Planning for the future and your retirement is at the front of any individuals mind when it comes to financial planning. With the various schemes and options available to taxpayers, we have made things simple and focused our attention on two similar choices, the Lifetime ISA (LISA) and pension savings. Below we have taken a look at the potential benefits of each.
Lifetime ISA (LISA)
First lets look at what a LISA is and the benefits one can provide. A LISA is a way for younger investors to save, either their first home or towards retirement.
- LISA can be opened between the ages of 18-39
- You can contribute up to £4,000 a year towards one (Up to age 50)
- You will receive a 25% bonus from the government on what you pay in (max 1,000 per year)
- Money can be withdrawn tax free when either, purchasing your first home or from the age of 60
If in the future, you need to withdraw from the LISA for any other reason you will incur a 25% charge which effectively means you will have lost 6.25% on any money invested.
For example, if you invested £100 your bonus would be 25%, £25 if you then withdrew this you would be charged a 25% penalty on the whole of the pot, £125 thus leaving you with £93.75 and a shortfall of 6.25 or 6.25%
Pension
Pensions however are much more complicated, your “bonus” when contributing to a pension is given in the form of tax relief and this depends on if you are a basic rate, higher rate or additional rate taxpayer.
- Basic rate taxpayers bonus equivalent is 25%
- Higher rate taxpayers bonus equivalent is 67%
- Additional rate taxpayers bonus equivalent is 82%
For example, an additional rate taxpayer will need to contribute £80 to receive £100 into their pension pot they could then claim a further £25 back from the taxman meaning that it has only cost them £55 in order to receive £100 in their pension pot equating to a 82% bonus equivalent
Unlike the fully tax-free LISA when you come to withdraw your pension only 25% of your pot is tax free and the rest will be charged at your marginal rate in the year with you receive the pension pay-out.
The annual limit for tax free pension contributions is £40,000 or 100% of relevant earnings. Those earning over £150,000 will have their allowance reduced to a minimum of £10,000.
Further points to consider
Saving in a pension will not impact any benefit entitlement should you be made redundant in the future whereas LISA savings will. You therefore may be forced to cash in your LISA before the age of 60 and incur the 25% penalty for doing so.
Saving in a LISA is usually considered as and asset in bankruptcy cases, again you may be forced to cash in early incurring the 25% penalty whilst again savings in a pension are protected.
Apart from critical illness or death you can’t cash out a pension early as you can with a LISA.
What is best for you?
As you can see the benefits of each will vastly differ depending on your own personal circumstance.
If you are enrolled into a workplace pension then you also have contributions from your employer, from April 2019 the minimum contribution is 8% of your salary with at least 3% coming from your employer and the difference from yourself. In this situation it is likely to be more beneficial to use a pension over a LISA.
For a basic rate taxpayer that is self employed, it may be the case that a LISA is the more attractive option. This is especially if you are likely to want to have a higher lump sum that you can draw immediately in retirement.
For higher earners it is likely to be beneficial to use a pension, given the higher bonus equivalents, and the fact that at retirement they are likely to be taxed at the basic rate.
LISA & Pension
Just because you have one does not preclude you from also having the other. So, especially for wealthy savers, the LISA could provide the opportunity to save up to a further £4,000 per year (£5,000 including bonus).
