Pension vs Lifetime ISA: which is better for long-term saving?
By calculatemysalary.co.uk Editorial Team
A practical comparison of workplace pensions and Lifetime ISAs for 2025/26, with worked examples showing which puts more money in your pot.
Both workplace pensions and Lifetime ISAs (LISAs) are tax-advantaged ways to save for retirement. They work quite differently, though, and for most employees one is clearly better than the other.
How pensions save you tax
When you contribute to a workplace pension through salary sacrifice, the money comes from your gross salary — before income tax and National Insurance. Every £100 you put in costs less than £100 from your take-home pay.
For a basic rate taxpayer (20% tax, 8% NI), that £100 contribution costs you £72 from take-home. For a higher rate taxpayer (40% tax, 2% NI), it costs just £58.
On top of that, many employers match your contributions. A 3% employer match on a £35,000 salary adds £1,050 a year — money you simply wouldn't get otherwise.
The pension annual allowance for 2025/26 is £60,000, though you can only contribute up to 100% of your earnings.
How the Lifetime ISA works
A LISA lets you save up to £4,000 per year. The government adds a 25% bonus — up to £1,000 a year. You must be between 18 and 39 to open one.
The money can go towards:
- Your first home (property value up to £450,000)
- Retirement after age 60
Withdraw for any other reason and you'll pay a 25% penalty on the total withdrawal amount. Because the penalty applies to the sum including the government bonus, you lose more than just the bonus. On a £1,000 contribution with a £250 bonus, the penalty on early withdrawal is £312.50 — meaning £62.50 of your own money vanishes. That 6.25% sting catches people off guard.
Where does £100 of gross salary end up?
This table shows a basic rate taxpayer putting £100 of pre-tax salary into each option:
| Pension (salary sacrifice) | LISA | |
|---|---|---|
| Income tax | £0 | £20 |
| Employee NI | £0 | £8 |
| What reaches your account | £100 | £72 |
| Government bonus (25%) | — | £18 |
| Total saved | £100 | £90 |
Before employer contributions even enter the picture, the pension is ahead.
Worked example: earning £35,000
You want to save £200 a month from gross salary. Your employer matches pension contributions at 3%.
| Pension | LISA | |
|---|---|---|
| Monthly contribution | £200 (pre-tax) | £144 (what's left after tax and NI) |
| Cost to your take-home | £144 | £144 |
| Government bonus | — | £36 |
| Employer match (3%) | £87.50 | — |
| Monthly total in pot | £287.50 | £180 |
| Annual total | £3,450 | £2,160 |
Same cost to you. The pension puts 60% more into your pot.
When the LISA makes sense
The numbers above don't tell the whole story. A LISA is worth considering if:
- You're a first-time buyer. The 25% bonus on up to £4,000 a year is genuinely free money towards a deposit, accessible before retirement.
- You're self-employed with no workplace pension. Without employer matching, the pension advantage shrinks considerably. You still get tax relief on personal pension contributions, but you miss the NI savings of salary sacrifice.
- You can afford both. Max out your employer match in a pension first, then top up a LISA for the bonus. There's no rule against it.
When the pension wins outright
- You have an employer matching contributions — even a modest match outweighs the 25% LISA bonus
- You're a higher rate taxpayer (40% relief beats 25% bonus handily)
- You don't need the money before age 57 (rising from 55 in 2028)
Access rules
| Pension | LISA | |
|---|---|---|
| Earliest access | 55 (57 from 2028) | 60 (or first home) |
| Early withdrawal | Generally not possible | 25% penalty |
| Tax on withdrawal | 25% tax-free lump sum, rest taxed as income | Completely tax-free |
| Employer contributions | Yes | No |
One thing people overlook: pension withdrawals are taxed as income. If you retire with a large pension pot and draw heavily, you could end up paying 40% tax on some of it. LISA withdrawals are entirely tax-free. For people building very large retirement savings, this matters.
The short version
If you have a workplace pension with employer matching, use it first. Tax relief, NI savings, and employer contributions are too good to ignore.
A LISA works well as a supplement — particularly for first-time buyers. As a standalone retirement plan, it falls short for most employees.
Use our salary calculator to see how pension contributions change your take-home pay.