Introduction to personal pensions Lifetime Isa vs pension
Lifetime Isas are set to launch in 2017 and will offer an alternative to traditional personal pensions and Sipps - if you're aged under 40. Which? experts compare the options.
Using a lifetime Isa to save for retirement
From April 2017, you’ll be able to open a lifetime Isa if you're aged between 18 and 40. Any savings you put into it before your 50th birthday will get a 25% bonus from the government. Until you hit 50, you can add up to £4,000 a year - and if you did pay in £4,000, you'd get a £1,000 bonus from the government.
If you're not getting contributions from an employer, saving in a lifetime Isa may be your best option.
There will be cash lifetime Isas, which will pay interest, and stocks and shares lifetime Isas where you could benefit from investment growth.
The lifetime Isa allows you to continue to make contributions and receive the bonus up to the age of 50.
You can withdraw the money at any time, but if you do so before you turn 60, you'll have to pay a 5% charge, and you'll lose the government bonus and any interest or growth on this. This is because the savings are designed to be used as retirement income after the age of 60.
For more: The lifetime Isa
Lifetime Isa v pension
The lifetime Isa now offers a real alternative to younger people who might otherwise save into a personal pension or a self-invested personal pension (Sipp).
You might want to save into both - and the government has stressed that the lifetime Isa is not a replacement pension, rather an additional savings vehicle.
Which? compares the main pros and cons of the two options, below.
The lifetime Isa is likely to be the best option for you if:
- You don’t get the benefit of an employer pension contribution (for example, you are self-employed).
- You want to supplement retirement savings and you've made the maximum contribution via your workplace pension.
- You might need early access to all your retirement money in an emergency (but you’ll lose the government bonus and growth on the bonus, and incur a 5% penalty).
- You might want to temporarily borrow some money without charge, provided it is fully repaid (whether this option is definitely available will be confirmed in the autumn).
The traditional personal pension is likely to be the best option for you if:
- You are in a workplace pension to which your employer contributes – under auto-enrolment rules your employer will contribute at least 4% by 2019.
- You want to access your money at age 55 rather than have to wait until you turn 60.
- You are a higher-rate taxpayer (and therefore qualify for pension tax relief at 40%).
- You are likely to be paying a lower rate of tax in retirement (say 20%) than you did in work, perhaps as a higher-rate taxpayer getting upfront tax relief at 40%.
- You will want to make significant pension contributions past the age of 50.
- You intend to make substantial contributions – the lifetime limit for a pension is £1m from April 2016 while the most you can contribute to the lifetime Isa with the bonus is £128,000.
Lifetime Isa -how much you'll get
Our table shows the return of the different options if you make a contribution of £800. It includes no investment growth or interest, and assumes that you pay basic-rate tax in retirement.
|Initial contribution of £800|
|Auto-enrolled pension in 2019 (£200 government/£600 employer contribution)||£1,360|
|Personal pension/Sipp (without employer contributions)||£850|
|Lifetime Isa (early withdrawal)||£750|
The returns on the lifetime Isa assume that you make the contributions before the age of 50 and take the retirement money when you are aged over 60. Personal pensions and Sipps are accessible from age 55.
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