ISAs versus pensions: weighing up the tax breaks

By Jennifer Hill

LONDON (Reuters) - ISAs and pensions are top of the tax-efficiency tree, but which is a better way to save for retirement?

In simple terms, the pension investor enjoys tax relief on contributions and investment growth, but pays tax on the income withdrawals. An individual savings account (ISA) investor makes contributions out of taxed income, enjoys tax relieved investment growth and is able to withdraw funds free of tax.

There are, however, important nuances that complicate the choice between them:

Contribution limits

Up to 7,000 pounds can be saved in an ISA per year. Up to 100 percent of income up to an annual limit of 225,000 pounds can be stashed in a pension.

Access to capital

Access to cash is one of the key pro-ISA arguments.

Investments in ISAs do not show up on the taxman's radar: consumers are free to withdraw capital or income at will -- without having to even report it, let alone pay tax on it.