Is it better to save in an ISA or pension?

Under current regulations, investment returns made into your pension fund are not subject to Capital Gains Tax (CGT) or income tax.

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

Higher rate taxpayers can claim back a further £20 through HMRC via their self-assessment tax return, resulting in a net cost of just £60 for a pension contribution of £100, while additional rate taxpayers can claim back a further £25. Learn more in our article How to get back higher rate pension tax relief?

For most people, tax relief on pensions is limited 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 ordinary income tax rates. You can find out more about current pension benefits in our guide Understanding your pension benefits.

Another benefit of a pension is that if you are in a defined contribution company scheme, under automatic enrollment rules, your employer must contribute to your pension fund. This means you are effectively given free money by your employer, which you can use in retirement. You can read more about automatic enrollment in our article How does pension auto-enrollment work?

Some companies have matching contribution schemes, where the more you pay, the more your company will pay – up to a certain limit. If you’re unsure how your current employer’s scheme works, it’s best to speak to your line manager or HR representative to ensure you’re making the most of your employer contribution.

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

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 will also not form part of your estate for Inheritance Tax purposes. Find out more in our guide What happens to my pension when I die? and Can my pension be used to reduce Inheritance Tax?

However, this will change from April 2027, after Chancellor Rachel Reeves announced in Budget 2024 that from this date, pension funding will become the responsibility of IHT. Find out more in our guide Inheritance tax and pensions: what’s changing in 2027.