A lot of what you read about ISAs and pensions often talks about large sums of money and this can make people feel daunted by the whole market, possibly putting people off.
In fact, if you take manageable sums of money, but think about saving them regularly into a cash ISA, this can be the key to getting into a sensible savings habit.
Increasing the amount you save each month by just £5 can have a dramatic affect on what you have in your pot over the years, according to research carried out by Fidelity.
To your everyday life, that £5 could mean the difference between packing your lunch for a couple of days a month rather than buying it, but over twenty years, that small amount could have amassed to a staggering £1,813.40 if you had put it away in an ISA, based on a 5% interest return.
If you are a little more affluent at the end of the month and are able to save a larger amount then you can make an even bigger impact on your savings. If you can stash away £50 a month, after 20 years you could have saved £18,134.08 and in 30 years a massive £34,090.55.
Mark Till, head of personal investing at Fidelity, comments: "Every little helps when it comes to saving. There's a misconception that savers need to have large amounts of spare money to make the most of their ISA allowance each year. But in fact, it's often wiser to split your contributions over time.
"Savers should think carefully about how much they could gain from increasing their monthly ISA payments. An extra fiver per month could mean an extra £727.38 over ten years for your ISA savings pot. For many savers, this increase of £1.25 per week would be well worth it."
This could be a good way to get a sizeable pension pot amassed. ISAs are a long-term, tax efficient way of saving and they offer much more flexibility than pensions, although, you should bear in mind that pensions still offer the best tax breaks as the investments you make are taken from your gross income, before any tax is deducted.
ISAs can be a good way to supplement your pension, so you don't have all your eggs in one basket, and a mixture of investment plans could be the answer to both profitability and flexibility.
If you were serious about relying solely on ISAs for your pension pot then you would need to be investing the full amounts into both cash and stocks & shares ISAs, as Andy James, head of retirement planning at Towry, explains: "While many will rightly be seeking to use this ISA season in order to ensure they have used their full allowance this tax year, in reality getting the best possible returns means maximising your cash and stocks & shares ISAs as soon as possible in the new tax year. That means that from Sunday 6 April onwards, you should seek to put as much money into your ISA as you can right at the start of the 2014-15 tax year, maximising both your allowance and investment returns."
This means you would need to review your willingness to take on a level of risk, as stocks & shares ISAs, although often offering excellent returns, can also go down and there is the possibility of getting out less than your initial investment.
With current rates on cash ISAs so low, you may want to look into stocks & shares and research from Fidelity shows how ISAs can offer realistic returns. They found that a couple paying into ISAs over the last 20 years would have saved £331,760 if both has maximised their full ISA allowances each year and made no withdrawals. If the couple had managed to get 6% annual returns over the years their combined ISA portfolio would be worth £639,760.40.
James adds: "If you are thinking about funding your retirement, pensions are the most tax-efficient savings product, as the investments you make are taken from your gross pay prior to any tax being deducted. But there are restrictions – you cannot take any money out tax-free before the age of 55, and even then you are only entitled to 25 per cent of your savings in cash. It depends therefore on your lifestyle objectives and current financial needs as to which is the best savings product for you at any one time. However, it is clearly advantageous to maximise both ISA and pension as much as you can, due to the tax-efficient nature of both products.
Do your monthly budget to see where you could make some savings and then put that away in a cash ISA
If you are happy with a level of risk take a look at stocks & shares ISAs
Have a look at our retirement guides to make the right pension choices for you
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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