Lifetime ISAs

Post by Mearns & Company in News

Lifetime ISAs can save you tax of up to 55% and yet are often overlooked.

The Lifetime ISA (LISA) was introduced in 2017. It is commonly used by first time homebuyers. However, it is also commonly overlooked when saving for retirement – particularly when it can help to prevent tax charges of up to 55%!

The following information is intended to discuss the aspect of the LISA which involves saving for retirement. For information about first time homebuyers, please refer to our factsheet.

LISA overview

As a quick reminder:

• LISAs benefit from a 25% Government funded bonus on contributions of up to £4,000 per tax year.
• LISAs can be in the form of cash savings or investments.
• You must be over age 18 but under age 40 to open a LISA. You can make contributions, and receive the bonus, until age 50.
• Savings which aren’t used for either a first house purchase or funding retirement after age 60 incur a withdrawal penalty of 25% (20% until 6^th April 2021), effectively adding a 6.25% withdrawal charge as well as removing the Government funded bonus.

LISA vs. Personal pension

LISAs are often a tax-efficient option for people saving for retirement. In many cases, they should be used alongside pension savings and not as an alternative. The key differences between the accounts are:

• Both accounts, effectively, receive a 25% ‘uplift’ on contributions initially (known as ‘20% tax relief at source’ for personal pensions). Higher-rate and additional-rate income taxpayers can often claim extra tax relief on pension contributions, but not from LISA contributions.

• You can open and contribute to a pension and receive tax relief until age 75. As mentioned, you need to be under the age of 40 to open a LISA, but you can contribute and earn the Government funded bonus until age 50.

• LISAs can be accessed, without the withdrawal charge applying, from age 60. Pensions can currently be accessed from age 55, although this is set to increase to age 57 on the 6^th of April 2028 (and widely expected to increase further in future).

• LISAs can be withdrawn tax-free after age 60. Personal pensions currently attract a 25% tax-free lump sum entitlement, with the remaining 75% taxable and being subject to the personal allowance and then the relevant income tax bands.

• Pensions don’t form part of a person’s estate on death and so are exempt from inheritance tax. LISAs would be included in the estate and possibly subject to inheritance tax of up to 40%.

There is no immediate right or wrong answer here. It will depend on the individual’s circumstances. Consider the likely pension income in retirement and future relevant tax rate, if any, and not just the tax relief applied to contributions initially.

LISAs can be a great alternative to pensions in some cases. For example, high earners in Scotland who are impacted by the pension annual allowance can face a tax charge of up to 46% on contributions above their available allowance. Additionally, individuals with large pension funds could be impacted by the lifetime allowance, particularly with the news in the recent budget about this allowance no longer increasing in line with inflation each year. The maximum tax charge on excess pension savings above the lifetime allowance is 55%.

Anyone who is impacted by the pension annual allowance and/or lifetime allowance, and is under the age of 40, may wish to consider opening a LISA. Making even a small contribution before 40 opens the account and enables the ability to contribute tax-efficiently until age 50.

We recommend that you speak with your financial adviser to discuss the most appropriate options relating to your own financial planning. If you have any questions in relation to this, please contact us.

Graeme McInally FPFS

Questions?

If you have any questions or would like advice please use our contact page here.

A stocks and shares ISA is a medium to long term investment, which aims to increase the value of the money you invest for growth or income or both. The value of your investments and any income from them can fall as well as rise. You may not get back the amount you invested.  Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.