Lifetime ISAs (LISAs) vs pension

[Laquila]

Is there a hidden catch with LISAs? Is there a disadvantage to using it as a sort of starter pension, e.g. putting in the max p/a (£4k) from the earliest you can, on the basis that you have to stop at 50 and can't get it til 60?

Say you managed to do that, from 18-50 - you'd put in £128k and would get another 25% from the gov, so +£32k, =£160k in total. On top of that you'd get a bit more interest, I guess, depending on the rate.

That wouldn't be a bad single-person pension pot, depending on retirement outgoings/other investments, I guess, and would be very low risk - are they actually really popular and I'm just late to the party?!

Martin Lewis discusses LISA's on his website and he suggests a workplace pension is better than a LISA, TBH 160K would not buy you a decent pension in retirement, the general consensus is around 4k per year for every 100k saved.
I have a workplace pension which we pay in the max we are able to, as does DH but we both also have a LISA too as I agree its a addition, we were early 30's when we started it, just moved them over to moneybox who are offering 3.5%

If your workplace pension is salary sacrifice then you’re usually better off putting it into the pension due to the tax and NI efficiencies; this is especially true if you’re a higher rate taxpayer. There’s also employer contributions to consider - if you don’t put in the minimum to get these you’re leaving free money on the table.

I can see LISAs being useful for SAHP’s or people who are in danger of hitting the pension cap, but otherwise I’d stick to a pension.

Thanks very much both - apologies, I forgot to highlight that the above musing was in relation to self-employed people! I have a workplace pension but my husband is SI and currently has nothing other than the LISA we set up just before the cut-off at 39. (I wish I'd done one for myself too 😳)

We did it as a stop-gap whilst we worked out what to do about a pension for him but we've never really got any further with that, and I was just thinking out loud really, on the LISA (which is with Moneybox).

For SE people a Lisa is a good option. I have one myself. I'm SE (have a Ltd company) but also have a part time paye job so a workplace pension through that. If your dh wanted to set up a Ltd company he can pay a pension through that also. I do this and it's a tax efficient way as it's tax free and then it reduces corporation tax bill.

This video may be useful:

Higher rate tax payers are going to be better off using a pension, as they can get more tax relief than the LISA bonus.

Self employed people who use a Limited Company are able to put in money to a pension reducing corporation tax. So those people may be better using a pension.

There are only 4 (I think) providers of a Stocks & Shares Lifetime ISA, so the choice in the market place is limited and this means that there may not be much to make providers reduce fees. There are lots of pension providers and a big range in fees.

LISA is not taxable on withdrawal from age 60. A pension is taxable but may not be as it could use some personal tax allowance. You do not know what the personal tax allowance will be in the future. LISA, ISA and Pension I expect is the thing to do so there is choice when it comes to taking money out of investments.

You’d be mad to put it in a cash LISA as a retirement vehicle - references to interest made me wonder if you were looking at cash rather than stocks and shares. There aren’t many providers of stocks and shares LISAs but i think they do have their place especially as it is all tax free when you take it out.

Your references to "interest" and "very low risk" suggest a Cash ISA is in your mind.

Cash saving is great if you're saving for a few months or a year, but if you're saving from age 18 onwards for your retirement then Cash returns would be very poor compared to other investments like Stocks & Shares.

However, of course, a LISA can also be used for a first house.

Ultimately therefore both pensions and LISAs have advantages - but what I would NOT do is save in a Cash ISA for retirement as your interest will not be very good compared to inflation over the period.

It all depends what you earn. If your a higher tax payer then pension all the way.
There is also a penalty to pay if you need access to money in the LISA which isn't for property purchase or retirement.

If he is 40 and not paid in to a pension or LISA before, then i hate to say it but the max £4K a year isn't really going to cut it if he wants a decent retirement at a 60.

Thanks everyone!

Yes @whattodo1975 I'm aware of that 😁 but it's better than what he has this time last year, e.g. nowt! 😳 We do have some more savings and we need to look at how best to make those work for us in retirement.

@snowlaser and @Bucks67 it's a cash LISA, yes, although I think Moneybox do offer a S&S one.

I'm just trying to work out if there are any major disadvantages, really, to putting us much as we can in his LISA for now - it sounds as though you're saying at face value, no, but that money would effectively work harder in a pension, is that right? (Even though you wouldn't get the 25% gov top-up there.) He'd be very unlikely to retire before 65 at the earliest, I wouldn't have thought. I guess the attraction for us is that it's extremely straightforward and low-risk, and we don't have to make any decisions about what self-employed persons' pensions to go for - I do understand that that's a big compromise though, and means we won't get the same return we might get elsewhere. Back to moneysavingexpert I go, I think!

I agree with the other comments but still have a cash LISA, it will guarantee that 25% extra and I can claim it when I'm 60 apposed to 67 (public sector). My husbands pension will be peanuts so we both have a LISA to hopefully tide us over to work PT until we can claim my pension and our state pension. It probably would make more sense to put our LISA monies into DH pension pot TBH as he can withdraw down at 57 currently and he is a higher tax earner, but its something I haven't explored fully, we just felt the guaranteed 25% was decent. I remember when I was younger and my great aunt being really upset that she had lost a lot of her pension due to the markets and it has stayed with me!

@MrsFrugal funny you should say that - it happened with my dad's pension too, many years ago, and I think it's had a similar effect on me...hence the 25% looks quite attractive!

I have a workplace pension and Lisa, my Lisa is linked to my other accounts and rounds each expenditure, I don't really notice it coming out and it'll be a nice chunk of money in the future.

@Laquila the position as I see it is this:

LISA - contributions are post-tax but you get a government 25% bonus (which is equivalent to reversing out 20% income tax)

Pension - contributions are pre-tax, you get a 25% tax-free lump sum, but the other 75% is taxed as income

So this makes the LISA probably better if you are a 20% tax payer, and the Pension better if you are a 40% tax payer.

However, an equally key point (whether you have a LISA or Pension) is whether you invest in cash or stocks and shares. Shares typically do better over a 10+ year period than cash, but of course can go down as well as up.

I note your comments about low risk - but over long periods you have to be very careful that inflation doesn't just eat all the value if you invest in cash. Right now even the best interest rates are 4% but inflation is 10%. So the money you invest isn't going to keep up with the prices of what you want to buy in retirement. For a year or two that's not a problem, but if you invest for decades in cash the value could seep away. However, if you invest in shares, in the long term they should outperform inflation but on any given day could be up or down, and then can go up and down in big movements (for example, in early 2020 shares fell about 20% but then since then have gone up about 40%).

That's what you need to weigh up to find the right answer for yourself.