Case Study: Pension or ISA – which is best?

At age 55 Dave earns £170,000 per annum and makes a £15,240 (net) pension contribution and a £15,240 ISA contribution.
Both investments grow at 2.5% per annum in real terms (meaning 2.5% above the rate of inflation and net of charges) over 10 years.

On ceasing work at age 65 Dave decides to draw both investments as a lump sum. As he has no other income he is a Basic Rate taxpayer.

EQ has developed a unique online tool for demonstrating the relative attractions of ISAs, SIPPs and Investment Accounts.
Values in plan Exit values Pension advantage
Pension* ISA Pension** ISA
£35,470 £19,508 £30,149 £19,508 £10,641
*Assumes Additional Rate tax relief was also invested into the pension
**25% tax free cash with balance taxed at 20%

The pension provides an additional return of £10,641.

If Dave was a 40% taxpayer in retirement, the additional return provided by the pension would be reduced to  £5,320.

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