For most people in their 20s and early 30s, the answer is both, in a set order: build a small emergency fund, pay enough into your workplace pension to get the full employer contribution, then put money you might need before your late 50s into an ISA. The employer contribution and tax relief make the pension hard to beat, but you cannot touch it until 57 at the earliest, and young adults have plenty of big costs before then.
This guide is for people early in their working life. If you are later in your career and weighing up retirement income, see our wider guide to which to prioritise first.
The order that works for most young savers
Think of it as a ladder. Move up a rung only when the one below is in place.
- 1. A starter emergency fund of a month or so of essential spending in an easy access savings account, so a broken phone does not go on a credit card.
- 2. Your workplace pension, up to the employer match. Never opt out if you can avoid it. If your employer matches more than the minimum, contribute enough to get all of it.
- 3. Clear expensive debt such as credit cards and overdrafts. Student loans are different and do not need paying off early for most people.
- 4. A fuller emergency fund of three to six months of essentials.
- 5. Medium-term goals in an ISA, such as a house deposit, a wedding or a career break.
- 6. Extra pension contributions once those goals are on track, especially if you become a higher-rate taxpayer.
Why the workplace pension comes first
If you are 22 or over and earn more than £10,000 a year, your employer must automatically enrol you. Under the minimum rules, 8% of your qualifying earnings (pay between £6,240 and £50,270) goes in: 5% from you, including tax relief, and 3% from your employer.
Here is what that looks like on a £30,000 salary, where qualifying earnings are £23,760:
| Contribution | Amount a year |
|---|---|
| Your 5% (gross) | £1,188 |
| Of which tax relief | £237.60 |
| Cost to you | £950.40 |
| Employer 3% | £712.80 |
| Total into your pension | £1,900.80 |
You get roughly £2 in your pot for every £1 of take-home pay you give up, before any investment growth. No ISA can match that. Opting out to save into an ISA instead means giving up your employer's money entirely. Use our pension calculator to see what your contributions could grow to, and read how pension tax relief works.
Why you still need an ISA
The catch with a pension is access. The minimum age you can take money from a private or workplace pension rises from 55 to 57 on 6 April 2028, and could rise further in future. Anything you might need in your 20s, 30s or 40s belongs elsewhere.
An ISA lets you save or invest up to £20,000 a year with no tax on interest, dividends or gains, and you can take money out whenever you need it. Use a Cash ISA or easy access account for money you need within about five years, and a Stocks and Shares ISA for longer goals where you can ride out ups and downs. From 6 April 2027, under-65s will be able to put up to £12,000 a year of the £20,000 into cash ISAs, with the rest in stocks and shares.
Pension, ISA and Lifetime ISA compared
| Feature | Workplace pension | Stocks and Shares ISA | Lifetime ISA |
|---|---|---|---|
| Boost going in | Tax relief plus employer contribution | None | 25% government bonus, up to £1,000 a year |
| Annual limit | £60,000 (capped at your earnings) | £20,000 overall ISA limit | £4,000, within the £20,000 |
| Access | From 57 (from April 2028) | Any time | First home, age 60, or terminal illness; otherwise a 25% charge |
| Tax coming out | 25% tax-free, rest taxed as income | Tax-free | Tax-free |
The pension's tax treatment on the way out is less generous than an ISA's, but the employer contribution more than makes up for it at the matched level.
Where the Lifetime ISA fits
If you are 18 to 39 and saving for your first home (price up to £450,000), a Lifetime ISA is usually the best home for that money after your employer match. The 25% bonus is a big boost on a deposit.
As a retirement account, it is weaker than a workplace pension for employees, because there is no employer contribution and the withdrawal charge of 25% means you lose more than the bonus if you take money out early for anything else. It can make sense for self-employed people with no employer pension, or basic-rate taxpayers who value tax-free withdrawals at 60.
The government has said it will replace the Lifetime ISA with a new, simpler ISA for first-time buyers. Existing accounts carry on and new ones can still be opened for now, so check the latest position on gov.uk before opening one for the long term.
How to split once the match is banked
There is no single right ratio. These rules of thumb help:
- Saving for a home in the next few years: put most spare money into a Lifetime ISA or Cash ISA and leave the pension at the matched level.
- No big purchases planned: consider raising your pension contribution by 1% each time you get a pay rise. You will barely notice it in take-home pay.
- Higher-rate taxpayer: extra pension contributions get 40% relief, which usually tips the balance towards the pension. Claim the extra relief through Self Assessment or by asking HMRC if your scheme uses relief at source.
- Repaying a student loan: if your employer offers salary sacrifice, pension contributions made this way reduce the pay used to work out student loan repayments, as well as saving National Insurance.
Mistakes young savers often make
Avoid these and you are ahead of most people your age.
- Opting out of the workplace pension to boost take-home pay, which throws away the employer contribution.
- Keeping long-term money in cash for decades, where inflation can erode it. Check the effect with our inflation calculator.
- Locking house-deposit money into a pension, where you cannot reach it.
- Losing track of old pensions when changing jobs. Use the government's Pension Tracing Service to find them.
- Leaving pension money in a default fund without ever checking what it invests in or what it charges.
Frequently asked questions
Quick answers to the questions young savers ask most.
Should I put money in a pension or ISA in my 20s?
Is a Lifetime ISA better than a pension?
Can I take money out of my pension early?
How much should I pay into my pension at 25?
Should I pay off my student loan before saving into a pension?
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