In the absence of Harry Hill to settle the debate, we take a look at whether the new Lifetime ISA (or LISA to be trendy) is set to topple the mighty pension as the best way to save for retirement.
Meet LISA, the new kid on the block
We covered what LISAs are in our budget blog but here’s a quick recap:
The Lifetime ISA is for those between the ages of 18 and 40 and is designed to help people save for their first house or pension. It will be available from April 2017.
Like a regular ISA, you won’t pay tax on the interest earned, but George Osborne will sweeten the deal with an extra bonus each year. This is as much as 25% of everything you save.
You can contribute to this ISA until you’re 50 years old. You can withdraw money at any time but if you do, unless the withdrawal relates to a first property purchase, you won’t receive the government bonus and there’s a 5% penalty charge.
Lifetime ISA or pension: which one is right for me?
It’s not immediately obvious which is better and the answer, as with so many things in the financial world is, it depends on your individual circumstances.
A Lifetime ISA will probably be your best option if:
- You’re self employed and, therefore, don’t have an employer pension.
- You’ve already maxed out your contributions to your workplace pension and want to supplement retirement savings.
- There’s a possibility you might need to access your retirement money early. Think carefully about this one though, as early withdrawals not related to a first property purchase would mean that you’d lose the government bonus, growth on the bonus, and incur a 5% penalty.
- You might want to temporarily borrow some money without charge, and pay it back in full at a later date. Hold your horses though – this is still being discussed and isn’t set in stone yet.
A personal pension will probably be your best option if:
- You’re in a workplace pension with employer contributions. Under auto-enrolment rules all employers will contribute at least 3% by 2019 (under current plans). This is a major advantage and means a pension will almost certainly be the winning product for you.
- You want your money earlier. You can access a pension at 55 rather than waiting until you turn 60.
- You are a higher-rate taxpayer – this means you qualify for pension tax relief at up to 40%. So to contribute £100 only costs you £60 – this beats a LISA.
- You are likely to be paying a lower rate of tax in retirement than when you were working.
- You intend to make significant pension contributions past the age of 50.
- You intend to make substantial contributions – the lifetime limit for a pension is £1m from April 2016 while the most you can contribute to the lifetime ISA with the bonus is £128,000, and that’s only if you start saving at 18, right through to 50. Put another way, the annual limit for pension contributions is up to £40k but for the LISA it’s just £4k.
- You receive state benefits. Saving in a pension doesn’t usually impact your benefit entitlement – saving in a LISA can.
If you’re a first-time buyer
If you’re a first-time buyer, you can’t afford not to have a LISA. The government is giving you 25% on top of what you save – it’s basically free money. And who doesn’t love free money?!
So we’ve looked at the facts. And while there’s no definitive conclusion, the Lifetime ISA appears to offer a real alternative to young people who might otherwise save into a personal pension or a SIPP rather than frittering their cash on Tizer and Smash Hits magazine.
For retirement saving, it appears that LISAs will work well for the wealthy and the self-employed. Although if you’re self-employed and/or a higher-rate taxpayer, still prioritise paying in to your pension as the tax relief offers a better incentive.
If you’re employed, keep paying in to your employer’s pension scheme, as you get free money in the form of your employer’s contribution.
And don’t forget – pension schemes can work independently of LISAs, so you don’t necessarily have to choose one or the other. Many experts are recommending using both.
Take your time and do plenty of research. We’re always here to help if you need us.
This article is for general use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be or constitute advice.
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