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Emilia Farr opened a lifetime Isa when the accounts went on sale in 2017 as a way to save for her retirement. But having built up a pot of £76,000, the self-employed IT worker was shocked to hear that the accounts are being pensioned off.
“For me, [opening one] was a no-brainer. I treat it like a pension, and the government bonus is a real incentive to save,” says Farr, 40, who lives in London.
She adds: “If you’re employed, even if you do nothing, you have a pension – but it’s very different for the self-employed.”
Lifetime Isas have proved to be a hit with millennials and generation Z: the number of “live” accounts has jumped by 45% in two years and now stands at almost a million (an estimated 964,000 in 2023-24, according to the most recent official data).
You must be 18 or over and under 40 to open a lifetime Isa, and you can pay in up to £4,000 each year until you are 50. The money can be saved in cash or invested, and it can then be used to help buy a first home or accessed after age 60.
Crucially, the government adds a 25% bonus to your savings, up to a maximum of £1,000 a year. Someone who “maxes out” the account from age 18 to 50 could pocket £32,000 in free money, which in turn is increased by interest or investment returns, further increasing the size of their pot.
This has made the lifetime Isa a popular alternative to a pension for self-employed workers, for whom the government bonus is equivalent to basic-rate pension tax relief. There have been estimates that up to 45% of Lifetime Isa holders are using the account to save for retirement.
But in the November budget, the Treasury announced that the lifetime Isa is to be replaced with a “new, simpler” Isa designed to help first-time buyers only. The government said it would consult early this year on this new account, and that once available, “this new product will be offered in place of the lifetime Isa”.
Lifetime Isa holders have been told they will be able to keep using their account, but experts say there are lots of unanswered questions.
Farr also has a self-invested personal pension (Sipp) but prioritises her lifetime Isa, which she holds with investment platform AJ Bell. She invests in shares including National Grid and Unilever, as well as a fund that tracks the UK stock market.
Farr finds the £4,000 annual limit a manageable savings target and likes the fact that the bonus – which she invests – means she makes a gain, regardless of how her investments perform. While she could also claim tax relief on contributions to her Sipp and invest this, the lifetime Isa bonus, which is usually paid within a month of your contribution, feels simpler, quicker and more rewarding.
“As a self-employed person, I want an account that is simple, where the rules aren’t going to change,” she says.
What next?
It has been reported that the new first-time buyer-only Isa could launch in 2028.
After the original announcement, HM Revenue and Customs later clarified that it will remain possible to open a lifetime Isa until the new product becomes available and for account-holders to continue to save into their lifetime Isa in line with the existing rules indefinitely.
However, Rachel Vahey, the head of public policy at AJ Bell, says we are still missing a lot of detail.
She adds: “By only focusing on helping those buying a house, the government is leaving fewer options for those who might use a lifetime Isa to save for retirement.
“Self-employed individuals and others without access to a workplace pension can keep saving if they already have a lifetime Isa. But that doesn’t help the thousands of people who need a solution in the future.”
There are also many unanswered questions about how the two accounts will work in parallel.
Mind the gap
There are an estimated 4.25 million self-employed workers in the UK, and it is thought only about 20% are saving into a pension. These workers are at a huge disadvantage when it comes to building a nest-egg for the future, and there have long been calls for more to be done to help them.
Maike Currie, from the online retirement savings provider PensionBee, says: “Frequent chopping and changing of long-term savings products undermines confidence and discourages people from planning ahead. If the government is serious about supporting the UK’s growing cohort of self-employed workers, it needs to make it easier for them to save for retirement.”
A pension is technically a more efficient way to save for your later years, but for workers whose income is lumpy or who don’t feel confident locking their money away for the long-term, a lifetime Isa has been a great halfway house. While the pot cannot be accessed until age 60 if you are not buying your first home, it is possible to withdraw sooner, albeit with a penalty of 25% (meaning you lose the bonus and some of your own savings).
Under the government’s automatic-enrolment regime, those workers aged 22 and over and earning at least £10,000 a year are automatically signed up to a workplace pension scheme offered by their employer. As a minimum they contribute 5% of their salary, and their employer puts in 3%.
The proportion of employed workers saving into a pension has reached almost 90% – but there is no equivalent scheme for self-employed workers.
According to the wealth manager Hargreaves Lansdown, the average employed worker has pension savings of £86,700, compared with just £26,500 for the self-employed. Its latest ‘savings and resilience barometer’ found that only 36% of self-employed households are on track for an adequate retirement income, versus 46% of employed households.
Alistair McQueen, head of retirement and savings at pension provider Aviva, says: “Without auto-enrolment or employer contributions to fall back on, many self-employed workers risk reaching later life without the savings they’ll need.”
You can save up to £60,000 or 100% of your earnings into a personal pension each year and receive tax relief at your usual rate. That effectively means a basic-rate taxpayer gets an £80 contribution topped up to £100. Higher-rate taxpayers get £60 topped up to the same amount, but may have to claim the extra relief back through their tax return.
For a basic-rate taxpayer, this tax relief is equivalent to the lifetime Isa bonus, and for a higher-rate taxpayer it is markedly more generous. However, the bonus often feels more appealing because it is a visible and immediate uplift to the savings pot. Tax relief on a pension can feel less obvious, often because it manifests through an adjusted tax code or because your pension provider claims it back from HMRC.
The new UK Pensions Commission is scheduled to publish its interim report in the coming weeks, which may include proposals to help the self-employed save for retirement.
How to boost your savings
If the idea of making regular monthly contributions to a pension feels out of reach, set a target percentage of your annual income instead, suggests Shaun Moore, tax and financial planning expert at Quilter: “Aim to meet this over the year, even if it is not in regular, equal instalments.”
The simplest option is a personal pension, also known as a stakeholder pension. You can open one of these through big providers such as Aviva and Legal & General. They typically offer a limited range of investment choices but will handle all the investing for you. These are ideal for beginners who want a simple, low-cost and hands-off approach.
Sipps have become more popular in recent years and offer you more control over how your money is invested. These are available through platforms such as AJ Bell and Hargreaves Lansdown and apps including Moneyfarm and JP Morgan Personal Investing (previously Nutmeg). Savers can choose from thousands of funds and run their own investment portfolio; however, many providers also offer ready-made portfolios.
Boost your contributions in bumper earning years, says McQueen. So-called carry forward rules let you use up unused pension allowances from the previous three years, meaning you could contribute up to £220,000 this year. “It’s a useful way to build up your pot when the opportunity arises,” says McQueen.
And don’t forget the state pension. Check your national insurance contributions record to see if you are on track, says Currie. Workers typically need 35 years of qualifying contributions to get the full new state pension. It is possible to fill in gaps in your record, but it is best to take advice before doing so. The Future Pension Centre can help (0800 731 0175).
Those operating through a limited company could make pension contributions from their profits, rather than their take-home pay. “This can be far more tax-efficient than taking extra salary or dividends,” says Currie.
Check for any lost or forgotten pensions and consider consolidating them, she adds. Those who were previously employed may have a pot they don’t know about.
‘I realised that no one was coming to save me’
Laura Tilt opened a lifetime Isa in 2019 and has so far saved £40,000.
“Like a lot of self-employed people, I had been kicking the can down the road in terms of my financial future,” says Tilt, 43, who lives in Bristol. “I realised that no one was coming to save me and I really needed to get started.”
She likes that gains made in a lifetime Isa are tax-free and finds the £4,000 limit a manageable amount to save over the year.
“When you’re self employed, your income is unpredictable and your job is not always secure – this feels like a good way to save for my future,” she says.
Tilt, a dietician, says she hopes she will be able to keep using her lifetime Isa after the accounts are replaced. While she also has a Sipp and a stocks and shares Isa, she finds the 25% bonus on the lifetime Isa a big incentive to save.
