Pension vs ISA Calculator

Pensions give income tax relief on the way in at 20, 40 or 45%, then tax withdrawals as income once the 25% tax-free lump sum has been taken. ISAs work the other way round: no relief going in, because the money has already been taxed, and nothing at all to pay on growth or on withdrawal. Which wrapper comes out ahead therefore turns on the rate you pay while contributing against the rate you expect in retirement, plus whatever the 25% tax-free element is worth to you.

Take a 40% taxpayer putting in £100 gross. The pension costs £60 after relief and the whole £100 is invested, while the ISA receives £60 of post-tax money. If the pension fund grows to £200, £50 comes out tax-free and £150 is taxed at 20%, leaving £170. The ISA's £60 grows in proportion to £120, every penny of it free of tax. The pension finishes in front because the relief bought a larger starting investment and the retirement tax rate is lower than the rate that was relieved.

Scale that up and a £1,000 contribution costs a higher-rate taxpayer £600 after relief. Taxed at basic rate in retirement it returns £750 in all, £250 of which emerges tax-free, a 25% gain on the £600 that actually left the bank account. The same £1,000 costs a basic-rate taxpayer £800, which lands much closer to what an ISA would have produced, and the pension's remaining advantage is simply that everything inside it grows without tax along the way.

Several factors sit outside that arithmetic. Employer pension contributions are free money no ISA can match. Pensions are shielded from creditors and, for the moment, from inheritance tax, passing tax-free if you die before 75. ISAs allow access at any age, impose no lifetime limit on withdrawals, and leave State Pension and benefit entitlements untouched. For most people the sensible answer is both wrappers rather than one, taking the full employer match first and using ISAs for saving beyond it.

A workable order of priority starts with enough pension to capture the whole employer match. Anyone under 40 can then add a Lifetime ISA of up to £4k a year, which attracts a 25% bonus going in and pays out tax-free. After that comes more pension, to soak up higher-rate and additional-rate relief, followed by ordinary ISA saving for the emergency fund and mid-life goals such as university costs, a house deposit or a sabbatical. Anything left over can go back into the pension, up to the £60,000 annual allowance.

Access matters as much as tax. A pension is locked until 55, rising to 57 from April 2028, after which a quarter is tax-free and the rest is taxable income. An ISA can be emptied at any age, for any reason, with no questions asked. That is why people planning to stop work early often build an ISA to bridge the years between 55 and State Pension age at 67, leaving the pension untouched and avoiding heavy early drawdown.

Death rules currently favour the pension. A defined contribution pot sits outside inheritance tax until April 2027, and beneficiaries can draw it without income tax if you die before 75, while from 75 onwards they pay income tax at their own marginal rate on what they take. An ISA passes to a spouse with an Additional Permitted Subscription that preserves the wrapper, but any other beneficiary loses it, so the capital joins the estate for inheritance tax and future growth becomes taxable. The April 2027 change closes much of that gap.