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Pension, ISA or Lisa: which is best for young savers?

Those under 40 now have more choice about how they save. But how does the new 'Lifetime ISA' stack up?


by Michelle McGagh on Mar 17, 2016 at 16:29

Pension, ISA or Lisa: which is best for young savers?

Younger savers now have the choice of stashing their cash in a pension, ISA, or ‘Lifetime ISA’ (Lisa) – but which one is best?

In the Budget this week, chancellor George Osborne was true to his word and didn’t tinker with pensions, but he did give them some competition by bumping up the ISA limit to £20,000 (from next year) and introducing the Lisa.

The Lisa is for those aged 18 to 40 and has been designed as a cradle-to-grave savings account. Individuals will be able to save up to £4,000 a year in the new ISA and the government will top it up with a 25% bonus, meaning for every £4 saved the government gives you £1.

The £5,000 saved in the Lisa each year, including the government top up, will count towards the new £20,000 ISA limit, which will increase from £15,240 next April.

The money in the Lisa can be used to buy a first home worth up to £450,000 or individuals can continue to save, and receive the 25% bonus, until the age of 50.

If the money is accessed after age 60 it can be taken tax-free, but if it is accessed before age 60, unless you are buying a home, the government bonus will be lost – including any interest or growth – and you will have to pay a 5% charge.

With more incentives to save for homes and retirement being thrown at young people, there are more decisions to make on where to put your savings.

Pay £80 to get £100

The Institute of Fiscal Studies (IFS) said the Lisa provided a clear saving incentive.

Stuart Adam, senior research economist at the IFS, said if a person saved the maximum £4,000 a year from age 18 to 40 ‘they can get a maximum top up of £32,000 from the government for a contribution of £128,000 that you make yourself’.

Adam analysed how much a person would have to contribute personally into an ISA, Lisa, and pension in order to reach a £100 contribution.

Pension, ISA or Lisa? Click to enlarge

Saving £100 into an ISA costs £100 as there is no government top up, whereas saving £100 into a Lisa would only cost £80.

The amount saved into a pension is slightly more complex as Adam took into account the income tax rate paid while saving (which determines the tax relief received) and the income tax rate in retirement – he also factored in the 25% tax-free lump sum.

For a person who is a basic rate taxpayer paying 20% income tax in working life and in retirement, a £100 pension contribution would cost £94.

An individual who pays higher rate tax of 40% in both working life and retirement, would only have to make a contribution of £86 to receive £100.

Someone who is a 40% taxpayer in working life and pays zero rate income tax in retirement would only need to contribute £71 and someone who pays 20% income tax in working life and no tax in retirement (which applies to most workers) would have to contribute £80 - the same as saving into the Lisa.

Adam said the incentive to save into a pension ‘depends on the tax band at the time of putting money in and at the time of withdrawing it’.

For higher rate taxpayers he said paying into a pension was still the best deal as it was unlikely they would pay 40% tax in retirement as the amount you can save into a pension had been reduced.

‘It will be hard to be a higher rate taxpayer in retirement and most people who are working will be a basic rate taxpayer in retirement,’ he said.

He added that half of basic rate taxpayers would pay no tax in retirement and ‘in tax terms the pension and the Lisa look pretty much exactly the same’.

What about employer contributions?

However, Adam’s calculations do not take into account the employer contribution that individuals receive through their workplace schemes, just the government incentive.

By 2017, the auto-enrolment rules will insist all employers pay 3% into their employees' pensions as long as employees are contributing 4% - the government then tops up the contribution with a further 1%.

‘What [the calculations] show is the tax incentive, and what the government does to incentivise [saving],’ he said. ‘If you put money in and the employer matches it then that will be an incentive.

‘The way auto-enrolment works, if you contribute a certain amount of earnings your employer will march that, which is an incentive to contribute that amount. But if you are putting more in [to the pension] the employer does not have to put more money in.’

Adam said once workers had received their total employer match on their pension contributions, they should look at which savings vehicle would offer them the best deal.

7 comments so far. Why not have your say?


Mar 17, 2016 at 21:14

interesting note but it the numbers seems wrong ;

"Stuart Adam, senior research economist at the IFS, said if a person saved the maximum £4,000 a year from age 18 to 40 ‘they can get a maximum top up of £32,000 from the government"

22 years would equal £22k as Government add £1,000 if max paid. I could be wrong but i thought this thing runs to age 50 - in which case you get £32k off the tax man..

Any thoughts out there?

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Doug Sammons

Mar 18, 2016 at 10:56

More details are needed e.g.what happens if you die before you are 50 and/or 60?

Does your estate receive the accumulated bonus?

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Mar 19, 2016 at 09:54


As I see it, what this means is that the oldest you can be to start saving is 40, but that you can continue saving until you are 50 irrespective of what age you were when you commenced.

e.g. Max: 18 to 50 = 32,000 Min: 40 to 50 = 10,000 subject to the terms & conditions

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Mar 19, 2016 at 10:18

£4,000 per year seems like a tall order for the average 18 year old to start saving. At that age most young people will be aspiring to own a car, travel abroad, or simply buy nice clothes and have a jolly old time.

One way to achieve it though would be to join the Navy. You could have it all at the Govt's expense.

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Mr J

Mar 19, 2016 at 12:18

This is obviously a stalking horse for a full pension isa and abandonment of the EET pension system we have today. Look out for boy George raiding all our pensions to pay for his inability to actually cut anything at all and bring the deficit back to zero.

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Mar 19, 2016 at 12:24

How can any 18 year old really believe that this scheme won't have been significantly neutered or stolen from (see pensions) by a Treasury desperate for funds at multiple points over the 42 years until it reaches maturity, if thinking of using it for pension savings.

There's one long-term investment factor that we've been taught over the last century or so. Don't make long-term investment decisions based on Government promises or, as in this case, bribes.

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Mar 19, 2016 at 13:23

The most controversial budget in years. Blame it all on Top Gear doing donuts outside the Chancellor's window when he was writing it.

Why did the Chancellor reduce CGT and then propose penalising the disabled ?

I see people with walking frames and in wheelchairs struggling to do their shopping through rain, ice, and snow. These people deserve all the help they can get.

I also saw, last week, the rich capital gains tax payers squandering their profits at the Cheltenham Festival.

George Osborne said: "We have got to get the balance right" It doesn't look balanced to me. In fact I should say the scales are completely off their rocker!

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