ISAs or pensions: where to put your long-term savings
ISAs and pensions both shelter investments from income tax and capital gains tax. They differ in when you get the tax benefit, when you can reach the money and how they are treated when you die, and most people benefit from using both.
By Vince De Stefano, Head of Financial Services
Updated 26 October 2026
5 min read
Key takeaways
- Pensions give tax relief on contributions at your highest rate. ISAs give none going in but are tax-free coming out.
- Normally 25% of a pension can be taken tax-free. The rest is taxed as income.
- ISA money can be withdrawn at any time. Pension money is locked away until 55, rising to 57 from April 2028.
- From April 2027 most unused pensions will be within inheritance tax, which narrows one of their advantages.
How pensions work
Contributions to a personal pension receive tax relief at your marginal rate. If you pay £8,000, the provider claims £2,000 from HMRC to make £10,000. A higher-rate taxpayer can claim up to a further £2,000 back through self assessment, and an additional-rate taxpayer up to £2,500, to the extent the contribution matches income taxed at those rates. Taxpayers in Scotland have different rates. Employer contributions, including through salary sacrifice, also avoid National Insurance. From 6 April 2029, only the first £2,000 a year of salary-sacrificed contributions will be free of National Insurance.
You can contribute up to £60,000 a year, or 100% of your earnings if lower, with tax relief. Someone with no earnings can still pay in £2,880 a year, topped up to £3,600. The allowance is reduced for very high earners. See pension tax relief for higher earners.
How ISAs work
You can save up to £20,000 a year across cash ISAs, stocks and shares ISAs, innovative finance ISAs and Lifetime ISAs. From 6 April 2027, people under 65 can put no more than £12,000 of that into cash ISAs. There is no tax relief on the way in, but interest, dividends and gains inside the ISA are tax-free and withdrawals are not taxed. You can take money out at any time without penalty, apart from the Lifetime ISA.
A Lifetime ISA is available to people aged 18 to 39. You can pay in up to £4,000 a year, which counts towards the £20,000 limit, and the government adds a 25% bonus. Withdrawals are penalty-free for a first home costing up to £450,000 or from age 60. Other withdrawals lose the bonus and more. The government has consulted on replacing the Lifetime ISA with a First Time Buyer ISA.
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Comparing the two
- Tax relief now or later. A pension wins on tax when you get higher-rate relief going in and pay basic-rate tax coming out. If your tax rate in retirement will be the same or higher, the advantage narrows.
- Access. ISA money is available for any purpose. Pension money is not available until pension age.
- Employer contributions. Matching contributions from an employer are extra money that an ISA cannot match.
- Income in retirement. ISA withdrawals do not count as income, so they do not affect your tax band or the personal allowance. Drawing from both can keep your taxable income in a lower band.
- On death. ISAs are part of your estate for inheritance tax. A spouse or civil partner can inherit the ISA's tax-free status. From 6 April 2027 most unused pension funds will also count towards the estate.
Which to fund first
For most people, the order is: contribute enough to a workplace pension to get the full employer contribution, build an emergency fund in cash, then fund pensions and ISAs according to your tax rate and when you will need the money. Higher-rate taxpayers, and anyone with income between £100,000 and £125,140 where the personal allowance is withdrawn, usually get the most from extra pension contributions.
In retirement the order reverses into a question of which to draw first. From April 2027, that answer depends on your estate as well as your income tax. See pensions and inheritance tax.
We look at pension and ISA contributions alongside your tax return and your estate plan, so the saving that looks best this year is also best over your lifetime.
Frequently asked questions
Is a pension better than an ISA?
It depends on your tax rate now and in retirement, whether your employer contributes and when you need the money. Many people use both.
How much can I put into an ISA each year?
£20,000 across all your ISAs, including up to £4,000 in a Lifetime ISA. From 6 April 2027, people under 65 can put no more than £12,000 into cash ISAs.
Can I take money out of my pension early?
Not normally. Pension money can be accessed from 55, rising to 57 from April 2028, unless you have a protected pension age.
Are ISAs subject to inheritance tax?
Yes. ISAs form part of your estate. A spouse or civil partner can inherit an additional ISA allowance equal to the value of your ISAs.
Sources & further reading
The value of investments and the income from them can fall as well as rise, and you may get back less than you invest. Tax treatment depends on your circumstances and may change.
This article is general information, not advice. Tax, financial and legal rules change and their effect depends on your circumstances. Check the current position and take professional advice before acting. Last reviewed 26 October 2026. Totus One Limited (company no. 16855798).
An independent financial planner advising individuals and families on pensions, investments, protection and inheritance.
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