Pension vs ISA calculator
Put the same amount of take-home pay into a pension or an ISA and they end up worth different amounts. A pension gets tax relief on the way in, an ISA does not, but an ISA is tax-free on the way out. This shows which comes out ahead.
Why the two differ
Both wrappers grow free of tax inside. The difference is at the two ends. A pension gets income tax relief when you pay in, so your take-home cost buys a bigger starting sum, but three quarters of it is taxed as income when you draw it. An ISA gets no relief in, so the same take-home buys a smaller sum, but every penny comes out free of tax. The 25% tax-free pension cash is what usually tips the balance towards the pension.
Worked example
Save £1,000 of take-home as a basic-rate taxpayer. In a pension, 20% relief turns it into £1,250 invested. Double it and you have £2,500. A quarter, £625, is tax-free, and the rest is taxed at 20%, leaving £2,125 net. The same £1,000 in an ISA doubles to £2,000, all of it free of tax. The pension ends up about £125 ahead here.
Flexibility has a value too
The numbers are only part of the choice. Pension money is locked until 55, rising to 57 from April 2028, while ISA money is available whenever you need it. If there is any chance you will want the cash before retirement, that access can be worth more than the extra pension return. Many people sensibly use both.
Common questions
Is a pension or an ISA better?
For most people saving for retirement a pension wins, because the tax relief going in is worth more than the tax you pay coming out, especially as a quarter comes out tax-free. An ISA wins on flexibility, since you can take the money at any age with no tax and no restrictions.
Why does a pension usually beat an ISA?
Tax relief means a basic-rate saver gets £1 in the pension for 80p of take-home, and a higher-rate saver for 60p. That head start compounds. Even after paying income tax on 75% of the pension in retirement, and getting 25% tax-free, the pension typically ends up ahead. In this example the pension is worth about £125 more.
When does an ISA make more sense?
An ISA is better when you might need the money before pension age, when you are a higher-rate taxpayer now but expect to still be higher-rate in retirement so lose the rate advantage, or when you have already used your pension annual allowance. ISAs also pass on more simply outside the estate rules that pensions face.
Can I use both?
Yes, and many people should. A common approach is to pay enough into a workplace pension to get the full employer match, then use an ISA for money you may want before retirement, then return to the pension for the rest. They are complementary rather than alternatives.