What’s better for retirement, a Lifetime ISA or a pension?

If you’re happy to lock your savings away for a while, you’ve probably got your eye on either a Lifetime ISA or a self-invested personal pension (like the Dodl pension). Both offer a handy savings boost, but which one’s best for you depends on a few things like your tax bracket, retirement plans, and work situation. Let’s break it down.

Got a workplace pension? Start there.

If you’re employed and your company offers pension contributions, that’s usually the way to go. No matter what tax bracket you’re in, most people will get the most benefit from a workplace pension.

For example, let’s say you’re earning £30,000 and both you and your employer contribute 8% of your salary. After 30 years, you could end up with a pot worth around £140,000. If you put your share (£1,200 a year) into a Lifetime ISA instead, without your employer's contributions, you might end up with about £87,000 over the same period*. That’s a 38% smaller pot just by not taking advantage of the workplace pension contributions!

If you’re self-employed or don’t have a workplace pension

For those who are self-employed or don’t qualify for auto-enrolment, the decision becomes a bit trickier. In this case, it depends on whether you’re a basic-rate or higher-rate taxpayer.

Basic-rate taxpayers

If you’re a basic-rate taxpayer without a workplace pension, a Lifetime ISA can be an alternative. Both pensions and Lifetime ISAs offer similar upfront boosts—20% tax relief on pension contributions and a 25% bonus with the Lifetime ISA.

The big difference is in withdrawals. From age 60, Lifetime ISA withdrawals are tax-free, while pensions can be accessed earlier (from 55), but only 25% of the pot is tax-free. The rest is taxed as income.

If you think your income in retirement will be under the personal tax allowance, then your pension withdrawals might not be taxed anyway. But if you expect to pay income tax on them, a Lifetime ISA could mean more money in your pocket.

Higher-rate taxpayers

If you’re in the higher-rate tax bracket (40% or 45%), pensions generally have a real edge thanks to extra tax relief. You’ll get the basic 20% tax relief paid in, but you can claim the additional 20% or 25% back through your tax return. This makes pensions a clear winner over the Lifetime ISA for higher earners.

For example, if you’re contributing £1,200 a year to your pension, you could end up with a pot worth £87,000 after 30 years—similar to a Lifetime ISA. But, with the extra tax relief, you could invest that £300 elsewhere, like in an Investment ISA, and build up a tax-free pot worth £17,000 over time.

Beyond income tax

There are a few other things to think about when choosing between a Lifetime ISA and a pension.

• Contribution limits: You can contribute up to £60,000 a year into a SIPP, compared to just £5,000 (including the bonus) for a Lifetime ISA.
• Inheritance rules: pensions are more tax-efficient when it comes to passing on your savings, while Lifetime ISAs are part of your estate and could be subject to inheritance tax.
• Access age: SIPPs can be accessed from age 55 (rising to 57 in 2028), while Lifetime ISA funds are available penalty-free from age 60. Withdrawing from a Lifetime ISA early comes with a 25% penalty on everything in the account (unless you’re buying your first home or are terminally ill).

Given the different perks and rules, a mix of pensions, Lifetime ISAs, and Investment ISAs could be a good approach. You can open a Lifetime ISA if you’re between 18 and 40, and keep contributing (and earning the bonus) until just before you turn 50.

*Source: AJ Bell analysis

🔔 Tax treatment depends on your individual circumstances and rules may change. Pension and LISA rules apply. Investing carries risk. Dodl doesn’t give advice, but we do hope the info is helpful!