In 30 seconds
- Basic-rate taxpayer now and in retirement: a pension gives back about 6% more than an ISA.
- Higher rate now, basic rate later: about 42% more.
- Basic rate now, higher rate later: the ISA wins by about 12.5%.
- Any employer contribution tips the balance firmly towards the pension. ISAs win on flexibility: access at any age.
Key figures
The short answer
For money you won't need until your late fifties, a pension usually wins, because of tax relief on the way in and the 25% tax-free part on the way out. An ISA wins on flexibility: you can take your money out at any age, tax-free, for any reason.
The details decide how big the pension's advantage is, and in one common case it disappears.
How each one is taxed
| Pension | ISA | |
|---|---|---|
| Going in | Tax relief added: £80 becomes £100, more for higher-rate taxpayers | No relief: you pay in from taxed income |
| While invested | No tax on growth | No tax on growth |
| Coming out | 25% usually tax-free; the rest taxed as income | All tax-free |
| Earliest access | 55, rising to 57 in April 2028 | Any time |
| Yearly limit | £60,000 (or 100% of earnings) | £20,000 |
| Employer contributions | Often yes | No |
The maths: £1,000 from your take-home pay
To compare fairly, imagine you have £1,000 of take-home pay to save, and both options grow at the same rate. We show what you get back for every £1,000 the ISA would give you, depending on your tax rate now and in retirement.
| Your tax rate now, then in retirement | Goes into pension | Pension gives back | ISA gives back | Pension advantage |
|---|---|---|---|---|
| Basic now, basic later | £1,250 | £1,062 | £1,000 | +6% |
| Higher now, basic later | £1,667 | £1,417 | £1,000 | +42% |
| Higher now, higher later | £1,667 | £1,167 | £1,000 | +17% |
| Basic now, higher later | £1,250 | £875 | £1,000 | −12.5% |
| No tax now or later | £1,250 | £1,250 | £1,000 | +25% |
Three things stand out:
- Paying higher-rate tax now and basic rate in retirement is the sweet spot. Most people's income falls when they stop working, which is why pensions are usually the better deal.
- Basic rate now and higher rate later is the one case where an ISA beats a pension. It is uncommon, but it can happen if you build a very large pension or have a big final salary pension too.
- Employer contributions change everything. If your employer matches what you pay, the pension is far ahead in every row. Never turn down a match to use an ISA instead.
When an ISA makes more sense
- You may need the money before 57. An emergency fund, a house deposit or bridging an early retirement belong in an ISA or savings.
- You want to retire early. ISAs can pay your bills from, say, 52 until your pension becomes available.
- You are already near the limits. If you have used the £60,000 annual allowance or are close to the £268,275 lump sum allowance, ISAs are the next place.
- You expect to pay more tax in retirement than now. See the fourth row of the table.
The Lifetime ISA: a bit of both
If you are 18 to 39, you can open a Lifetime ISA. You can pay in up to £4,000 a year, and the government adds a 25% bonus, up to £1,000. You can take the money out tax-free from 60, or earlier to buy a first home.
The catch: withdraw for any other reason before 60 and you pay a 25% charge, which takes back more than the bonus. You can pay in only until you turn 50.
On the same £1,000 from take-home pay, a Lifetime ISA gives back £1,250 at 60, all tax-free. That beats a personal pension for a basic-rate taxpayer (£1,062 in our table), but not a workplace pension with an employer match. For a higher-rate taxpayer, a pension usually wins (£1,417 if you pay basic rate in retirement).
Does inheritance change the answer?
Until now, pensions also had an inheritance advantage: most unused pensions passed outside inheritance tax, while ISAs never did. From 6 April 2027 that advantage largely goes, because most unused pensions will count towards the estate too. See pensions and inheritance tax from 2027.
For most people the main reason to choose between them is still the same: tax relief and employer money versus flexibility.
A sensible order for most people
- Pay enough into your workplace pension to get the full employer match.
- Keep an emergency fund in cash you can reach quickly.
- If you pay higher-rate tax, put more into your pension and claim the extra relief. See pension tax relief explained.
- Use an ISA for money you might need before 57, or once your pension contributions are where you want them.
Your own order may differ. If you are unsure, free guidance from MoneyHelper is a good place to start.
See the tax relief on your own pension contributionsFree, no sign-up, nothing you type leaves your browser.
Open the calculatorCommon questions
Can I have both?
Yes. Most people benefit from both: a pension for long-term retirement saving and an ISA for flexibility and money needed before 57.
Is a stocks and shares ISA riskier than a pension?
Not in itself. Both are wrappers. The risk depends on what you invest in inside them.
What about the tax-free cash cap?
The 25% tax-free part of pensions is capped at £268,275 in total. Above that, all pension withdrawals are taxed, which reduces the pension's advantage.
Sources
This guide is general information, not personal financial advice. Rules can change and your situation may differ. For free, impartial help, contact MoneyHelper, or speak to a regulated financial adviser.
