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Pension or ISA – which is best?

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. [1]
Values in plan Exit values Pension advantage
Pension* ISA Pension** ISA
£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.