Lifetime Isas vs pensions

How do lifetime Isas work?

Lifetime Isas launched in April 2017 as a way of helping people to save for their first home or for their retirement. 

You can only open a lifetime Isa if you're aged between 18 and 39, but can continue to pay in up to £4,000 a year until you turn 50.

As with other types of Isa, any money you save in a lifetime Isa can grow completely free of tax. 

You'll also get a 25% bonus from the government to boost your savings, up to a maximum £1,000 a year. 

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Lifetime Isa conditions

The maximum you can pay into a lifetime Isa each tax year is £4,000. This counts towards your overall Isa limit of £20,000.

There are strict rules about when you can withdraw money from a lifetime Isa. You're free to take money out in the following scenarios:

• you're buying your first home
• you're aged 60 or over
• you have less than 12 months to live

If you take money out for any other reason you'll be hit with a penalty charge of 25%. This means you'll lose the government bonus, plus 6.25% of the amount you've saved.

• Find out more: best lifetime Isas

Lifetime Isas vs pensions

When you save into a pension you get a boost to your contributions, thanks to tax relief. 

This is based on the highest rate of income tax you pay, so if you're a basic-rate taxpayer it'll be 20%. This is equivalent to the 25% bonus you get with a lifetime Isa.

Unlike a lifetime Isa where you can only pay in a maximum of £4,000 a year, you can get tax relief on pension contributions up to £60,000 a year, or your salary (whichever is lower).

However, when it comes to accessing your money lifetime Isas have the edge as you won't pay any tax on withdrawals you make once you reach 60. 

With a pension, you can take 25% tax-free when you turn 55, but the rest of your pot will be subject to income tax.

A 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're a basic-rate taxpayer 
• You've already reached your annual allowance for pension contributions

A pension is likely to be the best option for you if:

• You're in a workplace pension and benefit from employer contributions
• You're a higher or additional rate taxpayer - this means you'll qualify for pension tax relief at 40% or 45%, which is worth more than the lifetime Isa bonus
• You want to save more than £4,000 a year
• You want to access your money before the age of 60 (55 is the earliest you can do this)

Of course, it's not a binary choice - you can build up your retirement savings using a combination of pensions and lifetime Isas.