If you read my last blog you'll know that a Lifetime ISA (LISA) is a Government savings product to help you save to buy your first home or save for retirement. Most people use them to save towards buying their first home, but are they any good for retirement?
When can you access your money?
If you are using your Lifetime ISA for retirement then you can access your money, including the government bonus, without paying a fee on or after your 60th birthday.
You can withdraw all of your money on or after your 60th birthday or take partial withdrawals. It's just like a normal ISA at this stage in that you can access funds whenever you wish and the remaining funds remain either invested, if it's in a Stocks and Shares LISA, or receiving interest, if it's in a cash LISA. The money within the ISA grows tax free and any withdrawals are tax free.
What do I need to be aware of?
Currently you can't access your Lifetime ISA for retirement before the age of 60 and this may change. If you do access your funds before 60 then you face a 25% withdrawal penalty. This means that you not only lose your government bonus, but also some of the original capital you put into your Lifetime ISA. If you haven't already, read my previous blog for further information on Lifetime ISAs and the withdrawal charge.
Is a Lifetime ISA better than a pension?
Generally, no. Look, with a pension, if it's taken from your gross salary, you will save on both income tax and National Insurance. With auto enrolment your employer will also pay into the pension (a minimum of 3% of qualifying earnings). If you are a higher or additional rate taxpayer you will get 40% or 45% tax relief which is higher than the 25% bonus added to your Lifetime ISA. Furthermore, you can only contribute £4,000 each tax year to your LISA whereas you can contribute up to £40,000 each tax year to your pension (if you earn at least £40,000 per annum). With a pension, you can carry forward any unused annual allowance from the previous 3 tax years. Annual allowance is the maximum amount you can put in your pension in a tax year. So, just assume you haven't paid into a pension for the past 4 years but have an old pension from years ago that is paid up (i.e. you have stopped paying into this pension).
Let's say you're having an amazing year financially and have already earned £180,000 this tax year. You could potentially put up to £160,000 gross into your pension this tax year. This is using your £40,000 annual allowance for this tax year and your £40,000 annual allowance for the previous 3 tax years. I will talk more about pensions in a different post.
Also, currently you can access your pension from age 55 (increasing to age 57 from 2028) whereas you have to wait until age 60 to access your Lifetime ISA. There are 2 more benefits to a pension over a LISA:
Your Lifetime ISA (including bonuses) is counted as savings for means-tested benefits whereas a pension is not, so your LISA could affect your eligibility for benefits. You may have to suffer the 25% withdrawal charge and use the funds from your Lifetime ISA if you become unemployed and want to bring your savings below the threshold to receive benefits. Your Lifetime ISA is also counted as an asset in bankruptcy cases whereas your pension is usually protected.
If you die, any money in your Lifetime ISA, including interest and bonuses, will lose the ISA tax wrapper and will form part of your estate for Inheritance Tax purposes. Pensions are usually outside your estate for Inheritance tax purposes and if your pension facilitates beneficiary drawdown, your benefits can be retained in the tax efficient pension wrapper and passed down the generations.
So are there any benefits of a LISA over a pension?
With your Lifetime ISA, any withdrawals you make are tax free. When you withdraw money from your pension, 25% of the pot is tax free and the remaining 75% is taxed at your marginal rate of income tax. Also, unless you are in ill health, you cannot access your pension savings before age 55 (rising to age 57) whereas if you're prepared to pay the 25% penalty you can withdraw your LISA funds before age 60.
So generally it is better to save into a pension than a Lifetime ISA but you could have a LISA in addition to your pension and save into both for retirement.
Please note that this is general guidance only and not advice. The information given relates to the tax year the article was written and tax and legislation may change in future years.