The Motley Fool

Worried about the State Pension? The Lifetime ISA could help you retire in style

Are you shocked at how poor the UK State Pension is? Given that it now pays just £8,767.20 a year, you should be. Few can live comfortably on that.

Lifetime chance

There’s no chance of any political party dramatically increasing the payout, so you have to take action yourself, by saving for retirement under your own steam. One way of doing this is the Lifetime ISA, which hands you free cash from the government as an incentive to invest.

You can claim £1 for every £4 you save, up to a maximum £1,000 a year. Better still, that money grows free of income tax and capital gains tax, and withdrawals are tax-free too.

There are other ways of saving for retirement and some may be better for you, but too many have overlooked the Lifetime ISA, and I’m keen to bring it to your attention.

Know the rules

If you’re not quite sure how the Lifetime ISA works, you can find a brilliant run through of the rules here. You can invest up to £4,000 per year and claim a government top-up worth 25% of the money you pay in. So invest £1,000 and you get £250. Invest £4,000, you get £1,000. This counts towards your overall £20,000 annual allowance across all types of ISA, it isn’t on top.

You can open a Lifetime ISA between ages 18 and 39, and continue contributing (and claiming that bonus) to age 50. Get in there right from the start and you could claim £33,000 in total, with your own contributions on top.

Property deposit or retirement

The Lifetime ISA has mostly been promoted as a way of helping young people get on the property ladder, but you can also use it to save for retirement. There are hefty penalties if you withdraw your money before age 60 for any other reason than buying your first home. This has annoyed some, but should help stiffen your resolve to leave the money untouched for retirement.

If the State Pension is your biggest concern, the Lifetime ISA could help you set that to rest. It could even be the first step in building a £1m retirement portfolio

If building a property deposit for the next few years then you may want to stick to cash. But if using a Lifetime ISA for retirement, then history shows stocks and shares offer a vastly superior return. So before choosing your provider, check it offers a Stocks and Share Lifetime ISA. Options include AJ Bell, Hargreaves Lansdown, Moneybox, Nutmeg and OneFamily.

Don’t quit your company pension

If you have a company pension, you must continue paying into it, as you’ll get employer contributions and tax relief on top. If you’re a 40% or 45% rate taxpayer, this relief will be worth more than the 25% you get from a Lifetime ISA. 

However, withdrawals from your Lifetime ISA will be free of income tax, whereas pension withdrawals aren’t. This means the Lifetime ISA offers the best of both worlds – a top up when you pay money in and no tax when you take it out (provided you avoid that exit penalty).

So don’t just moan about the State Pension, seize this once-in-a-lifetime opportunity to do something about it.

Under-The-Radar Investment

There are a number of small-cap stocks that could be worth buying right now, and our investing analysts have written a FREE guide called "1 Top Small-Cap Stock From The Motley Fool".

The company in question may have flown under your investment radar until now, but could help you to build a great income from your investments and retire early, pay off the mortgage, or simply enjoy a more abundant lifestyle. Click here to find out all about it — it's completely free to do so.

Harvey Jones 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.