My wife and I are about to turn 39. Should we open Lifetime Isas as part of our pension plan?

When Lifetime Isas launched in 2017, I wasn’t interested at all. I already had a house, so I didn’t need it for a down payment and savings for my private pension. It seemed like a strange product.

Since then, I have found myself in a position where I contribute 15 percent of my salary every month to my private pension, consisting of my own contributions and employer contributions.

I don’t think I need to put any more into it and then started thinking: should I max out a Lifetime Isa every year for the 25 per cent guaranteed bonus? And should my wife do the same?

Obviously we would use this as part of our pension if we can access it at age 60.

We’re quickly approaching 40, so this is our last chance to get a Lisa. Is it worth it? Or would it be better to invest €4,000 per year elsewhere?

Harvey Dorset from This is Money replies: It is good that you are taking steps to make your future as secure as possible.

If you’re deciding whether to use a Lifetime Isa alongside your pension, you’re well on the right track.

The problem you face is determining the potential benefits of each action – opening a Lisa, paying more for your company pension – or doing something else.

Each has its own benefits, and which one is right for you will depend on your own circumstances and those of your wife.

You and your wife can each put up to £4,000 a year into a Lisa, although this will eat up your £20,000 annual Isa allowance, and the government will reward you with a 25 per cent bonus on your savings.

This pales in comparison to the 40 percent tax relief you get on your pension contributions if you are a higher rate taxpayer. On the other hand, if you are a basic taxpayer, your pension will only receive a 20 percent discount.

But what about taxes on withdrawals? With a Lisa you can withdraw your money tax-free (although you will be charged if you withdraw the money before you turn 60), while pension withdrawals are taxed as income.

On the other hand, pensions offer you the opportunity to withdraw a lump sum of 25 per cent tax-free, which could be more than the £40,000 you could save in your Lisa over the next ten years.

To do this, This is Money spoke to two financial advisors to find out what factors you should consider when deciding whether to open a Lisa or take an alternative route.

Age limit: Brian Byrnes says you can’t get out of a Lisa until age 60, while pensions allow withdrawals at age 55

Brian Byrnes, head of personal finance at Moneybox, replies: First of all, it’s great that you’re thinking carefully about your retirement savings.

It is crucial to address these issues as early as possible in life and as you will have noticed, there are many products available designed to help you on your way to a comfortable and well-deserved retirement.

When looking at retirement savings products, it’s important to consider your workplace retirement first for three key reasons.

Firstly, if you are a higher rate taxpayer (earning more than £50,270) you get a 40 per cent tax reduction on your pension contributions, which is much higher than the 25 per cent bonus you get on the Lifetime Isa.

You also don’t pay National Insurance on pension contributions within salary sacrifice schemes, so the ‘top-up’ tax relief can be significantly more attractive than the Lisa bonus for higher (and additional) rate taxpayers.

Secondly, paying pension contributions via your paycheck is administratively very simple and the tax reduction takes place automatically.

Third, as you said, you receive contributions from your employer to your pension. So it’s always worth checking that you’ve maximized those contributions before looking elsewhere for retirement savings.

You indicate that you believe that you should no longer invest in your pension and that it would be interesting to know why that is the case. The combination of employer contributions and tax relief is hard to beat elsewhere. Your employer may already pay the maximum amount.

If your wife is self-employed, the Lisa may be an interesting option as she does not necessarily have the benefit of workplace pension contributions.

If you are both liable for basic tax, you will still receive a tax reduction at the basic rate (20 percent) on your pension contributions.

Again, you’ll also save on national insurance contributions, so the total tax relief works out the same as the Lisa bonus.

You should therefore consider the wider features and benefits of pensions versus the Lifetime Isa.

The main difference is the tax treatment upon withdrawal.

Pension income is taxable on withdrawal, while you can withdraw from a Lisa tax-free.

While this may seem like a significant advantage of the Lisa over a pension, the latter has a tax-free lump sum of 25 per cent, and like your wage income, your first £12,570 of income is taxed at zero per cent, so much of your pension income is effectively can be tax free.

It is therefore difficult to make a direct comparison without knowing more about you and your wife’s financial situation.

It’s also worth noting that you can currently take a private pension at age 55, rising to 57 in 2028, while you can’t take a Lisa for retirement purposes until age 60.

The contribution limits are also considerably different. The maximum contribution to a Lisa is €4,000 per year, while for a pension you can contribute a maximum of €60,000 per year.

In short, a lot will depend on your personal financial situation and that of your wife. In particular, which tax bracket you are currently in and therefore which tax reduction applies to your pension contributions.

The answer can be either a Lisa or continuing your pension contributions. You can only open a Lisa until the age of 40, but if you deposit £1 into a Lisa before your 40th birthday, you can continue making contributions until the age of 50.

So it may be wise to do that while you figure out which option is best for you, or to keep the Lisa option if your circumstances change in the future.

Janice Dallas, independent financial advisor at Aberdein Considine Wealth, replies: There are a few things to keep in mind when considering your question.

The ‘bonus’ the government pays on lifetime Isa contributions is a flat 25 per cent for everyone. So if you pay 40 or 45 percent income tax on part of your income, you’ll probably get a better ‘bonus’ if you pay more into your pension than you would into a Lisa.

You can only pay into a Lisa up to the age of 50. As you approach 40, this means you can deposit up to £40,000, with bonuses of up to £10,000. Then when you turn 60, you will have access to your money.

Do your research: Janice Dallas says the cost of different products can dramatically change how much you have left

There are fewer options available for Lisas on the market compared to other types of Isa. And if you opt for a Lisa shares and know what you want to invest in, check whether these investments are accessible via a Lisa.

If inheritance tax is likely to be an issue for you, please note that pensions currently do not normally form part of your taxable estate on death, while Isas do.

Apart from inheritance tax, the bottom line for the same investment in a pension or a Lisa over the same period will be affected by three main things: tax relief or bonuses added to contributions made; product costs deducted; and, crucially, taxes deducted when money is withdrawn.

Take a look at how the costs on your private pension compare to Lisa’s costs. Even a small difference in annual costs can have a significant impact on the end result.

If you can find a Lisa with product costs comparable to your private pension, then it’s your tax status that will make the difference, especially the tax around withdrawals.

Under current rules you can withdraw 25 percent of a private pension tax-free, with the remaining 75 percent subject to income tax, while you can withdraw 100 percent of a Lisa tax-free.

While higher and additional rate taxpayers can get better ‘bonuses’ by paying into a private pension, even a tax deduction at the basic rate for 75 per cent of a pensioner’s pension fund will mean a lower net return than what would be achieved with a tax-free Lisa.

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