Since the announcement that pensions will be brought into inheritance tax from April 2027, it's become one of the most common questions in financial planning: "Is there any point in pensions now? Should I just use ISAs instead?"
The short answer: no.
Pensions are still the single most powerful savings tool for the vast majority of people. The 2027 changes don't alter that. However, we understand why you're asking so let's walk through the numbers properly.
What hasn’t changed and why it matters?
When you put money into a pension, the government gives you money back. That’s simply how pension tax relief works.
If you're a basic rate taxpayer, every £80 you put in becomes £100 in your pension. The government adds £20. If you're a higher rate taxpayer, that £100 in your pension effectively costs you just £60 after you claim the additional relief on your tax return.
ISAs? Every pound you put in is a pound you've already paid full tax on. No top-up. No boost. No government contribution.
The same amount from your pocket means 25–67% more invested in a pension. That gap is enormous over a 20-30 year investing horizon.
Employer contributions add another layer of benefit. In a workplace pension, employers must contribute at least 3% of salary, often more. There’s no ISA equivalent.
What's actually changing in 2027?
Currently, pensions sit outside your estate for inheritance tax. If you die with money left in your pension, it passes to your beneficiaries without an IHT bill. From April 2027, that changes -unused pension funds will count as part of your estate.
For estates above the threshold (£325,000, or up to £500,000 when passing your home to direct descendants), this could mean 40% tax on pension savings you leave behind.
That may sounds bad but let's put it in context.
Why pensions still win? (even with the IHT change)
The tax relief on the way in still outweighs the tax on the way out.
Take a higher rate taxpayer who puts £6,000 of their own money into a pension. After tax relief, that becomes £10,000 in the pot.
If the full £10,000 eventually gets hit with 40% IHT, the beneficiaries receive £6,000.
You've broken even and that's the worst case, assuming the money was never invested, never grew, and was never touched.
In reality, that £10,000 has years or decades to grow tax-free before anyone pays IHT on it. The maths strongly favours pensions.
Pensions are for retirement income. Most people draw down their pension during their lifetime. IHT only applies to what's left when you pass away - which for many people is relatively little.
It’s also important to remember that ISAs have always formed part of your estate for inheritance tax purposes. The 2027 change doesn’t make ISAs more favourable, it simply brings pensions into line with where ISAs already are.
Many estates won't pay IHT regardless. If your total estate is below the threshold, the 2027 change is irrelevant to you.
When ISAs genuinely make sense?
You’ve maxed out your pension allowance - Once you’ve used your £60,000 annual pension allowance, ISAs are the natural next step.
You need access before age 55/57 - ISAs allow you to access your savings at any time, which can be useful if you're planning early retirement, a career break, or a major purchase.
Your retirement savings are already well funded - If your pension is on track, ISAs can add flexibility and diversification alongside it.
The right order (for most people):
It can help to think of it as a simple priority list:
1. Workplace pension up to the employer match - this captures the full employer contribution
2. Increase pension contributions - pension tax relief makes this one of the most efficient ways to save for retirement
3. ISA contributions - offer flexibility and tax-free growth, but without the contribution boost
4. Other investments - once pension and ISA allowances have been used
Now let’s look at your situation specifically…
The right balance depends on your age, tax rate, employer scheme, estate value, retirement plans and what you want to leave behind. There’s no one-size-fits-all answer - which is why generic headlines about “pensions vs ISAs” can be misleading.
It’s important not to make knee-jerk decisions based on a tax change that hasn’t happened yet. The 2027 rules add a new consideration to financial planning, but they don’t change the fundamentals. For most people, pensions remain the most tax-efficient way to build retirement wealth - by a significant margin.
If the IHT changes have prompted you to review your strategy, it may be worth looking at how pensions and ISAs work together in your overall plan. We’re happy to talk it through with you.
Important Information
This information is for general guidance only and does not constitute personal financial advice. You should seek professional advice tailored to your individual circumstances before making any financial decisions.
Pensions are designed to help fund retirement, so money can't usually be taken out again until at least 55 (rising to 57 from April 2028). Pension and tax rules may change, and benefits depend on your individual circumstances.
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