A pension and an ISA are both tax wrappers for long-term money, but they’re taxed at opposite ends: a pension gets tax relief going in and is taxed coming out, while an ISA gets no relief going in and is tax-free coming out. The other differences, employer money and when you can reach it, usually decide which to use.
The comparison
| Pension | ISA | |
|---|---|---|
| Going in | Tax relief at your highest rate of Income Tax; in a workplace pension, often employer contributions too | No tax relief |
| Limit | Relief on up to 100% of your earnings, within the £60,000 annual allowance | £20,000 a tax year |
| While it’s invested | No tax on growth | No tax on interest, income or growth |
| Access | Usually from 55 (57 from 6 April 2028) | Any time (the Lifetime ISA has its own rules) |
| Coming out | Usually 25% tax-free (at most £268,275 across all your pensions); the rest taxed as income | Tax-free |
| Inheritance Tax | Most unused pension funds count towards the estate from 6 April 2027 | Counts towards the estate |
How the tax relief compares
In a relief-at-source pension, your provider claims basic rate relief and adds it to your pot: £80 you pay becomes £100. If you pay a higher rate of tax, you can claim more back. An ISA has no relief, but nothing is taxed when you take it out.
Worked example: £1,000 of pay, for a basic rate taxpayer. Into an ISA, after 20% tax, £800 goes in and can all come out tax-free. Into a relief-at-source pension, the same £800 becomes £1,000. When it’s taken out, 25% (£250) is tax-free and the other £750 is taxed as income: at 20% that’s £150 of tax, leaving £850. (Scotland has its own Income Tax bands, so a Scottish taxpayer should check the example against the Scottish rates.) So before any employer contribution, the pension leaves more, as long as you pay no more than basic rate tax in retirement; with an employer contribution, the gap is larger.
When the ISA is the better choice
- Money you’ll need before pension age: a house deposit, a car, or a cushion for a career break. A pension usually can’t be touched until 55.
- When you expect to pay more tax in retirement than now, which cancels much of the relief.
- Flexibility in retirement: ISA withdrawals don’t count as income, so they don’t push you into a higher tax band.
Salary sacrifice
Salary sacrifice means agreeing to give up some pay in return for a non-cash benefit from your employer, such as a bigger employer pension contribution. It can save tax and National Insurance, but it only works for benefits your employer provides, so there’s no salary sacrifice into an ISA: you pay into an ISA from your take-home pay.
Using both
A common order, if you’re employed:
- Pay enough into your workplace pension to get the full employer contribution.
- Keep an emergency fund in easy access savings.
- Use an ISA for goals before retirement, and a Lifetime ISA if you’re saving for a first home and qualify.
- Put extra retirement money into the pension if you pay higher rate tax now, or the ISA if you want the flexibility.
Related guides
- ISAs guide: the ISA types, the allowance and the main choices in one place
- Lifetime ISA guide: LISA or pension for later life
- Pension planning: how much to save for retirement
- ISA calculator: what regular ISA payments could grow to