Mel Duffield says savers should think carefully before deciding to choose a LISA over a pension.
Anyone considering using - or being encouraged to use - a Lifetime ISA (LISA) instead of paying into a workplace scheme should carefully consider the substantial benefits they might be missing out on.
LISAs, with their 25% government bonus, undoubtedly present an attractive way to boost savings and offer a path to greater financial security in retirement for people who don't have ready access to a workplace pension.
But compare the benefits of a LISA to the benefits typically offered by a workplace pension and it is soon clear why the Lifetime ISA should be seen as an optional extra - NOT an alternative.
Compare the benefits of a LISA to the benefits typically offered by a workplace pension and it is soon clear why the Lifetime ISA should be seen as an optional extra – NOT an alternative.
Member contributions into workplace pension schemes receive matching contributions from employers, and the benefit of basic or higher-rate tax-relief.
Many employers also offer more generous matching structures above the minimum employer contributions required for auto-enrolment.
Those contributions are then typically invested in a default strategy that has been designed to suit the risk profile of a long-term saver with the charges on those investments capped and closely monitored to ensure value for money for savers.
With USS, members pay 8% of their pay and employers pay 18% of their pay, which covers the accrual of defined benefits and a guaranteed income in retirement (the USS Retirement Income Builder) for the first £55,000 of salary, and a 20% total contribution from member and employer to the defined contribution (the USS Investment Builder) in respect of salary above that level.
Impact of employer contribution and tax relief
Even for schemes less generous than USS, the combined impact of the employer contribution and tax relief will often be greater than that offered by a LISA.
The amount of tax you pay on your salary is likely to be higher than what you will pay on a pension in retirement - and while the LISA is tax-free at the end you will have paid tax on it before it goes in, through your payslip.
With USS you can set aside up to £40,000 a year free of tax (or a ‘lifetime cap' of £1 million) and still receive tax relief. That's up to 10 times the headroom of a LISA's £4,000 annual limit.
In a LISA, you will only be able to access your savings and benefit from the government bonus without a penalty after you've turned 60.
For those saving in a workplace pension, you can currently start to access it from 55, but for younger people that age is set to rise to age 57 from 2028 and is intended to be 10 years before the State Pension Age at any given time.
Ultimately, if you're in any doubt, you should get independent financial advice to make sure you're making the right choices for your circumstances.
Mel Duffield is head of pension strategy and insight at the Universities Superannuation Scheme.
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