When you start searching for the best ways to build a retirement fund, private pensions might be the first option that comes to mind.

However, they’re not the only way you can prepare for your life after work. An alternative is the Lifetime ISA (LISA) – a government-backed savings account.

While you might assume you can only use a LISA to purchase your first home, this isn’t its only purpose.

In fact, according to Financial Planning Today in September 2025, 45% of LISA savers opened their accounts specifically to save for retirement, compared to 46% who opened theirs to purchase a first home.

Despite their popularity, LISAs come with strict rules you must understand before you can decide whether they’re the most suitable choice.

Continue reading to discover how a LISA compares with a pension so you can make an informed decision about which best suits your long-term needs.

Lifetime ISAs are another form of Individual Savings Account that allows you to save wealth

A LISA is a specific type of savings account that can be opened by anyone between the ages of 18 and 39. You can use it to either save for the deposit on your first home or build a fund for later life.

As of 2025/26, you can contribute up to £4,000 each year to your LISA.

It’s important to remember that this forms part of your overall £20,000 ISA allowance. If you save the full £4,000 into your LISA, you can only invest a further £16,000 in your Cash or Stocks and Shares ISAs.

You can benefit from a government bonus when you contribute to your Lifetime ISA

There are two main types of LISA. A Cash LISA functions much like a traditional savings account, offering interest on your wealth.

Meanwhile, a Stocks and Shares LISA allows you to invest your contributions in a range of assets. While this typically exposes you to risk, it gives your wealth the potential for more competitive long-term returns.

For every £1 you contribute to your LISA, you can benefit from a 25% government bonus. This means that if you deposit the full £4,000, your total savings for the year could reach £5,000.

While you can only open a LISA until your 40th birthday, you can continue receiving the government bonus until you reach age 50. This could significantly bolster the overall value of your retirement savings.

Better yet, as is the case with other forms of ISAs, your savings and investments are completely free from Income Tax, Capital Gains Tax, and Dividend Tax.

You will typically face a withdrawal penalty if you don’t use the wealth for specific reasons

Perhaps the main limitation with LISAs is that you must use the funds to pay for the deposit for your first home (provided the property costs £450,000 or less) or leave them invested until you reach the age of 60.

If you withdraw funds for any other reason, you’ll typically face a 25% fee. This penalty removes the government bonus and takes a portion of your savings, meaning you could receive less than you originally put in.

For instance, if you contributed £10,000 over several years, you would receive a total government bonus of £2,500. If you then withdrew this early, the 25% charge would be £3,125, leaving you with just £9,375.

If you’re approaching the age of 40 and haven’t yet opened a LISA, it’s worth considering whether the remaining years of government bonuses make it worthwhile.

Pensions allow you to build a pot of wealth to support your dream lifestyle when you stop working

Pensions are one of the more effective ways to save for retirement.

You can tax-efficiently contribute to a pension while still benefiting from tax relief up to the value of the “Annual Allowance”. As of 2025/26, it stands at £60,000, or 100% of your earnings, whichever is lower. This includes personal and employer contributions, as well as tax relief.

This is significantly higher than the LISA limit, allowing you to save more each year.

You can even benefit from tax relief, which is when the government essentially “tops up” any contributions based on your marginal rate of Income Tax. This means that a £100 contribution would only “cost”:

• £80 for basic-rate taxpayers
• £60 for higher-rate taxpayers
• £55 for additional-rate taxpayers.

This government bonus makes saving in your pension particularly attractive, as it could help you reach your long-term goals more quickly.

While you can take the first 25% of your pension without incurring tax, the rest could count as income

Unlike a LISA, you can begin accessing your pension from the age of 55 (rising to 57 by April 2028).

You can then typically take the first 25% of your fund without incurring tax, while the remainder is treated as taxable income.

This means that when you draw from your pension, those withdrawals are added to any income you receive in that year, such as from your State Pension or property wealth. They will then be taxed at your marginal rate.

This means you could pay:

• 20% on income between £12,570 and £50,270 (the basic rate)
• 40% on income between £50,270 and £125,140 (the higher rate)
• 45% on income above £125,140 (the additional rate).

However, you do have flexibility over how you take the remainder of your pension fund.

You could choose to withdraw it through flexi-access drawdown, allowing you to leave the rest of your fund invested to continue generating potential returns.

Alternatively, you could use it to purchase an annuity – a form of insurance product that offers a guaranteed income for a set period of time.

You can also invest in a range of assets through your pension

Most pensions allow you to invest your contributions in a range of assets, which could offer competitive returns over time.

You can typically choose from several different strategies to suit your tolerance for risk and investment time horizon.

Over several decades, the compounding effect – essentially “growth on growth” – combined with tax relief and employer contributions, could make pensions a practical long-term savings method.

A financial planner could help you decide which option would best suit your needs

When comparing a LISA and a pension, the “right” decision for you will largely depend on your goals, income, and the stage of life you’re currently at.

If you’re younger and want the flexibility to either purchase your first home or supplement your retirement fund, the government bonuses and tax-free growth of a LISA could benefit you.

Conversely, if your main focus is retirement and you want to take advantage of the higher contribution limits and tax relief, a pension might be the wiser option.

To ensure that your approach fits your personal circumstances, it’s worth seeking bespoke advice from a financial planner.

A financial planner could help you determine which option – or combination of options – best supports your retirement goals.

Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. 

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The Financial Conduct Authority does not regulate tax planning.