Stocks & Shares ISA

Lifetime ISA vs Pension: Which is Better?

We've compared Lifetime ISAs with pensions to help you choose which is best for you.

Pensions and Lifetime ISAs are both designed to help you save towards retirement. Understanding how they compare can help you choose which is best for you.

What is a pension?

A pension is designed to help you save for retirement. Any money paid into a pension pot is locked away until you turn 55 (57 from 2028) – in return, pensions come with generous incentives.

Any pension investment growth is free from tax. You get tax relief on contributions, which amounts to 20% tax relief if you are a basic rate taxpayer. This means you can save £100 in a pension by only contributing £80. For higher rate taxpayers, a £100 contribution costs £60.

You can invest 100% of your income up to a maximum of £60,000 every year, or up to your maximum annual earnings, whichever is lower.

When you access your pension, you can withdraw 25% tax free, the remaining 75% will be subject to income tax. Any amounts left in a defined contribution pension (including personal pensions), when you die may be passed on free of inheritance tax and also potentially without your heirs paying income tax, depending on when you die. Please note: from 6 April 2027, pensions and death benefits will become subject to inheritance tax. Find out more here.

What is a Lifetime ISA (LISA)?

A Lifetime ISA is a savings or investment account available to all UK adults aged 18 to 39. The account was launched to help savers either with the purchase of a first home or with boosting retirement savings.

The maximum you can invest in a LISA is £4,000 per year. For every £4 you invest, the LISA pays you a £1 bonus up to the age of 50.

Investing the full allowance every year between ages 18 and 50 would net you £32,000 in bonuses.

Any money paid into a LISA counts towards your overall £20,000 ISA allowance.

You can only withdraw money from a LISA if:

You are buying a first property
You are over the age of 60
You are terminally ill

Any other reason would incur a 25% penalty.

Lifetime ISAs are available as cash LISAs or Stocks and Shares LISAs.

Pensions and LISAs Compared

	Lifetime ISA	Pension
When can I access my money?	You can access a LISA to buy a first home or after age 60. There are penalties to access the money for other reasons unless you are terminally ill.	You can access a pension from age 55 (rising to 57 in 2028)
Is my money taxed?	No, both withdrawals and growth are tax-free.	Growth is tax-free and you won’t pay tax on the first 25% of your pension – but the next 75% is taxable income.
When can I open an account?	Anytime between ages 18 and 39.	Between ages 18 and 75.
Incentives	25% bonus (up to £1,000 per year)	Tax relief on contributions & employer contributions on workplace schemes.
Inheritance and benefits after death	Upon death, a LISA is passed onto your beneficiary without penalty but will form part of your estate for inheritance tax purposes.	100% tax free if you die before age 75, after this your pension becomes part of your estate and is subject to income tax.
Annual allowance	£4,000 (part of your annual ISA allowance)	100% of your annual salary up to £60,000.

Is a pension or LISA best for me?

Both a pension and LISA have strong incentives for savers. Some might like to have a combination of both accounts to make the most of their money.

Workplace schemes, which include employer contributions as well as tax relief, and greater annual allowances generally make pensions more attractive.

If you are self-employed the balance of benefits may tip in favour of a LISA since you’ll miss out on employer contributions. Bear in mind you can only contribute into a LISA until age 50, so a Self-Invested Personal Pension (SIPP) might be better for you long-term.

Remember this isn't personal advice, if you think that you need a personal recommendation, you should speak to a suitably qualified financial adviser.