Savvy savers are planning to save both in their pension plan and in the Lifetime Individual Savings Account (LISA), following its launch this April.
The new LISA has been designed as a savings vehicle for those aged 18 to 40 who want to save up to £4,000 a year. The government offers a big incentive by adding a 25% bonus, meaning that for every £4 saved, the government adds £1. The money can be used to buy a first home worth up to £450,000, or individuals can continue to save and receive the 25% bonus until the age of 50. If the money is accessed after age 60, it can be taken tax-free. If it’s accessed before age 60, unless it is being used for a qualifying home purchase, the government bonus will be lost and a 5% charge will be applied, though with no charge for exit during the 2017-18 tax year.
PENSIONS AND LISAS – THE DIFFERENCES
The government has been careful to point out that the LISA is not a replacement pension, but an additional way of saving, to either purchase a property or help save for retirement.
Saving into a pension as well as a LISA makes sense. Pension contributions can continue to be made up to age 75, but saving into a LISA must stop at age 50. Workplace pensions have the big advantage that employers can also contribute. So, deciding to opt for just a LISA could mean missing out on this valuable extra free cash, and restricting the number of years you have left to build up your savings for retirement.
The LISA has a maximum contribution of £128,000 (before bonus) and a £4,000 annual limit that comes out of your ISA allowance (£20,000 for the 2017-18 tax year). When it comes to your pension, there is a lifetime limit of £1m (contributions plus growth) and in most cases an annual allowance of £40,000.
The main advantage of keeping a LISA going until retirement is that you can withdraw all the money tax-free from age 60 onwards. With a pension, 25% is free of tax, however, you can access your pension pot from age 55.
If someone chooses not to contribute to a pension they might lose out on employer’s pension contributions where they have a personal pension and an employer matching contribution structure is in place. People on means-tested state benefits also need to carefully weigh up the impact of taking out a LISA as opposed to saving in a pension.
GETTING GOOD ADVICE
Everyone’s financial goals and circumstances are different. That’s why it pays to get good advice that’s tailored to your individual needs.