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Investment and Retirement Planning
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I'm already investing in a pension policy. Should I also start an ISA?
It is always worth looking at alternative investment strategies.
Arguably, your pension policy is a better investment for the long term, but there are features which may mean that an Individual Savings Account (ISA) has advantages as a parallel savings vehicle.
As you will know, the premiums you pay on your pension policy will usually attract tax relief, and once invested the funds are largely free of income tax and capital gains tax. On retirement, you will be able to draw a tax-free lump sum (usually equal to about 25% of the value of your fund) and the remainder must be used to buy an annuity.
Investments in an ISA do not attract tax relief, but once invested your funds are generally in a position comparable to those in your pension policy. Income and gains are, largely, tax free.
The significant difference is that the ISA rules do not mean that your money is tied up until retirement, and beyond. Instead (subject to plan rules, in some cases) you can withdraw your investment at any time. So, if you are considering an ISA as part of your retirement strategy, you would be able to draw 100% of the accumulated income and capital fund when you retire, not just 25%. And if your circumstances change in the meantime, you will have the comfort of knowing that the ISA fund is available when you need it.
In theory, the tax relief on pension premiums should mean that your funds will grow faster in a pension policy than in an ISA. However, according to the Financial Services Authority, some investors choosing CAT-standard ISAs and who pay tax at the basic rate or less would be no worse off than if they had invested in a pension policy with a company making charges at the average rate for the market.
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