Lifetime ISA vs pension: what’s better for retirement?

Anyone saving for retirement will want to make sure they pick the best account for them. Choosing the right account can help to maximise your savings so you go into retirement with the biggest pot possible.

If you're willing to lock away your funds until later in life, you’ll likely be weighing up between a Lifetime ISA (LISA) and a pension. In this article, you’ll learn more about the differences between LISAs and pensions.

Is a Lifetime ISA better than a pension?

Deciding which is right for you, a Lifetime ISA or a pension, depends on a few different factors. These factors include:

• Your employment status
• Your tax bracket
• How much you want to contribute
• When you want to retire

We’ll run through the key considerations in this article.

LISA vs pension — how to choose

Consider your employment status

First up, if you're employed, then in most cases you'll be auto-enrolled into a workplace pension through your employer.

For the majority, that's likely to be the most common option for retirement savings.

*Source: AJ Bell analysis

Read more about employer pension contributions.

Choosing between a Lifetime ISA and a pension becomes a bit trickier and depends on your tax bracket, if you:

• Are self-employed
• Have another reason why you don’t qualify for auto-enrolment
• Are looking to save outside of a workplace pension

LISA vs pension for basic-rate taxpayers

For basic-rate taxpayers who don’t have the workplace pension option, a Lifetime ISA can be an interesting alternative to a pension.

With a pension, such as a Self-invested personal pension (SIPP) or Ready-made pension, a basic-rate taxpayer gets 20% tax relief on their contributions, which is the same as the 25% upfront bonus you get with a Lifetime ISA.

The big plus with a Lifetime ISA is that all withdrawals are tax-free from age 60. Pensions, on the other hand, can be accessed earlier from age 55, but only a quarter of the pot is tax-free, and the rest taxed as income.

When it comes to retirement income, the difference between a Lifetime ISA and a pension will depend on how you manage your withdrawals. If you know your income in retirement from your pension, state pension, and other investments will be within the tax-free personal allowance, then you won’t pay tax on your pension withdrawals anyway. But if you think your income and withdrawals will exceed the personal allowance and you get hit with income tax, the Lifetime ISA might leave you with more money in your pocket.

For many people, retirement is still a long way away. So, it can be difficult to know what your income is going to be and what the income tax rules will be at that point. There’s an element of guesswork involved in weighing up the two options. Contributing to both accounts could be worth considering.

LISA vs pension for higher-rate taxpayers

Things shift a bit for higher-rate taxpayers, who can claim extra tax pension relief each year. This additional tax pension relief means that the perks of a pension likely outweigh a Lifetime ISA.

If you pay income tax at 40% or 45%, you can claim that tax relief back on your pension – which is higher than the 25% upfront bonus from the Lifetime ISA. You’ll only get the basic 20% tax relief paid into your pension and then you must claim back the additional tax relief through your tax return.

What are some other considerations?

Beyond employment status and tax bracket, there are also some other factors to consider when deciding between Lifetime ISAs and pensions.

Contribution amount

The amount that you want to contribute towards your retirement will impact which is right for you, a Lifetime ISA or a pension.

With registered pension schemes and SIPPs, you can generally contribute up to the full annual allowance of £60,000 a year for most people. With Lifetime ISAs, the annual contribution limit is £4,000 which, paired with the government's 25% bonus up to £1,000, means you can save up to £5,000 each tax year. If you’ve already maxed out your pension’s annual allowance, a Lifetime ISA could be a smart place to stash any extra savings.

Read more about contributing to your pension and tax relief on pension contributions.

Inheritance tax

It’s also worth considering how the pots are treated when you die. Pension pots and SIPPs have favorable tax rules when it comes to inheritance, potentially allowing your funds to be passed on tax-free. There are current proposals that SIPPs will be part of the estate from 6 April 2027.

Lifetime ISA funds form part of your estate and could be subject to inheritance tax.

For more information, read about what happens to your ISA when you die and what happens to your pension when you die.

Age you want to access the money

Pensions and Lifetime ISAs have their own rules for when you can access your retirement savings.

SIPPs cannot be touched until age 55 – rising to 57 in 2028. The same rules usually apply to workplace pensions.

With a Lifetime ISA, you can access your savings from the age of 60. Any Lifetime ISA withdrawals before that age (except for buying your first home or in cases of terminal illness) come with a government penalty of 25%.

Can I use a Lifetime ISA for retirement?

Yes, the Lifetime ISA has two purposes – saving for your first home and saving for your retirement.

The government tops up your LISA savings with a 25% bonus on the money you pay in. If you use your LISA savings for any other reason than buying your first home or retirement, you will likely have to pay the penalty charge.

To open a Lifetime ISA, you need to be over 18 and younger than 40 years old. Once you have one, you can keep contributing (and receiving the bonus) until the day before you turn 50.

Find out more about Lifetime ISAs and LISA rules

You can also try our Lifetime ISA calculator to see how much your savings could grow.

Can I have both a Lifetime ISA and a pension?

Yes, you can have both a Lifetime ISA and a pension open at the same time.

Can I transfer my pension into a Lifetime ISA?

No, you can’t transfer money directly from your pension fund to a Lifetime ISA.

LISA vs pension — summary

Given the different rules, benefits and drawbacks of each product, a mix of pensions, Lifetime ISAs, and Stocks and shares ISAs might be the way to go.