ISA or pension? A plain-English comparison

ISAs and pensions are the two big tax-efficient wrappers in the UK. They're often talked about as alternatives, but they actually complement each other.

Pensions: tax relief in, tax on the way out

Contributions get tax relief at your marginal rate — 20%, 40% or 45%. But when you draw money out, 25% is tax-free and the rest is taxed as income. You can't normally access a pension until age 55 (rising to 57 in 2028).

ISAs: no relief in, no tax out

Contributions are from post-tax money, but growth and withdrawals are completely tax-free. You can access the money at any time, for any reason.

The rough rule of thumb

• Higher-rate taxpayer expecting to be a basic-rate taxpayer in retirement? Pension wins comfortably.
• Basic-rate taxpayer who might need the money before 55? ISA gives you flexibility.
• Want to leave money to family free of IHT? Pensions are currently more efficient, though rules are due to change from April 2027.

In practice

Most people should be doing both — enough into a pension to get the employer match, then an ISA for flexibility, then more into a pension.