Is a pension a better option for saving than an ISA?

Q: I'd like to save for my five-year-old daughter's retirement. I understand the virtues of stocks and shares individual savings accounts and the likelihood of growth over the long term, but would I be better off opening a pension, rather than saving in an ISA?

A: Francis Klonowski is principal of Klonowski & Co in Leeds.

The junior ISA - christened JISA - launched on 1 November 2011 may attract attention for children's savings.

However, I suspect you may not be eligible because your daughter was born at a time when child trust funds were being offered. Both these accounts raise a dilemma for parents, as the child becomes entitled to the money at 18  and you can't control how it is used.

So you need to decide whether you can accept this or would prefer to control when your daughter gets the money, and how much she gets at a time, especially if you wish to save for her retirement.

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The main difference between an ISA and a pension is how you're taxed.

With pensions, you enjoy tax relief when you put money in. For example, if you invest £100, it becomes £125 in the pension fund as the provider claims back basic-rate tax relief.

As for ISAs, you'll get your tax benefits when it comes to drawing down your money. For example, when you take out money from a cash ISA, you don't have to pay any income tax on the interest you've earned.

When you withdraw money from a pension, you can only withdraw 25% as a tax-free lump sum - the rest has to provide some form of income, which is taxable.

Beyond that, you can invest in the same types of funds in both plans, and both benefit from tax-free growth.

Generally, though, I would only consider pension savings for someone this age if all their interim needs, such as university fees or a house deposit, have already been covered.

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My understanding is that there is also a fundamental difference between ISAs and Pensions regarding remaining capital.

If one saves £100,000 and places it in a Pension then that Pension company guaranties an annuity income of say £4000 per year - possibly index linked, etc. When the pensioner / couple die, the Pension company keeps the the capital of £100,000 if it has been able to earn as much as it has paid out - end result, nice shiny office for Pension Company and large bonuses for directors.

However, with the ISA system, the interest of Cash ISAs becomes the Pension - currently say £3000 from £100k cash investment. Also its easy to use capital draw-down. If ISAs are in Stock and Shares they are initially invested for Capital Growth. Then on retirement they can be changed so that they are invested in Stocks and Shares that maximise the Dividend Income to provide a Pension. However, when the pensioner / couple dies, my understanding is that the capital of the ISA then becomes part of the dead person's estate which can be transferred by a Will to children who then are half way to paying for their pension. Thereby, keeping the capital in the family for the Pension of the next Generation, or to be frittered away if so desired. I am not sure of the tax arrangements, but I assume the ISA tax protection ends upon death.

Am I correct in the above, because if a lady is thinking of her Grandchild, then it might be possible with an ISA scheme to ALSO help her Great Grandchildren and beyond.

R Harrap

Indeed! Harrap makes a very valid point and one glossed over or ignored when pensions are discussed.

It's difficult to see how pensions can EVER be a good investment as your capital is lost 1) as soon as you invest in a pension, you cannot recover any of the money until you take the 25% and 2) when you die you lose the blance of the fund.

This is one of the major cons being perpetated by the gov and pension companies and, unfortunately, most people take the advice of so-called experts rather than looking at the product in detial and thinking through the consequences.


Mr Harrap, your understanding is about 10% correct. I would urge you to seek proper professional independent advice as you need to learn much more about pensions, ISA's and investments in general before you consider that you have sufficient understanding to invest in these tax shelters yourself, let alone profer advice to others. On death an ISA does loose its tax shelter status. Pensions and ISA's can invest pretty much in all asset classes and the areas that people invest must be established on an individual basis after considering a very thorough fact finding process to establish what an individual wants to achieve with their life or in this case what they want to offer for the child/children.
The original question cannot be answerd generically in two paragraphs and with respect to Francis Klownowski, no one should try to answer such a question without giving more detail and examples but it would take a book the size of "War and Peace" to cover all the chapters needed to be considered to offer a good generic answer to this question as religious considerations, ethical considerations, tax status, etal have to be taken into account as well as personal preferences. For example, certain religions canot allow investment in an annuity. Some children might be very unhappy to find that investment for them had been made in funds that invest in non ethical companies. My advice anyone who needs advice on these areas is to read the FSA webb site and then find a true, trustworthy individual experienced in this area of business, they must have the right qualifications and be authorised to offer advice but many bank and large employees of large companies with "big shinny offices and Bonnuses" can and will offer "ADVICE" on the subject but they tend to be OFFERING ADVICE RELATED TO PRODUCTS WHICH HAVE BEEN PUT INTO THEIR SELLING TARGETS. You need someone who actually cares about you and for you! Unfortunately it does mean that most will need to pay for this advice through a fee, which will be the only route post December 2012, although at the moment advice can be paid for through commission in the same way you pay a retailer in just about every other product. So you DIYers
beware, you may be able to paint your lounge pretty well with items you have bought from B&Q on information you gleen on the internet, through books, shown by a parebt or friend etc. Could you build a whole house that can last a lifetime without professional help or advice? Probably, the computer says, NO. This subject requires similar broad knowledge and skill sets and all may not be found in one person but you do need a professional architect that can project manage and understand quantity surveying as well as listen and understand the customers wants and needs in relation to the "materials, designs and processes involved in good retirement provision building.

Much learned opinon gets expressed by journalists not qualified nor experienced in many areas but the most dangerous opinion I have seen by these self appointed "experts", has been in discussions in regards to Pensions, ISA's, Annuities and Investments. They highlight the good the bad and the ugly, particularly the latter two. Some also receive some very good "benefits" from involved, concerned, "shiny office People". Go to an IFA, get a personal recommendation, get educated and at the same time get a service from the most regulated people in this country who also have clear routes of recourse in the event of mal-practice and have to have personal indemnity insurance as well as contribute to ombudsman schemes without having you to get them to appear infront of a Palimentary Committee to gain satisfaction, but here is the pull.......... you will have to pay for it to get anwhere near the result you want and I cannot guarantee even that, as times and the world changes without consultation nor consideration!

Mr/Ms Harrap... Thank you for your thoughts... I believe that your suggestion makes a lot of sense and will follow it.

Hurray - someone who actually agrees that pensions are a rip-off. My father saved £72000 in his pension, bought an annuity and sadly died before he drew a penny; if, however, ISAs had been available, that money would have gone to his wife & chidren, rather than financing plush offices at pension companies (don't forget, the abysmal level of annuities now, purportedly because people are living so much longer - some, not the majority)
Pensions are a toal con - other means needs to be found to fund retirement, because pension companies just cannot be trusted

If you ever suffer unemployment though - and it looks like most now will at some time in their life - consider the fact that any benefit entitlement will be cancelled if you have savings in ISAs, whereas Pension savings are not considered at all.

Mr Llewellyn-Smith apart, I find the comments here frightening.  Ill-informed people spouting claptrap does little service to anyone.
Pensions are vital for retirement income and everyone should have a minimum, where possible, to bridge the gap between the State Pension and the Personal Allowance - this gives tax-free income in retirement from tax-relieved contributions.  Beyond this amount, investing into an S&S ISA is perhaps preferable.
Annuities also give guaranteed income once secured.
As for Mr Burns' father, I cannot understand why he would have opted for a Single Life annuity without guarantee.  It almost makes no sense.  There would be very few situations where either a guaranteed period or a joint life annuity (or both) would not be recommended by an independent financial adviser.  Caveat emptor.
People are living longer and therefore annuity rates must come down - an issue that seems to get little publicity is the enormous future cost of GPs' (& other public sector workers) pensions in retirement - after all how can the NHS pension scheme pay a pension from age 60 to, say, age 90 after receiving contributions for just 35 yrs.
Also Quantitive Easing is having a disastrous effect on annuities and drawdown rates at present as force-buying gilts has sent yields plummeting.  We don't hear much from Gideon on that do we?

 Mr Martyn Llewllyn-Smith has certainly said enough to convince me that he would not be placed very high on my list of potential professional advisors.