Pensions vs ISAs: Which should I use for retirement?

Pensions and ISAs are both popular savings vehicles, partly because of the tax benefits they receive. Pensions are, of course, meant for retirement so are suited for saving over a longer period of time. They also have restrictions on when they can be accessed. ISAs, on the other hand, are more general, but have different features to a regular savings account. So what’s the difference between the two, and which should you have?


The minimum age that money can be withdrawn from a private pension is 55, at which point many people are able to take up to 25% of the fund as tax-free cash. Earlier this year, revolutionary new rules took effect and it is now possible for people to empty their fund from the age of 55. After the 25% tax-free cash, withdrawals are subject to the person’s marginal rate of income tax.

Pensions benefit from tax relief on contributions and growth, and workplace schemes often include employer contributions, all of which can provide a big boost to the fund size, as the following example shows:

Your contribution


Tax relief for a 20% taxpayer

Employer contribution £100
Total £200

There are, however, limits. The annual allowance is the amount that can be contributed into a pension each year and still receive tax relief; this is currently set at £40,000.

The recent changes also scrapped the death tax, which previously meant a 55% tax could be applied when a person died. Under the new rules, if a person dies before the age of 75 the beneficiary receives the fund completely tax free, and if the person dies after the age of 75 the beneficiary will pay their marginal rate of income tax on any withdrawals.

As pensions are held outside of a person’s estate, they are exempt from inheritance tax if claimed within two years.


An ISA is a tax-efficient savings option for either the long or short term, so they are popular for retirement savings as well. There is no tax relief on contributions, but growth is not subject to capital gains tax and withdrawals are tax free. ISAs received various changes last year, including an increased annual allowance, removal of restrictions on how much cash could be held, and the ability to transfer between cash and stocks and shares as often as wanted. For the 2015/16 tax year, up to £15,240 can be saved into an ISA.

Although the interest rates for cash ISAs can be lower than on standard savings account, their benefit is in the tax-free growth and withdrawals. Interest earned in a standard savings account can be subject to tax, so they are not always efficient ways of saving; they also do not permit investments with stocks and shares.

To open a standard ISA you need to be at least 16 years of age for a cash ISA or 18 for a stocks and shares ISA, but junior ISAs can be opened on behalf of children. These can be an excellent way of saving for their future, such as tuition fees or a house deposit, but it’s worth remembering that on their 18th birthday they are legally entitled to the money and can spend it how they wish – which may be something different to what you had planned. They are still worth consideration, but there are other ways to save for your child’s future.

There is no minimum age to access an ISA, so it’s possible to dip into them as needed – but the tax relief on growth makes them a useful part of retirement planning too. There are no restrictions on how much money can be stored in an ISA.

ISAs are held inside of a person’s estate, but a recent change means the tax-free status is passed on to the spouse or civil partner, so the savings are still exempt from capital gains tax.

Which is right for you?

The following table gives a quick summary to some key features of pensions and ISAs:

  Pensions ISA's

Available for children

Age restrictions to access the funds

Held inside an estate

Tax relief on contributions

Tax relief on growth

Can hold cash and/or shares

Can be left to beneficiaries

Suitable for short-term savings

Suitable for long-term savings

Both products are excellent savings platforms, and many people choose to have both. Your own goals and situation may make one more or less appropriate than the other, but it’s not easy to say whether one is better or worse.

Call 0800 304 7288 for a friendly chat about your pension

Important Information

Tax treatment depends on your individual circumstances and may be subject to change in the future.

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section:

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