Using a Lifetime ISA for retirement saving

In this section we will cover:

• How the Lifetime ISA (LISA) is taxed compared to a pension
• The relative flexibilities of both products
• Whether you can access your LISA if living abroad

Should I save in a LISA instead of a pension?

Whether the LISA works for you as a source of retirement income – as a pension alternative or complementary savings option – is complicated, and depends on several factors.

You will need to consider your personal situation, employment and tax status. We cover the key points here; if you’re unsure, please seek financial advice.

How is the LISA taxed compared to a pension?

LISAs and pensions are taxed differently.

With a pension you can pay in net (after tax has been deducted) or gross (before tax has been deducted) contributions depending on the scheme rules. Tax relief will either be applied automatically or you will have to claim it yourself via tax return. This will depend on the type of pension scheme you are in and the income tax you pay. You pay no tax on 25% of the sum you withdraw subject to the lump sum allowance, but you’re taxed on the remaining 75% at your marginal rate when you withdraw it.

A LISA is the other way around: you contribute money you’ve already paid tax on, but eligible withdrawals are tax-free.

For both, there is no tax to pay on any interest, dividends or capital growth earned before the money is withdrawn.

I’m in full-time employment and have a workplace pension. Should I get a LISA?

If you are employed, you are likely to be enrolled into a workplace pension. Some workplace pensions offer the benefit of employer-matched contributions which means employers will match up to a percentage of what you pay into your pension up to a limit.

As a rule of thumb, if you’re employed, continue to pay into your workplace pension and reap the benefits of the employer-matched contributions. These contributions are likely to outweigh the LISA 25% government bonus, which at the time of writing is capped at £1,000 a year.

I’m employed and a higher rate taxpayer, should I get a LISA?

Whether you get a LISA as a higher rate taxpayer or not depends on your personal circumstances. As a higher rate taxpayer, you can get up to 40% tax relief on your pension. Additional rate taxpayers can get up to 45%. This saving easily beats the government’s 25% top-up on LISA contributions.

Which one gives me access to my retirement money sooner – a pension or LISA?

The earliest age from when you are allowed to access money from your pension is the normal minimum pension age (NMPA) which is currently age 55. However, this is increasing to 57 in April 2028. However, you might be able to access your pension earlier if you are terminally ill, subject to scheme rules. While most pension providers allow you to access your pension at 55, the age you can withdraw is based on the provider.

With a LISA, you can access your money at any time. However, unless you are buying your first home (valued at £450,000 or less), aged 60 or over, or terminally ill with less than 12 months to live, you will normally pay a 25% government withdrawal charge on any money you take out.

I’m self-employed. Should I save for retirement with a pension or LISA?

If you are self-employed, you won't have access to a workplace pension or benefit from employer-matched contributions. Choosing between a pension and a LISA for retirement savings will depend on your tax status, income level, and personal circumstances.

LISAs can be particularly attractive for self-employed people, especially those who value flexibility. Unlike pensions, a LISA allows you to withdraw funds if needed, although a 25% withdrawal charge applies unless you are aged 60 or over, buying your first home, or terminally ill with less than 12 months to live. This flexibility can be useful for those with variable income or concerns about tying up money for the long term.

Self-employed higher rate and additional rate taxpayers generally benefit more from paying into a pension, as the tax relief available is greater than the government bonus offered by a LISA. For basic rate taxpayers, the decision is less straightforward, and it is important to compare the benefits of each option.

If you are unsure which option is best for you, it may be helpful to seek advice from a financial adviser.

I’ve got a pension already, should I also have a LISA to save for retirement?

If you’ve maxed out contributions on your workplace pension and you want to save more, the LISA could be a good option.

For example, if you have already paid £60,000 into your pension in the current tax year, if you wish to pay additional contributions without paying a tax charge, opening a LISA might be a complementary way to save for retirement, provided you meet the eligibility criteria for opening a LISA.

I’m unsure what my final country of residence/retirement will be. Will I be able to access my LISA savings from abroad once I’m 60?

According to HMRC rules, you will be able to access your LISA funds from abroad once you are 60 without penalty.

But bear in mind that as with any ISA, you cannot contribute if you are not UK resident.

Head-to-head: the LISA vs the pension

Risk warning

As with all investing, your capital is at risk. The value of your portfolio can go down or up and you may get back less than you invest. Tax rules vary by individual status and may change.

If you need to withdraw the money from your LISA before you’re 60, and it’s not for a qualifying purchase of a first home, you may pay a 25% government withdrawal charge.

If you choose to opt out of your workplace pension to pay into a Lifetime ISA, you may lose the benefits of the employer-matched contributions. Your current and future entitlement to means-tested benefits may also be affected.