What’s best for retirement saving – a lifetime Isa or a Sipp?

Lifetime Isas (Lisas) are usually thought of as an option to help first-time buyers bolster their house deposit, but they also offer a 25% bonus for people saving towards their retirement.

Lisas were introduced in 2017 and their future is currently being reviewed by the government, with potential rule changes being considered. 

Here, we explain how Lisas work and analyse whether they could be a better bet for your retirement savings than self-invested personal pensions (Sipps).

What is a Lisa?

Lisas were introduced in 2017 for people saving to buy their first home or putting money away for retirement.

You can open a Lisa if you're aged between 18 and 39, and savings you put into it before your 50th birthday are topped up by a 25% bonus from the government. 

The maximum you can put into an Lisa is £4,000 per year, with a maximum government bonus of £1,000.

Money can be withdrawn either to buy your first home or from the age of 60 onwards. Withdrawals for other reason are subject to a 25% penalty.

Lisa rules are currently under scrutiny, following a Treasury Select Committee hearing at the end of February. 

Rule changes could be in the offing. Industry experts have called for a reduction in the withdrawal penalty from 25% to 20% to make the product more appealing to those on lower incomes and the self-employed.

Another potential reform could be increasing the age at which you can open a Lisa and the cut-off for receiving the government bonus.

• Find out more: what are lifetime Isas?

Lisas vs Sipps: tax benefits

Many savers consolidate their pension funds into a self-invested personal pension (Sipp) to prepare for retirement. 

A Sipp is essentially a 'do-it-yourself' pension, where you take on the responsibility for choosing and managing your own investments. 

Pension holders get pension tax relief at their marginal rate on a Sipp. It works out evenly with a Lisa for basic-rate taxpayers – the government bonus equates to basic-rate tax relief on a pension. 

However, if you are a higher-rate taxpayer, a £60,000 pension contribution costs you only £36,000, and with a workplace pension you’ll also get employer contributions. 

Both Sipps and Lisas are tax-efficient. You’ll probably end up with a larger amount with a Lisa, but only on the relatively low contributions these accounts allow.

The reason that you can end up with more with a Lisa is that any income taken is tax free. This differs from a Sipp, where up to 25% can be tax free with income tax payable on the remainder.

So if you made a contribution of £1,000 into a Lisa (ignoring potential investment growth or interest) you’d receive £250 from the government and pay no income tax on withdrawal, ending up with £1,250. 

A Sipp payment of £1,000 would benefit from £250 in the form of tax relief, but with the tax-free lump sum of 25% and assuming the remainder is taxed at 20%, the final fund would be worth £1,062.50.

• Find out more: lifetimes Isas v pensions

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Contributions and access to funds

Sipps allow larger contributions than Lisas, which can increase your pot faster given compound growth and investment returns. 

Savers can contribute a maximum of £4,000 per year into a Lisa and receive a 25% government bonus, bringing it up to £5,000. This compares to up to £60,000 per year for a Sipp.

You can contribute to a Lisa and receive the bonus from the age of 22 until 50. A Sipp can be opened at age 18 and qualifies for tax relief until 75.

The investment platform Hargreaves Lansdown has calculated that if someone contributed the maximum amount to their Lisa between the age of 22 and 50 and then left it to grow until the age of 67, they could have a pot worth £694,000. This calculation assumes 5% investment growth.

In comparison, someone contributing the same amount to their Sipp between the age of 22 to 67 would end up with a pension worth more than £825,000.

As with other types of personal pension, you can only access your Sipp from the age of 55. This is increasing to 57 in 2028. 

Savers can’t usually access a Lisa until age 60 without paying a 25% penalty. 

• Find out more: best Sipps 2025

Opting for a Lisa and a Sipp

The good news is that this isn’t a binary decision – you can have Sipps and Lisas at the same time.

Both carry incentives and enable you to take your money in a tax-efficient way.

It may be that you use the savings in a Lisa to pay off your mortgage when you come to retire, or it could provide income between when you stop working and reach state pension age. 

Juggling the two products can limit your tax bill. You could take income up to your tax-free personal allowance (£12,570) from your pension and any income over that from your Lisa, which is tax free and could avoid moving you into a higher tax bracket.

• Find out more: tax-free income and allowances