ISA vs Pension
Saving the same money out of your take-home pay, which leaves you better off in the end — a pension or a Stocks & Shares ISA? A pension gives you tax relief going in and a 25% tax-free lump sum, but taxes the rest on the way out; an ISA gives no relief but is completely tax-free later. This works out both, after tax, on your numbers.
Your plan
After tax, side by side
What's driving this
Assumes the same money leaves your take-home either way, growth is the same in both, and the pension's taxable 75% is taxed at the single retirement rate you choose. Pension tax relief and the 25% tax-free lump sum (capped £268,275) follow current rules; salary sacrifice also saves National Insurance today (though from April 2029 sacrifice above £2,000/yr will start to attract NI). ISA allowance is £20,000/yr; the pension annual allowance is £60,000 (or 100% of earnings). Pensions are normally locked until age 57 (from 2028); ISAs can be accessed any time. This is general guidance, not financial advice.
Same money, two tax wrappers
Strip away the jargon and the choice is about when you pay tax. An ISA takes money you've already paid tax on and never taxes it again. A pension refunds the tax on the way in, grows untouched, then taxes three quarters of what comes out, with 25% tax free. Identical investments inside each wrapper, different totals at the end, and the difference is decided almost entirely by your tax rate now against your tax rate in retirement.
£200 a month for 25 years
Save £200 a month of take-home pay for 25 years at 5% growth. In an ISA that builds £119,102, all yours. Route the same £200 of sacrifice through a workplace pension as a basic-rate taxpayer and the pot buys £140,606 of after-tax spending money even if you pay basic rate in retirement too: £21,505 ahead, an 18% bonus for choosing the better wrapper. For a higher-rate earner who retires into the basic band the pension's edge grows to £55,444, which is nearly half as much again as the ISA. Salary sacrifice is doing real work in these numbers, because it saves National Insurance as well as income tax on the way in.
When the ISA fights back
The pension's price is patience: nothing out before 55, rising to 57 in 2028. Money you might need for a roof, a redundancy or a wobbly year belongs in the ISA, and a Lifetime ISA has its own case for a first home. The pension argument also weakens if you expect to pay higher-rate tax in retirement, and strengthens to unbeatable the moment an employer match is on the table, since free money outruns every wrapper subtlety. Most people end up wanting both pots for different jobs. See when the pension pot lets you stop working with the retirement age calculator, or test growth assumptions on their own with the investment calculator.
Common questions
Is a pension or an ISA better?
For most people saving for retirement a pension usually wins, thanks to tax relief going in and a 25% tax-free lump sum, especially if your employer matches contributions. An ISA wins on flexibility and if you expect a higher tax rate in retirement than the relief you get now.
What is the 25% tax-free lump sum?
From age 55 (rising to 57 in 2028) you can usually take up to 25% of your pension pot tax-free, capped at £268,275. The remaining 75% is taxed as income when you draw it.
Can I be worse off choosing a pension?
An ISA can leave you better off if you will pay a higher tax rate in retirement than your relief rate now, or if you need access before age 57. The calculator shows which option wins on your own numbers.
How much can I pay in each year?
You can put up to £20,000 a year across ISAs, and up to £60,000 (or 100% of your earnings if lower) into pensions with full tax relief.
These results are estimates for general information only and are not financial advice. Check every figure yourself and seek appropriate advice from a qualified professional before making any decision. Read the full disclaimer.