Pension or ISA: Where Should a Higher-Rate Taxpayer's Next Pound Go?

Aug 10

2 min read

For a basic-rate taxpayer this question is close. For a higher-rate or additional-rate taxpayer it usually is not - the relief on the way in changes the maths substantially. What makes it complicated at your income level is not the relief; it is the allowances, the taper, and when you can actually get at the money.

How they differ

A pension typically gives tax relief on the way in, grows largely free of tax, and is taxed as income when drawn beyond the tax-free element.
An ISA is funded from taxed income, grows free of tax, and is not taxed on withdrawal.
A pension cannot normally be accessed until age 55, rising to 57 from 2028. An ISA can be accessed at any time.
Pensions have historically enjoyed favourable treatment on death, which matters for estate planning.

When a pension tends to win

When you receive relief at a higher rate than you expect to pay in retirement, when your employer contributes, or when you are a director able to contribute through the company as an allowable business expense.

When an ISA tends to win

When you may need the money before pension access age, when you have already used your pension allowances, or when flexibility is worth more to you than the relief.

The practical answer

Most people need both: pensions for the long-term, tax-efficient core, ISAs for accessible capital and for bridging the years between stopping work and drawing a pension. The right split is a planning question, not a product question.

If you'd like these questions answered for your own situation, download our free guide, The Pre-Retirement Pension Review, or book a free no-obligation call at www.dmfinancialplanning.co.uk.

Important information

This article is for general information only and does not constitute personal financial advice. The value of investments can fall as well as rise and you may get back less than you invest. Tax treatment depends on individual circumstances and may change. A pension is a long-term investment; funds cannot normally be accessed until age 55 (57 from 2028). DM Financial Planning is a trading style of Aegis Financial Planning Limited, authorised and regulated by the Financial Conduct Authority (FCA No. 624298).