Retirement Saving: Lifetime ISAs vs Pensions
The retirement challenge
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?
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.
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- Only 25% of the fund can be withdrawn tax-free, from the age of 55, with the rest taxable at your marginal income-tax rate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
So, which one is best?
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.