Financial Independence

How to Use Pensions and ISAs for Retirement Planning

When you think of retirement planning, pensions are probably the first thing that comes to mind. Most people have a pension through their employer and have contributed for at least part of their working life.

But the most effective retirement strategy uses a combination of approaches. Other investment options, such as ISAs, can make your retirement plan more flexible than using pensions alone.


A pension is an investment vehicle designed to help you save for retirement. 

You may have a Defined Benefit pension, which provides a guaranteed income depending on your salary and years of service. In this case, your defined benefit pension could form the baseline of your retirement strategy, although you may wish to supplement this with additional savings.

This guide is mainly concerned with Money Purchase pensions, which allow you to build up a pot of money to fund your retirement. 


A Money Purchase pension works as follows:

  • You can personally contribute up to £3,600 per year into a pension, or the equivalent of your gross salary if this is higher.
  • Your gross contribution is made up of your net contribution, plus 20% tax relief. So a contribution of £3,600 would be made up of £2,880 paid by you, and £720 paid by HMRC.
  • Higher and additional rate taxpayers can claim further relief through their tax returns. 
  • Your employer can also contribute to your pension.
  • Personal and employer contributions are subject to an overall annual allowance of £40,000 per year. This can be carried forward by up to three tax years if you are a member of a pension scheme and have not used your full allowance.
  • Your annual allowance could be reduced if you earn above £240,000 or if you have taken benefits from a Money Purchase pension.
  • Your total pension savings (including any Defined Benefit schemes) will be measured against the Lifetime Allowance (currently £1,073,100) with tax of up to 55% payable on the excess.
  • Pension funds grow free of tax on any income or gains generated within the fund.
  • At retirement, you can withdraw a 25% tax-free lump sum.
  • The remainder of your pot can be withdrawn as you wish, and is taxed at your marginal rate.
  • Pensions are outside your estate for Inheritance Tax purposes, and can be paid out free of tax if you die before age 75. After age 75, the fund can be withdrawn by your beneficiaries, taxed at their personal rates. 


  • Pensions are extremely tax efficient providing you remain within allowances.
  • Your pension cannot be accessed until age 55 (although this is rising to 57, and will subsequently remain ten years under State Pension age), which removes the temptation to take early withdrawals. 
  • If you are working, your employer is required to contribute to your pension if you do. If you have your own company, your pension contributions are an allowable expense. 


  • The minimum pension age means that you will need to make other plans if you would like to retire early.
  • Annual and Lifetime Allowances can make pension planning complicated, particularly for high earners.
  • Your pension income will be taxed. If you need to increase your pension income or withdraw a lump sum, this may push you into a higher tax bracket. 

Individual Savings Accounts (ISAs)

An ISA is a savings or investment account that can be used for any purpose, including retirement planning. 


  • You can contribute up to £20,000 per year.
  • You can invest in cash, stocks and shares, or both.
  • Investment income and gains are tax-free.
  • You can access your money without tax or penalty (unless imposed by the ISA contract).
  • If you withdraw money, you can replace it in the same tax year without using up any of your ISA allowance.


  • You can make withdrawals at any time, regardless of age.
  • There are no tax implications on accessing your money.
  • Other than the contribution limit, there are no complicated restrictions on how much you can pay in or how much you accumulate. Higher earners have the same ISA allowance as anyone else. 


  • There is no tax relief on contributions.
  • As you can access the money whenever you wish, it can be tempting to dip into the fund earlier than planned. 
  • Higher earners may find the ISA allowance limiting, particularly if their pension allowances are also capped. Other investment options may need to be considered in addition. 
  • ISAs are included within your estate for Inheritance Tax purposes. 

Lifetime ISAs (LISAs)

LISAs were introduced in 2017 and are effectively a hybrid of the ISA and pension models. 

The main features are:

  • You can contribute up to £4,000 per year from your total ISA allowance.
  • This is topped up by a 25% government bonus.
  • The money can be accessed to buy a first home, to provide retirement benefits (if you are over age 60) or if you are terminally ill.
  • If you withdraw the funds early, a 25% penalty applies. 
  • You can open a LISA between the ages of 18 and 40, and can make contributions up to age 50.

A LISA is not a substitute for an ISA or a pension, but can be used to complement your other investments if:

  • You are saving for your first home or;
  • You have maximised your pension allowance and would like to save a little extra to benefit from tax relief.

Using ISAs and Pensions in Combination

In most cases, it is not a case of choosing between an ISA and a pension, but deciding how to combine them.

Using ISAs and pensions together can allow you to:

  • Maximise both sets of contribution limits.
  • Reduce the chance of exceeding allowances, and therefore paying excessive tax.
  • Benefit from tax-free investment growth.
  • Retire early, as you can access your ISA funds before age 55. 
  • Adjust your income from each source as required, depending on your situation and tax position.
  • Use your ISA for any lump sum withdrawals, avoiding additional tax on your pension income. 
  • Spend your ISA money first, preserving your pension (free of Inheritance Tax) for the next generation.

The most suitable retirement strategy will depend on what you would like to achieve, and when. Both ISAs and pensions could have a role to play.

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Joe Jackson

Helping people achieve their financial goals is an extremely rewarding experience. No two clients are the same, which means no two days are the same. It’s a really fast-paced industry, full of characters and personal interaction, and I absolutely love it.