Pensions have been a popular way to get ready for retirement, but ISAs are the new kid on the block as far as saving goes. While some people have taken to ISAs, there are others who swear by pensions. Like most things, it depends on where you are at in your life, how much you will save, and over what period you will save it.
Benefits of Pensions
Since they have been used for years, people generally know what is good about pensions. Investing in a pension offers immediate tax relief. You will typically not have to pay taxes on anything you save until you try to take it out. Another positive are employee benefits. Specialists at Money Pug, a site used to compare pensions, say that when you begin investing in a pension you can ask your employer to match what you contribute. This and high contribution limits make pensions enticing for people with a lot of money to save. In general, pensions will help you grow your savings a lot more, but people often have problems with a few aspects of them, encouraging people to open up an ISA.
Cons of Pensions
A big drawback of pensions is that no matter when you start saving, you will not be able to access it until you’re 55. Even then you will need to pay an annuity to access your funds, which is essentially an insurance product that pays a set income for the rest of your life unless you are very wealthy. Pensions are complicated, which makes them pretty off-putting to the average saver, making it hard to know how much to save and how much they will get back in their retirement.
Pros of ISAs
There are flexible options for ISAs. Cash ISAs are like having a savings account, and stocks and shares ISAs are wrappers you can put into shares, stocks, and bonds. One of the things people love most about ISAs is the ability to access your money whenever you need it. As for fixed-rate cash ISAs, you will only see your money tied up for a couple of years. Simple tax rules are another benefit, your savings will grow completely tax-free. With stocks and shares ISAs, you do not have to pay Capital Gains Tax either. The only tax you will pay is the dividend, which is only 10 percent. Higher rate taxpayers pay 32.5 percent outside of ISAs.
Cons of ISAs
One of the biggest drawbacks of an ISA is that you don’t get tax relief on your contributions. With no tax-back incentive like the one in pensions, the growth of savings isn’t as powerful. You will typically save more money for the same contribution with a pension. In addition, there are saving limits. While you can only contribute £10,680 into ISAs a year, it is possible to put all of it in one type of ISAs or split it up between both. These limits are usually enough for most people, but if you start saving late this limit is a restriction that must be acknowledged. ISAs also lack employee benefits such as employer contributions. When you are using an ISA, your employer is not allowed to match your contributions. Lastly, an ISA will affect most means-tested benefits like income support, but a pre-retirement pension will not.
What Should I Choose?
Pensions and have ISAs both have benefits and flaws, but it depends on your situation which one will benefit you more. For the people who start saving late or have a lot of money, pensions are a good choice. The access to the funds and age requirement won’t matter as much. But you can avoid those restrictions and save tax-free with ISAs while investing in stocks and shares. But why choose one? There are no penalties for utilizing both saving methods. If you keep some of your money in a pension while saving other funds in an ISA, you will be able to save as much money as possible while keeping the access to the money that you need.
The point is, if you do your research and you can avoid pesky restrictions and find yourself with a hefty retirement fund. In this case, due diligence can mean the difference between a relaxing period of old age and a retirement with no money left.