When preparing for retirement it’s tempting to focus solely on your pension. And that’s understandable given the enormous benefits of doing so.
Benefits like the tax relief top up you get from the government. Or if you’re enrolled in a workplace pension the benefit from an employer contribution that can really boost how much goes in. When you come to access your pension, you even have the ability to take up to 25% of your pot tax free.
All of this, alongside long-term investment growth, and the fact your money is locked away until the age of at least 55 (rising to 57 in 2028) make pensions a hugely efficient way to prepare for retirement.
But are they the only account that can play a role in your retirement strategy, and why is it important not to forget about ISAs?
This article isn’t personal advice. Pension, ISAs and tax rules can change, and benefits depend on your circumstances. If you’re not sure an action is right for you, ask for financial advice.
How can an ISA help in retirement?
You might not benefit from tax relief or an employer contribution in an ISA, but like pensions they will shelter your money from a host of taxes.
Taxes like capital gains and dividend taxes if you’re investing in a Stocks and Shares ISA. Added to this income from an ISA is tax free, so working alongside a pension, it can help generate tax efficient income. Compare this to keeping large amounts of money in savings accounts where you might end up taxed on interest, and it seems more favourable.
Taking tax free income from an ISA is especially useful when tax thresholds are frozen as you can use the tax-free income to keep yourself under tax thresholds.
How much can I put in an ISA?
You can make use of both Cash ISA and Stocks and Shares ISAs depending on your needs. Everyone has a £20,000 annual allowance that they can spread across all types of ISAs if needed or stick to just one like a Cash or Stocks and Shares ISA.
It’s worth remembering that from April 2027 people aged under 65 will be restricted to annual contributions of just £12,000 per year into a Cash ISA. But allowance for a Stocks and Shares ISA remains the same. If you’re over 65 you can still contribute £20,000 to a Cash ISA.
Building up your ISAs also gives you a source of money that you can call on during your working life if you need to. Since a pension cannot be accessed until at least age 55, if you needed money earlier, then your pension is off limits. Having access to an ISA can give you much needed flexibility in managing your money and can play an important role in building up your long-term financial resilience alongside your pension.
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