Pensions should be your first option when planning for life after you stop working, but did you know you can also use a lifetime ISA to put extra money aside for retirement?
In short
If you have an employee pension (a pension your employer pays into), increasing your contributions to the maximum that your employer will match is always the best way to increase your retirement savings.
If you've maxed this out, and you pay basic rate tax (you earn under £50,270 a year), a lifetime ISA might be a good way to top-up your retirement savings.
This article is for information only. You should always seek advice from a professional before deciding how to save for your retirement, especially if you don’t have an employer pension.
Most people who have worked for an employer at any point in their lives will have a pension. This, along with your state pension, will most likely be your main source of income when you retire.
If you have some extra income that you’d like to put towards your retirement (very sensible), you could choose to do this by paying more into an existing pension, opening a new private pension or you might consider using a lifetime ISA.
How can a lifetime ISA help you save more for retirement?
Lifetime ISAs come with a government bonus. When you pay in, the government pays in too. In fact, it'll top up everything you pay in by 25%. You can pay in up to £4,000 each tax year, so that's up to £1,000 a year extra to go towards life after 60.
So, a lifetime ISA can be a great add-on to your retirement fund, but it’s worth weighing up the different options before you decide. 25% sounds like a lot, but some people will get more than this added to their pension contributions.
Lifetime ISA or pension, which is right for you?
If you're wanting to increase how much money you're putting away for life beyond retirement, your choice on how you do this will likely depend on these key factors:
- whether your employer will contribute to and/or match your own pension contributions (which you could see as a 100% bonus)
- how much money you earn and therefore which tax bracket you fall into
- your eligibility for a lifetime ISA (you can’t open one after you turn 40)
Employer pension ‘contribution matching’
This is when your employer increases how much they pay into your pension when you increase how much you pay in. This works out as a 100% increase on everything you pay in.
If you haven’t already increased your pension contributions to the maximum that your employer will match, this is likely the most financially savvy move you can make to increase your retirement savings.
How much you earn
The government offers ‘tax relief’ on pension savings, so when you pay money in, you get back the tax you paid on that amount. So, if you pay higher tax, you get more back.
- If you're in a lower tax bracket (you're paid less than £50,270 a year), you'll get 20% added to payments into your pension.
- If you're in the higher tax bracket (you earn more than £50,270 a year), you'll get 40% added to payments into your pension.
With a lifetime ISA, you don’t get this tax relief, but you do get a 25% bonus on your savings.
Lifetime ISA eligibility
To open a lifetime ISA, you must be between 18 and 39 (inclusive) and be either a UK resident or crown servant (or their wife or civil partner).
You can keep paying money in until you turn 50.
You can use a lifetime ISA for two purposes: buying your first home or saving for life after 60. If you take money out for anything else, you'll be charged a government withdrawal charge.
Tax on pensions and lifetime ISAs
When you reach retirement age, you can withdraw 25% of your workplace or private pension tax-free.
The remaining 75% will is taxable at the point you withdraw it.
This is charged in the same way as income tax, so the more you access each year, the more tax you may pay. If you access less than your Personal Allowance in a year - currently £12,570 - you won't be charged income tax.
With a lifetime ISA, you can withdraw the full amount from your account without having to pay tax on it. But as you didn't get tax relief when you paid money in, you'll likely have already paid income tax on the money.
How does a lifetime ISA compare to a pension?
| Lifetime ISA | Pension | |
|---|---|---|
| How much can I put in? | Up to £4,000 each tax year. | Up to £60,000 each tax year with tax-relief. Anything above this doesn’t receive tax relief. |
| How much extra money can I get? | 25% of everything you put in, up to £1,000 each tax year. | You get the tax you’ve paid back (known as tax relief). So this depends on your income tax band. |
| When and how can I take the money out? | To buy your first home, or after you turn 60 (you can take money out sooner if you need it, but you’ll be charged a withdrawal fee). | From age 55, going up to 57 from April 2028. How you take money out depends on the type of pension you have, but usually you can take out up to 25% of your pension as a tax-free lump sum. |
| How long can I pay in for? | Until age 50. | Until age 75. |
| Do I pay tax on the money I take out? | No. | You don’t pay tax on the first 25% you take out of your pension pot. You’ll pay income tax on the remaining 75%. |
So, is a lifetime ISA worth it for retirement?
Lifetime ISAs give you a 25% bonus on everything you pay in, making them potentially a good way to put extra money aside for life after 60 - but increasing your pension contributions instead might give your retirement fund a bigger boost.
You could use a lifetime ISA for a big holiday or home improvements when you turn 60 while keeping your pension for regular spending (such as food shopping, bills and your mortgage payments, if needed).
No matter how much money you take out of your lifetime ISA, you’ll never have to pay capital gains or income tax on it and you can choose how much you take out and when (but only after you’ve turned 60!).
Open a OneFamily Lifetime ISA
Our Lifetime ISA comes with a 25% government bonus, worth up to £1,000 a year!
Our Lifetime ISA invests in stocks and shares, so the value is likely to go up and down over time. This is normal for this type on investment, but it means there is a risk you could get back less than you put in if you withdraw at a time when the value is lower.
