The Government is expected to scrap the option for retirement saving in the lifetime ISA (LISA) meaning the product would only be available for first-time buyers.
The Labour Party said in the Budget last November that the LISA wasn’t “working for everyone” as it takes a number of steps to overhaul savings products available.
Currently, a LISA can be used to save for a first home or for your retirement with the government providing a 25 per cent top up for every £4,000 you save per tax year.
There are some conditions people need to meet when they withdraw from their LISA or they face a 25 per cent penalty.
For example, a first-time buyer can only use a LISA on properties worth £450,000 or less and needs to have been contributing to it for a full 12 months before withdrawing.
If a LISA is used for anything other than buying a first home or for retirement, then a 25 per cent penalty is applied, leaving people with less money than they have saved.
With a LISA no longer set to be available for retirement saving, experts have said now is a good time to review the other options to help boost pension pots.
Save into a workplace pension
When you turn 22, you are automatically enrolled into your workplace pension scheme, unless you specifically opt out.
Rosie Hooper, chartered financial planner at Quilter Cheviot, stressed the importance for people to look at not only how much they saved into their workplace pension but also how their money is invested.
Your workplace pension will put you into a default set of funds but people have the option to choose which funds they want to put their pension in depending on how much risk you want to take.
Hooper said: “Younger workers, who have decades before retirement, can normally afford to take more investment risk because their contributions have a long period to ride out market volatility.
“Those closer to retirement may prefer funds that gradually reduce risk to protect the value they have built up. Reviewing default investment settings and checking they match your goals is a simple step towards improving long-term outcomes.”
Understand how much you need for retirement
It is also important to understand how much you need in retirement and Pension UK’s “Retirement Living Standards” is a good benchmark.
To have a “comfortable” retirement it says a two-person household would need £60,600 a year.
Clare Moffat, pension and tax expert at pension provider Royal London, said: “When you get a pay rise, try to allocate some or all the extra money into your pension before you get used to the extra being paid into the bank.
“Even small increases in your monthly contributions can dramatically increase the amount in the pot you retire with.”
It is also important to check you are not contributing to the UK’s £31bn worth of lost pension pots, Susan Hope, a retirement expert at Scottish Widows said.
She added: “If you’ve moved jobs, check where your previous workplace pensions are – it’s your money, and bringing everything back into view can give a far clearer picture of your long term outlook.”
Make the most of salary sacrifice schemes
Many employers offer salary sacrifice arrangements which can be an effective way to boost retirement saving while reducing taxable income.
Salary sacrifice is where you give up a proportion of your salary from your employer for non-cash benefits.
In the case of your pension, you give up a portion of your salary in exchange for a higher pension contribution from your employer.
By reducing your pre-tax salary, you pay less income tax and national insurance (NI) on your earnings.
However, from April 2029, only the first £2,000 of pension contributions made through salary sacrifice will remain exempt from national insurance.
Any amount above this threshold will be treated as normal earnings for NI purposes.
Hooper said: “Most basic-rate taxpayers will not be heavily affected, but higher earners or those making larger voluntary contributions may see changes to their take home pay. The long lead-in period provides the opportunity to adjust contributions or plan alternative methods.”
Boost your self-invested personal pension
A SIPP (self-invested personal pension) is a way of saving and investing for your retirement by contributing monthly or in lump sums.
You can choose and manage investments yourself or with the help of a financial adviser and you will receive tax relief on your contributions at 20 per cent, 40 per cent or 45 per cent depending on whether you are a basic, higher or additional-rate taxpayer.
Ruairi Dennehy, chartered financial planner at Dennehy Wealth, said: “The first general positive of a SIPP versus LISA is the age of access. SIPP’s can be accessed from age 57 (from 2028) whereas LISA’s (if used as a pension pot) can’t be touched until age 60.
“Contribution limits also favour SIPP’s [where you can contribute] up to £60,000 versus £4,000 per tax year [for a LISA].”
If you are a higher-rate taxpayer, contributing to a SIPP is generally more tax-efficient than saving into a LISA for retirement.
When you contribute to a SIPP, the provider claims basic-rate tax relief on your behalf.
“As a result, income that would otherwise be taxed at 40 per cent is instead taxed at 20 per cent, allowing higher-rate taxpayers to reclaim the additional 20 per cent difference through their tax return or contacting HMRC, a key benefit not available with a LISA,” Dennehy added.
Other ISAs
There are still other types of ISAs on offer, which can help you save and invest in a tax-efficient way, as withdrawals from them are tax-free.
You can choose from a stocks and share ISA which allows you to invest in the stock market through funds, shares and bonds or a cash ISA which is essentially a savings account where you don’t pay tax on any interest earned.
Currently, you can put a maximum of £20,000 into a single ISA or across multiple per tax year.
However, from April 2027 those under-65s will only be able to pay up to £12,000 a year into a cash ISA.
Susan Hope from Scottish Widows, also pointed out it was important to understand your state pension and how much you will get and when.
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Knowing this baseline income can help you judge how far you are from the “comfortable” level and what extra saving might be needed.
She said: “Check your pension balance, review how much you’re contributing, and consider increasing contributions whenever your finances allow.
“Small, consistent steps have a remarkable compounding effect over a working life, and for anyone who has taken time out for childcare, health or caring responsibilities, revisiting contributions when you’re able can help rebuild your long-term outlook.”
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