Case Study: Pension or ISA – which is best?

At age 55 Dave earns £95,000 per annum and makes a £20,000 (net) pension contribution and a £20,000 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	Pension advantage
£32,002	£25,602	£27,202	£25,602	£6,600

*Includes £5,000 tax relief claimed through his tax return when he made the original contribution

**25% tax free cash with balance taxed at 20%

The pension provides an additional return of £6,600.

If Dave was a 40% taxpayer in retirement, the additional return provided by the pension would be reduced to £1,800.

Themes: Accumulating Wealth, Investment, Pensions, Tax Optimisation

Pros and cons of ISAs, GIAs and SIPPs

Making optimal use of tax allowances is essential for maximising your returns but you also need to take account of other factors such as flexibility if your plans change. In this analysis we show the pros and cons of the three most common types of investment account.

ISA to pension transfer

If you are short of the funds needed to make maximum use of your pension contribution allowance it might be worth considering withdrawing some funds from your ISA.

Use your ISA allowance