiency

Both ISAs and pensions possess some interesting features from the perspective of tax-saving opportunities. In 2019-20, you are allowed to commit up to £20,000 per tax year into an ISA (if you are a UK resident) and any interest, capital gains or dividend income from this capital will be tax-free. Over many years, this does open up the opportunity to build up a significant ISA portfolio which is potentially completely free of tax.

Over 10 years, for instance, contributing the maximum annual amount to your ISA(s) could lead to a portfolio worth £200,000. This excludes any investment growth which might have occurred over that period. Moreover, you can withdraw up to 100% of your capital from your ISAs without facing any tax. A defined contribution pension, on the other hand, cannot be accessed until you are at least 55 years old, and then only 25% can be withdrawn tax-free.

Pensions, however, do have a significant advantage over ISAs in the form of tax relief on your contributions. For a Higher Rate taxpayer, for instance, every £1 you put towards your pension is effectively “topped up” by the UK government by 40p (those on the Basic Rate get 20p per £1 of contributions). This can considerably boost your pension fund over time compared to an ISA. Moreover, your pension contributions are made before tax. Contributions to an ISA, however, are made after income tax has been paid.



With an ISA you are usually on your own when it comes to contributing towards your retirement fund, unless you have a wealthy relative offering you a helping hand. A workplace pension, however, in 2019-20 requires your employer to contribute at least 3% of your salary towards your pension, whilst you must contribute at least 5%. ISA contributions are also capped at £20,000 per tax year, whilst your annual allowance enables you to contribute up to £40,000 per year into your pensions (or up to 100% of your salary – whichever is lower). This can make pension contributions a particularly attractive option for Higher Rate taxpayers, who are likely to be in a better position to contribute more.


Investment flexibility

Both ISAs and pensions have a lot to offer when it comes to presenting a wide range of investment opportunities. ISAs allow you to commit up to £20,000 pre tax year towards cash, for instance, or you could tap into the equity markets using a stocks and shares ISA. There is even the option for higher-risk investors to engage in peer-to-peer lending opportunities or crowdfunding through an innovative finance ISA.

Pensions, in our option, still largely hold the upper-hand regarding investment flexibility. Whilst it’s certainly true that many workplace pension schemes are fairly limited in the choice of funds they offer, other types of pension give investors much more control. Self-invested personal pensions (SIPPS), for example, can enable you to invest in offshore funds and commercial property, whilst a Small Self-Administered Scheme (SSAS) lets you lend money to sponsoring employers – thus enabling you to invest in your own company using your pension.



Cash ISAs are intuitively more straightforward for many people to understand, given their strong resemblance to a regular savings account. Moreover, all of the taxes on your ISA contributions are completed before you invest your capital. The amount you see in your portfolio, therefore, is usually the amount you can withdraw. A pension, however, carries important tax considerations which must be evaluated carefully before withdrawal.


Verdict & invitation

In our opinion here at Castlegate, in most cases, pensions are going to carry the day in the majority of cases when it comes to pension planning. The addition of employer contributions to your pension can significantly grow your retirement fund over time, at no extra cost to you. In addition, the government tax relief on your contributions can also make a huge difference.

However, this is not to say that ISAs hold no place within a retirement strategy. During our years providing financial advice here in Grantham, we’ve often found that ISAs can form a powerful retirement income supplement and crucial tax optimisation tool.

If you are interested in discussing your own financial plan or retirement strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:

01476 591022