When you invest in a Lifetime ISA, HMRC will top up your investment by 25%. This negates the 20% tax that most people pay. As Lifetime ISAs are ISAs and are therefore never ever taxed, this makes Lifetime ISAs well and truly tax free. In comparison, other ISAs are built with your post-tax earnings and receive no such negations. Finally, pensions, although being built from pre-tax earnings, are taxed during the glorious days in which you finally withdraw from them.

Effectively, this means that from these three, the only retirement-focused investment that is well and truly tax free is the Lifetime ISA. Otherwise equivalent non-Lifetime ISAs plain and simply cannot compete. So, unless your pension offers truly remarkable benefits from topping it up, if you have extra income to contribute to your retirement, why would you use any option other than a Lifetime ISA?

For ease of answering, assume the following:

  • The hypothetical investor is taxed at the normal 20%, meaning that the Lifetime ISA's benefit negates their tax on all money invested in to it.
  • The hypothetical investor does not have enough disposable income to contribute anything beyond the £4,000 limit on Lifetime ISAs.
  • The hypothetical investor's pension scheme does not offer employer match on additional payments made to their pension beyond the automatic contribution that everyone pays.
  • The hypothetical investor isn't anywhere near hitting their annual allowance on pension contributions.
  • The hypothetical investor would use a Lifetime ISA for retirement and nothing else.

If need be, you can also assume that the pension's growth rate on additional contributions is comparable to the Lifetime ISA's. I sincerely do not know how reasonable that assumption is.

The heart of my question is that I believe total tax negation to be a huge benefit and can't see why any reasonable person with the money to spare would even as much as consider topping up their pension when they could just throw it in to a Lifetime ISA, let's say a Stocks and Shares one, and just hold that until retirement.

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    And presumably the hypothetical investor is willing to accept no withdrawals prior to age 60 and no contributions after age 40. With a pension that limit might well be somewhat lower (55-57) and you can still contribute after age 40. Commented Jan 29, 2022 at 0:37
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    @RobertLongson you have to open it when under 40, but can then keep contributing till age 50. Commented Jan 29, 2022 at 1:16
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    So, in short, if you hypothetically eliminate all alternatives (other than stuffing cash under the mattress), is the only one left the best?
    – TripeHound
    Commented Jan 29, 2022 at 12:37
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    @J.Mini I think it's more that the title and high-level premise of the question is a bit misleading. Yes, for some people, LISAs are clearly the first choice for where to put money. But not for everyone. Commented Jan 29, 2022 at 14:19
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    For what it's worth a similar question was asked here: money.stackexchange.com/questions/83531/… (if I'd remembered it before I might have just pointed you there, as I gave a more detailed answer with the same conclusion; but your question does call out the caveats better.) Commented Jan 31, 2022 at 10:43

1 Answer 1


It's a lot of hypotheticals, but yes you're right that a Lifetime ISA is likely to be strictly superior to a pension if you're a 20% taxpayer and can still contribute to it (i.e. haven't used up the £4K allowance and are still under 50).

Two further assumptions:

  • You don't want to withdraw sometime between age 57 and age 60, since you can currently withdraw from a pension at age 57.
  • You can't make pension contributions by salary sacrifice, which could also save you ~10% employee National Insurance contributions (or more if your employer also gives you the employer contributions they save).

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