Martin Lewis has explained a Department for Work and Pensions (DWP) rule that could see Universal Credit payments reduced, and how pensions can help claimants avoid the cut. The consumer advocate set out the restriction while comparing pensions with Lifetime ISAs (LISAs) on his BBC podcast.
He was asked whether keeping a LISA open makes financial sense for retirement planning, even after using the funds to buy a first property. Mr Lewis explained that the product is "dual purpose", as account holders can use their balance toward acquiring a first property priced at or below £450,000, or access the account once they reach the age of 60.
Withdrawals for any other reason, apart from terminal illness, incur a 25 per cent penalty. However, it was announced at the Budget that a lower 20 per cent penalty will now apply for first-time buyers purchasing properties priced above the £450,000 ceiling.
How Savings Affect Universal Credit
Mr Lewis noted that pensions hold a clear advantage over LISAs when it comes to benefits entitlement. He said: "A pension advantage is money in a pension doesn't count towards benefits. So, if you have too much in savings, over £6,000 say for Universal Credit, you start to lose benefits." Any funds held in a LISA would count towards this limit.
Under DWP rules for Universal Credit, claimants with total savings and investments above £6,000 lose £4.35 of their monthly award for each £250 above this threshold. Entitlement is lost entirely if income reaches £16,000.
When discussing whether a LISA is a viable retirement tool, Mr Lewis pointed out its primary financial perk: "What you're getting with a Lifetime ISA is a 25 per cent boost on what you put in."
Key Features of a Lifetime ISA
Much like standard ISAs, any growth within a LISA is totally tax-free. Savers can deposit up to £4,000 each tax year, which comes out of the £20,000 overall ISA allowance, into a single LISA per year.
Deposits get an immediate 25 per cent bonus from the Government, up to £1,000 each year, paid during the month the contribution is made. The account can only be opened between the ages of 18 and 39, with deposits allowed only up to the age of 50. Savers must then wait another 10 years to access the funds when they turn 60, though they can transfer the LISA to another provider during this time.
Even after using LISA savings to buy a first home, the account can be used again, with savers able to continue contributing afterward to build a retirement nest egg.
Why Pensions Often Win
Despite the appeal of upfront bonuses, Mr Lewis said conventional pensions will often outperform LISAs over the long run. He said: "If you are an employee and you're doing auto-enrolment—which means that your employer up to a certain amount has to provide matching contributions, the minimum amount is if you contribute 5 per cent, they must put in a minimum of 3 per cent—well, then a pension is just smacking the bottom of Lifetime ISA, and you want to prioritise putting your money into a pension."
Mr Lewis also described tax relief at source on contributions as the "big superpower" of pensions. This automatic relief is claimed by the pension provider, adding 20 per cent to contributions.
When a LISA Makes Sense
Mr Lewis said a LISA can be a prudent retirement choice for some savers. He said: "We already said on auto-enrolment, the pension is easily going to win. And generally, if you're a higher rate or top rate taxpayer, a pension is going to win again. Where a Lifetime ISA becomes competitive is if you are a basic rate person who's not getting auto-enrolment, either because you've used it up or because you're self-employed. In that case, there are pros and cons to pensions versus Lifetime ISAs."
One key benefit of pensions is earlier access, with savers currently able to draw funds from age 55, rising to 57 in April 2027. LISA holders must wait until age 60 to withdraw money penalty-free.
Upcoming Changes to Savings Rules
The LISA will eventually be replaced by a First Time Buyer ISA, exclusively for property purchases. The new product will still have the £4,000 annual deposit allowance with the 25 per cent bonus, offering up to £1,000 a year in bonuses, paid when the home is bought.
The new product will launch in April 2029, after which it will no longer be possible to open a LISA. However, savers will be permitted to hold both accounts at the same time and claim the respective Government bonuses on each.
