More and more people are becoming aware of their need to save for retirement. With the government failing to provide a sufficient income in retirement for most people the realisation that we might all be stacking shelves at 80 is real and should be addressed as early as possible.

So the question is what is the best way to save for retirement? Well this really depends on you as a person. There are various different methods you can use and all have their advantages. Two of the most popular are a personal pension or an ISA.

Personal Pension Plan

• The government pays a tax rebate straight into your pension every time you make a contribution. This is an excellent way of seeing your money jump in value overnight.
• You can claim a further tax rebate via your tax return if you are a higher rate taxpayer, which makes contributions to a pension even more attractive.
• You can choose a wide variety of investments once your money is in a pension plan as long as you choose a good provider that allows you to access unit trusts, investment trusts, shares, ETFs, bonds and gilts.
• Profits made from investments inside your pension plan are totally free of capital gains tax.
• Your money is tied up until retirement age, which can be a good thing because it stops you being able to access it and running down your retirement fund so therefore helps to keep you more disciplined.
• The maximum contribution limits are quite high so are unlikely to be an issue. Currently the most you can contribute to a personal pension each year is 100% of your gross annual earnings.
• You must use your pension fund to purchase an annuity at the latest by age 75. This is a little restrictive, however until then there are various options available and more options are being developed as people are demanding better choices at retirement that suit their lifestyle.
• You can take up to 25% of your total pension fund at retirement as a tax free cash lump sum.
• An annuity will provide you with an income for life, which is simple and hassle free.
• The income you receive from an annuity will be liable to income tax.

ISA

• You can invest up to £10,200 each tax year (over 50′s only, under 50′s after 6th April 2010) into an ISA.
• There is no tax rebate available on investments into an ISA.
• Any profits made on investments within your ISA are totally free from capital gains tax.
• You can invest in a wide variety of investments as long as you open your ISA with a good provider. These include unit trusts, investment trusts, shares, ETFs, as well as bonds and gilts.
• You can access the money within your ISA whenever you like and can access as little or as much as you want to. This makes an ISA a much more flexible way to save for retirement but does not impose any discipline by forcing you to hold on to your investments until retirement like a pension would.
• You can withdraw the money from your ISA at any age and so could choose to take this earlier, say before you retire if you are looking to reduce your hours leading up to full retirement.
• You do not have to purchase an annuity when you withdraw your money from an ISA.
• Instead you could use your money in any way you like to provide you with an income for life.
• One way would be to slowly withdraw the money from your ISA which would mean no tax is payable on the ‘income’ you take.

Overall the ISA has greater flexibility when taking your money out at retirement, with the added benefit of being able to access your money at any time. You can use the money in any way that suits. However there is no generous tax rebate on investment into an ISA.

Unless you are very disciplined then the temptation to access the money invested in an ISA at some point during your lifetime might prove too strong. This is dangerous as it could significantly reduce your eventual income at retirement. So by not providing access to the money at all until you reach retirement a pension could work well for some.

The pension also provides those tax rebates when you invest new money, although it forces you to buy an annuity at retirement, the income from which would be liable to income tax.

As an added twist another popular retirement income investment to consider is property. This has become very popular over recent years with the sustained increase in house prices.

Ideally a comparison of Pension v ISA v Property would help you assess what is best for you.

In reality whichever option you decide is best for you the most important thing is that you do something. There is no reason why these options should be considered exclusive of each other. They could certainly work well together and provide you with the best of both worlds.

Please note that the considerations highlighted above do not form any sort of personal recommendation. They are intended to highlight the relative merits of each option. Please also consider that tax levels, basis and reliefs are based on individual circumstances and are liable to change.

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