When it comes to saving for retirement, pensions are by far the most popular choice. Whether you go for a pension from an insurance provider or a SIPP, the combination of the government top up in the form of tax relief, long-term investment growth and an employer contribution (if you have an employer) is compelling. However, there is another option that is much less talked about but could be a game changer for many — the Lifetime ISA (LISA).

The Lifetime ISA was launched to help people trying to balance saving for their first home and for retirement. You can open one if you are aged between 18 and 39 and contribute up to £4,000 per year.

You’ll get a 25% top up from the government, which means up to £1,000 a year of free cash. Over time you can use these savings towards a first home — as long as it’s worth under £450,000 — or for retirement.

The 25% bonus acts in a similar way to basic rate tax relief on a pension, plus when you come to take an income from it, it’s all tax free.

This makes it a particularly attractive prospect for groups such as self-employed people who pay basic rate tax. They get the same tax relief going in as they do on a pension, they don’t benefit from an employer contribution on a pension so they don’t miss out on it by using a LISA, and when they take a retirement income it’s all tax free — whereas a pension income may be subject to tax.

Read more: How to make sure you'll get the full state pension

It’s too early to see the retirement outcomes people are getting from a LISA but we can see how it’s helping people fuel their property dreams. Recent data shows that in 2023/24, almost 57,000 people used one to help them get that all important first step on the housing ladder. It’s a sign that the LISA is clearly resonating with people.

However, there are challenges that are stopping it from appealing to many more.

Any withdrawals that are not used for a house purchase or for retirement are subject to a 25% exit penalty. This not only removes the government bonus, but a chunk of your hard-earned savings too.

As an example, someone saving £4,000 in a year would receive a 25% top up of £1,000 giving them £5,000 overall. If they then needed to access that money for an emergency, the 25% exit penalty would total £1,250, so £250 of their own money would be lost. The data shows that just under 100,000 people made an unauthorised withdrawal from their LISA in 2023/24 and got clobbered with a penalty.

Life comes with its ups and downs, and people don’t want to take the time to build savings up only to lose a chunk when they access them during tough times. This is particularly the case for self-employed people, who may need to access savings during times of income volatility.

Read more: What is pension credit and are you eligible to claim?

Financial services company Hargreaves Lansdown has called on government to reduce the early access penalty to 20% to stop this from happening.

Capping the maximum age for opening a LISA at 39 also needs to be assessed. Allowing people to open and contribute to a LISA up until the age of 55 would open this product up to even more people.

Again, these are changes that would particularly benefit the self-employed, and people who may opt to start working for themselves later in life.

Recent analysis from Hargreaves Lansdown’s savings and resilience barometer estimates it could help around 1.2 million self-employed households to build their retirement resilience.

Download the Yahoo Finance app, available for Apple and Android.