Pension vs ISA Calculator

Pensions receive income tax relief on contributions (20/40/45%) but withdrawals are taxed as income after the 25% tax-free lump sum. ISAs receive no tax relief on contributions (money goes in from post-tax income) but all growth and withdrawals are completely tax-free. The comparison depends on your tax rate when contributing versus your expected tax rate in retirement, plus the value of the 25% PCLS.

For a 40% taxpayer contributing £100 gross, a pension costs £60 after relief and the full £100 is invested. An ISA receives £60 (post-tax) for investment. If the pension fund grows to £200, you get £50 tax-free (25%) plus £150 taxed at 20% in retirement = £170 net. The ISA £60 grows proportionally to £120, all tax-free. Pension wins when your retirement tax rate is lower than your contribution tax rate.

Additional factors tilt the comparison: employer pension contributions are free money an ISA cannot match. Pensions are shielded from creditors and inheritance tax (passed tax-free if you die before 75). ISAs offer flexible access at any age, no lifetime limit on withdrawals, and no impact on State Pension or benefits. The optimal strategy for most people combines both: maximise employer pension matching first, then use ISAs for additional savings.

Pension wins for higher-rate taxpayers, ties for basic-rate. Higher-rate (40%) taxpayer: contribute £1,000 to pension at 40% relief = £600 net cost. At retirement (assuming basic-rate then), 25% tax-free (£250) + 75% taxed at 20% = £600 + £400 = £750 from £600 net cost = 25% gain over ISA. Basic-rate (20%) taxpayer: £1,000 pension = £800 net cost. At retirement: £250 tax-free + £400 net (75% at 20% tax) + £100 (=£500 less 20%) = £750 — same as ISA but pension still wins on growth-tax shelter.

Why use BOTH pension and ISA. Pension: tax relief in, tax most of it out. ISA: post-tax in, ALL tax-free out. Optimal strategy: (1) Pension to max employer match (free money); (2) LISA up to £4k/year if under 40 (25% bonus + tax-free out); (3) Pension to fill higher/additional rate bands; (4) ISA for emergency fund and mid-life goals (kids' uni, house deposit, sabbatical); (5) More pension up to £60k Annual Allowance.

Access age difference matters. Pension: 55 (rising to 57 from April 2028), 25% tax-free, rest taxable income. Need to wait. ISA: any time, any age, any reason. Total flexibility. For those who might retire early (55-65), pension wins on tax efficiency but ISA gives flexibility. Common strategy: build ISA to bridge from early retirement age (e.g. 55) to State Pension age (67), then start drawing pension. Avoids forced annuity or aggressive early-pension drawdown.

Inheritance and tax-on-death rules. Pension (DC): currently inheritance tax-free until April 2027. After death before 75: beneficiaries can take pension income-tax-free. After death at 75+: beneficiaries pay income tax at their marginal rate on withdrawals. ISA: passes to spouse with 'Additional Permitted Subscription' allowance (keeps tax wrapper); to other beneficiaries the ISA wrapper is lost — capital becomes part of estate for IHT, future growth is taxed. Pension currently massively wins for IHT — but rules change April 2027.