These two main approaches involve investing in Individual Savings Accounts (ISAs) and personal pensions. Both of these accounts offer valuable tax advantages and long-term benefits to your finances - although they work in very different ways.
In this guide, we'll explain some of the key features of each investment vehicle, how they compare, and how you might use them as part of your financial planning process. This can help you know what strategy might be best, before you open an ISA or transfer your pension to Netwealth [1], for example.
What is an ISA?
An ISA is a flexible way to save or invest money for the future whilst sheltering your returns from tax charges. There are several types of ISA you can invest in each year, including:
- Cash ISAs - Similar to a traditional savings account, but the interest earned is tax-free.
- Stocks and shares ISAs - Allows you to invest in different assets and markets, with returns also sheltered from income and capital gains tax (CGT).
- Lifetime ISAs (LISAs) - Designed to help you save for a first home purchase or retirement, offering a 25% government bonus on contributions.
- Innovative finance ISAs - Allows you to hold peer-to-peer (P2P) loans and other innovative finance investments while benefiting from tax-free returns.
Each tax year, you can contribute a total of £20,000 into your ISAs (as of the 2025/26 tax year). This allowance can be split across different types of ISAs, but you can only open one of each type per year.
ISAs also give you access to your money at any time (except in some cases, like the Lifetime ISA, where you cannot withdraw the government bonus if conditions aren't met). This makes ISAs a flexible option for building wealth towards your medium- to long-term goals.
What is a personal pension?
A personal pension is another long-term savings account that's designed specifically for your retirement.
You can make contributions to this account, which are then invested in certain securities, according to your chosen level of risk for your portfolio. Over time, your money has the potential to grow significantly, so when you choose to retire (the age for early retirement and accessing your pension pot is usually 55 or above), you can have a lump sum to help you live the comfortable lifestyle you want.
One of the key benefits is that you can gain tax relief [2] at the standard rate on private pension contributions worth up to 100% of your annual earnings. Higher and additional-rate taxpayers can claim even more via their tax return.
Unlike ISAs, your money is locked away in your pension until you reach retirement age - but in exchange, you benefit from tax advantages and disciplined, long-term investing for the future.
Which is right for you?
Both ISAs and personal pensions have their benefits, and which one is best for you depends on your goals, time horizon, and unique financial situation.
- If flexibility is a priority, ISAs are often more suitable. You can access your money at any time, and there's no tax to pay on any withdrawals.
- If retirement is your focus, pensions offer more generous tax relief, helping your savings go further for your future goals - especially for higher-rate taxpayers.
Many people use ISAs and pensions side by side [3]. For example, you might:
- Use a Stocks and Shares ISA to invest towards medium-term goals like children's education or a house move, for example.
- Contribute to a pension to take advantage of tax relief and grow your retirement savings for the long term.
By combining both, you can create a well-rounded, tax-efficient savings strategy that balances things like access to funds, growth, and long-term security.
Please note, the value of your investments can go down as well as up.