Pensions, ISAs or LISAs?

23 March 2016

Jackie Hall

The introduction of the new lifetime ISA (LISA) in the Budget, now means the under 40s have some options when planning for retirement. But this means that they now have to decide: Pension, ISA or LISA? It’s not going to be an easy choice.

Available from April 2017, the LISA gives adults under 40 the opportunity to save flexibly for the long-term in one account, with the savings used to either help buy a first home worth up to £450,000, or for retirement. Up to £4,000 can be saved each year until the age of 50, and the Government will contribute a further 25 per cent on top of this - ie a maximum of £1,000 per tax year. 

Whilst LISAs sound like a good deal, in many ways they’re not as attractive as traditional pensions. For example, any early withdrawals (before the age of 60) not used to purchase a first home will suffer a 5 per cent tax charge, the bonus received will need to be repaid, the funds will be part of the individual's estate at death for inheritance tax (IHT) purposes and, while the bonus received is the equivalent of the basic rate tax relief received on a personal pension contribution, there’s no further relief for higher or additional rate taxpayers. Pensions can usually cascade down to the next generation without suffering any IHT.

If comparing LISAs to workplace pensions, you also need to consider employer contributions and, where a workplace pension is available, it will generally represent the best retirement savings option for the employee.

There are good reasons to invest in the new lifetime ISA - not least of which is the Government bonus of a maximum £32,000 - but with a lower overall possible lifetime fund, no further tax relief for higher or additional rate taxpayers, no employer contributions, no IHT advantages and a five year further wait to withdraw funds in retirement: the new accounts have a long way to go to beat the traditional personal pension fund. An individual’s age, earnings and chosen retirement date will have a major impact on their savings decision. As ever, there’s no ‘one size fits all’ solution in planning for retirement, but the table below might help when deciding what the best option is…

  Pension
ISA
Lifetime ISA 
Tax relief or equivalent on contributions
Up to 45%
Nil
25% up to age 50 
       
Maximum contribution per annum  Between £10,000 and £40,000 depending on income
£16,000 (including the Lifetime ISA contribution)
£4,000 
       
Tax on income/growth while invested  Tax free 
Tax free 
Tax free 
       
Tax in withdrawal  25% lump sum tax free plus income tax on ongoing pension
Tax free 
Tax free 
       
Minimum withdrawal age  55 Not applicable 
60
       
IHT  Potentially tax free
Tax up to 40% of fund value
Tax up to 40% of fund value

* The above rates and limits are as expected to apply for 2017/18 

For more information please contact Jackie Hall, or your usual RSM contact.   
  
   

 









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