My spouse and I are about to show 39 – ought to we open Lifetime Isas as a part of our retirement plan?

When Lifetime Isas launched in 2017, I wasn’t interested in the slightest – I already own a home, so didn’t need it for a deposit, and save into my private pension. It seemed like a strange product.

Since then, I’m in a position where I am paying 15 per cent of my salary a month into my private pension, made up of my own contributions and employer contributions.

I don’t think I should put any more in there and then started thinking… should I max out a Lifetime Isa each year for the guaranteed 25 per cent bonus? And should my wife, too?

Clearly, we’d use this as part of retirement when we can access it at 60.

We’re fast approaching 40, so this is our last chance to get a Lisa. Is it worth it? Or would we be better off putting £4,000 a year somewhere else?

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

Deciding whether to use a Lifetime Isa alongside your pension to do so means you are already well on the right track.

The problem you face is establishing the potential benefits of each course of action – opening a Lisa, paying more into your work pension – or doing something else.

Each one comes with own benefits, and the one that is right for you will depend on your own, and your wife’s circumstances.

You and your wife can both pay up to £4,000 per year into a Lisa, though this eats into 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 per cent tax relief you will receive on pension contributions if you are a higher-rate taxpayer. If, on the other hand, you are a basic-rate taxpayer, your pension would only receive 20 per cent relief.

But what about tax on withdrawals? A Lisa will allow you to withdraw your funds tax-free (though there will be a fee charged if you withdraw before you turn 60), whereas pension withdrawals are taxed as income.

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

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

Brian Byrnes, head of personal finance at Moneybox, replies: First of all, it’s great that you are giving careful thought to your retirement savings. 

It’s crucial to address these things as early as possible in life and as you have identified, there are plenty of products out there designed to help you towards a comfortable and well-deserved retirement.

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

Firstly, if you are a higher-rate taxpayer (earning more than £50,270), you will get tax relief of 40 per cent 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, so the tax relief ‘top-up’ can be significantly more attractive than the Lisa bonus for higher (and additional)-rate taxpayers.

Secondly, making pension contributions via your paycheque is very easy from an administrative perspective, and the tax relief happens automatically.

Thirdly, as you mentioned, you get contributions from your employer into your pension, so it’s always worth checking whether you have maximised those contributions before looking elsewhere for retirement savings.

You mention thinking you shouldn’t put more into your pension and it would be interesting to know why that is. The combination of employer contributions and tax relief is hard to beat elsewhere. Perhaps your employer is already paying in the maximum amount. 

If your wife is self-employed, the Lisa can be an interesting option, given she won’t necessarily have the benefit of workplace pension contributions.

If either of you are basic-rate taxpayers, you still get tax relief at the basic rate (20 per cent) on your pension contributions. 

Again, you also save on National Insurance contributions, so the overall tax relief works out similarly to the Lisa bonus. 

You therefore need to consider the broader features and benefits of pensions vs. the Lifetime Isa.

The main difference is the tax treatment on withdrawal. 

Pension income is taxable at 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 25 per cent tax-free lump sum, and, like salaried income, your first £12,570 of income is taxed at zero per cent, so a lot of your pension income can effectively be tax free. 

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

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

The contribution limits are also significantly different. The maximum contribution to a Lisa is £4,000 a year, whereas for a pension, you can contribute up to £60,000 a year.

In short, a lot will depend on your personal financial situation and that of your wife, particularly regarding which tax band you are both in at the moment, and therefore what tax relief applies to your pension contributions. 

The answer may well involve both a Lisa and continuing your pension contributions. You can only open a Lisa up to the age of 40, but if you pay £1 into a Lisa before your 40th birthday, you can continue making contributions until the age of 50. 

So, it might be wise to do that while you figure out which option is better for you, or to retain the Lisa option should your circumstances change in the future.

Janice Dallas, independent financial adviser at Aberdein Considine Wealth, replies: There are a few things to think about when considering your question. 

The ‘bonus’ paid by the Government on Lifetime Isa contributions is a flat 25 per cent for everyone. So if you pay 40 per cent or 45 per cent income tax on some of your income, you stand to get a better ‘bonus’ by paying more into your pension than into a Lisa.

You can only pay into a Lisa up to age 50. If you’re nearing 40, that means you could pay in up to £40,000, with bonuses up to £10,000. Then when you turn 60 you’ll be able to access your money.

There are fewer options available for Lisas in the market compared with other types of Isa. And if you are opting for a stocks and shares Lisa and know what you want to invest in, check if these investments can be accessed through a Lisa.

If inheritance tax is likely to be an issue for you, keep in mind that currently, pensions don’t normally form part of your taxable estate on death, whereas Isas do.

Inheritance tax aside, the end result for the same investment held in either a pension or a Lisa over the same period, will be influenced by three key things: tax relief or bonuses added to contributions paid in; product charges deducted; and, crucially, tax deducted when funds are withdrawn.

Look at how charges on your private pension compare with Lisa charges. Even a small difference in annual charges can have quite a big impact on the end result.

If you can find a Lisa with product charges similar to your private pension, then it’s your tax status that’s going to make the difference, in particular tax around withdrawals.

Under current rules, you can withdraw 25 per cent of a private pension tax-free, with the remaining 75 per cent subject to Income Tax, whereas you can withdraw 100 per cent of a Lisa tax-free.

So, while higher and additional-rate taxpayers can get better ‘bonuses’ by paying into a private pension, even basic rate tax deductions on 75 per cent of a pension fund in retirement will mean a lower net return than that which would be achieved with a tax-free Lisa.