Saving for your retirement: Pension or ISA

With talks about the new national pension scheme that is set to change pensions as we know it, pensions are on everyone's lips at the moment. But have you thought about what is the best option for you?

It has been calculated that many of today's 30 year olds could live to their 90's or even 100. This will be a nice long retirement, but you will have to save more money to be able to fund the retirement lifestyle you have dreamed of. How will you pay for it?

Depending on your circumstances there could be a better option than the standard government pension. Personal ISA's could be another way of helping you generate income for your retirement. Read the pro's and con's for each and see which could suit you better.

Pensions

• A state pension starts when you begin work. The minimum age you start to 'pay' into your pension fund is 16 and the maximum is 65 for men and 60 for women (but this will soon be changing). The state pension provides a guaranteed monthly payout during retirement and many people rely on this as the main way to fund themselves during their retirement years.
• You can top this up with a personal pension scheme or company scheme through your work. At present you can pay up to £225,000 per year into a pension fund.
• It has good tax benefits as it also entitles you to take 25% of your pension before having to pay tax back.
• The disadvantages to drawing an income on a pension are that pensions are taxable after the initial 25%.
• There are also big tax penalties in place if your pension is passed on to an heir - up to 82% in some cases.
• Future changes will include an increased age before you can draw on your pension and a mean's tested pension too.

ISA's

Some financial advisors reckon drawing a retirement income from an ISA (Individual Savings Account) is the better option.

• ISA's have similar tax breaks to pensions.
• It is easy to pass onto your family when you die and there are less hefty penalty fees.
• It is a cheap way to save and invest, is flexible and easy to set up.
• It is tax-free forever.
• Your money isn't locked away at all so you can draw on an ISA anytime you want. Although some people may find this a disadvantage.
• It is a riskier practice, if you exceed your life expectancy, you may not have enough funds to cover your extra years.
• You can only input £7000 tax-free into it per year.

Research has shown that in most cases pensions beat ISA's hands down in terms of a retirement fund, but not in every case as each individuals circumstances differ. That is why we always recommend how important it is to seek professional, independent advice from a financial advisor before making any serious decisions.