Pension vs ISA - How you can boost returns by up to 41%

Unless you’re about to retire, pensions can seem like a bit of a dull subject - but if you’re in your fifties or older, they can offer a whole new way of thinking about investment.

Once you reach 55 you can take money from your pension either as lump sums, income or both. This means they can offer an attractive alternative to ISAs if you’re looking to build up funds for the future or to potentially pass on wealth free of Inheritance Tax.

Harnessing the tax benefits

The tax boost you get when you put money into a pension can make a huge difference to returns.

For every £80 you pay in NFU Mutual will claim £20 from HMRC and add it to your fund.

If you pay 40% Income Tax, you can then reclaim up to an additional £20 direct from HMRC. The amount of additional tax you can reclaim will depend on your earnings.

An ISA doesn’t attract the same tax boost on the money you invest, but any money you take out is tax free. If you take a lump sum from your pension, normally 25% is tax free and 75% is taxable.

How it works

  • Tim is 56, earning £60,500 a year. He wants to invest £6,000.
  • As a 40% Income taxpayer, he could invest £8,000 into a pension. HMRC would then boost this with a further £2,000 giving him a fund of £10,000.
  • He can then claim back an additional £2,000 direct from HMRC meaning the cost to him would be £6,000.
  • Alternatively, he could pay £6,000 into an ISA.

Taking the money out

To show the impact of tax relief, let’s assume the value of the fund doesn’t move and there are no charges and...

Tim is still a 40% taxpayer when he takes the money out:

  Pension ISA
Value of fund £10,000 £6,000
25% tax free £2,500  
40% tax on remainder (£3,000)  
Cash available £7,000 £6,000

The pension would give 16.6% more than the ISA.

Tim is a 20% taxpayer - with income of £42,770 or less - when he takes the money out:

  Pension ISA
Value of fund £10,000 £6,000
25% tax free £2,500  
40% tax on remainder £1,500  
Cash available £8,500 £6,000

The pension would give 41.6% more than the ISA.

Inheritance Tax

One of the advantages of pensions is that in most cases, any money left in the fund can be left free of Inheritance Tax.

If you die before 75 in most cases the benefits can also be paid free of Income Tax (although there are limits, if paid as a lump sum). If you die after 75 your beneficiaries will be taxed on the money paid out to them.

ISAs will be included in any Inheritance Tax assessment.

Which is right for you?

Your NFU Mutual Financial Adviser will be able to provide advice on the right options for you.

What's next?

You can give us a call on:

0800 622 323

You can open a new pension or top up an existing pension online:

Open a pension online    Top up a pension online

You should be aware that the value of investments may rise or fall and you may get back less than you invested.

The tax treatment of pensions depends on individual circumstances and may change in the future.

Inheritance Tax advice is not regulated by the Financial Conduct Authority or the Prudential Regulation Authority.

NFU Mutual Financial Advisers advise on NFU Mutual products and selected products from specialist providers. When you contact us, we'll explain the advice services we offer and the charges.

Financial advice is provided by NFU Mutual Select Investments Limited.