Long-term investing success means making the most of advantages where you can, including making your saving and investments as tax-efficient as possible.

Most UK savers have two main ways to save and make the most of tax benefits - Individual Savings Accounts (ISAs) and pensions, either workplace pension schemes or Self-lnvested Personal Pensions (SIPPs). ISAs and pensions each have different rules, advantages and drawbacks so it is important to be aware of these before you decide where to save and how much.

It shouldn't be one or the other - it is normal to have savings in both - but the balance between them will depend on what’s right for you and what you hope to use the money for - as well as what's most tax-efficient.

Here's what to consider when deciding between an ISA and a pension for your savings….


When do you need the money back? (Really Important this bit!)

An obvious difference between an ISA and a pension is when each allows you to access your money.

Anything saved inside an ISA can be withdrawn at any time, which makes it a good place to save money you think you may need at short notice. As a general rule, leaving savings and investments to grow untouched makes sense but sometimes there is a legitimate reason to dip into long-term savings. If you need money to help you buy a house for you or a grown-up child, for example, or in an emergency like loss of employment, the flexibility to access money held in an ISA at any time makes it a good place for those savings.

Pensions, on the other hand, have rules around when you can access your money. You can't normally access money held in a pension before age 55, so if you think you'll need money before that, a pension may not be the place for it.

If 55 isn't that far away, you might see sense in saving money into a pension where the tax treatment - as we will explain - can be advantageous. But remember that pensions have the express purpose of holding money needed in retirement, so even at age 55, it may be sensible to leave pension money alone if you'll need it later.

It's worth noting the Government's Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at or over the telephone on 0800 138 3944.


Cutting the tax you pay on savings

Both ISAs and pensions have tax advantages but they work in different ways. Money saved into an ISA can grow free from capital gains tax and no income tax applies when you withdraw money from an ISA. We are each allowed to contribute £ 20,000 a year into an ISA.


Money saved into a pension has a significant benefit of tax relief. Pension contributions are boosted with 20% tax relief by the government - and more if you're a higher or additional rate tax-payer. For example, a £1 contribution today effectively costs you 80p if you're a basic-rate taxpayer, as little as 60p if you're a higher-rate taxpayer, or 55p if you pay additional-rate tax.

With your 2021/22 tax year pension allowance, you can receive tax relief on contributions up to a maximum of £40,000, capped at the amount you earn if this is less. Those earning above £200,000 may be subjected to a lower allowance.

Your pension pot then grows free of income and capital gains tax over time and you can normally take up to 25% tax-free cash from age 55, with the rest of your withdrawals subject to income tax at your marginal rate.

This system of pension tax relief means that the biggest tax boost comes when you contribute at one level of income tax but withdraw at a lower rate. For example, if you get higher-rate tax relief on a contribution but then withdraw money as a basic rate tax-payer. This is a great way to boost your retirement income.

All this means that pensions have the potential to save you more in tax than ISAs, but your money will be tied up till age 55 at least.

Once you reach 55 and have the option to access your pension money there are other important rules to consider as well. If you take out any money beyond the 25% that is normally allowed tax-free, you may trigger the Money Purchase Annual Allowance, which limits what you can then pay into a pension and benefit from tax relief to just £ 4,000 a year. So, if you intend to continue pension contributions above that level you need to limit your withdrawals.


What kind of pension?

Even if you have decided to save money into a pension, you may have different types of pensions to choose between. If you are employed you are likely to have a workplace pension scheme available to you which your employer will pay into. Always ensure that you contribute enough to maximise this free help from your employer.

Beyond that, you may either pay extra contributions into your workplace scheme or into a pension you set up yourself, such as a SIPP.


Passing it on

ISAs and pensions are treated differently when it comes to Inheritance Tax (IHT). Money held in an ISA can be passed onto spouses or civil partners at death with no IHT to pay. Money passed to anyone else, however, is included in your estate and may be liable for IHT.

For money held in a pension, if you die before the age of 75 anything in your pot can be passed on to anyone you wish and the recipient may not have to pay tax on it, as long as this is done within two years of the date of death and from a trust-based plan.


The money is not normally part of your estate, so no inheritance tax is due when it is paid out from the pension. Bear in mind that, if you have already started accessing your money, anything that you have withdrawn, including the potential 25% of it that is available to you tax-free, would fall inside your estate and therefore be liable for inheritance tax.

For funds still within the pension at death, beneficiaries can withdraw some or all of it, or take an income as if it were their own pension. They don't have to be of pension age to get the money.

If death occurs after age 75, then the money withdrawn is liable to income tax at the recipient’s marginal rate. This can limit their options because, in order to avoid an abnormally high tax bill, they may wish to take the money in chunks small enough that it does not take income above the basic rate threshold and into the higher rate thresholds.


lmportant information - Eligibility to invest in a pension or ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. You can't normally access money in a pension until age 55. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Rock Adviser or an authorised financial adviser of your choice. You should regularly reassess the suitability of your investments to ensure they continue to meet your attitude to risk and investment goals. Pension transfers are a complex area and may not be suitable for everyone. Before going ahead with a pension transfer, we strongly recommend that you undertake a full comparison of the benefits, charges and features offered.

Important information - The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.