Key points
- £100 a month of take-home pay for 25 years could become £58,573 in an ISA, or £62,234 in a pension for a basic-rate taxpayer after tax when you take it.
- Employer money changes everything: at the auto-enrolment minimum, every £100 you put in becomes £200 in your pension, worth £99,575 after 25 years.
- An ISA is yours any time. A pension is locked until 55, rising to 57 from April 2028.
- An ISA can win if you would pay higher-rate tax in retirement but only got basic-rate relief going in, or if you might need the money sooner.
Work out your own
See what your own workplace pension could be worth at retirement, with your State Pension. For an ISA, use the investment and ISA calculator.
Open the pension calculatorSaving £100 a month sounds the same wherever you put it. It isn't. Put it in a pension and the government adds tax relief straight away, and your employer may add more, but you can't touch it for decades and you pay some tax when you take it. Put it in an ISA and nothing is added, but it's yours, tax-free, whenever you need it.
Which is better depends on three things: your tax rate now, your tax rate in retirement, and when you might need the money. Here is how each one works in 2026/27, what the same £100 a month turns into, and how to decide.
What is a pension?
A pension is a savings pot you can't usually take money from until later in life. Most employees have a workplace pension, set up automatically through auto-enrolment; anyone can also open a personal pension, such as a SIPP.
Three things make pensions powerful:
- Tax relief going in. Money you pay in comes from your pay before Income Tax, or the government tops it up. For a basic-rate taxpayer, £80 from your take-home pay becomes £100 in the pension.
- Employer contributions. With auto-enrolment your employer must pay at least 3% of your qualifying earnings (pay between £6,240 and £50,270) when you pay 5%, including tax relief. Many pay more.
- No tax on growth while the money is invested.
The catch is access and tax on the way out. You can usually take money from 55, rising to 57 from 6 April 2028. You can usually take 25% of the pot tax-free (up to £268,275 in all); the rest is taxed as income when you take it. You can pay in up to £60,000 a year, or your earnings if lower, with tax relief.
What is an ISA?
An Individual Savings Account is a wrapper that keeps interest, dividends and investment growth free of tax. You can put in up to £20,000 a year across all your ISAs. There are four types: cash ISAs, stocks and shares ISAs, innovative finance ISAs and the Lifetime ISA.
There is no tax relief going in: you pay in from money you've already been taxed on. But there's no tax coming out either, and you can take your money whenever you like (a fixed-rate cash ISA may charge you for leaving early). For long-term saving, a stocks and shares ISA is the fairer comparison with a pension, since both invest for growth.
Pension vs ISA at a glance
| Pension | ISA | |
|---|---|---|
| Tax relief going in | Yes, at your top rate | No |
| Employer can add money | Yes | No |
| Tax on growth | None | None |
| Tax when you take it out | 25% tax-free, the rest taxed as income | None |
| When you can take it | From 55 (57 from April 2028) | Any time |
| Yearly limit | £60,000, or your earnings if lower | £20,000 |
What £100 a month becomes
Take £100 a month from your take-home pay for 25 years: £30,000 of your own money. Invest it for growth of 5% a year, the Financial Conduct Authority's middle projection rate, and compare what you'd have after any tax when you take it.
| Where it goes | Going in each month | After 25 years, after tax |
|---|---|---|
| Stocks and shares ISA | £100.00 | £58,573 |
| Pension, basic-rate taxpayer | £125.00 | £62,234 |
| Pension, higher-rate taxpayer | £166.67 | £82,979 |
| Workplace pension with employer at the minimum | £200.00 | £99,575 |
The pension wins in every case here because the tax relief going in is worth more than the tax coming out. A basic-rate taxpayer gets 20% relief now, and pays 20% tax on three-quarters of the pot later: an effective 15%. Employer money is the biggest boost by far: you can't get it any other way.
Take a £35,000 salary at the auto-enrolment minimum. You pay £95.87 a month from take-home pay; with tax relief that becomes £119.83, and your employer adds £71.90. That is £191.73 going in for £95.87 of your money.
How pension tax relief adds up
How you get the relief depends on how your pension is paid. In a net pay arrangement your employer takes the contribution before Income Tax, so you get relief at your top rate straight away. With relief at source, you pay from take-home pay and the provider claims 20% from the government; higher-rate taxpayers claim the rest on a tax return. Through salary sacrifice you also save National Insurance, which makes the pension even better value. Read salary sacrifice explained for the figures.
When you can take the money out
This is the pension's real cost. If you're 30 today, money you pay in now stays locked for at least 27 years. That is fine for retirement and a problem for anything else: a house deposit, a gap between jobs, or an emergency. Keep a cash buffer in easy-access savings or an ISA before you lock money away.
The Lifetime ISA: somewhere in between
If you're under 40, a Lifetime ISA adds a government bonus of 25% to what you put in, up to £4,000 a year (a bonus of up to £1,000), and you can keep paying in until 50. You can take the money for a first home costing up to £450,000, or from 60. For anything else there's a 25% charge, which takes back the bonus and a bit of your own money.
For retirement saving, a Lifetime ISA's 25% bonus matches basic-rate pension relief, and the money comes out tax-free. But it can't take employer money, it's limited to £4,000 a year, and it's locked until 60 rather than 57. It suits first-time buyers best; for retirement, a workplace pension with employer contributions usually beats it.
When an ISA can beat a pension
The pension's advantage comes from getting more tax relief going in than you pay coming out. That flips if you get basic-rate relief now but pay higher-rate tax in retirement: then £100 a month becomes £51,252 after tax, against £58,573 in an ISA. It's unusual, but possible with a large pension pot, rental income or a generous final salary pension.
An ISA also wins whenever you might need the money before 57, because a pension can't be touched, and when you've already used your employer's matching and would rather keep the flexibility.
How to choose
- Take all the employer money. If your employer matches extra contributions, pay in enough to get the full match first. Nothing else gives you that return.
- Build an emergency fund. Three to six months of spending in easy-access savings or a cash ISA, so you never need to raid long-term money.
- Saving for a first home? Look at a Lifetime ISA if you're under 40; otherwise an ISA, since the money must be there when you buy.
- A higher-rate taxpayer? Extra pension contributions are hard to beat: £100 in your pension costs you £60.
- Want flexibility? Use an ISA for long-term saving you might need before 57, and the pension for money you know is for retirement.
Questions and answers
Can I have a pension and an ISA?
Yes. They have separate limits: up to £20,000 a year in ISAs, and up to £60,000 (or your earnings, if lower) into pensions with tax relief. Most people use both.
Is a pension worth it for a basic-rate taxpayer?
On our figures, yes: £62,234 against £58,573 from the same £100 a month, because 25% of the pot comes out tax-free. With any employer contribution it's not close. The ISA only wins if you need the money before 57.
Does my State Pension change this?
It can. The full new State Pension is £241.30 a week in 2026/27, and it uses up most of your tax-free Personal Allowance in retirement. That makes it more likely your pension income is taxed at the basic rate, as we've assumed. Check yours with the pension calculator.
Methodology
We take £100 a month from take-home pay for 25 years, paid in at the end of each month and growing at 5% a year (the FCA's middle projection rate, COBS 13 Annex 2) with no charges, using the same calculation as our investment calculator. Charges, which apply to pensions and ISAs alike, would lower every figure.
Pension contributions are grossed up for tax relief: £100 becomes £125.00 for a basic-rate taxpayer and £166.67 for a higher-rate taxpayer. Employer contributions use the auto-enrolment minimum ratio of 3% for every 5%. When you take the pension, 25% is tax-free and the rest is taxed at the basic rate (20%), except in "When an ISA can beat a pension", where it is taxed at the higher rate. Figures are in future pounds; for today's money see the pension pots study. Rates and allowances are for 2026/27 in England, Wales and Northern Ireland.
Bottom line
For most employees the answer is both, in order: take every pound of employer pension money first, keep an emergency fund and short-term savings in an ISA, and decide where extra long-term saving goes by your tax rate now and in retirement. On our figures, a basic-rate taxpayer ends up about 6% better off in a pension than an ISA, a higher-rate taxpayer about 42% better off, and anyone with employer contributions far more, as long as they can leave the money until 57.
Tips
- Check your payslip for how your pension is paid. Through salary sacrifice you save National Insurance too, which adds to the pension advantage.
- If you pay higher-rate tax and use a personal pension or relief at source, claim the extra relief through Self Assessment. It isn't added automatically.
- You can use the whole £20,000 ISA allowance across more than one type of ISA, but unused allowance doesn't roll over to next year.
- Look at the charges. A 1% yearly charge can take a large share of the growth over 25 years, in a pension or an ISA.
- If you have old workplace pensions, find them before deciding: you may already have more for retirement than you think.
This guide explains the rules; it is not personal financial advice.