Tudor Stainsby, Chartered Financial Planner at The Penny Group, provides insight into choosing between ISAs and pensions based on short, medium and long-term priorities.

ISAs or Pensions: Where to focus first?

With Christmas decorations hastily stored away and New Year’s resolutions filled with fresh optimism, the start of a new year is the perfect time to feel organised and in control. A review of your finances is a central pillar when creating a strong foundation for the year ahead, and this can often involve considering whether it is better to prioritise an ISA or pension.

Should I contribute in a pension or my ISA?

One of the most common questions in financial planning is whether it is better to prioritise ISAs or pensions. Both are highly tax-efficient savings vehicles, but they serve different purposes. The “right” answer often depends on your stage of life, income level and long-term objectives.

I’ve often found the best way to help clients understand this is to begin viewing your money through the short, medium and long-term lens.

Short-term financial planning and emergency savings

For the eagle-eyed reader, you may have noticed that the FTSE 100 index has recently climbed above 10,000 points for the first time on the 2nd January 2026 which is a significant milestone. The FTSE 100 tracks the performance of the 100 largest companies on the London Stock Exchange.

This news will naturally increase the curiosity to consider investing your hard-earned money, however, the very first step to financial freedom is to ensure we have the basics covered through an emergency fund.

This is money that you may need within the next 3-year period and should be retained as cash in an accessible current or savings account. We typically suggest anywhere between 3-6 months of essential expenditure (food, rent, bills etc) although this is very personal.

Want to know where you stand compared to your peers? The average UK adult has a cash savings pot of £16,067 and c. 39% of UK adults has £1,000 or less in savings altogether.

https://www.money.co.uk/savings-accounts/savings-statistics

Your ability to save is more in control than you may think and a key psychological hurdle is understanding that you don’t need a specific reason to save either. According to the Financial Conduct Authority, the majority of Brits’ reasons for saving is for a ‘rainy day’ which despite sounding blasé, is ironically helpful as savings without a specific purpose provides flexibility and choice over how you spend your time. It gives you the opportunity to think – is this a need or a want. A frequently overlooked return on wealth.

Medium Term financial planning using a Stocks and Shares ISA

This is money that you may not need for the next 3-5 years which could be invested, although it is important to ensure your funds remain accessible if required. The typical tax-wrapper we would suggest is a Stocks and Shares Individual Savings Account (ISA) which allows your money to grow entirely free of tax, making it one of the most tax-efficient savings options available. A key benefit is when you eventually need to withdraw money there are usually no access restrictions for you to worry about. Please note that not all ISA products are instantly accessible, an adviser will be able to provide guidance on this.

It is important to ensure your money is working harder for you especially when considering how inflation (rising prices) has outstripped the level of interest you have earned in the bank over the past 5-year period considerably.

Despite the recent changes announced in the 2025 Autumn Statement, within a Stocks and Shares ISA you will continue to have up to £20,000 ISA allowance that can be contributed into the tax wrapper to invest diversely across the globe and via different asset classes in a bid to grow your money over and above the rate of interest available.

You will need to consider an investment platform and the level of investment risk you are both willing and able to take, depending on your investment goals. There is a vast amount of choice here and you may find it useful to seek initial advice.

ISA vs pension: How to balance both effectively

For many individuals, the decision is not about choosing one over the other, but about using ISAs and pensions together as part of a wider financial planning strategy. Naturally, the combination of the using an ISA and a pension should be directly aligned to your own circumstances and objectives to ensure you are building financial robustness.

Younger savers may prioritise ISAs when considering saving for a house, wedding or starting a family to maintain flexibility, whilst continuing to contribute to their workplace pension scheme through auto-enrolment in the background. As earnings increase, pensions often become more attractive due to higher marginal tax relief, and this becomes especially important once earnings breach £100,000.

In later working life, the balance may shift again once the effects of compounding begin within the pension. ISAs can play a valuable role in bridging the gap between either early retirement and pension age or retirement and state pension age - by managing tax during retirement, allowing income to be topped up without pushing someone into a higher tax band or affecting allowances.

Legislative risk should also be considered. Tax rules change over time, and diversification across different wrappers can help reduce reliance on any single set of rules.

Ultimately ISAs and pensions are complementary, not competing, tools. A well-structured financial plan considers how and when each should be used to support income needs, tax efficiency and long-term security, both during life and beyond.

Click here for more information on pensions.

Get expert advice on ISAs and pensions

Planning how you use ISAs and pensions is not about chasing tax-efficiency at all costs, nor is it about relinquishing all control of your assets. It is about ensuring that more of your wealth passes to the people you care about, in a controlled and considered way.

Starting early provides more options, greater flexibility and better outcomes for your financial goals, short, medium or long-term.

Remember, all decisions should be considered in the context of your own personal circumstances.

If you wish to discuss your financial position, savings and investment options, or wider financial planning solutions available to you, please contact one of our advisers.

You can reach us at info@thepennygroup.co.uk or on 0207 061 2345.

An ISA is a medium to long term investment, which aims to increase the value of the money you invest for growth or income or both. The value of your investments and any income from them can fall as well as rise. You may not get back the amount you invested.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

The Penny Group Ltd is an appointed representative of The Openwork Partnership, a trading style of Openwork Limited which is authorised and regulated by the Financial Conduct Authority.

Approved by The Openwork Partnership on 13/01/2026