Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

Most savers have two places to look when choosing a tax-efficient home for their money - ISAs and pensions.

These are the flagships of the UK savings regime, each offering tax-breaks designed to encourage ordinary people to save. Given their mainstream audience, you’d think that choosing between them would be simple.

Sadly not. Or at least not always. ISAs and pensions have different purposes and different rules. Perhaps the most significant is that money held in pensions is not usually available until you reach the minimum pension age - currently 55 but rising to 57 in 2028. Money in ISAs, on the other hand, can be accessed at any age.

That difference alone will determine for a lot of people where they store their money.

For others, though, the decision is less straightforward. Those closer to the point they can access their retirement money may be less concerned about tying it up in pensions. Others might simply want to invest in the most tax-advantageous way possible - no matter how easy it is to access their money.

How can you put figures on the financial benefits of each option? Here we’ll try to answer that.

A gentle warning - try as we might to simplify things, what follows is heavy on numbers and might be confusing if you’re unfamiliar with tax on savings. If you’re not a numbers person you can skip to the ‘Conclusion’ section at the end for a quicker answer.

A question of tax

There are tax advantages to both ISAs and pensions but they benefit savers in different ways. A more complete breakdown of the rules for ISAs is available here. The same for pensions - including an explanation of tax relief, limits on contributions and where tax benefits are withdrawn - can be found here.

To contribute to an ISA, it is required that money is taxed first but it can then grow and eventually be withdrawn free of tax.

For pensions, money can be contributed with the benefit of tax relief, then grow tax-free before facing Income Tax when withdrawn. But there are two other significant tax breaks that also apply to pensions.

Firstly, 25% of the value of a pension pot can be withdrawn completely free of tax - subject to the availability of relevant allowances - with Income Tax only applying after that.

Secondly, if the rate of Income Tax paid on withdrawals from a pension is lower than the rate of tax relief when contributing to it, there can be a significant uplift to the value of contributions.

For example, a £10,000 contribution by someone paying 40% tax effectively costs only £6,000 when full 40% tax relief has been claimed. If they pay no tax when they take the £10,000 out, their net contribution has effectively grown by 66.67%.

If they are a basic-rate taxpayer when they make the withdrawal, the first 25% can be tax free while the rest is taxed at 20% – resulting in a net withdrawal of £8,500 and an uplift of 41.67%. Even if they are still a higher-rate taxpayer when they take the money out, they will still receive £7,000, an uplift of 16.67%.

The table below shows how this works for different combinations of contributions and withdrawals. The column on the left shows the rate of tax relief on contributions. Read across to see the net percentage uplift when withdrawing at different Income Tax rates. Negative reading indicates a net loss.

The calculations are based on contributions into a SIPP - a self-invested personal pension. These rates are based on full tax relief being claimed and contributed. When contributing to a SIPP, only tax relief equal to the basic rate is automatic. Any extra relief due must be obtained via self-assessment. Withdrawals include 25% tax-free cash.

Tax rate paid on contributions Uplift if no tax on withdrawals Uplift if 20% tax on withdrawals Uplift if 40% tax on withdrawals Uplift if 45% tax on withdrawals
None 25.00% 6.25% -12.50% -17.18%
20% 25.00% 6.25% -12.50% -17.18%
40% 66.67% 41.67% 16.67% 10.41%
45% 81.80% 54.55% 27.27% 20.45%

Source: Fidelity Adviser Solutions, 28 February 2024. Figures after full tax relief reclaimed. This will differ for Scottish taxpayers.

Comparing ISAs to SIPPs

ISA contributions do not enjoy the potential tax uplift that applies to pension contributions - but they can be withdrawn tax-free. To see a true comparison between the two options requires a bit more number-crunching.

We can compare what happens to £20,000 contributed to both an ISA and a pension over several years - assuming a consistent level of investment growth and different level of tax relief on contributions and tax on withdrawals. The figures here reflect the value of contributions once full tax relief has been claimed and contributed. In practice, only tax relief equal to the 20% basic rate is automatic within SIPPs, the rest must be claimed via self-assessment. It is possible to contribute these amounts to a pension, although this may mean the extrais contributed in a different tax year.

The table below shows the value of £20,000 contributed to both ISAs and pensions over 10 years, with 5% investment growth a year after all fees. Returns are, of course, never guaranteed.

   ISA Pension with 20% relief Pension with 40% relief* Pension with 45% relief*
Annual contribution of £20k £20,000.00 £25,000.00 £33,333.00 £36,363.00
Balance after 10 years contributions plus growth £264,135.74 £330,169.68 £440,221.84 £480,238.40

Source: Fidelity Adviser Solutions, 28 February 2024. Figures after full tax relief reclaimed. This will differ for Scottish taxpayers. Assumed growth of 5% a year (which is not guaranteed) and after all fees. * Only tax relief up to basic rate of 20% is automatic - the rest needs to be claimed via self-assessment, with a further contribution made that may not be during the same tax year.

From here we can work out how long each pot would last, assuming £20,000 of net withdrawals were made each year with the same assumptions of 5% investment growth. These numbers are based on each withdrawal including 25% of tax-free cash, with Income Tax applying on the rest.

  ISA Pension at 20% tax Pension at 40% tax Pension at 45% tax
Starting fund £264,135.74 £330,169.68 £440,221.84 £480,238.40
Withdrawal required to produce £20k after tax £20,000.00 £23,529.41 £28,571.43 £30,188.68
Fund at end of year 5 £221,073.32 £284,873.88 £396,078.08 £483,877.54
Fund at end of year 10 £166,113.55 £227,063.68 £339,738.21 £501,525.72
Fund at end of year 15 £95,969.40 £153,281.60 £267,832.67 £524,049.78
Fund at end of year 20 £6,445.73 £59,114.88 £176,060.97 £552,796.81

Source: Fidelity Adviser Solutions, 28 February 2024. Figures after full tax relief reclaimed. This will differ for Scottish taxpayers. Assumed growth of 5% a year (which is not guaranteed) and after all fees.

You can see that the ISA pot would run out before year 21 of withdrawals. The pot based on 20% relief and tax would run out before year 23, while the pot based on 40% relief and tax would last run out before year 28. 

The pot based on 45% relief and tax would not run out at all on this basis - that’s because its starting size means the 5% investment growth we’ve assumed adds more each year than the £20,000 net withdrawal. 

And remember - the results would be even more advantageous for pension savers if the tax relief on their contributions was higher than the tax rate on their withdrawals.


In a purely financial comparison, pensions are the most tax-efficient way to save in most circumstances. Only if you were to find yourself paying a higher tax rate in retirement than you had paid during your working life would this not be the case.

If the opposite is true, and you go on to pay a lower tax rate in retirement, the advantage becomes even more clear.

The 25% of savings that pensions allow to be withdrawn tax-free - up to a limit of £268,275 - is also key to their advantage. If you risk breaching that limit (because your overall pension value rises above £1,073,100) then pension savings lose some of their appeal.

You need to consider all your circumstances when deciding where to save. When you’ll need access to your savings is an important factor, and on that score ISAs are far more flexible than pensions. Conversely, pensions enjoy better relief from Inheritance Tax.

Professional advisers will often recommend mixing ISAs and pensions to produce the most tax-efficient income in retirement. Seek out professional financial advice if you’re in doubt about the best place to save.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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