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An Isa (individual savings account) lets you save up to £20,000 a year tax-free.
Cash Isas work like traditional savings accounts, and you can choose from instant-access or fixed-rate options. The key difference is that you don’t pay tax on the interest you earn, and you can’t deposit more than £20,000 per tax year.
From April 2027, under-65s will only be able to pay up to £12,000 a year into a cash Isa.
A stocks and shares Isa is an investment account. You can invest up to £20,000, and this money will be able to grow tax-free. You can either choose your own investments or opt for a managed account.
You can have multiple Isas, but be aware that you'll need to split the £20,000 limit between them. For example, if you deposit £15,000 in a cash Isa, you’ll only be able to invest £5,000 in an investment Isa in that tax year.
The Lifetime Isa was launched in April 2017 to help people save for their first home or for their retirement. You can open one only if you're aged between 18 and 39, but you can continue to pay in up to £4,000 a year until you turn 50.
As with other types of Isas, any money you save in a Lifetime Isa can grow completely free of tax, and you can choose to save or invest it.
You'll also get a 25% bonus from the government to boost your savings, up to a maximum of £1,000 a year.
If you use a Lifetime Isa to save for retirement, you won’t be able to withdraw your money until you turn 60. And if you withdraw it for something other than paying for retirement or buying your first home, you’ll have to pay a 25% penalty.
The Lifetime Isa will be replaced with a new savings product solely for first-time buyers in April 2028, under changes announced in the Autumn 2025 budget.
You’ll be able to open a lifetime Isa until the new product becomes available in 2028. If you already have one, you will be able to continue saving into it under the current rules indefinitely, according to HMRC.
The first thing to note is that it’s not a binary choice – you can build up your retirement savings using a combination of pensions and Isas.
Both offer tax advantages, but pensions are more tax-efficient overall. Their big advantage is that you get tax relief on your contributions, so the money you would have paid in tax on your earnings goes into your retirement pot instead.
If you save in a workplace pension, you’ll receive employer contributions of at least 3% of your qualifying earnings (between £6,240 and £50,270).
This table outlines the key differences between Isas and pensions:
Pensions | Isas |
|---|---|
| Payments | |
| Money saved in a pension benefits from tax relief based on the highest rate of income tax you pay. | There’s no tax relief on money you save. You’ll receive a 25% bonus (up to £1,000 a year) on any money paid into a Lifetime Isa. |
There’s no limit on the amount you can pay in, but the maximum you’ll receive tax relief on is £60,000 or 100% of your salary per year – whichever is lower. | You can save or invest up to £20,000 a year (the limit for Lifetime Isas is £4,000). |
| Access | |
You can withdraw money once you turn 55 (57 from 2028). | You can withdraw money at any time (with Lifetime Isas you'll pay a penalty unless you're withdrawing the money to buy your first home, or you're aged 60+) |
You can withdraw 25% tax-free. The rest of your savings will be subject to income tax. | You won’t pay any tax on the interest you earn or on money you withdraw from an Isa. |
| Impact on benefits | |
Pension savings don’t affect your entitlement to means-tested benefits until you reach state pension age. | Savings in an Isa count towards your entitlement to means-tested benefits. |
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If you’re a higher-rate taxpayer, you’ll qualify for pension tax relief at 40%, or 45% for additional-rate taxpayers. This means you need to contribute only £60 or £55, respectively, to top up your pension by £100.
Different income tax rates apply in Scotland: if you're a higher, advanced or top rate taxpayer you'll qualify for pension tax relief at 42%, 45% or 48% respectively.
This is worth more than the Lifetime Isa bonus.
If you have a workplace pension, employer contributions will further boost your savings. Legally, minimum contributions to a workplace pension are set at 8% of your qualifying earnings, with your employer contributing at least 3% of this. Some workplaces offer much more, or match your contributions up to a certain limit.
You earn £55,000 a year and pay the minimum into a workplace pension scheme (5% employee and 3% employer contributions).
You contribute £2,200 a year from your salary. The government automatically adds £550 (20%) in tax relief, and you can claim back an additional £550 via your tax return, which you reinvest into your pension. You receive £1,650 in employer contributions, meaning £4,950 goes into your pension in total.
If you saved £2,200 in a Lifetime Isa, you’d receive an extra £550 thanks to the 25% government bonus, bringing your savings total to £2,750.
If you saved £2,200 into a standard Isa, you wouldn’t receive any additional money via tax relief or a government bonus.
This example assumes that you receive pension contributions on 100% of your salary, you pay tax at the rates for England, Wales and Northern Ireland, your workplace pension operates under relief at source arrangements, and you reinvest tax relief claimed via your tax return into your pension.
If you’re a basic-rate taxpayer who's self-employed (or starter or basic-rate taxpayer in Scotland), so you don't receive pension contributions from an employer, you may want to consider a Lifetime Isa. The 25% government bonus is equivalent to the tax relief you’d receive on pension contributions, and you won’t be taxed on withdrawals.
An Isa is a good option if you’ve reached your annual allowance for pension contributions. You won’t be taxed on withdrawals, and if you save into a Lifetime Isa, the government bonus will boost your savings.
When saving for retirement, it’s best to leave your money untouched for as long as possible. That said, an Isa can be a useful tool if you still want the option to access your money if needed.
Whether you’re unsure if you have enough to retire, or are already accessing your savings, our money guidance service can talk you through your options. Which? Money members get unlimited access to them via phone.
Find out moreFor passing money on tax-efficiently, pensions currently have the edge over Isas, as they're excluded from your estate for inheritance tax (IHT) purposes.
But from April 2027, they will no longer be exempt.
Isas can be handed to your spouse or civil partner tax-free – they’ll get an extra Isa allowance equivalent to the value of the Isa inherited. If inherited by anyone else, Isas will be included as part of your estate for IHT calculations.