Should I save into a Stocks and Shares ISA or a pension?

18 July 2019

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Question by Christopher

I am torn between continuing to invest in my ISA, which holds around £40000 at present, and putting money into a personal pension. I know about the grossing up of pension contributions, and the 25% tax free cash. However I will inevitably pay tax on the 75% which is not tax free, whether I take it via an annuity or flexi-access drawdown. Whereas with the ISA, I don't get the grossing up benefit, but won't pay any tax at all. What do you think?

Answered by Helena Wardle

Hi Chris,

Great question and one that I am asked often.

Your income tax rate
It will depend on your income tax rate when you draw the pension at retirement.

Most pensioners are basic rate taxpayers (currently this means having taxable income below £50,000), and you can choose how you draw your pension income when you retire so you will have some control over this.

If you are saving for retirement and can afford to lock away access until you are 55 (this will increase to age 57 in 2028) then typically a pension would be better for you as shown in the table below.

Investment type
Initial investment
(What you put in)



Total investment
(Including tax relief)



Value if you withdraw investment*
(Minus any tax to pay)


(first 25% tax-free, the rest taxed as income)


If we assume that you will be a basic rate taxpayer in retirement, and compare investing £100 into a pension to saving £100 into an ISA as shown in the example below, you are £6.25 better off per £100 by saving into a pension.

You will also get returns on a higher starting amount in a pension than you would in an ISA due to the tax relief that gets added to the amount you save. To put it simply, you are earning a return on £125 as opposed to £100 using the example above and over time this should result in a bigger pot if you save into a pension versus an ISA.

The limits...
There are limits to how much you can save into a pension - up to your earnings or £40,000 whichever is lower.

This total limit is the contributions including the tax relief, and your income needs to be earned income to qualify.

If you don’t earn any income you can still pay up to £2,880 before tax relief into a pension, up to the age of 75. If you are unsure of the rules, speak to a financial adviser about your specific circumstances.

It may also be worth looking at a Lifetime ISA if you are under age 40. This would give you a 25% bonus per contribution, up to £4,000 per tax year, and you can withdraw this all tax free after age 60 or to buy your first home. Any access prior to this will have a penalty.

I hope this helps,

Answered by

Helena Wardle

Chartered Financial Planner

I am passionate about helping people get more clarity, confidence and reassurance with their money matters. I feel it is important to understand our client’s stories and to help connect their money with what matters to them.