Lifetime ISAs – the perfect partner to your pension?
We explain how a Lifetime ISA could support your plans for retirement.
Last Updated: 1 January 2003
Security in retirement isn’t as easy as it used to be.
Final salary pensions aren’t as common as they were, and there’s always the possibility that the government could tinker with pension tax relief.
So if you’re worried about not having enough income in retirement, and 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) were first introduced in 2017 to help people save for retirement and/or towards their 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.
The perfect partner to your pension?
In addition to a pension, a Lifetime ISA could be a good way of saving for the future.
Although you have to be under 40 to open a LISA, 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 your LISA from age 40 until age 50, you could get £10,000 extra from the government towards your retirement.
Of course 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 LISA. The benefits of a LISA could really supplement your retirement alongside a pension.
Things to think about
With the LISA, 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 in 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 this 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 LISA. The options you choose will depend on your personal circumstances.