Martin Lewis has shared advice for people saving for retirement, comparing two savings vehicles after key changes announced in the Autumn Budget. On his BBC podcast, the consumer expert was asked whether the Lifetime ISA (LISA) is a good savings vehicle for retirement, and if it is worth keeping one open even after using the funds to buy a first home.
As Mr Lewis said on the show, this type of ISA is "dual purpose", as you can use the funds towards the purchase of your first home, as long as it's worth £450,000 or less, or you can access them when you turn 60. Any other withdrawals from a Lifetime ISA, apart from terminal illness, will be subject to a 25 per cent withdrawal charge. However, the rules were changed slightly at the Budget, so now only a 20 per cent charge applies if you use the cash to buy a first home worth more than £450,000.
'25 per cent boost'
Responding to the question, Mr Lewis said that in some cases the LISA may be a good choice to save for retirement, while in others you'd be better off piling cash into your pension. He explained the key benefit of a LISA: "What you're getting with a Lifetime ISA is a 25 per cent boost on what you put in."
These are the deposit and bonus rules to note if you are thinking of using the account to save for your retirement: as with any other type of ISA, all your interest earnings or investment growth within a LISA is tax-free. You can put up to £4,000 each tax year into a Lifetime ISA, which comes out of your total £20,000 ISA allowance. You can only make deposits into one Lifetime ISA each year, and you get a 25 per cent bonus added on any deposits, so you can get up to £1,000 a year in bonus cash, paid in the month you make your deposits.
You can only open the account between the ages of 18 and 39, and you can only make deposits up to the age of 50. So you'd have to wait another 10 years beyond this to access the funds at age 60. You can move your Lifetime ISA over to another provider to get a better rate, but you wouldn't be able to make any deposits over this decade. You can withdraw part or all of the funds to buy your first home, and still make deposits into the account to save for your retirement.
Prioritise your pension
Mr Lewis said that in some cases, a workplace pension will perform better than a Lifetime ISA. 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."
He added that with paying into your pension, the "big superpower" is that you get tax relief at source. This means the Government tops up the amount you pay into your pension, adding an extra 20 per cent on top. For a workplace pension, your provider will claim an extra 20 per cent on your contributions, so for every £80 you pay in, this is topped up to £100.
Pros and cons
Mr Lewis said the case is different for some pension 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 tax payer, 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 advantage of pensions here is you can access them earlier than your Lifetime ISA. You can access your private pensions from the age of 55, increasing to 57 from April 2027, while you'll have to wait another three years to access your LISA funds, at the age of 60.
The LISA is being replaced by a new type of ISA, which will be solely for saving up for your first home. More details were announced about this new product at the Budget. The new First Time Buyer ISA will similarly allow deposits up to £4,000 a year, with a potential bonus of £1,000 a year. But in this case, the bonus will be paid when you buy your home. This new ISA will go live from April 2029, so you will no longer be able to open a LISA from then, but you will be allowed to hold both products at the same time, and get bonuses for both.
