Lifetime ISAs – the perfect partner to your pension?

To retire you’re going to need to build up a big pot. But it doesn’t all have to be in a pension.

If you’re under 40, you could consider turning to a Lifetime ISA to give your retirement pot a boost.

Remember, this isn't personal advice. If you need help with your retirement or investment decisions, please ask for advice. ISA and tax rules can change and their benefits depend on your circumstances.

What is a Lifetime ISA?

Lifetime ISAs (LISAs) can help you save for retirement and/or towards your first home.

They let you save up to £4,000 a year, and the government will add a 25% bonus on top of what you save. So, if you put in the full £4,000 allowance, the government will add an extra £1,000. As long as you use the money (after 12 months from the first payment) to purchase your first home (worth up to £450,000), or wait until 60 to access it, you can take the money and any returns tax-free.

You get a new LISA allowance at the beginning of every tax year on 6 April.

More about Lifetime ISAs

The perfect partner to your pension?

In addition to a pension, a Lifetime ISA could be a good way of saving for the future.

You have to be under 40 to open a Lifetime ISA, but you can still pay in up to £4,000 per year until you turn 50 and receive the bonus on top. Like a Stocks and Shares ISA, investments within the LISA can grow free of UK tax. The £4,000 allowance forms part of your overall £20,000 ISA allowance.

Remember all investments can fall as well as rise in value so you can get back less than you invest.

If you opened a Lifetime ISA before 40 and paid the maximum of £4,000 per year into one from age 40 until age 50, you could get £10,000 extra from the government towards your retirement.

If you’re close to putting the most you can in a pension, and can claim tax relief on, a Lifetime ISA unlocks extra allowance you can use and get money from the government on.

This doesn’t have to be a “one or the other” decision, if you’re already paying into a pension and have valuable benefits that come with it – you can also pay into a Lifetime ISA.

The benefits of a Lifetime ISA could really supplement your retirement alongside a pension.

Things to think about

With the Lifetime ISA, you can normally only withdraw the money to buy a first home or from age 60 without incurring a withdrawal charge (a pension can normally be accessed from 55 – or 57 from 2028). Any other withdrawals will normally incur a government withdrawal charge of 25%. This means you’ll not only lose your government bonus, but an extra 6.25%.

And if you’ve made any gains on your investments or received any interest on your cash, you’ll be charged 25% on them, too.

Remember savings outside a pension could affect your entitlement to state benefits. And if your employer makes pension contributions when you do too, you should always consider contributing to your workplace pension first. Once your employer is making pension contributions at the maximum level, or you don’t have a workplace pension, it may be more tax-efficient to make contributions into a Lifetime ISA. The options you choose will depend on your personal circumstances.

More on Lifetime ISAs for retirement