What is a Lifetime ISA and can I use it to save for retirement?
The Lifetime ISA (LISA) was introduced in 2017 to encourage people to save towards retirement or their first home.
First, lets cover the LISA rules:
- You must be over 18 or under 40 to open a LISA.
- You can contribute up to £4,000 per year, until you're 50: This counts towards your £20,000 ISA allowance (for 2021/22).
- The government add a 25% bonus to your savings, up to a maximum of £1,000 per year.
- You can hold cash or stocks and shares in your LISA, or a combination.
- You must be a UK resident (or crown servant) to open and contribute to a LISA.
- You can only take money out of your LISA without penalty if you are buying your first home, over 60 or terminally ill with less than 12 months to live.
- The penalty for any other withdrawals is 25%. E.g. Assuming no growth, initial savings of £800 + 25% government bonus = £1,000, minus 25% charge, leaves you with £750.
- You can use a LISA to help buy your first home as long as the property costs £450,000 or less; you buy the property at least 12 months after you make your first payment into the LISA; you use a conveyancer/solicitor to act for you in the purchase and you're buying with a mortgage.
How does the LISA compare with a pension then for retirement saving?
- Availability: LISA must be opened before age 40, whereas anyone over age 18 can open a pension.
- Contributions: LISA maximum is £4,000 per year, whereas the maximum is £40,000 per year (tapered for those earning over £150,000) for a pension (subject to a lifetime limit).
- Government top up: 25% at the end of the tax year for LISAs (up to age 50), whereas for pensions the tax relief on contributions depends on your marginal rate of tax (20%, 40% or 45%). Note that a 25% LISA bonus is equivalent to 20% tax relief on a pension contribution: £800 LISA savings + 25% government bonus = £1,000 v £800 pension contribution + 20% tax relief = £1,000.
- Interest: The LISA bonus is only added at the end of the tax year, whereas with a pension the tax relief is added straight away and therefore there is potential for growth on the tax relief immediately.
- Tax: LISA growth and withdrawals are tax free, whereas with a pension although contributions and growth are tax free within the pension wrapper, tax is due on (usually) 75% of a withdrawal (25% tax fee).
- Flexibility: LISA money can be withdrawn at any time but there is a 25% penalty if not used for a first home deposit or after age 60. Pension funds cannot be touched until age 55 (or 57 in 2028) but can then be accessed (subject to tax as per above).
What should I consider when deciding on a LISA or a pension?
- If you are a higher or additional rate taxpayer then the tax relief on pension contributions is likely to be higher than the LISA bonus rate.
- If you are able to make larger contributions to a plan, then you will be able to put more into a pension over time than a LISA.
- If you have a workplace pension then your employer will contribute, boosting your savings.
- If you want to access your savings from age 55 (57 in 2028), then you can do this with a pension.
- If you desperately need money before age 55 (57 in 2028) then you can withdraw from a LISA (subject to 25% penalty).
Don't forget though that you can hold a LISA and a pension at the same time!
Whether a LISA or pension is best for your retirement savings depends on your personal circumstances, and you might want to seek financial advice to help you, but hopefully this article has given you some things to consider.
- Charlie Rigg, FMB Chartered Financial Planner
Please note the value of investments can go down as well as up, so you could get back less than you put in. The information in this blog doesn’t constitute as advice, tax rules can change, and Lifetime ISA benefits depend on your circumstances. You can withdraw money from a Lifetime ISA to buy your first home, or at age 60. Other withdrawals will usually mean a 25% government charge, so you could get back less than you put in. Using a Lifetime ISA for later life complements a pension.