In our weekly series, readers can email in with any question about retirement and pension savings to be answered by our expert, Tom Selby, director of public policy at investment platform AJ Bell. There is nothing he does not know about pensions. If you have a question for him, email us at [email protected].
Question: I am self-employed and haven’t got a pension plan in place yet. It is on my to do list for the year! Should I open a Lifetime ISA for my retirement or what other options do I have?
Answer: Automatic enrolment reforms have been successful in getting millions of people saving at least something for retirement. However, auto-enrolment only benefits those who are employed and meet certain qualifying criteria – the UK’s army of self-employed workers do not have a similar arrangement in place, largely because there isn’t an employer who can match contributions or set up a scheme on their behalf.
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As a result, millions of self-employed workers are in danger of having little or nothing saved for retirement. And while government has previously made noises about addressing this challenge, little has been done to help the self-employed save for retirement.
So, the fact saving for later life is on your “to do list” in 2026 is a fantastic starting point, and as always when it comes to building a retirement pot, the sooner you are able to start, the easier it will be.
There are a number of options available that you could consider. Let’s start with the Lifetime ISA (LISA) as that’s the product you flagged in your question.
As things stand, any UK resident aged 18-39 can open a Lifetime ISA and pay in up to £4,000 a year. This will be topped up by a 25 per cent government bonus, worth up to £1,000 a year. You can keep paying into a LISA and receiving the bonus until the day before your 50th birthday, your money can grow tax-free and you can then withdraw the money completely tax-free if you use it for a deposit on your first home (provided it is worth £450,000 or less) or from your 60th birthday.
If you withdraw the money in any other circumstances (other than being terminally ill), you will pay a 25 per cent government-imposed early withdrawal charge, meaning you might get back less than you put in.
It’s worth noting that the government intends to replace the LISA with a new product, although this will be aimed at first-time buyers only, with no retirement element. The government has, however, confirmed that anyone who opens a LISA before it is shuttered will be able to continue to use the product as they can today.
The other main retirement saving option you could consider is a personal pension. If you go down this road, your contributions will benefit from upfront basic-rate tax relief, meaning an £80 contribution will automatically be boosted to £100 – exactly the same as the LISA bonus.
If you are a higher-rate taxpayer, you can claim back an extra £20 from the taxman, meaning the £100 contribution would only have cost you £60. If you are an additional-rate taxpayer you can claim back an extra £25, meaning the £100 contribution would have cost you just £55.
You can make personal contributions to a pension up to 100 per cent of your UK salary, while there is also an overall annual allowance of £60,000. If you are a very high earner or have accessed your pension flexibly previously, you may have a lower annual allowance.
Just like a LISA, your money will grow completely tax-free in a pension, although the access age and tax treatment at this point are different.
You can currently access your pension from age 55, although this will rise to age 57 in 2028, with up to a quarter of withdrawals tax free and the rest taxed in the same way as income.
If you are the sole director of a limited company, you also have the option of making contributions from the business to your pension, potentially allowing you to benefit from lower corporation tax bills as well as pension tax relief.
In terms of comparing the two, if you are a basic-rate taxpayer and self-employed, the LISA will be an attractive alternative to a traditional pension, given you get the same bonus, have the flexibility of being able to get at the money earlier if needed (albeit with an early withdrawal charge applying) and can access the money completely tax-free from age 60.
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If you are a higher or additional-rate taxpayer, the ability to get extra tax relief swings the balance, at least in terms of getting the biggest financial bang for your buck, in favour of pensions.
The final main option would be an ISA, which offers tax-free investment growth and tax-free withdrawals, although unlike the LISA or pensions, there is no upfront bonus.
You can pay in up to £20,000 a year into an ISA, although the £4,000 LISA limit is within this £20,000, not in addition to it. It is also perfectly possible to have a combination of these products if that’s what best suits your financial needs.
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