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Pensions are heavily in the spotlight right now. In the 2024 Autumn Budget, Chancellor Reeves announced a plan to bring pensions into a deceased person’s estate from April 2027. In effect, many unused pension funds could become subject to inheritance tax (IHT).
This has raised the question: Are pensions still worth it for retirement planning? In particular, do they still compare favourably against other tax-efficient “vehicles” – e.g. ISAs (individual savings accounts)? Below, our Carlisle financial advisers offer some reflections and answers.
Pensions & ISAs – Overview
Before comparing, we need to remind ourselves how pensions and ISAs work. In this discussion, we primarily refer to defined contribution (DC) pensions – i.e. pension “pots”, rather than the State Pension or final salary (defined benefit) schemes.
DC pensions are primarily built to incentivise saving for retirement. For instance, a scheme member cannot access their benefits until they reach their Normal Minimum Pension Age (NMPA – 55 in 2025). By contrast, the ISA comes in many forms – each designed for different purposes.
For instance, the Cash ISA operates much like a regular savings account (with easy-access or fixed term options). However, any interest earned within this “wrapper” will be tax-free. A Stocks & Shares ISA acts like a general investment account, except all capital gains and dividends are free from their respective taxes.
A specific ISA type – the Lifetime ISA (i.e. “LISA”) – heavily influences this discussion. This type follows special rules that encourage saving for retirement or a first home. If funds are used for these purposes, the UK government will “top up” your LISA contributions by 25% up to a maximum of £1,000 each tax-year (the personal annual contribution limit to a LISA is £4,000).
A Comparison in 2025
Rules for ISAs and pensions have remained relatively stable for some time. However, new rules are being introduced and discussed, potentially altering their attractiveness to certain clients.
In particular, unused funds in DC pensions have long been exempt from IHT upon death, but in April 2027 this might change. Under current plans, at that point, pensions will fall into an individual’s taxable estate, potentially subjecting unused funds to IHT.
Moreover, ISAs may also experience some changes in the months/years ahead. Notably, the UK Chancellor is reportedly considering reform to Cash ISAs (e.g. to encourage taxpayers to put more money into investments that help stimulate economic growth).
However, it is important not to make big financial decisions based on what “might happen” in markets, government policy, and the wider economy. Instead, speak with a financial adviser about your options based on the best information.
Guiding Principles
So, which is better for long-term saving and investing, DC pensions or ISAs? Here, the answer depends heavily on your unique financial goals, needs, situation and time horizon(s).
For instance, suppose an individual wants to retire early – e.g. before age 55. Since pension benefits will be unavailable due to NMPA restrictions, ISAs could be a useful “vehicle” to help fund their lifestyle in their initial retirement years.
Before the 2024 Autumn Statement, DC pensions had an advantage over ISAs in that they enjoyed an IHT exemption, whilst the latter did not. However, the playing field is potentially being levelled in this respect, with new IHT pension rules expected to come into force in April 2027.
However, there are areas where pensions still shine strongly. In particular, workplace pensions still benefit from contributions from employers (under auto enrolment rules). In 2025-26, an employer is required to put at least 3% into your workplace scheme, with employees required to contribute 5% minimum. Some employers are even more generous. Pension contributions can also enjoy tax relief at your marginal rate, boosting the amount saved into a pension. ISA contributions on the other hand are made from post-tax income and receive no tax-relief.
Pensions also enjoy a higher contribution limit. Each year, you can put up to £20,000 into your ISAs. However, the annual allowance for pensions is £60,000. However, there is an important caveat. ISAs have no “limit” on the total you can store inside them, and you can make as many tax-free withdrawals as you like. There is no limit to the amount you can save into a pension during your lifetime, however the maximum amount of ‘tax-free cash’ you can receive from your pensions is limited to £268,275.
Invitation
Both ISAs and Defined Contribution pensions offer powerful – yet distinct – benefits. Rather than viewing ISAs and pensions as either/or options, the most effective strategy often lies in combining both. For instance, by blending the accessibility of ISAs with the tax relief and employer contributions of pensions, savers could create a more balanced, tax-efficient and resilient retirement plan.
As with any financial strategy, the best mix depends on individual circumstances (age, income, retirement goals, tax position and more). So, seeking tailored financial advice is always recommended.
To discuss your own financial plan, please get in touch to arrange a free, no-commitment consultation with an adviser here in Cumbria.
Your capital is at risk. Investments can go down as well as up. Past performance is not indicative of future results. Tax treatment depends on individual circumstances and may change. Content is for information only and not investment advice. Any decision to invest is the reader’s own. Diversification is key to managing risk. Market volatility affects investment values. Inflation erodes savings. Liquidity risks may prevent quick access to funds.