A new approach to retirement saving
The new Lifetime ISA (LISA), which was announced in the March Budget and will be available from April 2017, will be a very attractive proposition – even better than a traditional pension for many people. In fact, the LISA could even be a forerunner of how pensions might be in the future.
Age: LISAs can be opened by anyone over age 18 but under the age of 40. This compares with the upper limit of age 75 to invest in a pension. Funds in a LISA can then be used for retirement at age 60,rather than the current age 55 for pensions.
Investment limit: You will be able to save up to £4,000 a year into a LISA, and, until age 50, contributions will be topped up with a 25% government bonus, meaning that £5,000 is actually invested. This is equivalent to benefitting from basic rate tax relief and will come with any earnings requirement. That should be particularly attractive for non-earners given that the equivalent pension limit is £3,600. Higher/additional rate taxpayers will obviously benefit more by making pension contributions.
Flexibility: Pension savings are tied up until age 55, but savings within a LISA can be withdrawn at any time. You will lose the bonus (and any interest or growth on it) and also be charged a 5% penalty, but it could be a useful option in an emergency; and a partial withdrawal is possible.
Choice of investments: Qualifying investments in a LISA will be the same as for a cash or stocks and shares ISA, although not quite as wide ranging as permitted for a pension.
On retirement: This is where a LISA comes into its own because withdrawals from age 60 are tax free. In contrast, only 25% of a pension fund can be taken tax free, the remainder being taxed as income.
If you are self-employed, using a LISA for retirement saving will be particularly appealing. You can always run a pension scheme in tandem to benefit from higher tax relief in those years when you have more income. A pension scheme will also be a better option once the LISA top-up stops at age 50.
But be warned: a LISA is unlikely to be a good choice if you have a pension where you benefit from employer contributions. LISAs might also be inadvisable for anyone who would expect to use the savings as a readily accessible piggy bank.