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Retirement saving: SIPP or Lifetime ISA?

Thanks to the rocket fuel that is compound interest, it’s never too early to begin planning for your retirement. What may seem a small amount in the early days can balloon over time if you stay patient and refrain from meddling with your portfolio.

But which retirement-focused product — a Lifetime ISA (LISA) or  Self Invested Personal Pension (SIPP) — is best? Here’s my take.

The basics

The Lifetime ISA can be opened by anyone between the ages of 18 and 39. The money put into this account can be used to help first-time buyers get their feet on the housing ladder or — given our focus — to kick-start your retirement savings.

As an incentive, the government will add 25% to the amount of cash deposited in a LISA. Should you make the maximum annual contribution of £4,000, this equates to an extra £1,000. Thus, you would have a total of £5,000 in your account after one year, ignoring growth (or loss) from any investments you’ve made.

In contrast to a LISA, there are no age restrictions when it comes to opening a SIPP (you can even open a junior version for a child). Just like the LISA, however, your money can be invested in a variety of instruments, such as shares, funds, trusts and bonds.

Running what is essentially your own pension scheme has the incentive of tax relief. In practice, it costs a basic-rate (20%) taxpayer £80 to invest £100. A higher-rate (40%) taxpayer can invest the same amount for only £60.

So which is best?

Both have benefits and drawbacks. A SIPP allows you to invest as much as £40,000 every tax year — far more than the LISA. Even if you can’t make the maximum contribution (and few can!), the more you can stash away, the more your wealth should snowball over time.

Unfortunately, only 25% of your SIPP can be withdrawn tax-free. The remainder gets taxed at your normal rate. This isn’t the case with the LISA. That’s not to say the latter is without its restrictions.

Here, you’re prevented from making contributions after 50 years of age. The maximum benefit that can come from opening a LISA at 18 would, therefore, be £33,000. Unlike the SIPP (which can currently be accessed at 55), you’ll also have to wait until you’re 60 before scooping up your money without incurring a 25% penalty.

This penalty can hit hard. Invest £4,000, receive your £1,000 bonus from the government, then withdraw everything and you’d only get £3,750 back — less than you started with. It’s also worth noting that LISAs can be taken into account when someone declares bankruptcy or claims benefits.

Clearly, both products are intended for long-term investors only. If you want to invest but enjoy the flexibility of access to your cash, a standard stocks and shares ISA is the way to go.

Score draw?

Ultimately, choosing between a SIPP and a LISA will depend on your own circumstances. Nevertheless, picking one is far better none at all. And should you be undecided, you can always do what I’ve done: open one of each.

Yes, as someone who will turn 40 very soon (where life, I’m reliably informed, actually begins), I’ve decided to open a LISA alongside my SIPP, thereby giving me maximum flexibility when it comes to planning for my retirement.

Should I eventually decide to focus on one product over the other, so be it. It’s an option worth having.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.