Should I invest in my Pension or an ISA?


Hello everyone! A question that comes up occasionally in a personal finance group I’m a member of is one of if it’s better to invest in a Pension, or in an ISA / General Investment Account

The conversation usually follows a pattern of something along the lines of that the person has been putting money into a pension, but it feels a little bit pointless at the benefits are so far off.

Today, I wanted to evaluate this point a little bit further to help anyone else struggling with this question and draw out the trade off between both.

As ever – our normal note that we take care with what we write on this site but it is not official “financial advice” and whatever investments and savings you enter need to be right for your circumstances. We always suggest doing your own further research. If you’re in doubt about anything, it’s worth consulting a regulated and reputable financial advisor who can provide tailored advice built for you.

Unbiased is a resource that can help you match with an advisor who matches your needs.

What is a Pension or ISA?

If you’re not sure what a Pension or ISA is, we’ve got guides to both that may be a good starting point! You can read about Pensions here and ISA’s here.

Arguments in favour of a prioritising pension

Prioritising Pension over ISA is more likely to be tax efficient in the long term

Investing in a pension holds a massive benefit because in the short term at least, because you start with a larger pot of money via your contribution not being subject to tax.

The reason for this is that when making a contribution, you are likely to be able to salary sacrifice any money being put into a pension (your company doesn’t pay you alongside their taxable income, they just put the money straight into your pension) – or you can declare what you’ve put into your pension as part of a self-assessment tax return and be refunded.

For avoidance of doubt, this route is only possible with a pension – you can’t salary sacrifice into an ISA.

This means you’re effectively getting 20% or 40% more in your pension than you would have had receiving it as salary.

This combined with the wonderful thing that is compound interest over time – because your investment pot is initially bigger, it provides more room to grow, and this is especially key given the very long term nature of a pension. We illustrate compound investment more in our article on why investment works.

Prioritising Pension over ISA can be helpful to take advantage of employer matching

If you work for a bigger company, it’s very worth your time to go and take a look at your employee benefits and if your employer will match any additional contributions to your pension beyond the statutory minimum.

It’s usually capped, but there are many employees out there that will match the first couple of additional percent you put in as contributions. If you’re not taking advantage of this, unless you desperately need the money to meet your expenses it’s madness to turn this down, as it’s effectively your employer giving you free money.

Prioritising Pension over ISA can secure your retirement lifestyle

One of the biggest personal finance challenges the UK faces is that many people simply underestimate what they need for their retirement, and focus on short-term challenges rather than putting adequate money aside for retirement.

Pensioner poverty has become a real problem and it makes me sad. Relying on a state pension is simply not enough for most people, and many people simply do not appreciate the later-life challenges of paying for things like care.

It is possible to over-do your pension, but most people are on the other side. Before you make changes in either direction, it’s worth looking at a pensions modelling calculator, and considering if you have enough.

Prioritising Pension over ISA can be helpful for inheritance planning

At the time of writing (and be warned, this is always one that’s subject to change) money is a private pension is considered outside of your estate of inheritance tax purposes, which is incredibly generous. As a result in the unfortunate case you pass away, money in a pension can leave your dependent in a good position.

(Note: Whilst inheritance tax won’t apply, your beneficiary may be subject to income tax – the specific rules around inheriting a private pension can be found on the Government’s website here).

An ISA investment will form part of your estate for inheritance tax purposes.

Picture of UK coins for Pension or ISA article.

Arguments in favour of a prioritising ISA

Prioritising ISA over Pension provides more flexibility on timings

The point the person who inspired this post was making is true – if you’re going to have some short-term financial needs it’s easier to dip in to a general investment account or ISA than it is a pension

Prioritising ISA over Pension tends to provide flexibility on the investments with less faff

Most people invested in a private pension will likely be invested via a workplace scheme. These often default to a relatively conservative portfolio and if you try to change it within the scheme, don’t tend to offer a particularly wide range of choice.

Whilst you do have the option to transfer your pension elsewhere, when it comes to an ISA it’s usually the case that you’ve chosen the provider – and most investment platforms now have a significant range of options to fufill your heart’s desire, from single name stocks to a range of ETF’s.

Any questions?

If you have any further questions about choosing to invest in a pension or an ISA (or have an argument on either side that you think is worth considering) we’d absolutely love to hear from you! Just drop us a note in the comments below.

And that’s it!

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