Savers urged to make one change that could lead to £180k boost | Personal Finance | Finance
Millions of savers are being urged to rethink how they save for retirement after analysis suggested a simple switch could leave them with up to £180,000 more by the time they stop work.
Retirement specialist Standard Life says people who would otherwise pay the maximum £4,000 a year into a Lifetime ISA (LISA) for retirement could be significantly better off by directing that money into a pension instead. The warning comes after the Government announced plans to overhaul the Lifetime ISA, removing its retirement savings role and replacing it with a First-Time Buyer ISA, leaving pensions as the main long-term retirement savings vehicle.
Standard Life’s calculations suggest that someone who starts work at 22 on a salary of £25,000 and makes only the minimum automatic enrolment pension contributions would build a retirement fund worth around £210,000 by age 68.
But if that same worker invested an extra £4,000 a year into their pension from age 22 until age 49 – matching the current maximum annual Lifetime ISA allowance – their pension pot could grow to around £390,000.
That represents an increase of around £180,000 after inflation, assuming annual investment growth of 5%, salary growth of 3.5% and pension charges of 0.75%.
The research comes as new figures obtained by Standard Life through a Freedom of Information request reveal there are now more than 1.2 million Lifetime ISA accounts across the UK. The vast majority contain relatively modest sums, with 1,177,940 holding less than £25,000.
Only 50 Lifetime ISA accounts have amassed balances of more than £100,000. Under current rules, savers can put up to £4,000 a year into a Lifetime ISA until the age of 50 and receive a 25% Government bonus.
The money can be used to buy a first home or withdrawn from the age of 60 for retirement without penalty. However, ministers are planning to remove the retirement element of the product as part of wider ISA reforms, with the replacement First-Time Buyer ISA expected to focus solely on helping people onto the housing ladder.
Standard Life argues that for most workers, pensions already offer a more generous route to retirement because they benefit not only from tax relief but also employer contributions. For higher-rate taxpayers the difference can be particularly striking.
Someone paying £4,000 into a Lifetime ISA receives a £1,000 Government bonus, giving them £5,000 to invest. By contrast, a higher-rate taxpayer making a £4,000 net pension contribution would receive £2,666 in tax relief, leaving £6,666 invested in their pension.
Mike Ambery, Retirement Savings Director at Standard Life, said: “Planning for retirement is a much longer-term journey, often spanning decades, and where investment growth plays a far bigger role, so there is a strong case for separating out these two goals as saving for a home and saving for retirement involve very different timeframes and investment considerations.
“For those planning for retirement, pensions will in most cases remain the more effective way to save for later life. While LISAs currently offer a 25% Government bonus, pensions benefit from tax relief based on your income tax rate, meaning higher-rate taxpayers can receive a significantly greater boost.
“Early in your career, when you’re more likely to be a basic-rate taxpayer, the difference between a Lifetime ISA bonus and pension tax relief may be less pronounced, but as earnings increase, pensions can become increasingly valuable as higher rates of tax relief become available.
“On top of that, employer contributions can make a substantial difference, which is something a Lifetime ISA can’t replicate. As the savings landscape evolves, it’s important people understand what is changing, what isn’t, and the role that different savings mechanisms can play in helping people achieve greater financial security both in the short term and in later life.
“For those who may have been considering using a Lifetime ISA specifically for retirement, opening one ahead of future changes could offer an additional option, particularly for higher earners who may eventually approach pension contribution limits, however, for the vast majority of people, the priority should be making full use of their pension.”
The Government has yet to publish full details of the proposed First-Time Buyer ISA, including exactly when the changes will take effect. Until then, existing Lifetime ISA rules remain in place.
