6 pros and cons of using ISAs to save for retirement

The age at which most pension savers can start withdrawing from their personal pension pots is set to rise from 55 to 57 from 2028. With the minimum age rising for many people, you may be considering flexible alternatives – such as Individual Savings Accounts (ISA).

In fact, PensionsAge reports that over a third of UK adults are saving for retirement with an ISA. Pensions offer a range of unique benefits and are generally the first port of call for retirement savings. However, ISAs can sometimes be a good way to complement your pension pot.

In particular, Financial Planning Today reports that 45% of Lifetime ISAs (LISA) are being used for retirement or later life. Additionally, in some circumstances you may choose to grow your savings with a Cash ISA or Stocks and Shares ISA.

Read on to learn how these ISAs work, the pros and cons of using them to save for retirement, and why a solid retirement plan should see any ISA savings balanced against regular pension contributions.

 

3 pros of saving into an ISA alongside a pension

1. ISAs can help grow your savings tax-efficiently

As of 2025/26, you can save up to £20,000 a year across all adult ISA types without paying tax on interest, investment returns, or government bonuses. When saving for retirement, there are three ISA types you may consider.

• Lifetime ISA: Subject to certain conditions, LISAs offer a 25% government bonus on savings of up to £4,000 a year, provided you either use the funds to purchase your first home or withdraw them after age 60.
• Cash ISA: These accounts allow you to grow your savings without paying Income Tax on any interest you accrue.
• Stocks and Shares ISA: With these ISAs, you can make gains on your investments without paying Income Tax, Capital Gains Tax (CGT), or Dividend Tax.

Usually, savers opt for a combination of Stocks and Shares and Cash ISAs. You can open a LISA of either type, too. Blending cash holdings with stocks and shares can mean you have cash to hand when you need it, while benefiting from the potential long-term returns of an investment portfolio.

Read more: Few investors are happy with their returns. Here’s how to take a more positive outlook

 

2. You can withdraw funds from your ISA tax-free

Retirees in the UK are facing a rising Income Tax burden, which means you could see more of your income eroded by tax in your later years.

Withdrawals from ISAs are tax-free, regardless of how much you take out, provided you follow the rules of the individual ISA you’re taking money from. For example, when you take money out of a LISA, you may face a 25% withdrawal charge if you’re under 60 and not using the funds to purchase your first home.

In general, you’ll pay Income Tax at your marginal rate when drawing down from your pension. However, unless you have certain lump sum protections in place, you can typically take 25% of your fund as a tax-free lump sum, up to a maximum of £268,275, as of 2025/26.

If you’re likely to need more than your tax-free lump sum upfront in early retirement, saving or investing into an ISA could help you pay less tax in retirement.

Withdrawals beyond your tax-free lump sum will count towards calculating your Income Tax bracket – potentially meaning your annual income is taxed at a higher rate.

By supplementing your income with ISA savings, you may be able to draw down your pension at a lower rate and keep your income from moving into a higher Income Tax bracket.

 

3. ISAs can offer more flexible access

With the exception of LISAs, you can withdraw money from your ISAs whenever you need it.

By contrast, unless you have a protected pension age, you generally can’t access your pension funds until you reach the Normal Minimum Pension Age (NMPA) – which is set to rise from 55 to 57 on 6 April 2028.

Even then, if you draw down funds while still contributing to your pension, you could lose some tax relief benefits. Accessing your pension could trigger the Money Purchase Annual Allowance (MPAA), which can permanently reduce the amount you can contribute tax-efficiently to as little as £10,000 a year.

So, if you’re planning to retire before the NMPA, or could need to access the funds before you retire, setting some savings aside in an ISA could be a good option.

 

3 cons of ignoring your pension in favour of ISAs

1. You could miss out on potential tax benefits by neglecting your pension

While ISAs offer a tax-efficient means of growing your savings, pensions also offer significant tax advantages.

You can generally claim tax relief at your marginal rate of Income Tax on pension contributions up to the Annual Allowance. As of 2025/26, the Annual Allowance is usually £60,000 or 100% of your relevant UK earnings, whichever is lower.

However, it could be as low as £10,000 if you have a high income or if you have flexibly accessed your pension.

If your annual income is £3,600 or below, your Annual Allowance is usually £3,600 a year. Annual Allowance legislation is complex, so it is often worth seeking advice about your pension.

While you will typically pay Income Tax at your marginal rate as you draw down your pension, this could be lower than the rate at which you received tax relief on contributions.

So, by saving into an ISA rather than your pension, you could potentially lose out on the opportunity to boost your retirement savings with tax relief.

 

2. Due to the age restrictions, pensions can offer more long-term investment growth

While you may be tempted to dip into your ISA funds in the short term, the restricted access for pensions can help keep your savings locked in – and growing – over a longer period.

What’s more, the returns on your pension investments compound over time – meaning the sooner you pay into your pension, the more time your funds will have to grow with compound interest. As with Stocks and Shares ISAs, you won’t pay CGT on investment returns as your pension pot grows.

In the interest of discipline, it’s often worth prioritising pension contributions when saving for retirement. A financial planner can help you balance long-term investment growth opportunities with accessible savings in ISAs.

 

3. You could miss out on employer contributions

As of 2025/26, if you’re enrolled in your workplace pension and contributing at least 5% of your salary, your employer must contribute a minimum of 3%. However, some employers will match your contributions up to 6% – or even more, in some cases.

Even the minimum employer contributions could offer a regular boost to the value of your pension, meaning your pot could grow even further.

As such, in some cases, choosing to save into an ISA rather than boosting your contributions could mean leaving extra pension savings on the table.

 

Get in touch

For support with retirement planning, email info@chancellorfinancial.co.uk, or call 01204 526 846 to speak to an adviser.

If you’re already a client here at Chancellor, contact your personal financial adviser to discuss any of the content you’ve read in this article.

 

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Workplace pensions are regulated by The Pensions Regulator.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.

The Financial Conduct Authority does not regulate tax planning.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.