Individual Savings Account (ISA) and Pension Comparison


Craig Hendry

Craig Hendry

Managing Director & Chartered Financial Planner

01 February 2016


Recent media coverage has speculated whether a Pension or an Individual Savings Account (ISA) is a better home for your savings. 

The table below answers some of our frequently asked questions on the subject and highlights the key differences. 

Frequently Asked
Questions
PensionISA
Do my contributions
receive Tax relief?
Employees  – Yes – 20% basic
rate tax relief applies to gross
contribution (higher rates to be
reclaimed via tax return)
Employers – No – all contributions
are paid gross
No – contributions are paid
from earned income.
Who can make
contributions?
Employee/Plan holder
Employers
Third Party (i.e. Grandparent)
Plan holder
Third Party – i.e. Family
members
Are my contributions and
funds subject to any limits?
Yes – Annual Allowance for total
personal and employer
contributions is £40,000 per annum.1
Tax charges apply if the limit is
exceeded.
Option to carry forward unused
allowance from up to 3 previous tax years.
Lifetime Allowance of £1.25m
(£1m from 6 April 2016) applies
to size of fund that can be accrued
before further tax charges will apply.
Yes – ISA allowances are
£15,240 for NISA and £4,080
for Junior ISA2 for 2015/16
and 2016/17 tax years.
No carry forward facility.
No limit on value of funds
that can be built up.
What are my
investment options?
Fund availability depends on
product. Options include collective
funds, direct shares, cash deposits
and commercial property.
ISAs have 2 categories –
Cash or Investment in shares,
collective funds.
You can spread the limit
across both products and can
now transfer freely between
Cash and Investment ISAs.
Are my funds
accessible?
Subject to scheme rules, funds
can normally be accessed from
age 55 increasing to 57 in 2028.3
Yes – you may withdraw some
or all of the fund at any time.
Exceptions include Junior
ISAs which must be held until
age 18 and Fixed Rate Cash ISAs,
which may incur a penalty.
Are withdrawals
subject to tax?
Yes – Currently able to receive up
to 25% of fund as a Tax Free
Lump Sum from age 55.
Income taken from pension
is taxed at your highest marginal
rate.
No – Withdrawals are Tax Free.
Until April 2016 dividends are
subject to non-reclaimable
10% tax charge.
What happens
when I die?
Nominated beneficiaries can receive
the pension as a lump sum or beneficiary
drawdown dependent on scheme rules.
Funds will be paid tax free if death occurs
before the age of 75 and will be subject to
tax in the recipient’s hands if death occurs
after 75.
Spouse or Civil Partner only will
receive an ‘additional permitted
subscription limit’ equal to the
value of the ISA at the Plan
holder’s death.4

What is the Inheritance
Tax position on death?
Funds held within a Pension Wrapper are
not typically subject to Inheritance Tax.
Any withdrawals made from the pension and
not spent or gifted will form part of the
Estate for Inheritance Tax purposes.
Funds held within an ISA Wrapper
will form part of the estate and will
typically be liable to Inheritance Tax.5
  1. From April 2016 the Annual Allowance will be tapered for higher earners.  Total income earned above £110,000 is subject to a test to determine any reduction in annual allowance to a minimum of £10,000 per annum.
  2. Junior ISAs can be opened by anybody with Parental Responsibility for a child under 16. A child cannot hold both a Child Trust Fund and a Junior ISA. The same investment rules apply as for regular ISAs.
  3. From 2028 the minimum age will be set as being 10 years below State Pension Age and could therefore increase further if State Pension Age increases.
  4. This does not affect a Spouse’s or Civil Partner’s personal ISA allowance for that tax year.
  5. Another type of ISA is an Alternative Investment Market (AIM) ISA. These can be used for Inheritance Tax planning and may be suitable for clients looking for higher risk investment options.

Johnston Carmichael Wealth Limited is authorised and regulated by the Financial Conduct Authority.

The information contained in this article represents Johnston Carmichael Wealth Limited’s interpretation of current legislation and HMRC practice. Please remember the value of investments and income derived from your investments can go down as well as up and you may not get back the amount you originally invested. Past performance is not necessarily a guide to future performance. The Financial Conduct Authority do not regulate tax advice. The value of tax savings and your eligibility to invest in a particular product depends on individual circumstances and all tax rules may be subject to change in the future.