ISA vs Pension: Where Should Your Next £ Go?

Two wrappers, opposite tax timing

An ISA and a pension can hold exactly the same investments. What differs is when the taxman takes his cut — and that timing difference is worth tens of thousands of pounds.

ISA: you contribute money that has already been taxed. From then on, nothing: no tax on growth, no tax on withdrawals, no forms, no waiting. Up to £20,000 a year, accessible at any age, for any reason.

Pension: you contribute money before income tax — the government tops your contribution back up to its pre-tax value ("tax relief" at 20%, 40% or 45%, matching your tax band). Growth is tax-free inside. On the way out, from age 55 (57 from April 2028), you can take 25% of the pot completely tax-free, and the rest is taxed as income when you withdraw it. The annual limit is £60,000, and for personal contributions no more than you earn.

So the contest is: pension takes a bigger starting amount and a taxed exit; the ISA takes a smaller starting amount and a clean exit. Who wins depends overwhelmingly on two things — your tax rate today, and your tax rate in retirement.

The worked example: £10,000 of gross pay

Take £10,000 of gross salary and follow it down both paths for 25 years at 6% growth (£10,000 grows to £42,919 over that span). Through a pension — ideally salary sacrifice at work — the whole £10,000 goes in untaxed. Through an ISA, the money must first survive tax and National Insurance to become take-home pay, so less goes in.

*Pension "keep" figure: 25% of the pot (£10,730) tax-free, the remaining £32,189 taxed at 20% in retirement (£6,438 of tax), leaving £36,481. It assumes a basic-rate retirement; your mileage depends on your actual retirement income.

The pension wins every row — by £11,588 against the higher-rate ISA and by £2,146 even in the closest comparison. Three separate advantages are stacked inside that result, and it helps to see them individually, because each can disappear in the wrong circumstances:

• The relief itself. £10,000 gross became £10,000 invested. The ISA investor needed to earn £10,000 and surrender £2,000–£4,200 of it first.
• The National Insurance saving. Under salary sacrifice, pension contributions dodge employee NI (8% for basic-rate, 2% for higher-rate) as well as income tax. The ISA route pays NI in full, forever, with no way back.
• The 25% tax-free slice. A quarter of the pot escapes tax entirely — money that was relieved at 20–45% on the way in and taxed at 0% on the way out. That asymmetry alone explains most of the closest row's gap.

See it with your own numbers

Everything above, live. Change the numbers to match your own situation:

Prefer the full-screen version? Open the UK Pension Calculator →

So why does the ISA exist in anyone's plan?

Because the table above prices only tax, and tax is not the only variable:

• Access. Pension money is locked until 55 (57 from 2028). Retiring at 52, funding a career break, or bridging the years between stopping work and reaching pension age — all of that needs ISA money. A retirement plan that is 100% pension can be rich and stranded at the same time.
• The annual allowance can run out. High earners and big contributors hit the £60,000 pension limit (and it tapers down further at very high incomes). The ISA's £20,000 is separate room that never interacts with it.
• Your retirement rate might be higher, not lower. The pension's edge assumes you withdraw at a lower rate than you contributed at. A saver with a small income now and a large pension later — or one who expects tax rates to rise — can find the comparison flipped.
• Certainty. ISA rules have been stable and simple for 25 years; pension rules change with governments. Some savers happily pay a small expected-tax premium for money nobody can legislate a lock onto. (Under-40s have a middle path: the Lifetime ISA adds a 25% government bonus on up to £4,000 a year — pension-like subsidy, ISA-like wrapper, with withdrawal charges if used for anything but a first home or retirement after 60.)

A wrinkle on the way out: your allowances stack up

One refinement before the pecking order. Our worked example taxes pension withdrawals at a flat 20%, but real retirements are layered. A full new State Pension pays roughly £12,000 a year, and the personal allowance is £12,570 — so the State Pension alone nearly fills your tax-free band, and pension withdrawals on top are taxed from almost the first pound. That slightly weakens the pension versus the naive comparison. The counter-move is timing: in the gap years between retiring and the State Pension starting, your personal allowance sits empty, and pension withdrawals of up to £12,570 a year (plus the 25% tax-free slice on top) can come out with little or no tax at all. Drawing the pension before the State Pension arrives, and leaning on the ISA later, is the kind of sequencing that turns the same two accounts into a noticeably bigger retirement income — and it is only possible if you built both wrappers along the way.

The order most people should fill them

Tax maths aside, there is a practical sequence that falls out of everything above:

• 1. The employer match, in the pension, always. If your employer matches contributions, contribute at least enough to collect all of it. It is an instant 100% return before tax relief even enters the picture — on a £40,000 salary with a 5% match, that is £2,000 a year, which alone grows to roughly £110,000 over 25 years at 6%.
• 2. Pension for higher-rate taxpayers, while the 40% relief lasts. Relief at 40% (or 45%) against withdrawals likely taxed at 20% is the widest gap the system offers.
• 3. ISA for flexibility and for money needed before 57 — and, for basic-rate taxpayers without salary sacrifice, the race is close enough (£36,481 vs £34,335 in our example) that the ISA's freedom is a legitimate tiebreaker.
• 4. Pension again with what's left, up to the annual allowance, as income rises.

Run the pension half of the comparison with your own salary and contribution rate in the calculator above — the right split is a personal number, but for most working savers the answer is "pension first for the tax breaks, ISA alongside it for the freedom," in proportions set by how soon you might need the money.

Allowances and rules: UK 2026/27 tax year — ISA allowance £20,000; pension annual allowance £60,000; tax-free lump sum capped at £268,275 (the cap binds on pots above about £1,073,100); normal minimum pension age 55, rising to 57 on 6 April 2028. Worked examples assume 6% growth for 25 years, a 20% tax rate on pension withdrawals above the tax-free slice, and ignore the personal allowance, which would improve the pension figures slightly.

Frequently asked questions

What are the 2026/27 allowances?

You can put £20,000 a year into ISAs, tax-free in and out, accessible any time. Pensions allow up to £60,000 a year (capped at your earnings for personal contributions) with tax relief at your marginal rate — but the money is locked until age 55, rising to 57 from April 2028.

Why does the pension win in the worked examples?

Three stacked advantages: tax relief adds 20–45% on the way in (plus National Insurance savings under salary sacrifice), 25% of the pot comes out tax-free, and most people pay a lower tax rate in retirement than while working. Together they beat the ISA's clean tax-free growth in most like-for-like comparisons.

When is an ISA better than a pension?

When you need the money before pension access age, when you have already used your annual allowance, when you expect a higher tax rate in retirement than today, or as a bridge fund for retiring before 57. Flexibility is the ISA's superpower — the pension's lock-in is the price of its tax breaks.

What about the employer match?

Take it first, before either account. If your employer matches 5% of a £40,000 salary, that is £2,000 a year of free money — left invested for 25 years at 6%, the employer's contributions alone grow to roughly £110,000. No tax break on any account beats a 100% instant return.

Is there a cap on the pension tax-free lump sum?

Yes. You can usually take 25% of your pot tax-free, but only up to £268,275 — which means the cap starts to bite on pots above roughly £1,073,100. Below that, the full 25% is available; above it, the excess is taxed as income when withdrawn.

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