By: Tim Bennett
04.08.2017
04.08.2017
A comparison of the Lifetime ISA with existing personal pensions as a way of saving for retirement.
Earlier this year the government launched the Lifetime ISA, billing it as a flexible savings vehicle that would allow first-time buyers and retirees to save money tax-efficiently. Here I focus exclusively on retirement saving and offer a quick comparison of this new product with existing personal pensions. What follows is very much an overview: to find out more about either product, please contact an Investment Manager.
The retirement challenge
A key long-term savings goal for most of us is to reach the point where we are no longer financially fully dependent on an employer. We may choose to continue working beyond a traditional retirement date (such as 65) for all sorts of reasons but we would hope to do so, at least in part, because we have chosen to rather than because we must. So how will we reach that happy state of affairs? Here is an overview;
Assuming we are not going to rely on just the State pension in retirement (for all sorts of reasons, including the fact that it could be reduced, or even withdrawn, by future governments) and also assuming we are not fortunate enough to have a final salary pension (because these are becoming increasingly rare) most of us will need to choose the right vehicle within which to accumulate our Lifetime Savings.
A similar objective
Both the Lifetime ISA and personal pensions have some key things in common;
- They are designed to act as tax wrappers
- They can hold cash, investments or a mixture of the two
- They are designed to be tax-efficient
- They can be held independently, or alongside other savings products such as Individual Savings Accounts (ISAs)
Now though let’s look at some important differences.
Who can have one?
This is summarised below. Whilst the two products can be held by the same person in many cases, the Lifetime ISA is age-restricted: you need to be aged 18-39 to open one and having done so you can only contribute up to your 50th birthday. By contrast, a junior self-invested personal pension (SIPP) could be opened on your behalf from birth and you can make contributions up to any age into an adult SIPP should you subsequently choose to open one, albeit tax relief on contributions (see below) currently only applies up until age 75.
Tax differences
The whole point of both products is to facilitate tax-effective saving but they do so in different ways.
Lifetime ISAs offer a government bonus of 25% of the amount saved, capped at £1,000 per year and £32,000 in total (under the current rules). This is repayable if certain conditions are not met, the key one being that the funds saved can only be used for either a first-time property purchase or retirement from the age of 60. You risk forfeiting 25% of your fund if you break these rules.
Lifetime ISAs offer a government bonus of 25% of the amount saved, capped at £1,000 per year and £32,000 in total (under the current rules). This is repayable if certain conditions are not met, the key one being that the funds saved can only be used for either a first-time property purchase or retirement from the age of 60. You risk forfeiting 25% of your fund if you break these rules.
Once inside the Lifetime ISA wrapper any growth on investments held and any income received is tax-free as is any amount withdrawn provided you do not do so before the age of 60. With personal pensions (whether set up by an employer or by you) the deal is different;
The key points to note may be summarised as;
- There is no bonus from the government but you do get tax relief on money paid in
- Higher rate taxpayers can claim higher rate relief, in addition to the basic rate relief that is given at source
- An employer can contribute to a personal pension but not a Lifetime ISA
- Only 25% of the fund can be withdrawn tax-free, from the age of 55, with the rest taxable at your marginal income-tax rate
Summing it up
Although accessibility and tax are two of the key considerations, there are several others. Here is a snapshot comparison;
So, which one is best?
Ultimately, the decision about which product is best is personal and must take your personal circumstances fully into account. However here are some broad guidelines;
The bottom line is that for many retirement savers, a personal pension remains the better bet. However Lifetime ISAs will be of interest to younger savers, who may have one eye on their first property purchase and not just retirement, those who value the additional flexibility and/or anyone who has already used up other tax-efficient savings wrappers. Please contact an Investment Manager to discuss further or find out more here.
