Should I invest in an ISA or a Defined Contribution (DC) pension?

Both DC pensions and ISAs are tax-efficient ways to save money for the future, but there are some differences which it is helpful to understand when deciding how to invest.

Investment amounts

DC Pensions are basically funds of money that you have saved in a pension wrapper – I like to call them Money Pot Pensions. Under DC pension scheme rules, the maximum annual investment is £60,000 or 100% of your earnings if less (although this is different in certain circumstances, so it is always worth checking what applies to you).

For ISAs, the annual allowance is £20,000 and there is currently no limit on total savings.

Tax situation

Both savings vehicles grow free of UK Income and Capital gains tax.

Pensions attract tax relief from the Government at your highest rate of tax, although any tax relief over the basic rate must be claimed via your annual tax return. This is equivalent to a tax refund for tax payers, and for non taxpayers it is just like a government giveaway!

When it is time to withdraw from a pension, whilst you receive a 25% tax-free lump sum, the remaining 75% will be subject to tax at your highest marginal rate.

ISAs on the other hand do not attract either income tax or capital gains tax on withdrawal. However they do form part of the taxpayer’s estate for Inheritance tax (IHT) purposes, whereas pensions do not attract IHT.

Accessibility

Pensions are generally available to be taken from age 55 (sometimes earlier on medical grounds, and sometimes later depending on the type of pension) whereas ISAs can be accessed at any time.

If you have any questions about whether to invest in a pension, an ISA, or both, please do get in touch.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and the value may fall as well as rise.  You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.