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Should I use a Lifetime ISA for retirement?

Here’s why basic-rate taxpayers and people nearing their annual pension allowances should consider using a Lifetime ISA to save towards retirement.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

You might know that a Lifetime ISA can help you save for your first home, but have you ever considered using one to help you save for later life too?

In some cases, a Lifetime ISA can be more tax efficient than a pension.

It’s important to know that if your employer offers a workplace pension, and you qualify for it, that should typically be your first port of call for retirement savings. Especially if they offer salary sacrifice. But once your employer is making contributions into your pension at their maximum level, then a Lifetime ISA could be a more tax-efficient choice for any other retirement savings. If you save into a Lifetime ISA (LISA) instead of a pension, your entitlement to certain means-tested state benefits could be affected.

We hope you find this article helpful, but it isn’t personal advice. ISA, pension, and tax rules can change, and any benefits depend on your circumstances. If you’re not sure what’s right for you, ask for financial advice.

Who could benefit from using a Lifetime ISA for retirement?

New to Lifetime ISAs? Key rules

  • A savings or investment account where your money has the chance to grow free of UK income tax and capital gains tax.
  • Open an account between age 18-39 and add money until you’re 50.
  • Pay in up to £4,000 every tax year and get a 25% bonus of up to £1,000 each year.
  • You’re free to take money out whenever you like. But if you make a withdrawal before age 60, which isn’t for a qualifying house purchase, a government withdrawal charge of 25% will usually apply. So you could get back less than you put in.
  • The Lifetime ISA allowance of £4,000 forms part of the £20,000 ISA allowance.

Basic-rate taxpayers (earn less than £50,270)

The tax benefits of personal contributions into a pension and Lifetime ISA are broadly the same at the moment. With a Lifetime ISA, you get a 25% bonus from the government on anything you pay in up to the £4,000 annual allowance. This means you could get a bonus of up to £1,000 each tax year. If you add this £4,000 to a pension instead, you’d currently get the equivalent ‘bonus’ as basic-rate tax relief, which is paid into your pension.

The key tax benefit of Lifetime ISAs for basic-rate taxpayers is the tax treatment on withdrawals. Assuming the money in a Lifetime ISA is being used for retirement, it will be completely tax free if withdrawn after age 60. With a pension, only up to 25% can usually be withdrawn tax free, but from age 55 (rising to 57 from 2028).

Let’s say you pay in £4,000 into your Lifetime ISA for ten years. You'd have a pot worth £50,000 which you could withdraw entirely tax free from when you’re 60. If you pay that money into a pension, you'd normally get up to £12,500 tax free when you’re 55, and the rest would be taxed as income.

This is just an example. It doesn't account for any investment performance or growth. Investments can fall as well as rise in value, so you could get back less than you invest. Scottish tax rates and bands are different, as are the benefits.

More on Lifetime ISA for retirement

Self-employed

If you’re self-employed, you won’t benefit from employer pension contributions, just any personal contributions you make into a pension and any tax relief on top. This means if you’re a basic-rate taxpayer, a Lifetime ISA will likely be more tax efficient for you than a pension. Once you’ve maxed out the £4,000 Lifetime ISA allowance and secured your 25% bonus, then you could look to a pension for any other retirement savings.

DOWNLOAD LISA VS PENSION FACTSHEET

MORE ON LISAS FOR THE SELF-EMPLOYED



New Year's cash prize draw - win what you pay in

If you pay into your HL LISA, you could win back up to £3,000. Total new payments made of £100 or more between 1 December 2021 and 23 February 2022 will count towards your potential cash prize. There will be 7 winners of up to £3,000 each. Full terms here.

Open an HL LISA

Top up an HL LISA

If you’ve maxed out your pension annual allowance

Most people have an annual pension allowance of £40,000. This is the total that can be paid into your pensions every year. It includes contributions made by you and your employer, plus any money the government pays in as pension tax relief. Tax relief on personal contributions is also limited by your earnings (or £3,600, if earnings are lower). If your pension contributions go over your annual allowance, you trigger a tax charge on that amount.

There could be a way around this tax charge if you’re eligible to use the pension carry forward rules.

If you can’t use pension carry forward, or you’d like to pay in more than those rules allow, then a Lifetime ISA could be the next best option.

More on Lifetime ISA for retirement

If you’re nearing the lifetime allowance

The lifetime allowance is the total amount you can have in all your pensions together over your lifetime. It’s currently set at £1,073,100, and it’s expected to stay at this figure until April 2026. If your total pension value goes over this allowance you trigger a hefty tax charge on that amount.

If you’re nearing the lifetime allowance limit, it’s likely you could be close to the maximum age to open or contribute into a Lifetime ISA. If you’re eligible, you could continue to build up your retirement savings with a Lifetime ISA. The maximum age to open a Lifetime ISA is 39. Once it’s open, you can add money into it until you’re 50.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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