Should I have a savings account or pension?
The earlier you start planning for your retirement, the more money you can save. Pensions come with generous tax breaks but they’re not as flexible as savings accounts. Here we look at which might be best for your nest egg.
Key takeaways
Pensions are designed for the long term and can’t be accessed until you’re at least 55
Savings accounts allow you to withdraw your money when you need it, unless they are fixed for a set period of time
There are government bonuses available for pension pots and Lifetime ISAs
When it comes to preparing for retirement, it can be overwhelming thinking about how much you might need to live off, and where to save your retirement fund.
Most people will have a pension through their employer and if you do it’s worth checking where it is invested and what fees might be associated with it.
You can also save for your retirement in a savings account or a tax-free ISA. There are benefits and drawbacks of both, and the best option for you will depend on things like how much you earn, your retirement goals, and how much you can afford to put away.
Pension or savings?
You don’t have to pick either a pension or a savings account for your retirement fund, many people use both. In fact, using both savings and pensions could be beneficial for greater flexibility, tax breaks, diversification of risks, and increasing the savings nest egg for the future.
However, it’s key to know the differences between the two, including how they work when it comes to access to your money and what tax breaks and government bonuses are available.
What's the difference between savings and pensions?
Savings accounts and pensions help you to put away money. They usually also pay interest or grow with the stock market. There are lots of differences in how they both work including:
How you earn interest
When you can withdraw your money
How much tax is due
The government bonuses and tax-breaks available
What is a pension?
Pensions, are long-term savings and investment products. You put away money, usually monthly, and this is invested. There are government tax breaks available for those saving within a pension and most employers will pay into workplace pensions too. You can only access the money within them when you turn 55 (rising to 57 in 2028).
Types of pensions
Here are some of the main types of pensions in the UK:
Types of pensions
Defined contribution pension
This is a workplace pension which both you and your employer put money into. The final value depends on how much is paid in and the performance of the investments. You will be automatically enrolled into a workplace pension, through a scheme called auto enrolment.
Self invested personal pension (SIPP):
You choose where you invest your money with a SIPP, which can be a good option for those who aren’t eligible for a workplace pension, such as the self employed. Money is invested with a pension provider and invested in a range of different assets, in the same way as a company scheme.
Defined benefit pension
These are less common and are typically set up by employers. They promise a specific annual income upon retirement, calculated based on your salary, how long you've worked for the company, and the terms of the pension scheme.
State pension
This is the pension paid out by the government if you have made enough National Insurance contributions within your working life (you can claim credits for these if you’re not working).The maximum weekly amount is £203.85, and this is rising to £230.25 a week from April 2025.
Savings accounts
You can use a savings account for your retirement and there are no age-related restrictions on when you can withdraw your money. Some savings products, like ISAs, offer tax-free benefits, making them an appealing option for many savers.
Types of savings accounts
There are many different types of savings accounts available. Read our guide on how to choose the best savings accounts for an in-depth look at each savings account, including:
ISAs
Easy access savings accounts
Notice accounts
Fixed-rate bonds
Regular savings accounts
Help to Save accounts
Peer to Peer lending
Advantages of a pension pot
Pensions are designed with retirement in mind and offer several benefits:
Tax relief: Contributions are tax-efficient, as they are made before tax is taken out. Pension providers can also claim tax back on your behalf. Higher-rate taxpayers can claim additional relief
Employer contributions: Many employers match your pension contributions or pay in a higher percentage
Compounding returns: The power of compound interest works best over long periods, making early pension contributions particularly beneficial.
Guaranteed income: Some pensions can provide a regular income for life through annuities or remain invested for potential growth. You have the option to buy an annuity for a guaranteed income, with the flexibility of annuities to provide fixed, increasing, or inflation-adjusted income. Additionally, you can receive an income from your pension while it remains invested in the stock market, which could allow the pension to continue to grow.
Disadvantages of a pension
However, pensions are not without their drawbacks:
Accessibility: Pensions are locked away until at least age 55, making them less flexible than savings
Complexity: Pensions can be difficult to understand, but there are lots of free guides to help, including our guide
son pension plans. You can also speak to a financial advisor for help, although there may be a fee for this.Investment risks: The value of your pension can fluctuate with the market, although there is usually time to recover any losses before you retire. Pensions can be hard to access, and the complexity of saving rules, difficult choices at retirement, and the potential for poor returns due to investment risks are potential drawbacks
Advantages of a savings account
Savings accounts also have their perks:
Flexibility: You can access your money more easily than with pensions
Simplicity: Setting up a savings account is generally quicker and less complex
Tax efficiency: If you have an ISA allowance, your savings or investment returns grow free of tax. All savers also have the personal savings allowance – allowing a certain amount of interest to be earned tax-free
Disadvantages of a savings account
Yet, savings accounts have limitations:
Inflation risk: Cash savings can lose real value over time due to inflation
Tax breaks: Unlike pensions, savings accounts don't have the same level of tax advantages. The disadvantages of savings accounts include the erosion of value due to inflation and missing out on the generous tax breaks available with pensions
Easy access to your money: Unlike with pensions, there’s nothing stopping you taking your money out of a savings account. This can be a benefit, if you need the money, but it also means there will be less in your pot for when you stop working.
Additional resources
We have a wide range of articles and guides to help you with understanding pensions and saving for later life.
Compare savings and pensions with MoneySuperMarket
At MoneySuperMarket, we're here to help you compare savings products and pension plans. We've partnered with MoneyFarm to offer tailored pension advice.
Whether you’re looking to open a savings account or a pension plan, MoneySuperMarket can help you.
We have a full range of savings products, including cash ISAs, fixed rate bonds, and easy access accounts for you to compare.
And if you’re looking for a pension plan, we’ve partnered with private pension provider MoneyFarm, to help you get your pension goals in order.
Capital at risk. This website does not constitute personal advice. If you are in doubt as to the suitability of an investment please speak to a financial adviser. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.
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