Saving for Retirement

Pensions or Individual Savings Accounts (ISAs)?

4 mins

When saving for retirement, it is important to make sure that your money works as hard as possible for you. Understanding your options is key. Both pensions and Individual Savings Accounts (ISAs) are tax-efficient ways to save for retirement, but they have different rules. Here's what you need to know to decide which is best for you.

ISAs – Flexible and Tax-Efficient Savings

ISAs come in many types, each with its own rules. One of the main benefits of an ISA is flexibility. You can withdraw money from an ISA at any time, unlike pensions. However, Stocks & Shares ISAs are usually intended for medium to long-term investments (5 years or more).

In contrast, you must be 55 years old (57 from 2028) to access your pension funds. If you don't need to access your money before then, pensions offer the advantage of tax relief on contributions. ISAs do not offer tax relief on contributions.

Pensions – Boosted by Employer Contributions

If you're employed and eligible, your employer must enrol you in a pension scheme and usually contribute to it. These contributions can significantly boost your pension savings. Opting out of a pension to save in an ISA means losing out on tax relief and employer contributions.

Key Features of ISAs

  • Tax Benefits: Returns are not subject to Income Tax or Capital Gains Tax (CGT).

  • Flexibility: Withdrawals are tax-free and can be made at any time.

  • Variety: Options include cash ISAs, Stocks & Shares ISAs, and Junior ISAs.

  • Transferable: You can transfer your ISA between providers without losing its tax-free status.

  • Inheritance: ISA status can be inherited by a spouse.

  • No Additional Tax: Except for Inheritance Tax (IHT) in some cases.

Things to Consider About ISAs

  • Contribution Limit: Annual contributions are limited to £20,000.

  • No Tax Relief: Contributions do not receive tax relief.

  • Employer Contributions: Employers cannot contribute to your ISA.

  • Withdrawal Rules: Once money is withdrawn, it cannot be re-deposited (except within the same tax year).

  • Unused Allowance: Unused annual allowance cannot be carried forward.

  • Inheritance Tax: ISAs are subject to IHT unless inherited by a spouse or civil partner.

  • Restrictions: Some investment restrictions apply.

  • No Joint ISAs: ISAs cannot be held jointly or put in trust.

Key Features of Pensions

  • Tax Relief: Contributions up to £60,000 or 100% of your annual earnings, whichever is less, receive tax relief. The contribution amount is reduced to £10,000 if you withdraw taxable income from your pension.

  • Carry Forward: You can carry forward up to three years of unused Annual Allowance.

  • Tax-Free Lump Sum: 25% of your pension fund (up to a maximum of £268,275) is usually available as a tax-free lump sum after age 55 (57 from 2028). Your tax-free amount may be higher if you hold a protected allowance.

  • Tax-Free Growth: Growth within the pension plan is not subject to Income Tax or CGT.

  • Inheritance: If you die before age 75, remaining funds can usually be left to beneficiaries without IHT. After age 75, beneficiaries may have to pay tax on the money.

NB - in the 2024 Autumn Budget, it was announced that from 6th April 2027, any unused pension savings will be included in IHT calculations if your estate exceeds the tax-free thresholds – irrespective of age. These changes won’t affect anyone who has already accessed their pension savings. The details of how these changes will work in practice are still to be finalised.

Things to Consider About Pensions

  • Contribution Limits: Contributions are limited to the Annual Allowance plus any Carry Forward.

  • Access Age: Pensions cannot usually be accessed until age 55 (unless in a special profession like sports). This will rise to age 57 in 2028.

  • Tax on Withdrawals: After the tax-free lump sum, withdrawals are subject to Income Tax.

Combining ISAs and Pensions

The best approach depends on how much you can save and when you need access to your money. Using both ISAs and pensions together can help you maximise tax efficiency and grow your savings for retirement.

Please note:

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The content was accurate at the time of writing, changes in circumstances, regulation and legislation after the time of publication may impact on the accuracy of the article.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by interest rates at the time you take your benefits.

Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means-tested benefits and is not suitable for everyone. You should seek advice to understand your options at retirement.

This information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change and tax implications will be based on your individual circumstances.

FP2025-012 – last reviewed January 2025

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