I’m 51 with an extra £150 a month to invest until I hope to retire at around age 60.
I’m already contributing to a workplace pension, and I have a pot currently valued around £180,000. I expect to be a basic rate taxpayer on retirement.
Is it better to a) invest that £150 in a pension with tax relief now, knowing I’ll pay tax on the eventual income.
Or b) invest it in an Isa with no tax relief now, but no tax to pay on income? Appreciate your insight!
Tanya Jefferies, of This is Money, replies: While having money to spare every month is a great position to be in, it can be a dilemma to decide how to make best use of it over the long term.
Both of the options you float are sensible, so it’s just a matter of deciding which one best suits you personally and your plans for retirement.
We put your question to an experienced financial expert who answers you below.
Ray Black: Both options offer solid benefits – the key is to decide what financial goal matters most to you
Ray Black, chartered financial planner and managing director of Money Minder Financial Services, replies: This is a great question.
The answer comes down to whether you want tax relief on what you save now and to potentially pay tax on income payments later (pension) or to forego the tax relief now and enjoy tax-free withdrawals later (Isa).
Both options have benefits and your best choice will depend on your personal circumstances and priorities.
Investing £150 per month into a pension
Pros
Immediate tax relief: As a standard-rate taxpayer, every £150 you contribute turns into £187.50 in your pension (boosting money paid in by 25 per cent to take it back to the position before basic rate tax).
Employer contributions and National Insurance savings: If you have the option to increase contributions to a workplace pension through salary sacrifice, you may be able to benefit from lower tax payments and lower National Insurance contributions.
Some employers will increase their contributions to match yours if you opt to put more in yourself, so you should check if you would benefit from this perk.
Long-term growth: Pension savings benefit from tax-free growth and just like Isas they have the potential to benefit from compounding growth over time.
Inheritance benefits: Currently, pensions don’t form part of your estate for inheritance tax purposes (until the new pensions and IHT rules take effect in 2027), making them an efficient way to pass on wealth.
Cons
Lack of access: Your money is locked away until at least age 55 (the pension access age is rising to 57 from 2028) and it might not be in your best interests to draw on your pension plan before retirement, unlike an Isa, which can be accessed very easily if its needed.
Tax on withdrawals: When you retire, only 25 per cent of your pension withdrawals will be tax-free. The remaining 75 per cent is taxed as income. If you stay within the basic rate tax band, this will be at 20 per cent, meaning some of the tax relief benefit you get now will be repaid when you take the money out.
Future rule changes: Pension rules seem to change frequently so it’s worth keeping an eye on that.
Investing £150 per month in an Isa
Pros
Completely tax-free withdrawals: Unlike pensions, there’s no tax to pay when you take the money out, no matter how much you withdraw.
Easily accessible: Isas don’t have restrictions on when you can access your money, meaning you can use the funds before retirement if required.
Simplicity: Unlike pensions, where tax rules and limits can be complex, Isas are straightforward: you invest, your money grows tax-free, and you withdraw it without any tax complications.
Cons
No tax relief on contributions: Every £150 you put into an Isa remains £150. Unlike pensions, there’s no top-up from the government.
No employer contributions: If your employer offers additional pension contributions through matching your own higher contributions or offers salary sacrifice, you might miss out on some ‘free money’ by investing in an Isa instead.
Inheritance tax considerations: Unlike pensions (at least until 2027), Isa savings are counted as part of your estate for inheritance tax purposes.
Making a decision: Which best describes your priority
1. I want maximum growth and tax relief now
Pension contributions will give you the best return in the short term due to the tax relief boost on every contribution. Higher rate taxpayers can still claim back more than the basic 20 per cent too.
2. I want flexibility and access to funds
An Isa might be better, especially if you may need to access the money before retirement.
3. I want to make pension withdrawals that keep me within the basic rate tax band
The tax relief on the money going in roughly cancels out the tax you’ll pay on withdrawals, meaning the pension still edges out the Isa in terms of long-term benefits.
Easily accessible and simple: Reasons you might invest in an Isa instead of boost your pension
What about taking a balanced approach?
Some savers prefer to hedge their bets and split their investments between pensions and Isas.
For example:
£100 into a pension: Gaining tax relief now and benefiting from long-term growth.
£50 into an Isa: Ensuring some tax-free income in the future with added flexibility.
This strategy will help you get the best of both worlds – taking advantage of the pension tax relief while keeping some accessible, tax-free savings for retirement.
My verdict: There’s no wrong choice
Both options offer solid benefits. The key is to decide what matters most. If you want the biggest pot possible at retirement, go with the pension. If you want easy access and future tax-free income, go with the Isa.
If you want a mix of security and flexibility, consider splitting your contributions.
Since you’re already contributing to a workplace pension, it may be worth checking if your employer would boost their contributions if you increase yours—this could make the pension route even more attractive.
If in doubt, speaking with a financial adviser can help tailor a plan that suits your long-term goals.
Compare the best DIY investing platforms and stocks & shares Isas
Investing online is simple, cheap and can be done from your computer, tablet or phone at a time and place that suits you.
When it comes to choosing a DIY investing platform, stocks & shares Isa or a general investing account, the range of options might seem overwhelming.
Every provider has a slightly different offering, charging more or less for trading or holding shares and giving access to a different range of stocks, funds and investment trusts.
When weighing up the right one for you, it’s important to to look at the service that it offers, along with administration charges and dealing fees, plus any other extra costs.
To help you compare the best investment accounts, we’ve crunched the facts and pulled together a comprehensive guide to choosing the best and cheapest investing account for you.
We highlight the main players in the table below but would advise doing your own research and considering the points in our full guide linked here.
>> This is Money’s full guide to the best investing platforms and Isas
Platforms featured below are independently selected by This is Money’s specialist journalists. If you open an account using links which have an asterisk, This is Money will earn an affiliate commission. We do not allow this to affect our editorial independence.
| Admin charge | Charges notes | Fund dealing | Standard share, trust, ETF dealing | Regular investing | Dividend reinvestment | ||
|---|---|---|---|---|---|---|---|
| AJ Bell* | 0.25% | Max £3.50 per month for shares, trusts, ETFs. | £1.50 | £5 | £1.50 | £1.50 per deal | More details |
| Bestinvest* | 0.40% (0.2% for ready made portfolios) | Account fee cut to 0.2% for ready made investments | Free | £4.95 | Free for funds | Free for income funds | More details |
| Charles Stanley Direct* | 0.35% | No platform fee on shares if a trade in that month and annual max of £240 | Free | £11.50 | n/a | n/a | More details |
| Etoro* No investment funds or Sipp | Free | Stocks, investment trusts and ETFs. | Not available | Free | n/a | n/a | More details |
| Fidelity* | 0.35% on funds | £7.50 per month up to £25,000 or 0.35% with regular savings plan. | Free | £7.50 | Free funds £1.50 shares, trusts ETFs | £1.50 | More details |
| Freetrade* No investment funds | Basic account free, Standard with Isa £5.99, Plus £11.99 | Stocks, investment trusts and ETFs. | No funds | Free | n/a | n/a | More details |
| Hargreaves Lansdown* | 0.45% | Capped at £45 for shares, trusts, ETFs | Free | £11.95 | Free | Free | More details |
| Interactive Investor* | £4.99 per month under £50k, £11.99 above, £10 extra for Sipp | Free trade worth £3.99 per month (does not apply to £4.99 plan) | £3.99 | £3.99 | Free | £0.99 | More details |
| iWeb | Free | £5 | £5 | n/a | 2%, max £5 | More details | |
| Trading 212* | Free | Stocks, investment trusts and ETFs. | Not available | Free | n/a | Free | More details |
| Vanguard Only Vanguard’s own products | 0.15% | Only Vanguard funds | Free | Free only Vanguard ETFs | Free | n/a | More details |
| (Source: ThisisMoney.co.uk Jan 2025. Admin % charge may be levied monthly or quarterly | |||||||
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.
This article was originally published by a www.dailymail.co.uk . Read the Original article here. .