Archived article

Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

AJ Bell expert Tom Selby compares the two savings vehicles
Thursday 29 Nov 2018 Author: Tom Selby

Greavesy from Beverley:

‘I’ve been thinking about opening a Lifetime ISA but I’m not sure if it’s the right thing to do. Will I get more compared to a pension? And how does the exit penalty work?’

Any UK resident aged 18-39 is eligible to open a Lifetime ISA and pay in up to £4,000 a year. This money will automatically be topped up by a 25% Government bonus, up to a maximum of £1,000.

Once you have opened a Lifetime ISA you can keep paying in until the day before your 50th birthday and receive the 25% bonus. After this point, you can no longer make further deposits. This means someone who pays in the maximum to a Lifetime ISA each year could benefit from £32,000 in bonuses over their lifetime.

Withdrawals are tax-free if the money is used to fund the purchase of your first home (provided it is worth £450,000 or less, is in the UK and bought with a mortgage), after your 60th birthday or if you become terminally ill.

Any other withdrawals will be hit with a Government-imposed exit penalty of 25%. Because that’s 25% of all the money you take out, you could end up losing more than the Government bonus.

Let’s run through the example of someone saving the maximum £4,000 in a Lifetime ISA in one year and so had that topped up to £5,000 by the Government. We assume there was no investment growth.

If they took all the money out in circumstances other than a first home purchase, terminal illness or reaching their 60th birthday, the entire £5,000 would be hit with a 25% penalty. That means £1,250 would go back to the Government – meaning they’ve lost the £1,000 bonus and a further £250 on top.

When it comes to saving for retirement, there are a number of things to consider. Firstly, most people in employment are automatically enrolled into a workplace pension where they receive a contribution from their employer.

There is no similar employer contribution for a Lifetime ISA, so if you are considering a Lifetime ISA instead of, rather than in addition to, a workplace pension you will almost certainly be better off staying in your workplace scheme.

Higher and additional-rate taxpayers get a larger bonus (in the form of tax relief) from a pension than a Lifetime ISA, although only 25% of pension withdrawals are tax-free from age 55, with the remaining
75% taxed in the same way as income. 

If you’re a basic-rate taxpayer the bonus for saving in a pension and a Lifetime ISA is identical, and with tax-free withdrawals – albeit from age 60 – a Lifetime ISA could be worth considering depending on your personal circumstances. A Lifetime ISA could also prove a useful alternative vehicle for anyone at risk of breaching the £1.03m pensions lifetime allowance.

You still need to consider that investment returns from both a pension and a Lifetime ISA are unpredictable.


Send an email to with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide guidance and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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