Redirecting a £4,000 Lifetime ISA allowance into your pension could boost your final pot by £180,000, according to analysis from Standard Life. There are more than 1.2 million Lifetime ISA (LISA) accounts in the UK, with more than one million containing under £25,000 and 50 holding balances of £100,000 or over.
Government reforms put LISAs in spotlight
The Labour Party government's planned reforms to remove the retirement-saving function of Lifetime ISAs, expected to be replaced by a First-Time Buyer ISA (FTB ISA), have put their current role as a retirement savings vehicle firmly in the spotlight. Lifetime ISAs currently allow people to save up to £4,000 a year until their 50th birthday and receive a 25% Government bonus, with funds used either for a first home or later life.
With the proposed changes expected to focus solely on first-time buyers through the proposed First-Time Buyer ISA, those who had viewed or been using the product as a retirement planning tool may want to consider how maintaining a similar £4,000 annual contribution could boost their pension pot.
Standard Life analysis reveals potential gains
Standard Life analysis shows someone who starts working at age 22 on a salary of £25,000 and pays minimum auto-enrolment pension contributions of 5% employee and 3% employer could build a pension worth around £210,000 by age 68, after allowing for inflation.
However, if that same individual added an additional £4,000 a year to their pension from age 22 until age 49 (the current Lifetime ISA contribution cut off), their retirement saving could potentially grow to around £390,000 by age 68 - approximately £180,000 more than those who only make the minimum auto-enrolment contributions.
Pensions vs LISAs: expert view
Mike Ambery from Standard Life said: "For those planning for retirement, pensions will in most cases remain the more effective way to save for later life. While LISAs currently offer a 25% Government bonus, pensions benefit from tax relief based on your income tax rate, meaning higher-rate taxpayers can receive a significantly greater boost."
"Early in your career, when you're more likely to be a basic-rate taxpayer, the difference between a Lifetime ISA bonus and pension tax relief may be less pronounced, but as earnings increase, pensions can become increasingly valuable as higher rates of tax relief become available. On top of that, employer contributions can make a substantial difference, which is something a Lifetime ISA can't replicate."
"As the savings landscape evolves, it's important people understand what is changing, what isn't, and the role that different savings mechanisms can play in helping people achieve greater financial security both in the short term and in later life."
Considerations for retirement savers
For those who may have been considering using a Lifetime ISA specifically for retirement, opening one ahead of future changes could offer an additional option, particularly for higher earners who may eventually approach pension contribution limits. However, for the vast majority of people, the priority should be making full use of their pension.
