Investing the annual £4,000 Lifetime ISA allowance into a pension could boost retirement savings by £180,000, new analysis from Standard Life has revealed.
The Government’s planned reforms to remove the retirement-saving function of LISAs, expected to be replaced by a First-Time Buyer ISA, have put their role as a retirement savings vehicle firmly in the spotlight.
LISAs currently allow people to save up to £4,000 a year until they are 50 and receive a 25% government bonus, with funds used either for a first home or later life.
A Freedom of Information request from Standard Life showed there are over 1.2 million LISA accounts in the UK. The majority have balances of up to £25,000, while 50 accounts have grown to more than £100,000.
Standard Life said that with the proposed changes expected to focus solely on first-time buyers, those who had viewed or been using the product as a retirement planning tool may want to consider how maintaining a similar £4,000 annual contribution could boost their pension pot.
Its analysis shows someone who starts working at age 22 on a salary of £25,000 and pays minimum auto-enrolment pension contributions could build a pension worth around £210,000 by age 68. However, if that same individual added an additional £4,000 a year to their pension from age 22 until age 49, their retirement savings could potentially grow to around £390,000 by age 68 – approximately £180,000 more than those who only make the minimum auto-enrolment contributions.
Mike Ambery, retirement savings director at Standard Life, said: “Planning for retirement is a much longer-term journey and where investment growth plays a far bigger role, so there is a strong case for separating out these two goals as saving for a home and saving for retirement involve very different timeframes and investment considerations.
“For those planning for retirement, pensions will in most cases remain the more effective way to save for later life. Early in your career, when you’re more likely to be a basic-rate taxpayer, the difference between a Lifetime ISA bonus and pension tax relief may be less pronounced, but as earnings increase, pensions can become increasingly valuable as higher rates of tax relief become available. On top of that, employer contributions can make a substantial difference, which is something a Lifetime ISA can’t replicate.
“As the savings landscape evolves, it’s important people understand what is changing, what isn’t, and the role that different savings mechanisms can play in helping people achieve greater financial security both in the short term and in later life.
“For those who may have been considering using a Lifetime ISA specifically for retirement, opening one ahead of future changes could offer an additional option, particularly for higher earners who may eventually approach pension contribution limits, however, for the vast majority of people, the priority should be making full use of their pension.”
