The money that’s left over after all of your bills and expenses is yours to do whatever you wish with – but instead of squandering it on short term spending, it’s important to squirrel at least some away for the future.
If your not a seasoned saver then deciding how to save can be tricky, and lots of people find themselves wondering which option suits their needs best.
Today we’re going to look at long-term savings: money that you want to put away not just for a rainy day, but for the distant future when you’re no longer working and relying on a pension. If you’re looking to save for a specific purchase like a house, or you want your money to be readily accessible in case of emergency, then some of this information might not apply to you. The two options we’re comparing are pensions and ISAs. Let’s take a look at some of their best qualities.
Those lucky enough to work somewhere with a generously matched contribution scheme will probably benefit most from upping the contributions that are paid into their workplace pension. A matched contribution is when your employer agrees to pay into your pension at the same rate as you do, up to a certain percentage of your salary. For instance, if you pay in 5% of your salary, then they will also pay in a sum equivalent to 5%. Some employers will even pay in at a higher rate, to encourage their employees to put more away and ensure that their team are looked after in retirement.
This is effectively free money; you probably don’t want to turn it down! If you don’t know how much your bosses will match, the HR team can probably point you in the right direction – it also may be written in your contract.
Both pensions and ISAs have benefits when it comes to tax, one of the reasons that they’re so popular. Either type of saving will keep your money safe from capital gains and dividend tax. Pensions have an added benefit: contributions are made before income tax, which is not the case for ISAs. In practice, this means that the government pays the tax eligible on that portion of your income into your pension fund.
While this does mean that your fund can grow faster, it’s also worth noting that when you come to draw on your pension only the first 25% will be tax-free. An ISA, on the other hand, is totally tax free when it comes to withdrawing your money. The tax rules around an ISA can also be simpler, so if you want to keep things as easy as possible then that might be another point in its favour.
You have lots of options for how you want to invest your pension, and if you’re new to investing but want to have some input into your fund then your pension provider should explain the choices. However, the options can start to look limited when compared to what an ISA offers. If you’re somebody who wants to become active in investing, then an ISA will allow you to choose how to invest. You can also consider investing in ethical funds if you want to ensure that your money is having a positive impact on the world.
As you can see, an ISA gives you more control over your money, but a pension may well yield greater results long-term. Deciding which way to save comes down to your personal preferences. Just remember that locking your money away in a pension will stop you from accessing it if you need it in an emergency.