Is it better to save into an ISA or a pension?

Under current rules, returns from investments made into your pension are not subject to either Capital Gains Tax (CGT) or income tax.

But one of the biggest advantages of saving into a pension is that you get tax relief on the money you pay in. This means that if you’re a basic rate taxpayer, for every £80 you contribute, you’re actually putting away £100 as the taxman automatically refunds you the £20 in income tax it would have taken. You can find out more in our article How pension tax relief works.

Higher-rate taxpayers can claim a further £20 back through HMRC via their self-assessment tax returns, resulting in a net cost of only £60 for a pension contribution of £100, whilst additional rate taxpayers can claim a further £25 back. Learn more in our article How do I reclaim higher rate pension tax relief?

For most people, tax relief on a pension is restricted each year to contributions of up to 100% of their income or £60,000, whichever is less. Any pension payments you make over the £60,000 threshold will be subject to usual income tax rates. You can find out more about current pension allowances in our guide Understanding your pension allowances.

Another benefit of pensions is that if you belong to a defined contribution company scheme, under auto-enrolment rules, your employer must contribute to your pension pot. This means you’re effectively being given free money by your employer, which you’ll be able to use in retirement. You can read more about auto-enrolment in our article How does pension auto-enrolment work?

Some companies have matching contribution schemes where the more you pay in, the more your company will pay in – up to a limit. If you are unsure exactly how your current employers’ scheme works, it may be worth speaking to your line manager or an HR representative to ensure you’re making the most of any possible employer contributions.

If you haven’t been automatically enrolled into your company pension scheme, perhaps because you work part-time or are on a low income, you can ask to join and your employer cannot refuse. Find out more in our articles How does pension auto-enrolment work? and Can I join my workplace pension scheme if I’m on a low salary?

It’s also worth noting that, depending on your age at death, under current rules you may be able to pass your pension to your loved ones tax-free, and it won’t form part of your estate for Inheritance Tax purposes either. Find out more in our guides What happens to my pension when I die? and Can my pension be used to reduce Inheritance Tax?

However, this is set to change from April 2027, after the Chancellor Rachel Reeves announced in the 2024 Budget that from this date, pensions would become liable to IHT. Find out more in our guide Inheritance tax and pensions: what’s changing in 2027.