LIFETIME ISA VERSUS PENSION: WHICH IS BEST FOR RETIREMENT?

The Lifetime Isa is designed for first-time buyers – and retirees. So how do Lisas compare to pensions, the traditional way to save for a retirement? You can put £40,000 a year into a pension (and it is expected today’s Budget will raise this cap even higher), compared to just £4,000 in a Lisa. For basic-rate, 20pc, taxpayers the incentive for saving into both accounts is the same – a 25pc bonus with the Lisa, or tax relief at 20pc for the pension. But because tax relief on pension contributions is based on your marginal rate of income tax, higher and top-rate payers will receive more of a boost from a pension.

It is when you come to take income that the real differences emerge. Pensions offer 25pc tax free with the remaining taxed on top of your usual income, which could mean withdrawals taxed at 45pc. Isas on the other hand can be withdrawn entirely tax free. However, on death Isas will count as part of your estate for inheritance tax purposes while pensions are exempt. Which is why financial advisers recommend spending Isas first.