Pension or ISA? Think carefully

By HELEN LOVELESS, MAIL ON SUNDAY ENTERPRISE EDITOR
Updated:

 

Thousands of savers may be better off ignoring the seasonal ISA push and putting their money into a pension, according to one of the UK's largest independent financial advice firms.

Towry Law, which has 12 UK branches, warned investors not to get 'carried away' by hype surrounding ISAs but to compare the value of pensions versus ISAs.

It believes the tax advantages of pensions can outweigh the tax benefits of ISAs. ISAs have an annual investment limit of £7,000 while the annual investment limits for pensions depend largely on your age - up to 36 years of age you can invest 17.5% of earnings, rising to 40% at the age of 61.

When you put money into a pension fund you also benefit from tax relief at the rate of income tax you pay.

Towry Law's figures state a lower rate taxpayer investing £6,000 into the Fidelity Special Situations ISA in 1993 would have seen their investment reach £22,731.28 in 2003. This compares to a £6,000 investment in the Skandia Fidelity Special Situations pension, effectively the same product, which would have been worth £28,282.15 over the same period.

And a higher rate taxpayer would have reached £36,259.17 compared to £22,731.28 invested over the same period.

Roland Jones, senior pensions consultant at Towry Law, says: 'ISAs have their role to play in personal financial planning like any other product, but for some people, for example, higher-rate savers, pension saving is much more relevant. Pensions also have an important head start because of the 25% cash free entitlement.'

Mark Osland, director of independent financial adviser, Fidelius Investments, agrees. 'If you pay 40% tax then pension should definitely be the place to start, rather than ISAs. This is especially true if you are unlikely to be a 40% rate taxpayer in retirement.'

But everyone's situation is different and whether you should be heading straight for an ISA or investing in a pension first will have a lot to do with your income and your attitude towards risk.

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