You’ve probably come across Stocks & Shares ISAs and private pensions (SIPPs) if you’ve started planning for retirement. But you might be wondering if you can just use an ISA instead of a pension to fund your retirement.
TL;DR? Yes, you could use an ISA as part of your retirement plan. However, whether you should or not will depend on your long-term wealth goals like when you’d like to retire, how much you’d like to have in your retirement pot, your tax situation and how much flexibility you want with your money today.
In this post, we’ll explore how ISAs and SIPPs work, the pros and cons of using an ISA for retirement, how to choose between them and how InvestEngine can help you reach your pension goals.
What is a Stocks & Shares ISA?
A Stocks & Shares ISA is a type of investment account. You can invest up to £20,000 per tax year and pay no income tax or capital gains tax on the returns you earn.
What is a SIPP?
A SIPP is a self-invested personal pension which is sometimes called a private pension. It’s a tax-efficient vehicle, specifically designed to save for your retirement. You can invest up to £60,000 or 100% of your earnings per tax year (whichever is lower) and the government will add tax relief of at least 20% on your contributions if you are a UK taxpayer.
ISA vs SIPP: Key differences for pension planning
Both a S&S ISA and a SIPP are great for long-term financial planning, but they serve different purposes.
| Feature | Stocks and Shares ISA | SIPP |
|---|---|---|
| Annual allowance | £20,000 | Up to £60,000 or 100% of income* |
| Tax relief on contributions | No | Yes |
| Tax on withdrawals | No | Partially (you can withdraw a 25% lump sum tax-free, and then Income Tax applies to the rest of your pot) |
| Access to funds | Anytime | From age 55 (57 from 2028) |
| Carry forward unused allowance? | No | Yes (up to 3 years) |
| Flexible withdrawals | Yes | No (limited access) |
| Inheritance tax planning | Not always exempt | Usually outside estate |
*You can put in more than the limit, but tax relief only applies to £60,000 or 100% of your earnings (whichever is lower). Whatever you contribute above that level won’t benefit from tax relief. Remember that tapered allowance applies to those who earn over £200,000.
Benefits of using a Stocks & Shares ISA for retirement
By far the most appealing factor of using a Stocks & Shares ISA as a pension substitute is the flexibility. You’re not locked in and you have access anytime. Should you wish to retire earlier than 55, you’ll have this pot of investments to live off.
You’ll pay no tax at all on your withdrawals, plus there’s no impact on your income tax as withdrawals don’t count as income. ISAs tend to be more easily transferable too as, depending on your circumstances, it could go to your spouse tax-free.
Drawbacks of using a Stocks and Shares ISA as a pension
SIPPs are great tax-efficient vehicles, so by using a Stocks & Shares ISA instead, you’ll be forgoing some pension specific benefits.
You’ll get no tax relief on the money you put inside a Stocks & Shares ISA because you’re investing post-tax money. It’s not always Inheritance Tax efficient as ISAs are part of your estate (though some exceptions exist).
Don’t forget, the government tops up any contributions you make into a SIPP by 20% (up to £60,000 or 100% of your earnings per tax year – whichever is lower). Higher and additional rate taxpayers can claim back a further 20% to 25% via the self-assessment process.
You’ve got a lower annual limit in ISAs of £20,000 compared to the £60,000 available in a SIPP. Plus, because there’s no limit on accessing your ISAs, there’s a temptation to dip into your investments early which can reduce long term growth.
Combining a SIPP and a Stocks & Shares ISA for retirement
For many investors, a mix of both offers the best of both worlds.
You can use a SIPP for long term investments, benefitting from the additional tax-relief and higher contribution allowances.
Invest in a Stocks and Shares ISA for more flexible access and additional savings. This is a particularly appealing option for those who plan to retire earlier than 55 as your investments can act as a bridging pot of funds until you are able to access your SIPP.
Together, they give you more control over your retirement income, and help you plan withdrawals in the most tax-efficient way.
What’s the best way to split contributions between a pension and a Stocks & Shares ISA?
There isn’t a one-size-fits-all approach. The right balance depends on your income, tax position, and goals. Take these four steps to help you figure out how to plan your retirement:
- Maximise pension tax relief first
Contributions to a SIPP benefit from tax relief. For example, if you’re a basic rate taxpayer, every £80 you pay in becomes £100 in your pension. Higher rate taxpayers can claim back 20% to 25% more. For long term retirement savings, this is hard to beat.
Those who are earning above £50,270 as their yearly salary may benefit from contributing more to their SIPP in order to stay within the basic tax rate.
- Use an ISA for flexibility
Unlike a pension, an ISA allows withdrawals at any age, tax-free. This makes ISAs useful if you want access to your investments before pension age (currently 55, rising to 57 in 2028), or if you want a pot you can dip into alongside your pension in retirement.
- Think about allowances
- ISA allowance for 2025/26: £20,000
- SIPP tax relief limit: £60,000 or 100% of earnings (whichever is lower, with tapering for very high earners)
- Balance long-term and short-term needs
A common approach is to put enough into your SIPP to capture the valuable tax relief, then use ISAs for any extra savings where flexibility matters.
How InvestEngine can help you plan your pension
With InvestEngine, you can open and manage both an ISA and SIPP in one place.
Our DIY portfolios means you have more control over where your pension is invested. Use filters to find out which companies you’re investing in with each ETF and create your own weightings depending on the risk you’re willing to take.
We also charge no platform fees for DIY portfolios (ETF costs apply). Instead of paying costly fees, these savings can stay invested into your chosen ETFs, allowing you to benefit from potential compound interest.
Start a Savings Plan, so you can also automate weekly or monthly contributions, helping you stay on track with topping up your S&S ISA and your SIPP.
With fractional investing, you can get started with as little as £1 and invest cash automatically with our AutoInvest feature.
Conclusion
A Stocks & Shares ISA isn’t a pension, but it’s still a powerful tool for retirement planning. It gives you flexibility, tax-free growth, and full control over how and when you access your money.
For most people, combining an ISA and a pension like a SIPP gives the best results: peace of mind and security for the future, flexibility and easy access for the present.
FAQs
- Can I use my ISA instead of a pension? Yes, but you won’t get the tax relief pensions offer. Many people use both.
- Should I use both an ISA and a SIPP for retirement? For many people, yes. Using both gives you the pension’s tax relief benefits and the ISA’s flexible, tax-free withdrawals. Together, they help create a more balanced retirement plan. Plus, there’s no limit on how many ISAs and SIPPs you can open or contribute to in a single tax year.
- Can I retire early using only a Stocks & Shares ISA? Yes, potentially. Because ISAs allow withdrawals at any age, they can help you fund early retirement before you can access a pension. The challenge is the lower annual allowance* (£20,000 compared to £60,000 for a pension).
- Are ISA withdrawals taxed? No, everything you take out of a Stocks & Shares ISA is tax-free.
- Can I transfer my ISA into a pension? No, you can’t transfer ISA savings directly into a pension. You would need to withdraw the money from your ISA and then contribute it into a pension like a SIPP (subject to annual allowance rules).
- What happens to my ISA when I die? It becomes part of your estate and may be subject to Inheritance Tax. Some exemptions apply if you passed your ISA to a spouse.
- Can I transfer my workplace pension into a Stocks & Shares ISA? No, you can’t transfer a workplace pension into a Stocks & Shares ISA. They’re two very different products with separate rules. You can transfer a workplace pension into an InvestEngine SIPP which gives you more control and offers lower fees. This could be an option if you want to consolidate your pensions from multiple previous jobs.
- Does investing in an ISA or SIPP affect my workplace or state pension? No, your private investments do not affect your workplace or state pensions as they are separate products that are subject to separate allowances and tax rules. Workplace pension contributions are taken from your salary before tax, often with an employer contribution added. The state pension is based on your National Insurance contributions or credits, not on how much you save or invest.
- How do flexible ISAs work if I’m saving for retirement? With a flexible ISA, you can withdraw and then put the money back in the same tax year without losing any of your £20,000 ISA allowance. This matters as you can benefit from short term access, keep your allowances in tact and support early retirement.
Important information
Capital at risk. The value of your portfolio with InvestEngine can go down as well as up and you may get back less than you invest. ETF costs also apply.
This communication is provided for general information only and should not be construed as advice. If in doubt you may wish to consult a professional adviser for guidance.
Tax treatment depends on personal circumstances and is subject to change, and past performance is not a reliable indicator of future returns.