Is an ISA better than a pension?

Key Takeaways

• Pensions offer the best long-term value due to upfront tax relief and potential employer contributions.
• ISAs provide superior flexibility, allowing you to access funds before retirement age without tax penalties.
• Higher-rate taxpayers generally benefit more from pension contributions than LISA bonuses.
• Using both allows you to bridge the gap between early retirement and reaching the minimum pension age.

Is an ISA a good way to save for retirement?

Yes, an ISA can be a good way to save for retirement. They’re flexible, accessible, and you can withdraw your savings at any time without paying income tax or capital gains tax. However, savers with ISAs that have withdrawal restrictions, such as a Fixed Rate ISA or Lifetime ISA, need to be aware of any withdrawal charges involved with taking money out before the fixed period is over, or forineligible withdrawals.

Pensions have more upfront tax advantages than ISAs, particularly for higher-rate taxpayers, but they’re not as flexible. You’ll usually need to wait until you reach the normal minimum pension age, which is currently 55 and will rise to 57 in 2028. When you reach the minimum pension age, you can either withdraw your whole pension pot straight away or withdraw a small amount. You can withdraw 25% of it tax-free, but you will pay income tax on the rest.

Before accessing your pension, it can be a good idea to speak to a financial adviser or a pension charity - particularly if you have a very large pension or you’d like to withdraw more than 25%. A pensions advisor can help you find the most tax-efficient way to access your nest egg.

Another advantage of ISAs is that you can save for both short and long-term goals with fewer restrictions. With a Cash ISA or Stocks and Shares ISA, for example, you aren’t tied to using the money for retirement. You could use it before you reach the minimum pension age and spend it on a house, holidays, general living expenses or anything at all!

Another option is a Lifetime ISA, which lets you save up to £4,000 each tax year towards your first home or retirement and earn a 25% bonus from the government, up to £1,000 per tax year.

Let’s imagine you max out your LISA every year for the next 3 years. With help from the government bonus, you’ll have a sweet £15,000 saved for your deposit or nest egg, despite saving just £12,000 of your own money during this period. And with the market-leading Cash Lifetime ISA, you could earn hundreds more in interest vs saving with the next best rate on the market. Or use a Stocks and Shares Lifetime ISA to invest your money instead!

The Lifetime ISA is the only ISA that gives you a 25% boost, making it far more rewarding than standard Cash ISAs or Stocks and Shares ISAs. That said, there are a few things to keep in mind.

For example, you’ll need to be aged 18 to 39 to open one and you’ll need to have the account for a full year before you can withdraw your savings penalty-free for your first home. If you make a withdrawal before the age of 60 for anything other than an eligible property purchase, you’ll pay a 25% withdrawal penalty, meaning you may get back less than you put in. 

Learn more about the Lifetime ISA withdrawal charge here.

You might also like: What is a Lifetime ISA?

Is a pension a good way to save for retirement?

Yes, a pension can be a good way to save for retirement as it comes with a range of benefits, including getting tax relief on your contributions. For example:

• Basic rate taxpayer (20%) contributes £80, total in pension = £100
• Higher rate taxpayer (40%) contributes £60, total in pension = £100
• Additional rate taxpayer (45%) contributes £55, total in pension = £100

If you opt in to a workplace pension, your employer will pay the equivalent of at least 3% of your income into your pension for you, boosting your pot alongside your own contributions.

Opting out of a workplace pension may seem like a good idea if you’re saving for more immediate life goals, such as your first home, but you’ll miss out on free money from your employer.

Before you opt out, see if you can find any other ways to save money. Paying into a workplace pension can make a huge difference to your financial stability in later life, and it can even have an impact on the age you’re able to retire.

If you’re self-employed, you won’t be eligible for employer contributions, but you’ll still get tax relief when you save into a private pension. If you’re a basic-rate taxpayer, it might also be worth considering a Lifetime ISA. You won’t earn tax relief on your LISA contributions, but you will earn the 25% government bonus, up to £1,000 each tax year. It’s up to you whether you save for retirement in both a LISA and a pension, or one or the other.

If you’re a higher or additional-rate taxpayer, a pension will always beat a LISA for retirement, as the amount of tax relief you’ll get will be much higher than the 25% LISA bonus.

Learn more: How to open a Lifetime ISA

A pension also won’t affect your eligibility for means-tested state benefits, no matter how much you’ve saved for retirement. Money held in an ISA, however, can affect your eligibility for means-tested benefits. Exactly how much will depend on the benefits you’re applying for and how much money you have in savings.

If an individual applies for Housing Benefit, for example:

• Under £6,000: Usually eligible for full benefit.
• £6,000 – £16,000: Eligible for a reduced amount.
• Over £16,000: Generally ineligible for Housing Benefit.

If you (and your partner) are over State Pension age, you can have up to £10,000 saved before your eligibility for Housing Benefit is affected.

Should someone put money into an ISA or a pension?

As with many things in life, it depends! Pensions tend to be the default option for people looking to save for retirement, and for good reason. You’ll receive tax relief on your contributions, and your savings will grow in a tax-free environment, sometimes over a number of decades.

ISAs have their advantages too, like being better suited to flexible, short-term goals, such as buying a home, paying for summer holidays, or even funding day-to-day expenses. Instead of trying to choose one or the other, why not make the best of both worlds? 

For those who would like to retire early, ISA savings could potentially tide them over until they access their pension.

If individuals have saved enough, they might even be able to delay taking an income from their pension to give their investments more time to grow.

When making a decision whether to put your money into an ISA or a pension, it’s always best to seek financial advice beforehand.

What is the average UK retirement pot?

The average amount people retire with depends on the age at which they retire. The average pension pot for 55 to 64-year-olds was £107,300 between April 2018 and March 2020, but we don’t know whether these people retired at this age.

A good rule of thumb is to aim to have the equivalent of 50-70% of your working income per year saved up. So if you earn £30,000, and want to have enough money to fund 30 years of retirement, then you’d need to have £450,000 saved up in your pension pot (£15,000 x 30). But keep in mind that you may also get the State Pension, which can supplement your personal pension savings. 

Learn more: How much should I save in a pension?

*Based on saving £100 at the beginning of each month for 5-years. Calculations show at month 61 (after 5-years) Tembo customers saving at 3.80% would have £390.68 on average more than saving with Barclays, HSBC, NatWest or Lloyds. Accurate December 2025.