Pensions versus Lifetime ISAs - which is best for your retirement plans?
A pension and a Lifetime ISA can both be used to save for retirement. But they each have different rules, and their own pros and cons. We look at how they compare so you can work out which is best for you.

Lifetime ISAs are often viewed as a product that can help you build a deposit for a first home, but they can also be used to save for retirement.
It means you could use a Lifetime ISA instead of personal pension, or perhaps in addition to a pension.
Unfortunately, it can be tricky trying to work out which one might be best for you, as they each have their own perks, rules, and pitfalls.
Many people also don’t fully understand how Lifetime ISAs work. Research by the investment platform Hargreaves Lansdown reveals that only a quarter of people know exactly what they are, with more than a third admitting they had no idea.
Whether a pension or a Lifetime ISA is the right choice for you could depend on your age, whether you’re an employee, and how much tax you pay.
We look at both options to help you decide which one is better for you if you are saving into a personal pension.
What is a Lifetime ISA?
Launched in 2017, the Lifetime ISA (LISA) is designed to help people under the age of 40 get on the property ladder or save for retirement.
It is similar to a normal ISA (there’s a cash version, and a stocks and shares version, and your money can grow tax-free), but with an added bonus. Savers can squirrel away up to £4,000 each tax year and the government adds an extra 25% on what you save, up to a maximum of £1,000.
So if you save £2,000, you will receive £500 of free cash.
You can open a Lifetime ISA if you're aged between 18 and 39. Any savings you put into it before your 50th birthday will attract the 25% government LISA bonus.
What is a pension?
If you work for a company, you probably have a workplace pension. Pensions have been around a lot longer than Lifetime ISAs; they are a long-term, tax-efficient way to save money for your later years.
Generally speaking, there are two types of pension: workplace and personal. If you have a workplace pension, your employer likely pays some money into it, on top of your own contribution. With a personal pension, self-employed workers and other savers are free to set one up, but there is no employer contribution.
You get tax relief on the money you save into a pension. It’s a bit like the bonus you get on the Lifetime ISA. However, rather than receiving a flat 25%, the amount you receive is linked to the tax you pay. If you are a basic-rate taxpayer, you get 20% tax relief from the government. This means for every 80p you put into your pension pot, the government gives you 20p, giving you £1 in total.
Higher-rate taxpayers receive 40% tax relief, and additional-rate payers receive 45%.
How does a Lifetime ISA and a pension compare?
There are lots of differences between the two types of product. Here we run through five main differences:
1. Tax relief versus government bonus
The first thing to compare is how the free cash from the government stacks up with a Lifetime ISA and pension.
Basic-rate taxpayers get 20% tax relief on cash they put into their pension. This actually works out as the same amount as with a LISA. So, paying £80 into either product will get you a £20 top-up in a LISA, and a £20 top-up in a pension if you pay the basic rate of income tax.
But, if you pay higher-rate tax or additional-rate tax, you will receive more free cash from the government with a pension, compared to a Lifetime ISA.
2. The age at which you can access your nest egg
If you’re using a Lifetime ISA to save for retirement, the earliest you can start withdrawing your money is age 60.
With a pension, you can currently access your money at age 55. This will rise to 57 in 2028.
If you want to take money out earlier, you will face penalties with both products. The government will take 25% of the total amount you withdraw from a Lifetime ISA as a penalty, while with a pension you face charges of up to 55%.
3. The amount you can save
For most people, a pension allows you to save a lot more each year for retirement.
A LISA has a £4,000 contribution limit per tax year. For pensions, most savers can contribute up to £40,000 each year. Note that for very high earners, the pension annual allowance starts to fall the more money you earn, until it hits £4,000 for the highest earners.
4. How the money is taxed when you withdraw it
Withdrawals from a LISA are free of tax, whereas pension withdrawals are subject to your highest rate of income tax.
This means a Lifetime ISA could provide a really valuable source of tax-free income in your later years, compared to taking cash out of your pension which could be taxed.
5. Employer contributions
Under the government’s auto-enrolment initiative, companies must place qualifying workers into a pension scheme and pay some money in for them. This is on top of the worker’s own contribution and tax relief. (More details here about how auto-enrolment works and who is eligible).
So, if you have a workplace pension with your current employer, you are probably benefiting from an employer contribution.
With a LISA, there is normally no employer contribution.
Is a pension a better option than a Lifetime ISA?
For many people, a pension will be a better option. This is especially the case if you’re receiving an employer contribution in a workplace pension scheme.
Annabelle Williams, personal finance specialist at Nutmeg, the digital wealth manager, explains: “As a rule of thumb, if you’re employed, then continue to pay into your workplace pension and reap the benefits of any employer-matched contributions. These contributions plus the tax relief are likely to outweigh the Lifetime ISA 25% government bonus.”
Those earning more than £50,271 a year (in other words, higher-rate and additional-rate taxpayers), whether employed or self-employed, will also be better off with a pension as they’ll get more tax relief.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, points out that you can save more in a pension. “In most cases the amount you can contribute to a pension every year is much higher than for a LISA: £40,000 compared to £4,000.”
If you’re keen to access your money as early as possible - perhaps you dream of retiring before you reach your 60th birthday - then currently you can withdraw money from a pension earlier than you can with a LISA, which could make a pension a better choice for you.
However, the government can change these rules, and it’s possible the minimum age for accessing a LISA or pension could become the same in future.
A pension is also more flexible in terms of who can open and save into one (you can even open one for a baby!), whereas you have to be aged between 18 and 39 to open a LISA, and you can’t pay more money into it once you reach age 50.
When a Lifetime ISA could be the better choice
Having said all that, it’s important not to dismiss the LISA. There are several scenarios in which a Lifetime ISA could be a good option for saving for retirement.
Williams notes: “If you’ve maxed out annual contributions on your workplace pension or you think you’re likely to reach the lifetime allowance for your pension [you can currently accumulate £1,073,100 in pensions over your lifetime], and you want to save or invest more, the Lifetime ISA could be a good option. This will provide additional tax-free income for you in later life.”
Self-employed workers who pay the basic rate of income tax must think carefully about whether a LISA or pension is best for them.
The amount of free cash on offer from the government is the same with both products, so you’ll need to consider other factors like how much you’d like to save each year, what age you might want to access the money, and whether you want the flexibility to save for your first home at the same time.
One perk of the Lifetime ISA that should be remembered is that when you take cash out, it’s tax-free, so in that sense it is more tax-efficient overall for a basic-rate taxpayer.
In addition, if you expect to pay a higher tax rate in retirement than you do in work, a LISA could be the better choice.
Morrissey says: “LISAs appear to be more flexible – you can save for either a property or for retirement and if you are a basic-rate taxpayer then the government bonus acts in a very similar way to basic-rate tax relief. This can make it a good option for the self-employed who do not benefit from a workplace pension scheme.”
Approaching your 40th birthday?
If you’re really unsure of which savings vehicle is better for you, and you’re perhaps in your late 30s, one tip is to open a Lifetime ISA before it’s too late. That way you keep your options open, in case your circumstances change and the LISA becomes more attractive, or the government changes the pension rules, which then makes pensions less appealing.
Some providers like Moneybox will let you get started with just £1, and many others will accept an initial deposit of £100.
You can then decide later if and how much you want to contribute. Just remember that if you want to access the money in your LISA before you turn 60, there’s a 25% government penalty to pay.
You can have both
You can have a pension and LISA, so it’s not an either/or decision. For some people, having both could be ideal as it’ll allow you to benefit from the different perks and benefits, while giving you a bit of protection in case the government decides to tinker with either product in future.
Ruth Emery is contributing editor at The Money Edit. Ruth is passionate about helping people feel more confident about their finances. She was previously editor of Times Money Mentor, and prior to that was deputy Money editor at The Sunday Times. A multi-award winning journalist, Ruth started her career on a pensions magazine at the FT Group, and has also worked at Money Observer and Money Advice Service. Outside of work, she is a mum to two young children, a magistrate and an NHS volunteer.
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