Should you use a pension or a lifetime ISA for retirement?
Pensions should be your first option when planning for life after you stop working, but did you know you can also use a lifetime ISA to put extra money aside for retirement?
Summary
If you have an employee pension (a pension your employer pays into), increasing your contributions to the maximum that your employer will match is always the best way to increase your retirement savings.
If you have maxed this out, and you pay basic rate tax (you earn under £50,270 a year), a lifetime ISA might be a good way to top-up your retirement savings.
This article is for information only. You should always seek advice from a professional before deciding how to save for your retirement, especially if you don’t have an employer pension.
Most people who have worked for an employer at any point in their lives will have a pension. This, along with your state pension, will most likely be your main source of income when you retire.
If you have some extra income that you’d like to put towards your retirement (very sensible), you could choose to do this by paying more into an existing pension, opening a new private pension or you might consider using a lifetime ISA.
Lifetime ISAs come with a 25% government bonus. That means when you pay in, the government pays in too.
So, a lifetime ISA can be a great add-on to your retirement fund, but it’s worth weighing up the different options before you decide.
Lifetime ISA or pension, which is right for you?
Your choice will depend on several factors:
- whether your employer will contribute to and/or match your own pension contributions
- how much money you earn and therefore which tax bracket you fall into
- your eligibility for a lifetime ISA (you can’t open one after you turn 40)
Employer pension ‘contribution matching’
This is when your employer will increase how much they pay into your pension if you increase it. This works out as a 100% increase on everything you pay in.
If you haven’t already increased your pension contributions to the maximum that your employer will match, this is likely to be the most financially savvy option for increasing your retirement savings.
How much you earn
The government offers ‘tax relief’ on pension savings, so when you pay money in, you get back the tax you paid on that amount. So, if you pay higher tax, you get more back.
With a lifetime ISA, you don’t get this tax relief, but you do get a 25% bonus on your savings.
If you’ve maxed-out your contribution matching or you don’t have a workplace pension, whether you pay more into a pension or use a lifetime ISA to top up your savings, could depend on which tax bracket you fall into.
Lower tax bracket (you earn less than £50,270 a year)
If you have paid 20% tax on the money you’re putting away, you’ll get 20% back when you put it into a pension.
But if you put this money into a lifetime ISA, you’ll get back 25%.
Higher tax bracket (you earn more than £50,270 a year)
However, if you paid 40% tax on that money, then you’ll get 40% back in a pension, but still only 25% in a lifetime ISA.
Lifetime ISA eligibility
As well as being between the ages of 18 and 39, you also need to be either a UK resident or a crown servant (or their wife or civil partner) to be able to open a lifetime ISA.
A lifetime ISA is a savings or investment account that gives you a 25% government bonus on everything you put in. You can put up to £4,000 each tax year into a lifetime ISA, meaning you could get up to a £1,000 bonus every tax year!
The money in a lifetime ISA is tax-exempt, so you won’t have to pay tax on the money you take out, regardless of how much it is. However, you will likely have paid tax already on the money you pay in.
However, you must use the money to buy your first home or wait until you’re 60 to take your money out, otherwise you’ll have to pay a penalty fee that amounts to more than the bonus you received (so you could lose some of the money you’ve put in).
If you’re already a homeowner when you open a lifetime ISA, you can’t use it to buy another home, but you can still use the lifetime ISA for retirement.
Withdrawing money when you retire
When you retire, you can withdraw 25% of your pension pot tax-free, meaning you’ll have to pay income tax on the remaining 75%.
However, the amount you receive may be under the 20% basic-rate income tax bracket, so you’ll still have benefited from tax relief on your pension contributions.
With a lifetime ISA, you can withdraw the full amount from your account without having to pay tax on it. You will have already paid income tax on the money you put in.
How does a lifetime ISA compare to a pension?
| How much can I put in? | |
|---|---|
| Lifetime ISA
Up to £4,000 each tax year. |
Pension
Up to £60,000 each tax year with tax-relief. Anything above this doesn’t receive tax relief. |
| How much extra money can I get? | |
| Lifetime ISA
25% on everything you put in, up to £1,000 each tax year. |
Pension
You get the tax you’ve paid back (known as tax relief). So this depends on your income tax band. |
| When and how can I take the money out? | |
| Lifetime ISA
To buy your first home, or after you turn 60 (you can take money out sooner if you need it, but you’ll be charged a withdrawal fee). |
Pension
From age 55, going up to 57 from April 2028. How you take money out depends on the type of pension you have, but usually you can take out up to 25% of your pension as a tax-free lump sum. |
| How long can I pay in for? | |
| Lifetime ISA
Until age 50. |
Pension
Until age 75. |
| Do I pay tax on the money I take out? | |
| Lifetime ISA
No. |
Pension
You don’t pay tax on the first 25% you take out of your pension pot. You’ll pay income tax on the remaining 75%. |
| Lifetime ISA | Pension | |
|---|---|---|
| How much can I put in? | Up to £4,000 each tax year. | Up to £60,000 each tax year with tax-relief. Anything above this doesn’t receive tax relief. |
| How much extra money can I get? | 25% of everything you put in, up to £1,000 each tax year. | You get the tax you’ve paid back (known as tax relief). So this depends on your income tax band. |
| When and how can I take the money out? | To buy your first home, or after you turn 60 (you can take money out sooner if you need it, but you’ll be charged a withdrawal fee). | From age 55, going up to 57 from April 2028.
How you take money out depends on the type of pension you have, but usually you can take out up to 25% of your pension as a tax-free lump sum. |
| How long can I pay in for? | Until age 50. | Until age 75. |
| Do I pay tax on the money I take out? | No. | You don’t pay tax on the first 25% you take out of your pension pot. You’ll pay income tax on the remaining 75%. |
Lifetime ISAs for retirement FAQs
Can you have a lifetime ISA and a pension?
Yes, you can have a lifetime ISA and a pension, or even several pensions, as separate retirement pots.
Can you use a lifetime ISA for a house deposit and retirement?
Yes, you can use your lifetime ISA to buy your first home and keep it open to continue saving for your retirement.
Once you’ve used your lifetime ISA to buy your first home, you can leave your account open and keep paying into it (until you turn 50). You’ll still get a 25% government bonus on everything you pay in.
So, is a lifetime ISA worth it for retirement?
Lifetime ISAs give you a 25% bonus on everything you pay in, making them a potentially good way to build an extra retirement pot. However, you don’t need to choose between a lifetime ISA or a pension as you can have both.
You could use a lifetime ISA for a big holiday or home improvements when you turn 60 while keeping your pension for regular spending (such as your food shop, your bills and your mortgage payments if needed).
No matter how much money you take out of your lifetime ISA, you’ll never have to pay any tax on it, either, and you can choose how much money you take out and when - after you’ve turned 60!
Our Lifetime ISA
With our stocks and shares Lifetime ISA, you can invest for your first home or retirement and get a 25% top-up with everything you put in - up to an extra £1,000 each tax year!
Our Lifetime ISA invests in stocks and shares. This means it has good long-term growth potential, but the value of your investments could go down as well as up so you could end up with less money than you've put in.
If you withdraw money from your Lifetime ISA before you turn 60 for any purpose other than buying a home, you'll pay a 25% penalty fee that adds up to more than the government bonus, so you'll lose some of the money you put in.
More about the lifetime ISA
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