Should you invest in a pension or an ISA?

Retirement planning isn’t just about pensions. A stocks and shares ISA is another tax-efficient option. But which is better for your retirement goals?

In this guide, we’ll cover:

The key differences between pensions and ISAs

Can you have a pension and an ISA?

How to invest for retirement

Remember: investments can go down as well as up, and you could get back less than you invest.

Key differences between pensions and ISAs

1. Access to funds

Pensions:

Funds can be withdrawn from a pension from age 55 (57 from 2028)
Depending on the scheme, you can then choose how you’d like to receive your pension – as a lump sum or part of your regular income, for example
Designed for long-term retirement savings

Stocks and shares ISA:

Request to withdraw funds anytime
Ideally, leave your investments untouched for at least 5 years to give your money a chance to grow
Suitable for medium-term goals, like buying your first home or funding a dream holiday

2. Tax benefits

Pensions:

Receive tax relief on contributions up to 100% of your earnings or £60,000 each tax year – whichever is lower
Typically, 25% of your pension can be taken tax-free – the remaining 75% is taxed as income
Any investment growth is free from UK income tax and capital gains tax (CGT)

Stocks & shares ISAs:

You can invest up to £20,000 tax-free in the 2025 to 2026 tax year, and this limit remains for the 2026 to 2027 tax year
Any investment growth made through an ISA is free from UK income tax and capital gains tax
No tax relief on contributions, but funds are more accessible

3. Inheritance

Pensions:

Not subject to inheritance tax (until April 2027, when unused pensions will form part of your estate unless left to an exempt person, such as a spouse or civil partner)
You can pass your pension on to loved ones
Withdrawals by your beneficiaries are tax-free if you die before age 75; otherwise, they are taxed as income

Stocks & shares ISAs:

Form part of your estate and may be subject to inheritance tax unless left to an exempt person, such as a spouse or civil partner
Spouses or civil partners can claim the ISA balance as an additional allowance, even if they don’t inherit the estate

Remember: the value of any tax benefits described will depend on your individual circumstances and tax rules could change in the future.

4. Overall suitability

Pensions:

Ideal for long-term retirement savings with significant tax advantages
Suitable for those focused on building a secure retirement fund

Stocks & shares ISAs:

Suitable for medium-term goals requiring flexibility, such as taking a sabbatical
Offers tax-free growth but requires discipline to manage withdrawals

Can you have a pension and an ISA?

Yes, combining pensions and ISAs can provide the best of both worlds. For example, while both offer tax-free growth, ISAs can help bridge the gap before you can access your pension.

How to invest for retirement

When planning your retirement investments, consider these key factors:

There’s a risk you could run out of income

It’s tempting to withdraw a large chunk of your savings early, but you’ll need your funds to last a lifetime. Inflation (the rate at which the prices of goods and services increase) can also eat into your savings over time. It’s important to plan how much to withdraw and how often.

Explore: How to manage your pension pot in retirement

Your investment goals may change

During your career, you may have focused on long-term growth. In retirement, however, your focus may shift towards income-generating investments. Consider investments that could provide a regular income, as well as capital growth.

Explore: Income vs accumulation funds

Consider splitting your investment pot

For shorter-term income, consider investing some money in very low-risk assets, such as cash or bonds, to help provide the money you’ll need to live from.

For longer-term income, you may be prepared to invest in higher-risk income funds designed to provide a higher yield. Although, there are no guarantees – your investments can still go up or down in value and you could get back less than you put in.

Explore: Investing for your retirement