By Rob Starling
Prior to the 2016 Budget, all the talk centred around Pensions and whether they would continue to exist in their current form. We were also introduced to the Life-time ISA (LISA), touted as a potential replacement to the traditional Pension. Well, thankfully, the Pension remains (for now at least). But so does the LISA. So what is a LISA and how does it interact with other forms of tax efficient savings?
From 6th April 2017, the overall ISA limit will increase from £15,240 to £20,000. You can allocate your subscription of £20,000 to a Cash or Stocks & Shares ISA in any combination.
The LISA has a maximum annual subscription of £4,000. Where it differs from the traditional ISA is that it enjoys a top-up from the Government of 25% (e.g. £1,000 on a £4,000 contribution). Therefore, an individual who maximises their LISA allowance could also contribute a further £15,000 to a traditional ISA.
However, the LISA is not open to everyone. Applicants must be aged between 18 & 40 and the LISA must ultimately be used for either home purchase or retirement, anything else and the Government will reclaim the top-up.
So is the LISA stepping on the toes of two other al-ready established savings vehicles – namely the Help to Buy ISA and the Pension?
The Help to Buy ISA can only invest in Cash and contributions are restricted to £200/month (plus £1,000 up front), with an overall maximum of £12,000 which, if paid, would enjoy a £3,000 bonus from the Government. It is probably better suited to the individual who is looking to purchase a property in the relatively short term. Those with a longer time horizon might be better suited to the LISA, where larger contributions can be made and a wider investment choice is available. Comparison with a Pension is more complex. Based on current rules, the LISA appears to be a good complement to a pension. For those facing caps on pension contributions, a LISA may be a good option (although most of these people will not be under 40).
An individual can make a higher contribution to a pension and their employer may also pay into the pension scheme, so it is unlikely to be advantageous to cease Pension contributions in favour of LISA. Both receive a Government top up and both enjoy virtually tax-free growth. You can access pension benefits from age 55 compared to LISA at age 60 (traditional ISAs allow access at any time). In retirement, LISA could provide tax-free income whereas Pension income (over the 25% tax-free cash) is subject to Income Tax. Pension benefits can be passed on inheritance tax free whereas funds left in LISA would be subject to IHT. So, the debate is not ‘cut and dried’ and the appropriateness of pension or LISA (or traditional ISA) will depend on an individual’s circumstances and objectives.
Rob Starling is Partner and Chartered Financial Planner with Bluesky Chartered Financial Planners