A pension fund or an individual savings account (Isa) for your beloved nest egg: A grueling dichotomy for the indecisive, but taking stock of your financial situation is key.
Fundamentally, the difference between the two boils down to flexibility, or lack thereof.
Pensions are rigid
If you earn more than £10,000 per year, you’re probably enrolled in a workplace pension scheme. A penny from you, one from your employer until a point, and you eventually have a big bag of riches (BBoR) with which to sail into the sunset.
Pensions feature tax relief, tax-free interest on what you contribute, and tax-free returns when it’s invested. Sounds peachy, but in reality you’re forfeiting a sizeable chunk of your income for decades.
Workplace pensions tie your money up until retirement age, which ranges from 55 to 65 depending on the scheme. When you finally withdraw it as an old timer, only a quarter of your BBoR is tax-free.
Of course, each scheme is different, and pensions vary in shape and size. But the basic principle is the same. Isas are bendy
Isas are a tax haven for up to £20,000 of your annual income, which can take the form of cash, stock, or a loan from someone. The stocks can be as risky as you prefer, and money can be withdrawn tax-free at any point.
The interest or returns aren’t taxable either, so an Isa has BBoR potential as the years go by, albeit to a lesser extent than a pension. Employers don’t add to your Isa, and the annual limit on your own contributions is half the £40,000 annual upper limit for pensions.
The government might contribute – if you open a Lifetime Isa – but at the cost of flexibility. Your contributions are matched till a degree by the government and the money is tied up till retirement, just like a pension.
The upside is that this money can be withdrawn tax-free if you’re buying a house. The downside is that only £4,000 can be put in a Lifetime Isa every year.