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.