How ISAs and pensions could be the perfect partnership

ISAs and pensions are often viewed in isolation, but together they create a well-rounded approach to saving and investing. Here’s why:

• Tax efficiency: Both products offer tax benefits, but in different ways.
  • Pensions: Personal (and employer) contributions receive tax relief, subject to allowances (e.g., annual allowance, taper, and Money Purchase Annual Allowance (MPAA) where applicable). Withdrawals are generally available from the normal minimum pension age (currently 55, rising to 57 from April 2028); up to 25% is usually tax-free, with the remainder taxed as income at your marginal rate.
  • ISAs: No tax relief on contributions; you’re limited by the annual ISA subscription. Withdrawals can be taken anytime and are tax-free.
• Flexibility vs. stability: ISAs give you access to your money at any time, whereas pensions lock funds away until retirement age.
  • ISAs offer flexibility because savings can normally be accessed at any time without tax charges, making them useful for planned or unexpected expenses. 

  • Pensions offer long‑term stability by keeping funds invested until at least the normal minimum pension age (currently 55, rising to 57 in 2028), helping to support retirement income needs.

    Used together, they provide both short‑term flexibility and contribution to longer term retirement planning.

• Diversification: Using both investment products spreads risk across different tax treatments and withdrawal rules, giving you more options later in life.

Pensions are designed for retirement. Contributions benefit from tax relief, up to certain limits, meaning the government effectively tops up what you save. For example, if you’re a basic-rate taxpayer, every £80 you contribute becomes £100 in your pension. Higher-rate taxpayers can claim further tax relief through self-assessment.

Other advantages include:

• Employer contributions: Workplace pensions often include employer contributions, which is essentially free money towards your retirement.
• Tax-deferred potential growth: Investments within your pension grow free from income and capital gains tax.
• Inheritance planning: While pensions can currently be passed on to beneficiaries outside your estate for inheritance tax purposes, this will change from April 2027, when most unused pension funds will be included in your estate and subject to inheritance tax (with some exemptions for spouses and dependants).

The trade-off? You can’t access your pension until age 55 (rising to 57 in 2028), so it’s not suitable for short-term needs.

ISAs are flexible. You can invest up to £20,000 per tax year (current allowance) across different types of ISAs—Cash ISAs, Stocks & Shares ISAs and Lifetime ISAs (this is subject to a £4,000 per year limit).

However, from 6 April 2027, adults under 65 will be limited to £12,000 annually in Cash ISAs (while those aged 65 and over retain the full £20,000 cash limit); the overall £20,000 ISA allowance remains unchanged, but new rules will prevent transfers from Stocks & Shares ISAs into Cash ISAs.

Key benefits of ISAs include:

ISAs are ideal for medium- to long-term goals, such as buying a home, funding education, or supplementing retirement income. Benefits include:

• Tax-free withdrawals: Any growth or income within an ISA is free from income tax and capital gains tax.
• Accessibility: ISAs don’t all work the same. whilst all let you make withdrawals without tax charges, depending on the terms and conditions some (e.g., fixed‑term or notice accounts) may limit access or apply a fee. Lifetime ISAs have their own conditions and a potential government withdrawal charge.
• Investment choice: Stocks & Shares ISAs allow you to invest in a wide range of assets, from shares to funds, giving you potential for long-term growth.

Some ISAs also come with flexible ISA features, which let you take money out and pay it back in the same tax year without using up your annual ISA allowance a second time. This added flexibility can help you manage unexpected expenses while keeping your savings strategy intact. Not all ISA providers offer this flexibility so its important to check with the providers to understand if they offer this additional feature.

Here’s how ISAs and pensions can complement each other practically as part of your financial plan. However, it is important to remember that the different scenarios discussed are examples and what is right for each person will depend on individual circumstances.

1. Balance accessibility and lock-in
   While pensions are locked until retirement, ISAs provide accessibility By contributing to both, you ensure you have funds available for life events while still building a strong retirement pot.
2. Maximise tax benefits
   Use pensions to reduce your taxable income and benefit from employer contributions. At the same time, you may wish to shelter investments in ISAs to avoid future tax on growth and withdrawals.
3. Plan for different life stages
   • Early career: Focus on ISAs for accessibility while contributing enough to pensions to capture employer matching.
   • Mid-career: Increase pension contributions for tax efficiency, while continuing ISA savings for medium-term goals.
   • Pre-retirement: Build ISA reserves to bridge the gap between stopping work and accessing your pension.
4. Withdrawal strategy
   In retirement, using ISAs and pensions together gives you control over how you draw income tax efficiently. For example, you might use ISA funds first to keep taxable income low, preserving pension benefits for later.

ISAs and pensions aren’t an either/or choice, they should be considered partners in your financial plan. By understanding their unique benefits and how they complement each other, you can create a strategy that adapts to life’s changes while investing for your future.

If you’d like to explore how ISAs and pensions can work together for your personal circumstances, speak to one of our qualified financial advisers. We can help you tailor contributions, investment choices, and withdrawal strategies to meet your goals.

This article is for information purposes only. It is not intended as investment advice.

Fees and charges apply.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

The value of investments and the income from them can fall as well as rise and are not guaranteed.

The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits which isn’t guaranteed and can down as well as up. The benefits of your plan could fall below the amount(s) paid in.