It’s a question many people are asking as the cost of living keeps going up
Thursday 19 May 2022 Author: Tom Selby

Given the cost-of-living crisis is increasing bills for everyone, is it still better to prioritise pension saving if you don’t need to access the money? And once you start taking an income, does it make sense to go ISA first? Or should it be ISA and pension together to get as much tax-free as possible?


Tom Selby, AJ Bell Head of Retirement Policy says:

The cost-of-living crisis is causing households across the country to review their budgets, including how and where people save for the future.

Anyone considering reducing their savings or cutting back on pension contributions should think about the impact it will have on their longer-term aspirations. See if you can make cutbacks elsewhere.

For most people a balanced approach combining easy access cash accounts, medium-term ISA or Lifetime ISA savings (where the latter is used towards a first home purchase), and longer-term pension or Lifetime ISA savings will likely be appropriate.

How much you commit to each will depend on your personal circumstances, priorities and goals. For example, some will prioritise saving for a first home, while others might be more focused on retirement.

The starting point of a solid savings plan should be paying off any high-cost debts and building up a rainy-day fund
for emergencies. You can then start to think about pensions and ISAs.

If you’re employed, then contributing to your workplace pension should be a priority as it benefits from both employer contributions and tax relief.

Beyond this, ISAs, Lifetime ISAs or SIPPs – or a combination of all three – could be the right option depending on your income tax bracket, age and long-term goals.

It can make sense for your pension to be the last asset you touch, particularly if you’re prioritising passing money onto loved ones after you die.

Pensions are extremely tax efficient on death as inheritance tax usually doesn’t apply, and leftover funds can be inherited tax-free if you die before age 75. If you die after age 75, the funds will be taxed in the same way as income when your beneficiary comes to make a withdrawal. ISAs will count towards your estate on death.

Another priority for lots of people will be minimising the amount of income tax they pay. This could be achieved by combining pension and ISA withdrawals.

For example, a 60-year-old who has already taken their 25% pension tax-free cash who needs £15,000 of income in 2022 could withdraw £12,570 from their SIPP – the personal allowance – and take the remaining £2,430 from their ISA. This would mean, assuming they had no other sources of income, that they would pay no income tax for the year.


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Please note, we only provide information and we do not
provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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