ISA or Pension – Why Not Benefit From Both?
What’s Better: Investment in an ISA or Pension?
It might strike you as something of an odd question, as they are fundamentally different methods of saving or investing towards your future – and therefore it isn’t all that easy to make a direct comparison. One major commonality, however, is that both the ISA and pension offer investors a tax efficient way to grow their money. The government awards tax relief on pension contributions and different types of ISAs to incentivise people to save more. So, if you’re trying to work how to get the most bang from your buck, don’t limit your savings to either an ISA or pension. Rather, consider how ISAs can support and build on your pension pot.
But if you have money to invest and are struggling to decide between paying extra into either your ISA or pension, here are some important points to consider.
ISA vs pension: the pros and cons
If you don’t need to access your savings or investments before you turn 55, then a pension is very likely your best option. The good thing about a pension is that your employer can make a contribution towards it, boosting your returns with what can be seen as ‘free money’. Of course, to maximise the benefits of your pension – including the employer contribution – you need to pay as much as you can into it.
It’s possible to invest directly into your pension via a peer to peer lending platform. The House Crowd accepts investments from Small Self-Administered Scheme (SSAS) pensions. Self-contributed pensions are increasingly popular in the UK due to their flexibility. However, the SSAS pension option is mainly for limited companies and partnerships, specifically for directors, senior employees and family members.
Another self-contributed option is the Self-Invested Personal Pension (SIPP). It’s a, do-it-yourself pension plan that is ideal for people who want to take control of their money down to the last penny. It does require personal time and attention but, on the upside, you know where your money is at all times.
While SSAS and SIPPs offer potentially good savings, they don’t cater to everyone’s tastes. That said, people can’t necessarily rely on the state pension alone: it’s simply not enough to ensure a comfortable retirement.
This is where ISAs can provide a much-needed savings or investment boost. They definitely offer the most flexible form of tax advantaged savings or investments in that you don’t have to pay tax on the returns. With an ISA, you can access your money at any age, while a pension prohibits any withdrawal until you’re 55 or over. Although it’s worth noting that depending on your provider and type of ISA, you might be charged for an early withdrawal.
Cash ISAs are relatively simple and very secure, which still makes them the most popular type of ISA at the moment. However, they don’t deliver particularly exciting returns and inflation could erode paltry interest rates. For those not adverse to some risk, stocks and shares ISAs can yield higher returns, but there are no guarantees as these will fluctuate with economic volatility.
Fortunately, there is a new kid on the block that may offer an alternative to both of the more traditional types of ISAs.
Introducing the Innovative Finance ISA (IFISA)
The Innovative Finance ISA (IFISA) is a peer to peer lending ISA that broadens your ISA options to maximise your investment. The House Crowd’s IFISA offers you the potential to earn 7%* interest tax-free every year on an investment of up to £20,000, over a minimum investment period of three years. It offers better rates than cash ISAs and less volatilitythan the stock market.
Of course, the IFISA is not % risk-free. As with any investment there is some risk – but a diverse investment portfolio spreads that risk, reducing the impact upon your money from unexpected downturns or borrower defaults. An IFISA gives you access to FCA-regulated peer to peer lending and tax-free interest in return.
At The House Crowd, our secured peer to peer lending platform assists property owners and developers with bridging loans. These loans (your investment) are secured with a legal charge over the borrower’s property asset.
Investing for the future
The best approach to saving for your retirement is to choose an ISA and a pension, not an ISA or pension. To secure your financial future, work out a plan that allows you to benefit from both. We would always recommend maintaining a diverse portfolio of investments.
For more information about peer to peer lending in the property market, as well as to discuss IFISAs and investing in your pension via peer to peer lending in more detail, contact The House Crowd today.