Pensions and ISAs: what's the difference?

Pensions explained

Pensions are designed to help you save for retirement in a tax-efficient way. There are two main types of pensions:

• Defined contribution pensions

Defined contribution pensions include personal pensions and workplace pensions. You build a pot of money while you're working and choose how to use it to pay for your retirement. There’s no guarantee it will last until you die. Your employer arranges a workplace pension for you. Usually you set up a personal pension yourself, but your employer can also set one up for you.

• Defined benefit pensions

These provide a guaranteed income for life when you retire. The amount you receive is usually based on your salary and how long you’ve worked for the company and paid into the scheme. Defined benefit pensions are always set up by employers.

Most pensions in the private sector (where people don’t work for the government) are defined contribution pensions. 
 
If you’re employed, your employer will automatically enrol you in their workplace pension scheme if you’re eligible. They’ll also contribute to your pension, alongside the payments you make from your salary.
 
If you’re self-employed or want a pension outside of work, you can set up a personal pension on your own or with an adviser.

Learn more about pensions.

ISAs explained

ISAs are tax-efficient accounts where you can save or invest your money. There are five main types:

• Cash ISAs

Your money is saved in cash and you earn interest.

• Stocks and shares ISAs

Invest in a variety of assets such as company shares, loans to government and/or companies (bonds), commercial property, or commodities like gold and oil.

• Lifetime ISAs

Designed to help you save for your first home or retirement. You can pay in up to £4,000 a year and the government adds a 25% bonus. However, you can only take money out in limited circumstances without losing the 25% government bonus.

• Innovative finance ISAs 

Invest in peer-to-peer lending, where your money is loaned to people and companies looking for loans. The aim is to earn a return when the loan is repaid.

• Junior ISAs

Savings accounts for children with an annual allowance of up to £9,000. The money is locked away until the child turns 18.

Unlike pensions, most ISAs allow you to access your money at any time. However, Lifetime ISAs and Junior ISAs have restrictions or penalties if you take money out early.

See more about the different types of ISAs in our ISA Guide.

How much can I pay in every year?

Pensions 

The amount you can pay in to your pension each year depends on your earnings. For 2025/26, if you have earnings of:

• Less than £3,600: you can pay in up to £2,880, which becomes £3,600 with tax relief.
• More than £3,600: tax relief is available on up to 100% of your earnings (up to the annual allowance).

The annual allowance limits how much you can pay into your pension every year without a tax charge applying. For the 2025/26 tax year it’s £60,000.  Most people don’t have to worry about the annual allowance because they’ll be paying less into their pension.
 
Very high earners (earning more than £260,000 a year) get the annual allowance reduced. Read more about this in our Pension allowances explained article.

ISAs

For ISAs, you can open and hold a cash ISA, a stocks and shares ISA, an innovative finance ISA or a lifetime ISA each tax year - or even a combination of all four. For all ISAs except lifetime ISAs, you can even open and hold several ISAs of the same type.

Your ISA allowance is the maximum you can pay into any ISAs you have during a single tax year. In 2025/2026, your ISA allowance is £20,000, which is the total maximum you can pay in split between all ISAs you have in your name. The allowance for junior ISAs in a child's name is separate from yours, even if you're making payments into the junior ISA for your child.

Not every ISA has an annual allowance of £20,000 - some have specific allowances:

• Cash ISAs: up to £20,000
• Stocks and shares ISAs: up to £20,000
• Innovative finance ISAs: up to £20,000
• Lifetime ISAs: up to £4,000
• Junior ISAs: up to £9,000 for each child.

What can I invest in?

What you can invest in depends on the type of pension or ISA you choose. But both pensions and stocks and shares ISAs typically involve investing in funds.

Pensions

Workplace pensions from your employer will offer default investment options designed to suit the needs of a ‘typical’ investor of your age and in your scheme. However, you can choose your own funds or portfolios to invest in if you want.

ISAs

• Cash ISAs
  Your money isn’t invested. You save in cash and you get interest.
• Stocks and shares ISAs
  Generally, through funds, you can invest in various things, known as assets, such as company shares (equities), government and corporate bonds (loans to countries or companies), property or commodities (like oil, wheat and gold).
• Innovative finance ISAs
  You invest in peer-to-peer (P2P) lending, where your money is loaned to others in the hope of making a return when the loan is repaid.

Tax and tax relief

Pension tax relief from the government on what you pay into a pension is a key benefit of pensions.  
 
Tax relief offers most people a boost from the government of at least 20% on any money you pay into your pension. This applies to both basic rate taxpayers and people who don’t pay tax because they don’t earn enough or are non-earners. 
 
If you pay income tax at a rate higher than the basic rate of tax, you could benefit from additional tax relief. The rates of tax are different depending on where you live in the UK. 
 
With ISAs, if you're a tax payer then there's no tax relief on the money you pay in, as it comes from income you’ve already paid tax on. However, ISAs are tax-efficient because:

• You don’t pay income tax on interest earned in a cash ISA
• You don’t pay income tax on dividends or capital gains tax on investment returns in a stocks and shares ISA
• You don’t pay tax when you withdraw money from an ISA.

When can I withdraw money?

A big difference between pensions and ISAs is when you can take money out.

Pensions

As pensions are designed to pay for your retirement, you normally must be aged at least 55 (57 from April 2028) before you can take money out of them or get an income from a pension. For many people, but especially if you're just starting work, that means pension investing is for the long term.

You can usually take up to 25% of your pension pot tax-freee but the other 75% of your pension money is taxable. Find out more about how your pension is taxed.

ISAs

ISAs are more flexible. You can withdraw money at any time without penalties, except for Lifetime ISAs and Junior ISAs, which have specific rules.

However, for stocks and shares ISAs, it’s best to take a medium to long-term approach. Keeping your money invested for five years or more to gives you a better chance to ride out ride out market fluctuations, and more time to benefit from any growth in the markets.

Is a pension or an ISA right for me?

You can have both a pension and an ISA – you don't have to choose between them. The right option depends on your goals:

• Pension
  Pensions suit long-term retirement saving. They’re less suitable for short-term goals because your money is locked away until you reach retirement.
• Cash ISA
  Cash ISAs can be a good option for short-term goals, like building an emergency fund you can access quickly if needed.
• Stocks and shares ISA
  Stocks and shares ISAs tend to be better suited for medium- to long-term goals. Unlike pensions, you can access your money at any age, making them a flexible option for goals that aren’t as far off as retirement.