If you’ve ever asked whether to prioritise your ISA or your pension, you’ll have seen two things:

1. Endless arguments about tax wrappers, and
2. Very few answers that feel grounded in real life.

So here’s my take.

What I Actually Use Right Now

What I accounts I have and consider ‘active’:

• An employer DC pension (which allows salary sacrifice)
• A LISA I’ve been putting £4,000 in a year for 3/4 of the last years.
• A flexible cash ISA
• The cheapest stocks and shares ISA I could find a number of years ago, which at the time was iWeb through Halifax

On the pension side it has always been through work schemes. In my first job out of uni, I did the research and picked funds manually. In hindsight, I’m not sure it made a huge difference – I might come back to that in another post.

Since then, if there’s an “adventurous” option, I’ll take it because I generally want higher equity allocations than the default will otherwise give. Otherwise, I trust the default. Not because I think it’s amazing, but because done is better than perfect, and I’m okay with letting professionals run with a broadly diversified strategy.

For ISAs, it’s all about keeping it cheap and passive. Early on I trusted Hargreaves Lansdown and ended up in the Woodford debacle, years later I’m still stuck there. Never again. Cheap. Simple. End of. If I’m not able to make the selection myself, and I’m not paying someone to do it for me, I’ll stick to passive strategies.

The Trade-Offs in Plain English

Here’s the real question people are trying to solve, where should I put my next £100? And the right answer for you (as ever) is, it depends.

Tax Benefits

• Pensions: You get tax relief on the way in. That means more invested upfront, but it’ll be taxable on the way out.
• ISAs: You get tax-free growth and tax-free access later — but no upfront relief.

If you’re a higher-rate taxpayer, that 40% tax relief on pensions is hard to ignore. Even as a basic-rate payer, it’s still decent. But if you expect to have a chunky pension pot and other income in retirement, allocating to your pension might have limited tax advantages.

Flexibility

• ISAs: You can withdraw any time, no questions asked, other than the LISA.
• Pensions: You’re locked in until age 55 (and rising…).

This matters. If there’s even a chance you’ll need the money before retirement, ISA wins hands down.

How I Actually Think Through It

This isn’t about picking one over the other forever. It’s about understanding your priorities right now.

Here’s how I’d break it down:

If you want to get a bit more granular

Pensions come with a 25 percent tax-free withdrawal (up to a limit), available to be taken as a lump sum. The rest is treated as income and taxed accordingly. That mix is important when thinking about what your drawdown might look like in retirement.

If your goal is to avoid hitting higher-rate tax bands, the common rule of thumb is to stay under around £50,000 of taxable income each year. But because only 75 percent of your pension pot is taxable on drawdown, you can go further than you might think before breaching that threshold.

Here’s a rough example:

• A £1.5 million pension pot would give you the £268,000 tax-free
• The remaining £1.23 million would generate taxable income
• A 4 percent drawdown from the remaining pot is around £50,000 per year
• After applying your personal allowance, you’re on the margins of the higher-rate income tax band

So in practice, you could draw down 4 percent from a £1.5 million pot and stay within the basic-rate band. That makes £1.5 million a useful mental goalpost for when the tax efficiency of pensions starts to flatten out.

This isn’t tax or financial advice, please never read anything on this website as such, tax rates change, state pensions would change your allowance etc. etc.. No one knows what tax bands will look like in 20 or 30 years. But it can help frame how much benefit you are really getting from extra pension contributions – especially if you are weighing them against liquidity or shorter-term flexibility.

This kind of comparison can help clarify whether that next £10,000 is better off going into your pension or your ISA. It is not about trying to optimise everything to the pound. It is about understanding what is still working hard for you and what is mostly locked up for the future with diminishing returns.

If you are losing childcare benefits but can use pension contributions to bring down taxable income today then there may be a benefit for using pension anyway despite future rate being higher. It all depends.

If your employer pays the employer NIC’s for your salary sacrifice then that’s genuinely a free return that will compound and further de-risks the strategy or increases the effective rate of return.

What I’ve Done

• As a graduate, I maxed out the employer matching available. It wasn’t much, and this was before automatic enrolment schemes. I still needed cash day to day, and I was a basic-rate taxpayer
• After qualifying as a chartered accountant, I slowly increased my contributions with each pay rise. Initially, I set aside about 50 percent of each increase. Later on, as the pay rises got bigger and my lifestyle didn’t inflate, I pushed it to 100 percent of the basic uplift. My overall savings rate increased from a few % to something much more meaningful.
• When I joined an employer offering salary sacrifice, I started using it as much as possible. I was fortunate to receive some retention bonuses during a company acquisition, and I sacrificed most of those too. Combined with subsequent pay rises, I was able to use carry-forward allowances and contribute the full annual pension allowance for a few years in a row. When you get salary sacrifice plus National Insurance top-ups, it’s just too good to ignore
• Having done all that, I’ve now paused additional contributions above the minimum and am focusing more on liquidity. Why? Because I have more than 20 years before I can access my pension. And while nothing’s guaranteed, I suspect that any further contributions might push my drawdown into higher-rate territory, which reduces the marginal benefit. Losing the National Insurance top-up is a shame, but with one child and a new house, my focus has shifted toward reducing financial fragility. The risk of redundancy, career changes, or needing to downshift is much more present now than it was five years ago
• I’ve opened a cash ISA for the first time – purely to create short-term optionality. If we want to take time off, reduce hours, or deal with a big expense on our very old house, I want that flexibility
• I try to fill my stocks and shares ISA each year with passive funds. In the past, I also used the LISA strategy – putting £4,000 into the LISA and the rest into the main ISA – to maximise the combined tax benefits. That tells you something. Historically, I valued efficiency more than flexibility. But lifestyle changes have shifted that balance

If I had extra to invest right now, it would probably go into the ISA – not because it’s better, but because it gives us more breathing room in the medium term.

General reflections

If you are early in your career and not earning much, but expect your income to rise, I usually suggest starting with the ISA. You are probably financially fragile, and the liquidity helps. Plus, you will never get that ISA allowance back. In a few years, if your income increases sharply, you can look at carry-forward pension contributions.

Also, if you are lucky enough to be earning a lot, it doesn’t take that many years of £60,000 contributions before compounding and tax limits start to make pensions more complex. At that point, the ISA remains your most flexible tool.

You can withdraw from an ISA or LISA to buy your first home. You cannot do that with a pension. Don’t underestimate the power of liquidity.

It is also worth noting that pensions used to offer strong inheritance tax benefits. That is changing. Far too much detail for this post, but that’s why continually contributing to a pension pot might not make as much sense as it used to.

Concluding thoughts

There is no perfect answer here. That is the wrong goal.

The right question is: what gives you the most flexibility, confidence, and momentum in your financial life right now?

If you are early in your journey, an ISA is a great place to start. It is simple, liquid, and forgiving.

If you are in a strong earnings phase, your pension is probably the most efficient place to stash long-term money, especially via salary sacrifice.

If you can do both, even better.

But don’t let perfectionism stall you. I have taken the “default” route most of my life, and it has worked out fine. Sometimes the win is just getting the money where it needs to be, and moving on.

Next up

I’ve done it! 5 posts on my new blog. Horray for me doing a thing. Let’s see what’s coming next.