Pension or ISA? How to decide where to put your savings

id

There are various ways to save for the future, including pension plans and Individual Savings Accounts (ISAs). So, how are they different from each other?

Pension plans

A pension plan is a tax-efficient way to save for the long term. You pay into it, either with regular or one-off payments or a combination of both. Money paid in is invested, giving it the opportunity to grow over time.

Usually, your employer sets up a pension plan for you – which both you and they pay into. At least 8% of your ‘qualifying earnings’ will be normally be paid in, with a minimum of 3% coming from your employer and 5% minimum coming from you.

You can get tax benefits when you pay in. For some people, this means getting ‘tax relief’ (a top-up from the government into your plan, based on the rate of income tax you pay). Although some people get benefits in other ways – check MoneyHelper for information.

ISAs

Chances are you’ll have some savings goals you’d like to hit long before retiring. The tax efficiency of ISAs, and the flexibility that some types offer, can make them a good way to save for this kind of spending.

Cash ISAs let you earn interest on top of your savings, and usually allow you quick access to your money. 

For longer-term goals – generally five years or more – you might prefer to consider Stocks & Shares (S&S) ISAs, where your money is invested. 

There are also Lifetime ISAs (LISAs), designed to help people either save for their first home or retirement. The government adds a bonus each year. You can choose whether the money in the LISA is kept in cash or held in investments, or a mix of both. 

Or if you’re saving on behalf of children, a Junior ISA could be an option.

Pension plans and some types of ISAs are investments. The value of investments can go down as well as up and you could get back less than what was paid in.

So what’s the difference?

We’re focusing on the differences between pension plans, S&S ISAs and Lifetime ISAs. Why? These are ways that can help people save for the longer term, and they involve investing (although with a LISA you can choose whether or not the money is invested). 

	Pension Plans	Stocks & Shares ISA	Lifetime ISA
What are you saving for?	A pension is designed for long-term savings to help you save for retirement. You can usually access it from age 55 (rising to age 57 from 6 April 2028).	An S&S ISA is designed for medium- or long-term savings goals, such as a house purchase, a car or even retirement. You can access your money at any time.	A LISA is designed to save for a first home or retirement. You can take your money when buying your first home, when you’re 60+, or if you’re terminally ill with less than a year to live. There’s a 25% withdrawal charge if you take your money for any other reason.
How old do I need to be?	If you’re eligible, your employer will set up a pension plan for you when you’re 22, although you can ask for one if you’re younger. You can set up your own from age 18.	You can open an S&S ISA from age 18.	You need to be between 18-39 to open a LISA and you must make your first payment before you’re 40.
How can I boost my savings?	Your pension plan can get a boost from the government in the form of tax relief. Your employer may also pay into it, along with you. Plus, your pension plan is invested so it has the potential to grow over time.	Your S&S ISA can be boosted by payments you make. Plus, it’s invested so it can benefit from the potential to grow, and any growth you do achieve is tax free.	If you’re eligible, you can pay into a LISA. The government puts in a 25% bonus, up to £1,000 each tax year. You can choose for some or all of the money to be invested, giving it potential to grow.
How much can I pay into a pension or ISA each tax year?	There’s not a limit, but you can only get tax relief on payments up to £60,000 or your total relevant UK earnings – whichever is lower. This is your annual allowance. It may be lower if you have income over £200,000 or have started taking your pension savings.	You can currently save up to £20,000 each tax year.	You can save up to £4,000 per tax year in a LISA. This counts towards your overall £20,000 ISA allowance. You can’t pay in any more money after the age of 50 and the government bonus will stop then, although you could still get interest or investment growth.
Will I pay tax when I take my money out?	You can normally take 25% of your pension savings tax free. You pay income tax on any further withdrawals or income you take above your ‘personal allowance’ (which is £12,570 for most people).	You don’t pay tax when taking money from an S&S ISA.	You don’t pay tax when taking money from a LISA.
How is my pension or ISA passed on?	You nominate who you would like to receive your pension savings, sometimes tax free. You need to let your provider know as your Will doesn’t cover this. They normally take this into account when deciding who to pay your pension savings to.	You can leave your ISA to who you want in your Will. Your spouse or civil partner can continue to hold the investments or equivalent amount in an ISA, but if you leave them to anyone else they may become subject to some types of tax.	You can leave your LISA to who you want in your Will. Your spouse or civil partner can continue to hold the investments or equivalent amount in an ISA, but if you leave them to anyone else they may become subject to some types of tax.
Will my family pay inheritance tax on a pension or ISA?	Your pension savings aren’t normally part of your estate, so your loved ones won’t pay inheritance tax on them. From April 2027, the government have announced their intention to include unused pension savings when calculating the value of estates and so they could be subject to inheritance tax.	Your ISA is included as part of your estate, so your loved ones may need to pay inheritance tax, depending on who you leave it to.	Your LISA is included as part of your estate, so your loved ones may need to pay inheritance tax, depending on who you leave it to.

Not sure which option is right for you?

Whatever you choose isn’t set in stone. You can adapt where and how much you’re saving and investing as your needs and priorities change. You don’t need to pick just one option, either.

If you’re unsure, it might be worth considering taking financial advice before making any decisions. You can find out more about getting advice on MoneyHelper.

What’s next?

Whether you’re paying into a pension plan, ISA or LISA, it’s worth reviewing how much you’re putting in and checking it’s right for you. 

If you want to make a one-off payment into your Standard Life pension plan, you can usually do this online or on our app. You may be able to change your monthly payments too (remember, if your employer set up your plan, you’ll need to ask them how it works for you).

id