EQ Individuals | Pension or ISA – which is best?

Pension or ISA – which is best?

At age 55 Dave earns £95,000 per annum and makes a £20,000 (net) pension contribution and a £20,000 ISA contribution.

Both investments grow at 2.5% per annum in real terms (meaning 2.5% above the rate of inflation and net of charges) over 10 years.

On ceasing work at age 65 Dave decides to draw both investments as a lump sum. As he has other income, he is a Basic Rate taxpayer.

Values in plan		Exit values		Pension advantage
Pension*	ISA	Pension**	ISA	Pension advantage
£32,802	£26,241	£27,881	£26,241	£6,640

*Includes £5,000 tax relief claimed through his tax return when he made the original contribution

**25% tax free cash with balance taxed at 20%

If Dave was a 40% taxpayer in retirement, the additional return provided by the pension would be reduced to £1,720.

Pension or ISA – which is best?