Are you missing out on two bites of a tax-efficient cherry?

Only available to the under 40s, Lifetime ISAs (also known as LISA) are more commonly known as savings vehicles for a first home, but a LISA has another often forgotten purpose. As the name suggests, a Lifetime ISA can also be used for the longer term, plus you receive a 25% government bonus in a tax-efficient environment until you’re 50.
Lifetime ISA: The savings plan with a government bonus

LISA – a long-term savings plan

The Guardian recently reported that the amount of money you need to retire at a minimum living standard has increased by almost £2,000 in the last year due to soaring inflation. Researchers at Loughborough’s Centre for Research in Social Policy have created a set of “retirement living standards” that have become the industry benchmark for what people really need in retirement.1

Lifestyle Single Person Couple
Minimum Standard £12,800 per annum £19,900 per annum
Moderate Standard £23,300 per annum £34,000 per annum
Comfortable Standard £37,300 per annum £54,500 per annum
According to the 2022 figures published at the start of 2023.

These figures are, of course, an average and your retirement income needs will vary depending on your lifestyle and expenditure. However, looking at these figures your best step is to start saving early for a more comfortable retirement.

Start saving

The current pension annual allowance is £60,000 (2023/24 tax year). This is the most you can save into your pension pots before you incur any tax charges. This figure includes any increase in a defined benefit scheme and the total amount paid into a defined contribution scheme in a tax year by you or anyone else (for example, your employer).2

As many of our NHS clients will know, the annual allowance can be a limiting factor to pension contributions, so a Lifetime ISA could be worth considering as an alternative.

How does a Lifetime ISA work?

UK residents aged between 18 and 40 can open a LISA and pay up to £4,000 per tax year (which sits within the £20,000 overall ISA allowance 2023/24). The main attraction is the 25% government bonus received on the contributions made each year (the bonus does not utilise any ISA allowance).

You receive a government bonus until you are 50

Yes it’s true! If you contribute up to £4,000 per tax year, you receive up to £1,000 from the government. You can continue to pay into a lifetime ISA until your 50th birthday and receive the 25% bonus each tax year on new monies paid in, which is essentially the same as basic rate tax relief within a pension, however unlike a pension the entire pot is tax-free at point of access.

Withdrawals from a Lifetime ISA for retirement purposes can be made from age 60 onwards otherwise, you will incur a 25% penalty. This makes a LISA a useful way to supplement pension income.

Complement your portfolio

We should not overlook the benefits of pensions and the tax relief (especially for a higher rate taxpayer) they offer, along with the various benefit options brought in by the pension freedoms introduced in April 2015. 

Who wins the LISA or a pension?

In a foot race between a LISA and a pension, the winner is always dictated by several factors, including your income tax rate while contributing and your rate when retired and accessing the fund. As with all financial planning, it’s an individual thing and a topic best discussed with your financial adviser

However, one thing is clear Lifetime ISAs can work in tandem with pensions to boost income in retirement, and they are available as cash, or stocks and shares to suit your investment risk.

If you would like more flexibility over when you can access your savings without worrying about an early encashment penalty, you could opt for a stocks & shares ISA instead. Although there’s no bonus available from the government, withdrawals can be made without penalty, whilst any investment growth and income received will still benefit from a tax-sheltered environment.

If you would like to learn more about retirement planning and the various ISA products available, please do get in touch.

This article is for information purposes only. As always, we suggest you seek professional advice from an adviser who will consider your personal circumstances before advising you.

Have you thought of using a Lifetime ISA as part of your retirement planning?  Let us know by adding a comment below.

 1UK pensions: how much do you need to retire as the cost of living soars?
2 Tax on your private pension contributions

Guest Author: Kirsty Davis, Business Analyst, Legal and Medical

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