As I can't save much into a pension, is it better to put the money in an Isa?

26 May 2015


I am 34 and am not working at the moment, as I am on benefits after having two bone marrow transplants and two hip replacements. My health is improving and I plan to look for a part-time job this year but I am worried about my retirement. I have a small pension from a previous job that has not been paid into for two years. Am I best starting a private pension? I can only save about £100 a month and will not earn much working part-time. Or would it be better to save my money in an Isa?


If you are not earning enough to pay income tax, you can still receive tax relief at 20% on pension contributions up to a maximum of £3,600 a year.

That means if you pay in £2,880 into your pension and the pension scheme applies to HMRC to add tax of £720, the total contribution comes to a figure of £3,600. Earnings in this case are defined as including employment income. If you pay in higher amounts than £2,880, and still have the same earnings, you won't receive tax relief on the excess amounts.

It's good to remember that you may have to repay any tax relief that you have received from HMRC on these excess contributions.

Assuming your earnings are below the personal allowance of £10,600 and you pay in £2,400 into your pension, the government will add £600 to your contributions, bringing it to a total contribution of £3,000.

Assuming your funds grow over a period of 20 years or so, this contribution from the government is likely to add a favourable boost to your pension pot and such relief isn't available with an Isa.

But bear in mind that you cannot access your pension until at least 55, while Isas are often a better choice for those who wish to access their funds earlier as you can draw on them at any age. Assuming you pay tax at the basic rate when you start drawing your pension, your pension income will be subject to tax but your Isa income won't be.

Your pension pot does not affect your entitlement to state benefits whereas an Isa counts towards savings, and these can affect your entitlement to certain means-tested benefits.

David Wesley-Yates is a chartered tax adviser at Red & Black Accountancy