Pension or ISA?
How the tax relief and access rules differ, and a simple way to decide where to save.
The short answer
If your employer offers a pension match, take it first, because it is free money. After that, the choice depends on when you will need the money. A pension gives you tax relief going in but locks the money away until your late fifties. An ISA gives no relief going in but you can take the money out whenever you like, tax-free.
Pension
- Tax relief: money going in gets relief at your top rate. For example, £1,000 in a pension costs a basic-rate taxpayer £800, as £200 is added.
- Employer contributions: many employers add money on top.
- Access: you can usually take money from age 55, rising to 57 from 6 April 2028.
- Tax on the way out: up to 25% of the pot can usually be taken tax-free, up to a limit of £268,275, and the rest is taxed as income.
- Inheritance Tax: unused pensions are due to count towards your estate from April 2027, see Inheritance Tax explained.
ISA
- No relief going in: you pay in from money that has already been taxed.
- Tax-free growth and withdrawals: there is no tax on interest, dividends or gains, and nothing to declare.
- Access: you can usually get at it any time, which makes it better for goals before retirement. A Lifetime ISA is a special case, see the Lifetime ISA guide.
- Limit: £20,000 a year across all ISAs.
A simple way to decide
- Get any employer match first.
- Build an emergency fund in easy-access savings.
- Then split extra money by your goals: pension for retirement, where the relief is largest, and an ISA for anything you might need before then.
- Higher-rate taxpayers usually get the most from pension relief. Basic-rate taxpayers may value the flexibility of an ISA more.
Use the pension calculator and the compound interest calculator to compare.
Where to learn more
This guide is for information only and is not financial advice. A regulated adviser can help with your own circumstances.