The government offers a number of tax efficient ways for us to save our hard earned cash. The two most popular are an ISA and a pension. However, it is sometimes difficult to decide which option to go for. It is worth mentioning that you can (and should) have both, however, deciding when and where to put your money can be the tricky part.

ISA

An ISA essentially has two components; cash, and stocks and shares component. In this tax year the Chancellor has increased the limit to £10,200. A cash ISA is pre-dominantly used to replace a conventional savings account where funds do not exceed £5,100 (in this tax year). On the other hand, a stocks and shares ISA allows you to invest in a range of investment options with the remainder of the allowance. Although, any interest earned from an ISA is tax-free there is no tax relief paid up front. One of the main benefits is the fact that the money isn’t tied up - i.e. you can opt to cash in your ISA at any point.

To sum up ISA’s and Pensions both offer good ways to save for the future as they offer the same tax benefits on the funds accumulated. The major differences between the two is in the time horizon and reason for investment – which is largely a personal investment decision. As an ISA allows you to cash in at any point compared to a pension where your funds are tied until retirement, the first option should be used when looking at the short to medium term. While on the other had a pension is important to offer you a stable income upon retirement. A balance between the two options may be good strategy as they are by no means mutually exclusive.