Pensions vs. savings: which is best for your money?

There are many ways to put money away, but are you better off sticking with savings or placing funds in your pension?

Putting money into savings or pensions, said Flagstone, “helps grow your wealth for the long term”. And while pensions provide “generous tax breaks”, said MoneySuperMarket, they aren’t as “flexible” as savings accounts. So how do you decide which is “best for your nest egg”?

Pros and cons of pensions

You can get a pension through your workplace or set up your own self-invested personal pension to manage the pot yourself.

Pensions have “valuable tax advantages”, said PensionBee, including tax relief on money you put in as well as employer contributions on workplace schemes, but the money can’t be accessed until you are 55 – and this is rising to 57 in 2028.

Once you hit the minimum age, 25% of your pension savings can be taken tax-free, said MoneyHelper, which you are “free to spend or save in any way you like”.

Up to £60,000 can be put into a pension each year, said GoCompare, and the money is invested in the stock market so there is “no limit to how much your pension investments can grow”, depending on the performance of financial markets.

Additionally, earnings in your pension are tax-free and you only pay tax once you start making withdrawals.

The earlier you start “the more your fund can grow”, said Flagstone, but as with all investing, “you can lose your money”.

Should you stick with savings?

Relying on a pension, said GoCompare, means you won’t have “easy access to money in the short-term”.

In contrast, you could put money into a savings account to set funds aside for “the future, for emergencies or to buy expensive purchases like a new car or a holiday”, said Citizens Advice, plus you will earn interest on your money.

Savers can choose from easy access, regular saver or fixed accounts. Many let you “access your cash whenever you like”, said MoneySavingExpert, but some versions such as notice accounts or fixed rates may have restrictions.

There is also a personal savings allowance of £1,000 for basic rate taxpayers and £500 for those on the higher rate.

Unlike pensions, said MoneySuperMarket, savings accounts have “no age-related restrictions” plus interest can be earned tax-free through a cash ISA, which makes them an “appealing option for many savers”.

Up to £20,000 can currently be placed into a cash ISA and also into a stocks and shares ISA. An ISA can be beneficial, said LV=, for those with “shorter- to medium-term goals”, or “people who value flexibility and access to their savings”.

Many savers have benefited from high interest rates in recent years, said MoneyWeek, but if your savings are outside an ISA and above the savings allowance, your returns can easily be “eroded away further by tax and inflation”.

Benefits of both pensions and savings

Pensions will provide a “much higher return” than cash savings, but you won’t have access to it in the short-term and there is tax on withdrawals, unlike taking money from an ISA. The “real answer” is that you can have both.

The “ideal approach”, said GoCompare, is to “take advantage” of the benefits of both pensions and savings.

You could combine the tax relief and employer contributions that you get with a pension with the “flexibility and accessibility” of savings and tax-free withdrawals from an ISA to build a “balanced financial future”.